Financi

al
Topics

Professor : Dr Tian Lin

Student: Oussama El mimouni
202012012050014
Internationalizing in a
Foreign Market
Abstract

In the context of economics, internationalization can refer to a company that takes steps to
increase its footprint or capture greater market share outside of its country of domicile by
branching out into international markets. The global corporate trend toward
internationalization has helped push the world economy into a state of globalization, in which
economies throughout the world become highly interconnected due to cross-border commerce
and finance. As such, they are greatly impacted by each other’s' national activities and
economic well-being. This paper aim to seek the reasons of internationalizing in foreign
markets, methods of analyzing and establishing in foreign market.

Introduction
The disintegration of the former Soviet Union and the socialist bloc, the abolishment of the
Berlin Wall, the integration of Europe in 1992, the liberation of Eastern Europe and
continuous rise of Asia- pacific region etc., signifies a pointer to the drive and wave of
unification that is blowing across countries, regions, continents to make the word a Global
village with borderless entity. (Zuidhof 2003)
The thrust of Global-Trade-Wind brought about a lot of opportunities and challenges. More
and more firms are becoming involved in international activities and are exhibiting behaviors
not previously seen before. It is obvious that valuable lesson can learned from the study of
internationalization, from historical perspective so that methodological inadequacies can
identified and new paradigm of enquiry can be promoted in order to better understand the
entry strategy of firms (Grant 2005). Though, the motives for going across border are
different from one firm to another. While domestic market was inadequate for some firms,
other pursued internationalization because of economic of scale and opportunities available. If
the firms preferred to feel happier remaining home-bound in the past ages, there have been
remarkable changes and adaptations in respect to responses to the demand of the global trend
(Stephen Henderson 1989).
Consequently, more countries opening up the trade borders, elimination of barriers and joined
the WTO, acted as a booster to firm’s internationalization process. Moreover, the threat that
firms are no more secured by staying in their domestic markets as well as easy penetration of
domestic market by foreign firms due to communication and technological breakthrough
made it mandatory for many companies to go international or at least expand their activities
across their national border. While some firms prefer to export their product and consolidated
their home market, other prefer to adopt more aggressive approach by acquiring other firms,
forming alliance, go into joint venture or finally established their own subsidiary. In other to
understand and appreciate this inconsistency, we study how firms enter foreign market; by
identify the choice of entry strategies and the factors that influenced such choice. This is to
increase the stock of knowledge international business and positively to serve as a guide to
other firms when entering foreign market.
Deal with globalization this issue, how to manage their business and how to establish the
international strategy will be more important for firms. It is important to recognize what
strategies are feasible to be transferred abroad and then learn what needs to be adapted. In
accordance with this, Ohmae (1994) argues that global localization is the most advanced form
of the globalization process, hence the management both have a global and a local orientation.
The different external factors also are influencing between parent and host organization such
as cultural, political; economic and legal distances.

Chapter 1: Internationalizations in a Foreign Market

Internationalization describes the process of designing products to meet the needs of users in
many countries or designing them so they can be easily modified, to achieve this goal.
Internationalization might mean designing a website so that when it's translated from English
to Spanish, the aesthetic layout still works properly. This may be difficult to achieve because
many words in Spanish have more characters than their English counterparts. They may thus
take up more space on the page in Spanish than in English.
In the context of economics, internationalization can refer to a company that takes steps to
increase its footprint or capture greater market share outside of its country of domicile by
branching out into international markets. The global corporate trend toward
internationalization has helped push the world economy into a state of globalization, in which
economies throughout the world become highly interconnected due to cross-border commerce
and finance. As such, they are greatly impacted by each other’s' national activities and
economic well-being.
 Internationalization describes designing a product in a way that it may be readily
consumed across multiple countries.
 This process is used by companies looking to expand their global footprint beyond
their own domestic market understanding consumers abroad may have different tastes
or habits.
 Internationalization often requires modifying products to conform to the technical or
cultural needs of a given country, such as creating plugs suitable for different types of
electrical outlets.

