Modes of Entry into International Markets

A foreign market mode of entry is a channel which enables the enterprise’s product, human skills, management, technology or other resources, to enter into a foreign country. The choice of market entry mode is a vital strategic decision for firms intending to carry out business overseas. A number of definitions of different modes of entry exist. The major modes of international entry is classified as indirect export, direct export and alternatives to export.

Most models of foreign market mode of entry is due to limited resources, therefore enterprises initially penetrate a foreign market through indirect export methods. Indirect paths to internationalization are those whereby small firms are involved in exporting, sourcing or distribution agreements with intermediary companies who manage, on their behalf, the transaction, sale or service with overseas companies. Export intermediaries play an important middleman role in international trade, linking individuals and organizations that would otherwise not have been connected. Small and new ventures use intermediaries to overcome knowledge gaps, find customers and reduce uncertainties and risks associated with operating in foreign markets.

The modes of entry into international markets will switches to direct export such as agents, distributors, and sales branches, when the enterprise becomes more dynamic in international business. Direct export known as the producer will conduct the distribution activities to a foreign agent or importer or to the end customer directly

Selecting the channel of distribution is a long-term strategic decision and need to build long-term relationships and the necessity of stimulating cooperation among distribution alliance partners. Distribution channels defined as the external contractual groups that firms cooperation to accomplish their distribution objectives. The chosen channel will affect the enterprise’s effectiveness and efficiency for as long as it is operating. As a result, the enterprise should plan a long-term strategy and evaluate the own enterprises’s future economical abilities, before select distribution channel.

1. Indirect Export

Indirect export is a chain that connect with the exporting enterprise with a domestic middleman in the target foreign country and link to the end customer as a final point. Export intermediaries often help their clients to identify customers, financing and distribution infrastructure providers. Intermediaries also help firms in overcoming knowledge gaps of the local market, reduce uncertainties and risks associated with operating in foreign markets. Firms may hire export intermediaries because they perform certain functions related to exporting without large investments, with low start up costs and few risks better than the firm itself could. Firms may hire export intermediaries because they perform certain functions related to exporting better or at lower costs than the firm itself could, for example because they possess country-specific knowledge that the firm lacks. Manufacturers may be more likely to use intermediaries when entering foreign markets. Export intermediaries can also help firms to save costs associated with searching new customers and monitoring the enforcement of contracts as well as to help access intermediaries’ contacts, experience and knowledge of foreign markets.

Indirect export may work in three ways: through a trading firm, an export merchant and an export agent.

1.1 Trading firm

An export trading firm is an alliance among a few local small and medium enterprise (SME) to export their product to a target country. They will do export as teamwork to developing and penetrating a target country rather than do it single-handedly. Those firms cooperate to reduce export costs and risks while can develop market research to find new export business opportunities Firms that team-up for exporting can negotiate favorable rates on transportation, insurance and other export services. However ,a trading firm is independent when it operate in a foreign market.

1.2 Export through an Export Agent

Export agent is buyers in foreign countries who will buy products from enterprise and sell it abroad in their country. The agent usually awards the lowest bidder with the order and sell it with receives commission as compensation for their effort. Normally, the payment for export agent is received almost immediately plus there is very little effort required to complete the sale. Therefore, the manufacturer can get access to a larger market with minimum cost and risk. The manufacturer’s reputation is the largest risk when the manufacturer choosing export agent in foreign market. The manufacturer absolutely looses their control of the export activities after they select an export agent to help them sell their product in foreign market.

1.3 Export through an Export Merchant

An export merchant acts as a kind of international wholesaler. An export merchant seeks out needs in foreign markets and negotiates with a manufacturer. After makes purchases from manufacturers, the goods are exported to the waiting buyer. After having the merchandise packed and marked to specifications, the export merchant resells the goods in its own name. The export merchant normally specializes in a particular line of products or in a particular geographical market area where they have been operating during a longer a longer period. Sometime it sells the goods with the original supplier’s labels or puts its own label.

2. Direct Export

Direct export may be conducted in three ways: (1) directly to the final customer,(2) with the help of a representative or (3) through the exporting enterprise’s own establishment. The enterprise will confront with higher investment risks when they conduct export their product through direct link to foreign country. On the other hand, the enterprise may gain potential profit margin and the cost for transaction between home country and host country will drop.

2.1 Export Directly to the Final Customer

When conduct direct export without going through an intermediary in the home country to develops an overseas channel so that it deals directly with a foreign party, the exporting enterprise takes hold of all exporting activities. Therefore, they have to conduct their marketing research, investigations, transportation and documentation. The advantages of directly to final customers is active market exploitation and greater control to the transaction in the host country. On top of that, the channel also improves communication and consistency. However, it is a difficult channel to handle if the manufacturer is unfamiliar with the foreign market and causing time consuming and expensive.

2.2 Export through a Representative

Export through a representative have played a crucial role in the development of the internationalization process. A representative is an intermediaries in the foreign market which have their own market organization that separated from the exporting enterprise. The company can determine to adapt the quantity of the home-based sales representative travel abroad at certain times to take orders or find business. Those enterprise want to penetrate the foreign market but afraid of the risk can find an experienced intermediaries to help them start their operation in foreign country. This is because those intermediaries obtain the knowledge about the country and may efficiently locate the product to the final customer.

