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Discuss about the popular Modes of International Market Entry.
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Introduction
Today, in this changing world, the term globalization is known to all. Globalization can be regarded as an ongoing process which helps for creating new ideas, methods, practices, values, movements and identities. Globalization has various consequences which depend on the perspective of the viewer. (SETHY, 2008). The process of globalization has changed the game and has increased the competition in the market place. The ways of business handling are always changing due to upcoming developments in the technology and increased competition on the global market. An international market entry mode can be defined as an arrangement by the organization that helps to make the entry of products, services, management and human resources possible into the market of a foreign country. The research on various entry modes to the foreign market. When a company wishes to enter an overseas market, they have ample of varieties to choose from. These options differ regarding expense, risks associated and the degree of control that the marketer can exercise over it. Various studies have also implemented a hierarchical model for these entry modes. (Pan and Tse, 2000)
The modes of entry have impacted the global business effectively due to which the focus has changed from the service, manufacturing, etc. to the entry modes in the international market as well.
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Discussion
The markets are expanding globally either regarding geographical development of by expansion of their product line. The complexity of the managerial activities directly impacts the product line or the geographical areas and the product line. The expansion introduces various new market opportunities. However, there are various risks associated with it, and if researched properly, these risks might help in completing the process effectively. The company needs to make an attempt to globalize their offerings and services. Examples of these cases can be Coca-Cola and McDonald's etc. (Chapter 7: Market Entry Strategies, n.d.)
Cunningham (Cunningham, 1984) identified five strategies that could be used by any firms for entering into a new foreign market:
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The strategy of technical innovation, where the firms could demonstrate truly superior quality products. This part of the strategy include high technical services.
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The strategy of introducing adaptation in the product, where the firms need to make modifications to their existing products.
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The strategy of availability and security. This can be done by overcoming the risks associated with the transportation by offering higher security, delivery and services to the customers.
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Low price strategy, where the firm has to develop the penetration of price in the market.
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The strategy of adaptation and conformity, where the international producer gives attention to the needs of customers regarding the product, handling of product, its development, and delivery.
These global approaches might help to give economies of scale and better sharing of costs along with the risks between the global markets. Erramilli & Rao were the ones who began their research on the various entry modes to the market from the perspective of the services provided. When a firm or company decided on the type of entry mode best suited for them, they calculate the parameters of commitment, resources, expense and the risk involved with that entry mode. (Erramilli and Rao, 1993)
Some of the entry strategies in the international market for organizations are exporting, joint ventures, licensing, franchising, etc. The most popular entry modes i.e. exporting, joint ventures and licensing have been discussed thoroughly in this paper.
1. Exporting
The exporting mode is the most well-established and traditional mode of operating in the international market. The marketing of products, services, etc. that are produced in one country into another country is called as exporting of products. It can be considered that no direct manufacturing is not necessary for the overseas country, but considerable investments regarding marketing are required. Exporting has been considered as a low commitment of the company's resources and an low investment choice as well. (Johnson and Turner, 2003)
The exporting modes are or two types (Heilmann, 2010)
(a.) Direct exporting: Direct exporting as the name suggest is a straightforward method. It refers to a situation where the company itself carries out the exporting of their goods and services and further, builds the network of operation themselves.
(b.) Indirect exporting: The indirect exporting refers to a situation where the company tries to sell their products, services, etc. in a foreign market but the whole operation is done by some other firm as the company itself is not part of the processing. (Antell, 2012)
The entry mode of exporting has various advantages like:
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The manufacturing of product or services will be home based which reduces the risks as compared to the overseas manufacturing.
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It gives the company an opportunity to gain knowledge of overseas market before making an investment.
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It reduces the risks of operation in overseas countries.