1. Reasons and Decisions.

The current international economic reality is characterized by its dynamics and requires from
companies a broad vision of their economic strategies. Economic globalization becomes
indispensable if it comes to company’s viability and competition on the world markets. Yet,
due to the international pressure, it gets harder for competitors, suppliers and clients to access
those markets from the outside.
Nowadays internationalization has become one of the key elements of a good functioning of a
firm as well as its future perspectives. In order for a company to be competitive at a local
level, it is crucial to be such on the international level. And on contrary, internationalization
hardly appears if the company is not competitive within borders of its own country.
Internationalization appears to be tightly related to the problem of competitiveness before the
external firms. Current international economic environment is getting each time more
dynamic and global. That is why the entrance to the foreign market also requires a thorough
analysis of the own county’s and other national companies position in respect to the
international competition.
The main reasons why internationalization is a good choice:
 It grants a true independence from the local market business cycles
 Permits to access a broader market
 Helps to improve a general company’s image
 Enhances productive capacity
 Diminishes costs by virtue of enhancing productive efficiency
However, sometimes it might become quite complicated for small and medium size
companies to understand tendencies of world’s economy when trying to take advantage of
new commercial opportunities, a decision to internationalize corresponds to a will of growing.
In this sense, company’s size does not have to be a barrier on its way to expand far beyond the
national territory.
Internationalization can be a fantastic opportunity for your company. It is an important issue
that you should consider from the very beginning when launching your business.

2. Factors of internationalization strategy

In the time of internationalization, the mode of entry that a company must use to penetrate a
new market, depends on a series of characteristics according to the conditions of the country
of destination, of those relative to the country of origin and those who compete with the
company itself. Let’s take a look at it!
In relation to the characteristics relating to the country of destination, the most advisable input
mode will vary depending on:
The potential for market growth: If the market is small or the possibilities of growth of the
market share of the company are low, it is advisable that it starts its process of
internationalization with an entry method that involves low risk and investment similar to the
exportation. On the other hand, if the country of destination has a high growth projection, the
company must consider, if its resources allow it, to settle in the country of destination and to
establish production activities in that market in the medium or long term.
The competitive structure of the sector to which the company belongs in that new
market: The presence of markets with few competitors, as is the case of sectors with
situations of a certain oligopoly, favor acquisitions as a method of entry when entering the
new market.
The quality of the infrastructures: A good network of infrastructures favors export (either
through own channels or intermediaries) as a feasible entry method due to its low level of risk
and investment, since it promotes an adequate distribution of the company’s products in the
country of destination and the possibility of increasing sales as the distribution and logistics
system is perfected, with a low cost and an adequate service.
The presence of entrance barriers: If there are barriers to entry, it is very likely that the
company will not be able to consider as an option exportation, because the tariffs make the
product too expensive and not competitive. The company will then be obliged to have to
establish some type of establishment that will make some step of the value chain of the
product, with sufficient value to qualify the product as originating from the new market, or
alternatively, to cede the License to producers of the country of destination. This is the
situation that often occurs when you study the Brazilian market, for example
The social and cultural peculiarities of that market: The segmentation of potential clients
with certain characteristics in the new market, often dictates whether it may be advisable to
adopt input methods that allow the company to have more control in the new market, such as
direct investments or alliances with local partners.
The political risk: In certain markets it is advisable that companies look for a local partner
who will provide experience and security in the new market, to reduce this type of risk in
markets subject to it, for which it is necessary to study in advance the macroeconomic and
regulatory structure of the country.
In relation to the characteristics related to the country of origin, the chosen mode of entry will
depend on:
The production costs: If the production costs are relatively lower in the country of origin
with respect to the country of destination, an advisable form of entry is exportation, so that
products made in the country of origin are more competitive abroad. On the other hand, if the
costs in the new country are comparatively lower, the company should consider establishing
the production in the new country and take advantage of the cost opportunities offered by the
new market. This reterritorialization has been the usual practice of Western companies,
displacing their production plants to countries with cheaper labor, which is the case in many
Asian countries. However, after the drop in wages caused by the crisis and the increases
experienced by some of these markets, such as China, some countries have stopped presenting
the same attractiveness for certain sectors. It is therefore necessary to previously study the
cost structure involved in each market, before making decisions about the relocation of a
production.
The degree of competition in the market of origin of the company: If in the country of
origin, the sector from which the company comes is characterized by a structure with few
competitors, it may be advisable to choose fast entry methods such as acquisitions or the
search for reliable partners in the new market.

