Market Entry Methods

Exporting/Importing Direct Indirect

Contractual Entry Modes Licensing Franchising Management Contracts Turnkey Projects

Investment Entry Modes Wholly-Owned

Subsidiary Joint Venture Strategic Alliance

Exporting

Selling and shipping products across borders Easiest and most common first step All size companies use this strategy Direct exporting: Company actively seeks

exporting Indirect exporting: Casual exporting which

uses agents or intermediaries

Advantages: Risk of loss minimized because not much is

invested Product can remain unchanged Can be used to get rid of excess inventory or gain

additional sales

Disadvantages: May not make the most of an opportunity Strongly dependent on exchange rates

Examples: Producer sells to Wal-Mart which ships overseas Stora Enso sells paper products to Canada

Intermediaries

Agents Representatives of one or more indirect exporters

in a target market Export Management Company

Exports products on behalf of exporters Export Trading Company

Provides services to indirect exporters

Licensing

Domestic company allows foreign company to use trademarks, patents, copyrights, processes, or technical knowledge for a fee

Establishes foothold in foreign market without a big investment

Favorite strategy of small to medium size companies

Often use in addition to exporting

Advantages: Foothold in foreign marketing without big

investment Formal agreement in licensing contract Avoids import restrictions

Disadvantages: Hard to protect intellectual property May be least profitable means of entry

Examples: Nestle makes food products with Disney

characters

Franchising

Franchisor provides standardized products and management processes while franchisee provides capital, management personnel and knowledge of local markets

Fastest growing market entry strategy More than 30,000 franchises throughout the

world

Advantages: Allows skills to be located with franchisor while

operations are spread over franchisees Expands company quickly with little investment by

franchisor Foreign laws are friendly because of local

ownership

Disadvantages: Must share profits Poor franchisee can ruin image

Management Contracting

Company sells management skills and runs a foreign operation

Main advantage is that it’s low risk Main disadvantage is that there is low profit potential

and lack of a long-term presence in market Example: DBS Asia (Thailand) awarded a contract

to Favorlangh Communication (Taiwan) to set up and run digital tv programming in Taiwan

Turnkey Operation

One company designs, constructs and tests a production facility for a client firm for a fee

Often used by governments Ex: Turkey’s government had two

consortiums of international firms build four hydroelectric dams

Wholly-Owned Subsidiary

Domestic company owns 100% of the stock of another company

Can buy an existing business (easiest method that takes advantages of existing strengths) or start from scratch

Advantages: Can take advantage of low cost labor Avoid high import taxes Can gain access to raw materials May cut transportation costs to market

Disadvantages: High investment High risk May suffer backlash from country Many countries restrict foreign direct investment

Examples Nike Stora Enso

Joint Ventures

Legal agreements between two or more companies to conduct business together

Separate company is created and jointly owned

Creates an alliance that combines strengths and accomplishes goals more efficiently

2nd most frequently used strategy behind exporting

Advantages: Less capital investment required from each

partner Shared risks Access to skills of partner With a local partner may allow access to markets

which are forbidden to foreigners

Disadvantages: Shared control complicates decision making Agreements require frequent review Could create competitor Share revenue

Strategic Alliance

Relationship between two companies to cooperate to achieve strategic goals

Similar to joint venture except a new company is not formed

Unz & Co. Guide to Exporting http://www.unzco.com/basicguide/toc.html

Small Business Administration Guide http://www.sba.gov/OIT/info/Guide-To-Exporting/

Inc. equivalents

Canada, Japan, England – Ltd. (limited) France, Belgium – Sarl Spain, Mexico, Portugal and Brazil – S.A. Germany, Switzerland – GmbH Netherlands – N.V. Italy – Srl Denmark – A/S

What method of market entry is this??

A company from Singapore is working with businesses in Kenya to help organize and run hospitals

A British toy company allows a Japanese company to create clothing and school supplies with one of the British company’s doll characters on the products.

An example of this would be Nike making shoes in Asia and Honda producing cars in the United States.

A small food-packaging firm cannot afford to sell in other countries, so it asks an export agent to obtain orders for the company.

A Vietnamese company decides to obtain assistance from an Israeli company to share production costs and profits of a chemical manufacturing enterprise.

An Italian restaurant is planning to allow a company in New Zealand to operate several restaurants using the same name and menu items.

A company in Egypt has purchased 51 percent of the stock of a company in Peru.

A disadvantage of this entry method is that it is strongly dependent on exchange rates between countries and may not make the most of of an international opportunity.

Advantages to this method are that it requires less capital, and risks are shared

Which method of entry is the costliest?

Which method of entry is the easiest and most common first step for businesses to go international?

Which is the fastest growing market entry method with over 30,000 possibilities worldwide?