However, this mode of entry has few disadvantages also. The primary disadvantage of this particular entry mode is that the company has to be at the mercy of the agents dealing overseas which leads to lack of direct control of the company. Hence, the company has a major disadvantage that has to be weighed against the various benefits. Further, it has been noticed to have a low-profit return. Consequently, there might be disagreement between the parties on their perspective of marketing and benefits of the exported goods. (Chapter 7: Market Entry Strategies, n.d.)
The process of exporting requires a cordial partnership between the exporter, importer, and government of the country and the facility of transportation. If the relationship between these four factors is cordial and coordinated, then the probability of risks involved goes down to zero. Further, the roles of agents and forwarder also play a vital role in exporting.
The companies were further warned regarding the less availability of direct methods shortly. Thus, the indirect methods are preferred with more ease, and hence, the trading companies like cotton, soya, etc. utilize this method as their entry mode. Examples of indirect methods that are mostly used are piggybacking, Export Management Houses (EMHs), Consortia, etc.
The indirect methods are preferred over direct methods because of the following reasons:
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Contracts that help to operate in the foreign market efficiently
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The Commission sates help to give considerable motivation
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The manufacturers, exporters, need expertise
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Acceptance if credit usually takes burden from the exporters/manufacturers
Once the organization starts to handle its exporting efficiently, it needs to prepare a proper channel for distributing needs in each of its markets. These channels should include all the sales representatives, agents, distributors, retailers, etc. Thus, a perfect mix of entry mode along with a good marketing plan is necessary for the new business.
When Huawei started entering the markets of Asia, North Africa, and Middle-east market, it selected exporting as its entry mode owning to the advantages of exporting which offers the high level of flexibility, low dissemination risks involved and low resources commitment. (Wu, 2007)
2. Licensing
Licensing can be defined the method of international operation where an organization in one particular country gives permission to a company for using their manufacturing, trademark, and other skills that are provided by the licensor. The right for utilization of any expertise involve patents, company name, technology, designs, trademarks, etc. The licensee has to pay fees or percentages of their shares/sales in exchange of the rights provided to them. (Barua, 2014)
The process of licensing is quite similar to the process of franchising. One of the major examples of licensing is Coca-Cola. United Bottles, in Zimbabwe, have to license for making Coke. The process of licensing involves some amount of expense along with involvement. The expense incurred only involves the signing of the contract and agreement and for policing the implementation process.
Licensing is comparatively faster for generating income and in growing of the business due to the absence of any manufacturing or sales. This process of entry in the foreign market usually takes advantage of the pipeline of an existing company along with its infrastructure and in return or exchange, it offers a smaller proportion of the revenue. (Bridgman, 2013)
This entry mode is well-suited for the organizations where
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There might be some barriers for importing and investment;
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Possibility of legal protection in the target environment;
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Low sales area in the target country.
There should be some transfer of knowledge and information between the parental company and its licensee. However, the decision of making the international agreement depends on the host government and the way this government shows for the intellectual properties and further on the capability of licensee so as to make sure it chooses right partner to do business with so that they avoid any future competition. This mode of entry in the foreign market is quite flexible and is usually customized so as to fulfill the needs and wants of licensee and licensor.
Following are the advantages of licensing:
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It is considered as a good way for beginning a start-up in a foreign country and, therefore, gives opportunity for low level of risk in manufacturing relationships
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Both of the parties get equal share of their marketing efforts
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The capital is not tied up in the international operations
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There are options for buying into the partner exist.
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This process appeals mostly to small companies that lack major resources
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It provides faster access to the companies to the market
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This process enables a rapid penetration of the markets
The disadvantages of licensing are:
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The participation is very limited be it regarding agreement, products or trademark, etc.
