I have spent the last two weeks working on an international expansion strategy for one of the products that I head at my workplace. Every multinational business has started as a local business and over time, has adopted different modes of entry into international business.
Similarly, we are trying to break into the Middle East with something that we’re sure will work well there. In order to develop a plan of action for how I was going to take this further, I started with some really basic research – What are the various modes of entry into international business?
When businesses grow within their domestic markets, they attempt to expand their businesses into international markets, in order to replicate their success in overseas markets.
Your business can opt for different modes of entry into international business based on the existing size of your business, your expansion strategies, the potential size of your business, the demand of your chosen international market, the economic and the business environment of the overseas nation, etc.
In this article, I will share with you what the different modes of entry into international business are. Having an idea of the different modes will give you a head start in creating a solid international strategy.
What are the Different Modes of Entry into International Business?
Some of the modes of entry into international business that you can opt for include direct export, licensing, international agents and distributors, joint ventures, strategic acquisitions, and foreign direct investment.
I will put in my efforts to explain to you what each of this entails for an offline product and for an online product based company. While the crux remains the same for both the types of businesses, there are slight differences in how you carry out the strategy.
Let’s understand in detail what each of these modes of entry entails.
1. Direct Exporting
Direct exporting involves you directly exporting your goods and products to another overseas market. For some businesses, it is the fastest mode of entry into international business.
Direct exporting, in this case, could also be understood as Direct Sales. This means you as a product owner in India go out, to say, the Middle East with your own sales force to reach out to the customers.
In case you foresee a potential demand for your goods and products in an overseas market, you can opt to supply your goods directly to an importer instead of establishing your retail presence in the overseas market.
Then you can market your brand and products directly or indirectly through your sales representatives or importing distributors.
And if you are in an online product based company, there is no importer in your value chain.
Advantages of Direct Exporting
- You can select your foreign representatives in the overseas market.
- You can utilize the direct exporting strategy to test your products in international markets before making a bigger investment in the overseas market.
- This strategy helps you to protect your patents, goodwill, trademarks, and other intangible assets.
Disadvantages of Direct Exporting
- For offline products, this strategy will turn out to be a really high-cost strategy. Everything has to be set up by your company from scratch.
- While for online products this is probably the fastest expansion strategy, in the case of offline products, there is a good amount of lead time that goes into the market research, scoping and hiring of the representatives in that country.
2. Licensing and Franchising
For companies which want to establish a retail presence in an overseas market with minimal risk, the licensing and franchising strategy allows another person or business to assume the risk on behalf of the company.
In Licensing agreement and franchise, an overseas-based business will pay you a royalty or commission to use your brand name, manufacturing process, products, trademarks, and other intellectual properties.
While the licensee or the franchisee assumes the risks and bears all losses, it shares a proportion of their revenues and profits you.
When does this work the best?
I explored this strategy in a case where one of the established companies of the other country already had a loyal audience with them.
At the same time, their product line had gaps which I was able to fill up. Therefore, just like two pieces of a jigsaw, it made complete sense for them to carry my product.
How is this different from a Joint Venture, you would think? It is.
And in this case, I shall explain the little difference in a subsequent part of the article.
Advantages of Licensing and Franchising
- Low cost of entry into an international market
- Licensing or Franchising partner has knowledge about the local market
- Offers you a passive source of income
- Reduces political risk as in most cases, the licensing or franchising partner is a local business entity
- Allows expansion in multiple regions with minimal investment
Disadvantages of Licensing and Franchising
- In some cases, you might not be able to exercise complete control on its licensing and franchising partners in the overseas market.
- Licensees and franchisees can leverage the acquired knowledge and pose as future competition for your business.
- Your business risks tarnishing its brand image and reputation in the overseas and other markets due to the incompetence of their licensing and franchising partners.
3. Joint Ventures
A joint venture is one of the preferred modes of entry into international business for companies who do not mind sharing their brand, knowledge, and expertise.
