What is Foreign Market Entry?

Foreign market entry allows firms to sell their goods and services in the international market and expand their business in non-domestic markets. There are many foreign market entry strategies. A firm must take into account internal and external determinants while choosing the appropriate foreign market entry strategy. Few internal determinants include the firms’ objectives and global exposure, and the company’s financial and human resources. The external determinants include marketing, shipping, transportation costs, and degree of political, economic, and operational risks. Also, they involve the market size, competition level, and government laws of the targeted foreign market.

Foreign Market Entry strategies

Some foreign market entry strategies commonly used are explained below:

Exporting

Some companies use the strategy of direct exporting to send their merchandise to foreign markets. They sell directly to foreign customers without the involvement of a third party. Companies that are established in global markets and those that sell luxury commodities usually choose this strategy.

Certain companies use the strategy of indirect exporting - exporting their products and services by utilizing the services of agents. Companies that are in the initial stages of foreign entry go for this strategy.

Since the goods are produced in the domestic market, there is no investment needed in foreign production facilities. However, high costs are involved in transportation, distribution, marketing, and promotion. The firms may have to face high tariff rates and difficulties in customizing their products according to the preferences of the foreign markets.

Licensing

In this agreement, one company (the licensor) allows another company (the licensee) to use the licensor’s intellectual property (IP) to manufacture and sell the licensor's products and services, in exchange for a fee. To employ this strategy, the rules and regulations regarding IP and its subsequent licensing must be strong.

Intellectual properties, such as trademarks and patents, are intangible. Licensing strategy is usually adopted when the licensor’s product is in huge demand in the targeted foreign market.

For instance, an American company gives a license to a Japanese company to manufacture (using the American company’s production technique) and sell that American company’s product (for example - coffee flavored popcorn) in Japan under the brand name of the American company.

Franchising

In franchising, a company (the franchiser) allows a foreign company (the franchisee) to use its brand name to sell its products. Though the franchisee is responsible for all operations in the foreign market, it has to operate according to the business model established by the franchiser.

This strategy is adopted by popular chain restaurants such as McDonald’s and Domino’s.

Contract manufacturing and outsourcing

Here, a company agrees with another company local to the foreign market, to produce one of its products. This strategy is utilized for products with the highest production cost in the domestic market, whose manufacturing done in a foreign country would be profitable.

For example, in the US apparel industry, it is common to hire companies in Asian countries, to produce products. Nevertheless, American companies would possess full control of the product design and put their brand label on the finished products.

Strategic partnership alliance

It involves a contractual agreement between two or more companies, stating that the concerned parties will cooperate in a particular manner, for a certain period, to achieve a common objective. Companies generally enter into partnership agreements with foreign companies.

The investment required here is considerably less, and the costs and risks are often shared between the partners.

In some scenarios, a country’s laws may require foreign companies to partner with local companies. Such regulations are prevalent, especially in Asian countries.

Joint venture

A joint venture is a type of partnership in which the partners create and fund an independent business entity to manage their joint operations. For instance, the Sony Ericsson joint venture was created by Sony and Ericsson on 1^st October 2001, to popularize mobile phones with multimedia communication.

Acquisitions

In this scenario, a company buys (acquires) an established company in a foreign market. This strategy provides the foreign company with the status of a local company in the targeted market. This way, the foreign company can gain local market knowledge, an established customer base, a network of suppliers and vendors, and be treated as a local firm by the government.

This strategy is adopted mainly when the local company has a substantial market share and can pose as a direct competitor for the company.

This strategy involves higher costs. Moreover, evaluation of the true value of a company in the targeted foreign market requires thorough diligence.

Greenfield investments 

Greenfield investments are a type of foreign direct investment (FDI). In this strategy, the company enters the targeted foreign market by buying land, building new factories, plants, or stores, and operating to serve the targeted foreign market.

This strategy involves the greatest number of risks and investments. It is often adopted to facilitate local law and access to skilled labor and technology.

Turnkey projects

Turnkey projects are more common amongst companies that provide services like architecture, construction, and engineering. The client can be a foreign government, and the project can be financed and managed by international agencies like the World Bank. The company builds a facility in a foreign country and turns it over to the client. The foreign client just has to begin the operations.

Barriers to international market entry

Many barriers exist to prevent businesses from entering international markets. Following are the three main barriers:

Government policies

Laws and regulations of some countries do not allow foreign companies to operate with complete autonomy. Most Asian countries require foreign companies to become partners with local companies. Additionally, business laws and regulations surrounding manufacturing activities differ from country to country. Some foreign policies might not result in a business's success. For instance, Chinese e-commerce companies such as Club Factory and Romwe were banned in India, due to political tension between the two countries.

Huge costs

Penetrating a new market where the customer base is unknown requires huge investments in monetary terms. Costs can be incurred in the development of strategies owing to the different market structures, acquiring personnel, building a strong foothold, building a network of suppliers and vendors, and many such activities before the company can start doing business.

Monopolies

If the foreign market operates as a monopoly, and the existing companies control the distribution networks, it may prove to be impossible to find a cost-effective way to conduct business. The other major issue that a monopoly market entails is that they control the demand and supply mechanisms. It is nearly impossible for a new business to enter a monopoly market, and even if a new business enters, there is a high chance that it might not be able to compete.

Counter trade  

Counter trading functions as a barter system since companies trade products with each other instead of offering their products for purchase. In this strategy, a company ensures that the other company understands the quality of its products, and buys them. This strategy helps in the exemption of the import quotas.

Context and Applications

Foreign market entry is an important concept in international trade. There are multiple risks and costs involved while entering an overseas market, but the expected returns and potential profits are also multifold.

These concepts hold significant value in various professional exams at graduate and post-graduate levels. The courses in which such concepts are important are given below:

• Bachelor’s in Business Administration
• Master’s in Business Administration

Practice Problems

1. In which strategy are costs and risks shared between the involved parties?

1. Acquisitions
2. Joint Ventures 
3. Outsourcing
4. Exporting

Answer: Option b

Explanation:  In Joint Venture, costs and risks are shared between the partners.

2. Which of the following is considered to be one of the most expensive entry strategies and a type of FDI?

1. Greenfield investment
2. Brownfield investment
3. Acquisitions
4. Portfolio investment

Answer: Option a

Explanation: In Greenfield investments, the company has to build factories, stores, and distribution networks in a foreign county.

3. Which of these entry strategies follow the 1+1=3 approach?

1. Joint Venture
2. Licensing
3. Franchising
4. Turnkey projects

Answer: Option a

Explanation: In a joint venture, two companies agree to work together in a particular geographic market, and they create a third company to manage the operations (1+1=3).

4. Which strategy involves the presence of international organizations like the World Bank to ensure that the company provides high-quality services and clients pay in full amount?

1. Licensing
2. Outsourcing
3. Greenfield Investments
4. Turnkey projects

Answer: Option d

Explanation:  Turnkey projects involve the presence of international organizations to ensure that the company provides high-quality services and clients pay in full amount.

5. Which of the following is a major barrier to entry into foreign markets?

1. Huge Investments
2. Monopolies
3. Government Policies
4. All of the above

Answer: Option d

Explanation: Huge costs, government policies, and the existence of monopolies in local markets are the three chief barriers to entry into foreign markets.