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The loss of potential returns from the marketing (Gunnarsson, 2011)
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The partners develop know-how due to which the license might be short
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There might be chances that licensees become their competitors
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The process requires a significant amount of findings of fact, planning, investigations and data handling
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There might be chances that the licensee lacks the accurate measure of enthusiasm required
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The other choices for the modes of entry are also affected
Those who volunteer for the process of licensing should keep their options open to extending the participation in the market place. This can be achieved by combining the process of licensing with joint ventures. This mode of entry in the foreign market is a low investment alternative along with a low risk but it also provides the least amount of control for the firm that is licensing
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Joint ventures are defined as the enterprises where there are two or more who share the ownership and have direct control over the operations and rights of property. The joint-ventures is usually equity-based i.e. the new company that is set up with various parties who own some percentage of the business. (Rohn, 2009) There are various reasons as to why the companies choose joint-ventures when entering a foreign market. They are as followed:
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The companies gain direct access to technology or management skills etc. For example, the relationship of Honda, in 1980 along with Rover.
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For gaining a direct entry to an international market. For example, anyone who wishes to enter China should source some local Chinese partners.
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The most common forms of Joint Venture are manufacturing, pipeline and R&D, etc.
In joint ventures, the companies setting up new business need to work cordially for entering into the foreign market, and they share some proportion of revenue along with sharing risks. Therefore, there is a need to hire the staff exactly after acquisition or exactly after the point of joint-venturing. There should not be any gaps between the vision and thought of the company, its employees and the partners of the venture. The process of joint-venturing is more comprehensive regarding participation when compared to exporting and licensing. Example, Joint venture for food processing between Olivine industries and HJ Heinz.
Following are the advantages of joint-ventures:
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The risks are shared and the combination of the in-depth local information along with the chosen foreign partner in accordance with the know-how in the technology or process.
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The financial strengths are joined
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It might become a major source of supply for some other country.
Apart from being so beneficial for companies to help them enter the international market, there are various disadvantages that give this entry mode a huge setback. Following are the disadvantages of joint ventures:
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The partners of the company do not have a full control of management and operations
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If is nearly impossible to recover the overall capital
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There might be chances of disagreements on the third party for serving
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•The partners of the joint venture might have different thoughts and views on the expected results and benefits.
But if the partners of the new business map out each and every setback along with a great plan, most of the problems mentioned above might overcome giving new insights to the business. The joint ventures give access to the development or modifications of the products, financial resources, a wider channel of distribution and financial resources. There are cases of international joint ventures that are formed between the firms or organization of different countries. Consequently, these parties exchange information of different market places, and this makes the joint ventures a popular entry choice for international companies. Additionally, the foreign joint venture becomes beneficial for these international firms so that they can share the associated risks in the overseas along with local partners.
The process of joint venture involves low investment but in turn, it provides various associated risks, returns and even some control that is adequate for providing equity participating of both the investing firms.
The joint ventures usually create a hindrance in the strategic coordination. But the motivation is different from both the partners who might lead to considerable difficulties in running the business. A great example of joint ventures is when Huawei chose the joint venture as their first international market mode on the basis of the advantages of the technological R&D. (Wu, 2007)
Conclusion
The study on different entry modes in the international market dealt with giving insights to the relationship between the foreign market and the reaction when a foreign company enters their market. This study provided support when suggested the importance of various entry choices models. Many entry modes namely, exporting, licensing and joint ventures were discussed thoroughly, and it was suggested that a temporal focus that could provide more appropriateness to the business design. All the discussed entry modes have their sets of peculiar advantages and disadvantages suggesting that the marketer has to be careful when he considers his choice of entry mode into a foreign market. This study can be used by many marketers to provide them with a better understanding of different kinds of entry modes and the impacts of their decisions. (Agarwal, 1992)
Each set of the discussed entry mode can be highly beneficial for the marketers, depending on the external factors and their thorough planning. The global marketers should design a perfect mix of entry mode and marketing strategy. Direct entry from the home base usually involves the use of Government overseas subsidiaries, agents and distributers and an indirect entry from the home base involves the use of export management firms, trading companies, piggybacking, etc. If the marketers want to enter from a foreign base, then that procedure involves the use of licensing, export processing zones, joint ventures, etc.