Companies wishing to expand into overseas markets can form joint ventures with local businesses in the overseas location, wherein both joint venture partners share the rewards and risks associated with the business.
Both business entities share the investment, costs, profits, and losses at the predetermined proportion.
This mode of entry into international business is suitable in countries wherein the governments do not allow one hundred percent foreign ownership in certain industries.
For instance, foreign companies cannot have a 100 hundred percent stake in broadcast content services, print media, multi-brand retail, insurance, power exchange sectors and require to opt for a joint-venture route to enter the Indian market.
Here is what’s the difference between a Licensing/Franchisee kind of a setup and a Joint Venture.
The subtle nuance that I came across while recently creating a strategy was that a franchise setup would work well when you as a franchiser are a bigger brand in that particular product.
You could be big in your own country and not necessarily in the franchisee’s country.
In the case of a Joint Venture, both the brands have a similar level of brand strength for that particular product. And therefore, they wish to explore that product in that international market together.
Advantages of Joint Venture
- Both partners can leverage their respective expertise to grow and expand within a chosen market.
- The political risks involved in joint-venture is lower due to the presence of the local partner, having knowledge of the local market and its business environment.
- Enables transfer of technology, intellectual properties, assets, knowledge of the overseas market, etc. between the partnering firms
Disadvantages of Joint Venture
- Joint ventures can face the possibility of cultural clashes within the organisation due to the difference in organisation culture in both partnering firms
4. Strategic Acquisitions
Strategic acquisition implies that your company acquires a controlling interest in an existing company in the overseas market.
This acquired company can be directly or indirectly involved in offering similar products or services in the overseas market.
You can retain the existing management of the newly acquired company to benefit from their expertise, knowledge, and experience while having your team members positioned in the board of the company as well.
Advantages of Strategic Acquisitions
- Your business does not need to start from scratch as you can use the existing infrastructure, manufacturing facilities, distribution channels, and an existing market share and a consumer base.
- Your business can benefit from the expertise, knowledge, and experience of the existing management and key personnel by retaining them.
- It is one of the fastest modes of entry into an international business on a large scale.
Disadvantages of Strategic Acquisitions
- Just like Joint Ventures, in Acquisitions as well, there is a possibility of cultural clashes within the organisation due to the difference in organisation culture
- Apart from that, there mostly are problems with seamless integration of systems and process. Technological process differences are one of the most common issues in strategic acquisitions.
5. Foreign Direct Investment
Foreign Direct Investment involves a company entering an overseas market by making a substantial investment in the country. Some of the modes of entry into international business using the foreign direct investment strategy includes mergers and acquisitions, joint ventures and greenfield investments.
This strategy is viable when the demand or the size of the market, or the growth potential of the market in the substantially large to justify the investment.
Some of the reasons because of which companies opt for foreign direct investment strategy as the mode of entry into an international business can include:
Restriction or import limits on certain goods and products
Manufacturing locally can avoid import duties.
Companies can take advantage of low-cost labour and cheaper material.
Advantages of Foreign Direct Investment
- You can retain your control over the operations and other aspects of your business.
- Leverage low-cost labour, cheaper material, etc. to reduce manufacturing cost towards obtaining a competitive advantage over competitors.
- Many foreign companies can avail for subsidies, tax breaks and other concessions from the local governments for making an investment in their country.
Disadvantages of Foreign Direct Investment
- The business is exposed to high levels of political risk, especially in case the government decides to adopt protectionist policies to protect and support local business against foreign companies
- This strategy involves substantial investment to be made for entering an international market
While every business dreams of global domination within its industry, you need to plan its internationalization strategy based upon your finances, existing capabilities, the growth potential of the overseas market, etc. before opting for different modes of entry into the international business.
In this article, I discussed with you the 5 modes of entry into the international business which I discovered during my research on how to expand the business that I work for internationally.
On another note, I am soon coming out with a book on various interesting things that you should do in your internships. Comment below or e-mail me to let me know the things you want me to add in it.
I will be glad to hear from you.