Question

3. What are the seven modes of entry into foreign markets? Briefly describe each.

Answer 1

There are 7 major modes of entering into foreign markets. We will look at their advantages and disadvantages separately.

1. Exporting

When a company manufactures/produces a product or performs service for its customers living in another country, it is called export. By selling products or services to foreign country, a company increase sales and earn revenue from foreign market.

• Low investment and low risks
• Lack of control over foreign market; Lack of information about external environment and market

2. Licensing

In this mode of entry, a firm A leases its technology, patents, brand name and copyrights to another firm B in a foreign country for a predetermined price. A is called licensor and B is called licensee.

Advantages Low investment and Low financial risk of licensor for entry into foreign markets, licensee does not need to invest in R&D, Low risk of product failure for licensee, licensor can chose any market to enter easily without obligations of ownership, managerial decisions, investment.

Disadvantages chances of mistrust between both parties, chances of trade secret thefts, both parties responsible to manage quality and promotion of the products, risk of brand name dilution in case of low quality products

3. Franchising

Advantages	Disadvantages
Franchisee has no risk of product failure Franchisee gets the R&D and brand name with low cost Low investment and Low risk for both parties Both parties learn from the expertise of each other	Difficult and complicated for both parties to agree on certain aspects of business Responsibilities of managing product quality and product promotion on both Difficult to control and risk of trade secret leakage

4. Turnkey Project

In this setting a client pays contractor to design and construct new facilities in its country. In this way a contractor exports its technology and process to other country by building new plants and facilities. Major advantage for a company is to enter foreign market where FDI (foreign direct investment) route is limited and earn revenue from its technology expertise.

Disadvantages are revealing technology and trade secrets to competitors, risk of takeover by host country.

5. Mergers & Acquisitions

In this mode a home company can merge/ acquire with another foreign company to enter into foreign markets and take control of its assets. M&A offers quick access to international manufacturing facilities and marketing networks.

• Advantages Immediate ownership and control over the acquired firm’s assets, quick access to foreign market and customers
• Disadvantages Complex process and requires experts from both countries; Government restrictions on acquisition of local companies may disrupt business; Cultural problem may arise after M&A.

6. Joint Venture

When two or more firms join together to create a new business entity, it is called a joint venture. It is based on shared ownership. Various economics and political reasons may encourage JV route between several companies to achieve synergy and scale of operations.

• Advantages – Access to financial resources of each firms; Sharing of risks between partners; Provides skills, technology, expertise, of each party to a project.
• Disadvantages Conflicts may arise; Slow decision-making due to the involvement of more than one decision-makers; Delay in decision making can cause lost opportunity

7.Wholly Owned Subsidiary

Wholly Owned Subsidiary is a company where 100% stock-holding owned by another parent company. WOS can be created with the acquisition of another firm or create a new division in the parent company.