Explain Methods of Entry in foreign Markets

There are several methods of entry in foreign markets which an international marketer can opt for. Some of the methods are as follows:

1.      Direct Exporting: An international marketer can enter in foreign markets through direct exporting. In this case, the manufacturer obtains orders from overseas markets and manufacturers the goods, and then supplies to the overseas buyer. The main advantages of direct exporting are:

•        Reputation in the world markets.

•        Optimum use of resources.

•        Spreading of risks.

•        Export obligation fulfillment.

The main disadvantages for direct exporter include:

•        Greater risks – both production and marketing risks.

•        Higher overheads as compared to indirect exporter.

•        Lacks specialization, as he has to look after production as well as marketing.

•        Higher investment – both in production and in marketing.

2.      Indirect Exporter: A manufacturer may adopt indirect exporting method. In this case, the manufacturer produces the goods, and then exports them with the help of intermediaries such as merchant exporters, export and trading houses, etc. The main advantages are:

•        Less risks – only production risks.

•        Lower overheads – only production overheads.

•        Specialization in production activities.

•        Lower investment – only production related investment.

The main disadvantages are:

•        The customers may have to pay higher price due to margins of intermediaries.

•        The intermediaries may sell the products under their own brand name, and therefore, indirect exporter does not get reputation in overseas markets.

•        The indirect exporter may not get direct feedback from the overseas buyers.

•        The indirect exporter may not get export incentives.

3.      Joint Ventures: A business firm may enter into a joint venture with foreign firms as the main strategy for entry in foreign markets. Joint ventures have several advantages over other strategies. The firm can easily adapt to cultural variations in foreign markets with the help of its overseas partner. Also, the foreign partner may have well established distribution network. In other words, there would be less risks and a need for less investment due to the support of foreign partner.

4.      Franchising Strategy: Certain firms may adopt franchising route to enter in foreign markets. Franchize is a contract between two parties, especially in different countries involving transfer of rights and resources. The franchisor enters into a contract with the franchisee, whereby the franchisor agrees to transfer to the franchisee a package of rights and resources, such as :

•        Production processes.

•        Patents, trade marks and brand names.

•        Loans and financing.

•        Product ingredients.

•        General management assistance, etc.

5.      One Country Production Base: A firm may maintain one country production base, preferably in the domestic market, due to various locational advantages such as low-cost labour; or availability of cheap materials.                    However, the distribution could be done in several world markets. For distribution, the firm may use either company-owned distribution channels, or foreign-controlled distribution channels.

6.      Licensing: Licensing makes sense when a firm with valuable technical know-how or an unique patented product has neither the organisation capability nor the funds to enter foreign markets. This strategy also becomes important if the host country makes entry difficult through investment. However, there is a danger that the licensee might develop its competence to a point that it becomes a competitor to the licensing firm.

Under a licensing agreement, the licensing firm grants rights to another firm in the host country to produce and/or to sell a product. The licensee pays compensation to the licensing firm in return for the rights to use technology or patent.

7.      Production Sharing: This concept was developed by Paler Drucker, the term production sharing. It combines professional skills and technology available in the developed countries with the lower cost labour available in developing countries. For instance, the current trend is to move data processing and programming activities “offshore” to countries such as India, Philippines, Jamaica, Brazil, etc. where wages are lower, English is spoken, and telecommunication facilities are good.

8.      Acquisitions: It involves purchasing another company already operating in a foreign country / market where the firm wants to enter. Synergetic benefits can result if the firm acquires a unit with strong goodwill and a good distribution network. Research indicates that a wholly owned subsidiary is more successful in international markets as compared to joint ventures. However, proper information must be obtained before acquiring a foreign firm.

9.      Green-field Development: Firms may go green field development project. It involves setting up manufacturing plant and distribution system in other countries. It allows a firm more freedom in designing the plant, selecting its own workforce and choosing right suppliers and dealers. This strategy has been followed by many firms such as Honda, Toyota, Nissan, etc.

10.    Turnkey Operations: They are contracts for the construction of operating facilities in exchange for a fee. The facilities are transferred to the host country or a firm when they are completed. The client is usually a government agency that wants a particular product be produced locally under its control. MNCs that perform turnkey operations are industrial equipment manufacturers that supply some of their .own equipment for the project and that commonly sell replacement parts and maintenance services to the host country.

11.    BOT Concept: The Build, Operate, Transfer concept is a variation of Turnkey operation. Instead of turning the facility over to the host Country when completed, the company operates the facility for a fixed period of time during which it earns back its investment, plus a profit. It then turns the project over to the agency of the host country at an agreed cost or no cost.