  • Agent: An export agent, is an intermediary or trading company that acts on behalf of a company to open up or develop a market in a foreign country. However, the agent does not take title to the products and gives the exporter to take part in the planning and monitoring of the marketing activities. Export agents usually paid a commission on all sales and may have exclusive rights in a particular geographic area. A good agent will know or get to know local market conditions, which the exporting enterprises lack. An agent just carrying out part of the operations on behalf of the exporter, the exporter owns the product until it is sold to the final customer. The exporter has responsible for the customers risks because of the agent does not do not handle the products. The role of the export agent is to evaluate the export potential of the local manufacturer’s products, advertise them abroad, look for foreign buyers, place orders with the manufacturer, or arrange for, the documentation, take care of shipments and insurance once a sale has been made.
  • Distributor: Distributor is a firm located in the foreign market that purchase goods, re-label them with their own name, brand or trademark and then sell them as their own products. Foreign distributors are the backbone for many export manufacturer. These export intermediaries possess crucial contacts with foreign buyers, strong local-market knowledge, and the ability to provide sophisticated marketing services. Distributors usually has a close relationship with the exporter and given the exclusive right to sell the product. They typically provide complementary services to their buyers, such as maintenance, parts sales, and technical assistance. On top of that, the distributor will assist the export enterprise by running processing orders, stock foreign inventories, grant buyer credit n delivery. Entering foreign market with using distributors is less risky and payment will get directly after transaction. This methods allow SMEs with limited resources to operate in major markets and companies with significant resources to offer their products and services in smaller markets.

2.3 Export through an own Establishment

Export through an own establishment usually is a company-owned export department for a enterprise sells their product directly to companies or final customers in the foreign market.The enterprise has full control over export activities such as the marketing and distribution of its goods and services, and coordinates research, distribution, sales, marketing, pricing, and legal. This department usually consists of an export sales manager with some clerical assistants. Export through an own establishment is an expensive way but very effective for enterprise to conduct their business in foreign market.

  • Sales office: An enterprise starting a sales office in a foreign market have to be establish new relationships in the foreign business network. Enter a foreign market with sales office is very costly n time consuming. This is because establish a sales office in foreign market required a high level of resources and effort into the market, however, it is the best way to enterprise to obtain the knowledge of the local market.
  • Branch: A branch office established facilitate sales in the foreign market . They is an intermediary who selling products and providing support services to the manufacturer’s sales force. A sales branch allows the manufacturer to achieve greater presence and programme control in the foreign market. The role of sales branch handle sales is distribute product and managing warehouse and promotion. It often serves as a display center and customer service center in the foreign market. However, there are no manufacturing is done at this location.
  • Subsidiary: An export sales subsidiary basically removes the export function from the parent company and places the function in a separate wholly owned subsidiary. The export subsidiary purchases goods from the parent company, then resells it on their country. Export subsidiaries is able to add products from outside the parent company in order to round out its product line, and is able to separate out costs and expenses more efficiently than an internal department. On top of that, export subsidiaries can also develop into center of excellence, controlling critical resources that other parts of the MNE depend upon.

3. Alternatives to Export

A lot enterprise realized the importance of expanding their business internationally. However, there are several obstacles to internationalization for firms in the developing world. One of these is a lack of information and knowledge about foreign markets. In such case, licensing or franchising might be the right choice.

3.1 License Manufacturing

Licensing is another easy way to for a manufacturer to involve in international marketing with a limited degree of risk. Licensing occurs when an enterprise within the foreign market, the licensee, make an agreement with the licencor who offering the right to use a manufacturing process, trademark rights, patent rights, or trade secret of value for a fee or royalty. The licensee will produce the licencor’s products and market these products in his assigned territory. After that, the licensee will pay the licencor royalties related to the sales volume of the products. The producing enterprise hereby escapes expensive toll and other trade barriers, exchange fluctuations, high transportation costs and political risks. The disadvantage of licensing is the firm has less control over the licensee than if it had set up its own production facilities. After few years, once the know-how is transferred, the foreign firm may begin to act on its own and the international firm may therefore lose that market. Therefore, the licencor must establish a mutual advantage in working together, and a key to doing this is to remain innovative so that the licensee continues to depend on the licencor.

3.2 Franchising

Franchising is an entrepreneurial activity that plays a crucial role in the creation of new jobs and economic development. In franchising, an exporting enterprise collaborates with a franchisee-entrepreneur to create economic value in a prescribed manner. The franchisee obtains the right to use franchisers, brand name, and marketing techniques to market goods or services. In return, the franchisee pays an up-front fee and ongoing royalties to the franchiser. Franchisees usually operate in local markets and communities, therefore, they can provide local knowledge to penetrate the foreign market. Thus, franchisees bring to the franchise system not just financial capital, but also a knowledge of geographic locations and labor markets, and their own managerial labor; that is they represent an efficient bundled source of financial, managerial and information capital. The franchising tends to be more directly involved in the development and control of the marketing program. The main disadvantage of franchising is the level of the standardization of the product and service. Without a standardization there might be a risk of losing transferred know-how.

3.3 Foreign Direct Investment(Manufacture)

Foreign market investment is the direct ownership of facilities in the foreign market. There are two ways for enterprise to enter foreign market through investment. The first option is make a direct acquisition or merger in the host market. The second option is develop its own facilities from the ground up. The reason that the firm invest in the foreign market may be the production in the foreign market is much cheaper. On top of that, the firm develops a deeper relationship with government, customers and local suppliers, so that make a better adaptation of its products to the local marketing environment.

3.4 Joint Venture

Joint venture is a contractual agreement between an international enterprise and foreign enterprise to execute a particular business. A joint venture is a second broad method of entering a foreign market to set up production and marketing facilities in common with licensing. In joint ventures, the international firm has an equity position and a management voice in the foreign firm. Therefore, international firm better control over operations and also access to local market knowledge. The international firm has access to the network of relationships of the franchisee and is less exposed to the risk expropriation thanks to the partnership with the local firm. Equity ownership in a joint venture is an important determinant of its performance. This is because if the partner has different strategy than the international enterprise, it may lead to conflicting interests.