Choosing Market Entry Methods In International Business
Ahsan Hameed (24.01.2016)
This report presents the literature on critical evaluation of different market entry methods, which are being used by companies for entering foreign markets. Internationalisation is a route to business growth that provides businesses with the opportunities to expand their operations beyond the boundaries of the domestic market (Hynes, 2010). A company can establish its presence in foreign countries by using following market entry methods.
- Global Outsourcing / Off Shoring
- Direct Investing
- Joint Venture
- Wholly Owned Foreign Affiliates
- Green Field Ventures
The exporting has very commonly used market entry strategy in global trade. There are two kinds of exporting, direct exporting and indirect exporting. In direct exporting, company directly exports the products to customers along with taking responsibility of logistics, shipments, distribution and payments. On the other hand, indirect export doesn’t involve the responsibility of exporting procedures, because buyer takes responsibility of exporting its own country (Delaney, 2010). Now a day, the export of services is also increasing in terms of importance and share in global export volume (Kaleka, 2011).
There are many benefits of exporting, regarding market entry into international business. The companies can increase sales, profitability, efficiency, experience and economies of scale along with milking location advantages (Lahti, 2010); (ExportHelp, 2006). The Delaney (2010) states the advantages of exporting as, direct control on exporting, customer knowledge, and direct contact with customer, mutual trust and security, faster and direct feedback, complete involvement and better understanding of the market. However, the disadvantages of exporting are, higher transportation cost, barriers of trade and tariffs, lack of control on marketing representatives and threat of low cost manufactures, high competition (Lahti, 2010); (ExportHelp, 2006). According to Delaney (2010), the disadvantages of export are; less opportunities as compared to other methods, involve more time, cost and people, the risk of default, higher responsibility of product safety and custom clearance matters etc.
2. Global Outsourcing / Off-Shoring:
The global outsourcing or off shoring is another market entry strategy, in which firm offers its services to foreign company for performing work activities. The availability of skills and changing global economic conditions and labour conditions have increased the opportunities of global outsourcing (Gupta and Mukherji, 2007); (Business Wire, 2012). The examples of global outsourcing are mostly found in software development; cloud computing, web development and internet services (Greenemeier, 2002); (Antràs and Staiger, 2012)
The benefits of off shoring are increasing its importance. The companies, hiring off-shoring services are having a pool of talent and skills, saves cost of operations, flexibility of operations and greater quality of work (Anderson, 2011); (Kumar and Salzer, 2010). On the other hand, the disadvantages of off-shoring are; risk of exploiting privacy, confidentiality and misuse of information, bankruptcy of service provider, high dependency, virtual relation and poor quality due to miscommunication (Cordobo, 2009); (Upul, 2010).
3. Licensing and Franchising:
The licensing is a contractual agreement, in which a firm (licensor) permits some proprietary assets to foreign companies (licensee) in exchange of royalty fee. In licensing agreements, the rights are transferred from a domestic company to a foreign company for using products, inventions and processes (Gleeson, 2011).
The advantages of licensing are certain; it is known as an effective way of penetrating in foreign markets. The companies establish their presence in foreign markets, especially those markets, where the company cannot operate due to trade barriers, so if the company is unable to choose exporting or direct investment, then the company can use licensing (Narotama, n.d.). A company can increase its income and brand recognition through licensing (Flower, 2011); (Gleeson, 2011); (Ward, 2011). The disadvantages of licensing include; lack of control of market, limited scope, cross boarder difficulties misuse or breach of contract and licensee can become competitive (Gleeson, 2011). The Beanstalks and Ford are working together under fords licensing program to increase brand awareness and purchasing other than automobiles (Beantalks.com, 2013).
The franchising, also offered as turnkey business opportunities (Ward, 2010), is such business format in which franchisor gives a developed way of doing business under defined system, assistance, guidance and standard operating procedures in return of franchising fee (Queensland Govt., 2012).
There are many benefits of franchising, regarding market entry into international business. Similar to licensing, a franchisor can share the cost of establishing a presence in foreign countries and through giving franchising rights (Queensland Govt., 2012). The franchisor enjoys certain benefits such as, capitalized expansion, economies of scale, managerial talent, brand development, continuous revenue stream and growth opportunities in foreign market (Internicola, 2010); (Andrian, 2010). The disadvantages of franchising are; the franchisee can reduce product quality that may damage brand image. Further, the other disadvantages are; involvement of cost (fee), loss of control, poor relationship between franchisor and franchisee, misuse of authority, conflict of interest, managing growth and other operational and strategic disadvantages (Toporek, 2011); (Whichfranchise.com, 2013). The top three franchises of 2013 are Subway, Hampton Hotels and Jiffy Lube Int. (Entreprenur, 2013)
4. Direct Investing:
The direct investing, also known as foreign direct investment (FDI), is commonly used method of international market entry. In this method, the company makes investment in foreign country. There are three important forms of direct investment such as (a) joint venture, (b) wholly owned foreign affiliate and (c) Greenfield venturing.