The simplest form of the entry mode is exporting which can do either directly or indirectly varying on the interest and needs of the marketer. But complex forms of entry modes include highly technical business operations which include entry modes like joint ventures, licensing, etc. Once the firm decides on their entry mode in the international market, decisions need to be made on specified channels.
References
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Agarwal, S. (1992). CHOICE OF FOREIGN MARKET ENTRY MODE: IMPACT OF OWNERSHIP, LOCATION AND INTERNALIZATION FACTORS. 1st ed. [ebook] Iowa state University, p.22. Available at: http://www.rcmewhu.com/upload/file/20150525/20150525201726_6655.pdf [Accessed 9 Mar. 2016].
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Antell, F. (2012). Foreign market entry The strategic decision of foreign market entry by service firms. 1st ed. [ebook] Linnaeus, p.16. Available at: https://www.diva-portal.org/smash/get/diva2:530210/FULLTEXT01.pdf [Accessed 9 Mar. 2016].
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Barua, D. (2014). Market Entry Mode Strategies. 1st ed. [ebook] Linnaeus University, p.9. Available at: http://www.diva-portal.org/smash/get/diva2:723695/fulltext01.pdf [Accessed 9 Mar. 2016].
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Bridgman, B. (2013). Export Mode and Market Entry Costs. 1st ed. [ebook] Bureau of Economic Analysis. Available at: https://www.bea.gov/papers/pdf/movies1209BEA.pdf [Accessed 9 Mar. 2016].
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Chapter 7: Market Entry Strategies. (n.d.). [online] Fao.org. Available at: http://www.fao.org/docrep/w5973e/w5973e0b.htm#chapter summary [Accessed 9 Mar. 2016].
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Cunningham, M. (1984). CONTEMPORARY ISSUES IN INTERNATIONAL MARKETING. 1st ed. [ebook] England, p.3. Available at: https://www.escholar.manchester.ac.uk/api/datastream?publicationPid=uk-ac-man-scw:2n7&datastreamId=FULL-TEXT.PDF [Accessed 8 Mar. 2016].
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Erramilli, M. and Rao, C. (1993). Service Firms' International Entry-Mode Choice: A Modified Transaction-Cost Analysis Approach. Journal of Marketing, 57(3), p.19.
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Gunnarsson, A. (2011). The selection of entry modes when penetrating a foreign market –A research study on the education institutes choice of entry mode. 1st ed. [ebook] Linnaeus University, p.15. Available at: http://lnu.diva-portal.org/smash/get/diva2:421070/FULLTEXT01 [Accessed 9 Mar. 2016].
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Heilmann, M. (2010). Exporting as a strategy to enter Eastern European markets, taking Hungary, the Czech Republic, and the Slovak Republic as examples. 1st ed. [ebook] Büdingen: University of Cooperative Education Mannheim, p.8. Available at: http://www.dhbw-mannheim.de/fileadmin/ms/bwl-ib/Downloads_alt/Seminararbeit.pdf [Accessed 9 Mar. 2016].
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Hemsley?Brown, J. and Oplatka, I. (2006). Universities in a competitive global marketplace. International Journal of Public Sector Management, 19(4), pp.316-338.
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Johnson, D. and Turner, C. (2003). International business. London: Routledge, p.114.
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Pan, Y. and Tse, D. (2000). The Hierarchical Model of Market Entry Modes. Journal of International Business Studies, 31(4), pp.535-554.
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Rohn, U. (2009). Cultural barriers to the success of foreign media content. Frankfurt: Peter Lang.
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SETHY, S. (2008). DISTANCE EDUCATION IN THE AGE OF GLOBALIZATION: An Overwhelming Desire towards Blended Learning. Turkish Online Journal of Distance Education-TOJDE, Volume: 9(ISSN 1302-6488), p.29.
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Wu, D. (2007). Entry Modes For International Markets: Case Study Of Huawei, A Chinese Technology Enterprise. International Review of Business Research Papers, Vol.3(1), p.183.
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