4.1 Joint Venture:
The joint venture is the first form of FDI, in which a company comes into agreement with a foreign company to pool their resources for starting a new business activity (Investopedia, 2009). The companies, which use joint venture strategy, are enjoying certain benefits. A company can access large markets, perform longer market research, increase technological and resourcing capabilities, gaining new experience, reducing risk with venture partner, increasing business size and generating more profit opportunities (Christian, 2009); (Emery, 2012); (Ward, 2010). However, there are many disadvantages of joint venture such as, shared profitability, share control, mis-communication, imbalance of expertise, different cultures and lack of mutual trust (Emery, 2012). The Vodafone and Verizon made joint venture to create Verizone Wireless (Murphy, 2012). The joint venture of Pepsi and Straus group in North America (PepsiCo, 2011).
4.2 Wholly Owned Foreign Affiliate:
The wholly owned foreign affiliate or wholly owned subsidiary is defined as, “when a company buys all the shares of a foreign company and gain control on its operations, then that company will be called wholly owned subsidiary of its holding company” (Wise Geek, 2007). The wholly owned subsidiary also passes from two initial stages, called acquisition and mergers. At first, a company’s shares are purchased fully along with its control (acquisition), then it is merged with existing company (in some cases, the companies may not be merged and worked with the same name) and then it is known as a wholly owned subsidiary or foreign affiliate. The Chang, Chung and Moon (2013) confirms in his research that the wholly owned subsidiary is a better option as compared to the joint venture.
American Airlines is wholly owned subsidiary of AMR Corporation (Dictionnary, 2013). The Bugatti Automobiles S.A.S is wholly owned subsidiary of Volkswagen Group France S.A (Coolridescolorado.com, 2012).
The companies, use wholly owned foreign affiliate, are enjoying certain benefits. The wholly owned subsidiary is very easy in developing countries, because a company, from developed country, can easily enter into a foreign country through acquiring an already established and operating company in accordance under local regulations and rules (Mallah, 2010). The wholly owned subsidiary is having independent structure, product category and marketing plan under control of the holding company (Basu, 2011). The common advantages of wholly owned subsidiary are; more financial resources, more financing opportunities in multiple product lines, effective control of operations and location advantages (Basu, 2011); (Goldman and Nieuwenhuizen, 2006). The disadvantages are; the adverse impact of poor performance on finances, image and profitability, higher complexity and risks for managing more businesses and risk of significant loss (Basu, 2011); (Goldman and Nieuwenhuizen, 2006).
4.3 Green Venture:
The Greenfield venture, also known as Greenfield investments, is a very popular kind of foreign direct investment (FDI) (Raff, Ryan and Stähler, 2009). In this method of market entry, the firm chooses to build a new subsidiary from scratch in a foreign country. In china, the companies are having three options for establishing presence in mainland china, (a) though joint venture, (b) through acquisition, (c) Greenfield investments. The firms choose to develop an organization through Green field development for starting a business in china (Norris-Jr., 2011).
The Hyundai Motor Company opened new manufacturing plant in Czech Republic with Greenfield investment (Eironline, 2006). The Vodafone’s entrance in Indian Telecom market is also Greenfield investment (Rakapoor, 2009).
The companies, use Greenfield venture investments, are enjoying certain benefits in market entry. First of all, as compared to other forms of FDI’s, the Greenfield investments or ventures are most advance, viable and profitable method as compared to joint ventures and acquisition (Raff, Ryan and Stähler, 2009). The Greenfield venture provides the company with maximum flexibility of design, volume and equipments of new facilities (Wiley, 2009). The firms are also getting more control over on its overseas operations of the company as compared to other forms of FDI’s and also other forms of market entry (Szalucka, 2010); (Mallah, 2010). There are also risks involved such as, heavy investments, multiple overhead expenses, market information infrastructure development, threats of competitive forces and effect of environmental forces (Szalucka, 2010; Wiley, 2009).
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