3. Method of analysis of an international market

International businesses have the fundamental goals of expanding market share, revenues, and
profits. They often achieve these goals by entering new markets or by introducing new
products into markets in which they already have a presence. A firm’s ability to do this
effectively hinges on its developing a thorough understanding of a given geographical or
product market. To successfully increase market share, revenue, and profits, firms must
normally follow three steps:
Assessing Alternative Foreign Markets:
In assessing alternative foreign market, a firm must consider a variety of factor including the
current and potential sizes of the markets, the levels of competition the firm will face, their
legal and political environment, and socio-cultural factors that may affect the firm’s
operations and performance. Information about some of these factors is relatively objective
and easy to obtain.
Market potential: The first step in foreign market selection is assessing market potential.
Many publications such as those listed in “Building Global Skills” provide data about
population, GDP, per capita GDP, public infrastructure, and ownership of such goods as
automobiles and televisions. The decisions a firm draws from this information often depend
upon the positioning of its products relative to those of the competitors. A firm producing
high quality products at premium prices will find richer market attractive but may have more
difficulty penetrating a poorer market. Conversely a firm specializing in low priced, lower
quality goods may find the poorer market even more lucrative than the richer market.
Level of competition: Firm must consider in selecting a foreign market is the level of
competition in the market both the current level and the likely future level. To assess the
competitive environment, it should identify the number and sizes of firms already competing
in the market, their relative market share, their pricing and their distribution strategies, and
their relative strength and weaknesses, both individually and collectively. It must then weigh
these factors against actual market conditions and its own competitive position.
Legal and political environment: A firm contemplating entry into a particular market also
needs to understand the host country’s trade policies and its general legal and political
environment. A firm may choose to forgo exporting its goods to a country that has high tariffs
and other trade restriction in favor of exporting to one that has fewer or less significant
barriers. Government stability is an important factor in foreign market assessment.
Socio-cultural influences: Manger assessing foreign markets must also consider socio-
cultural influences, because of their subjective nature, are often difficult to quantify. To
reduce the uncertainty associated with these factors, firms often focus their initial
internationalization in countries culturally similar to their home markets.
Evaluating Costs, Benefits and Risks
The next step in foreign market assessment is a careful evaluation of the costs, benefits, and
risks associated with doing business in a particular foreign market.
Costs: Two types of costs are relevant at this point: direct and opportunity. Direct costs are
those firm incurs in entering a new foreign market and include costs associated with setting up
a business operation, transferring managers to run it, and shipping equipment, and
merchandise. The firm also incurs opportunity costs, because the firm has limited resources,
entering one market may preclude or delay its entry in another.
Benefits: Among the most obvious potential benefits are the expected sales and profits from
the markets. Other includes lower acquisition and manufacturing costs, foreclosing of markets
to competitors, competitive advantage, access to new technology, and the opportunity to
achieve synergy with other operations.
Risks: Of course, few benefits are achieved without some degree of risk. Generally, a firm
entering a new market incurs the risk of exchange rate fluctuation, additional operating
complexity, and direct financial losses due to inaccurate assessment of market potential. In
extreme cases, it also faces the risk of loss through government seizure of property or due to
war or terrorism.

4. Issues related to presence abroad

Meeting the challenges of international expansion is crucial. Without the right preparation,
any hopes of growth within an unfamiliar market will be impossible. Companies need to
define their business case, determine a customer type to target, research the regulations
involved and create a strategy to follow.
Risks to Supply Chain
Operating a supply chain that spans national borders is a big challenge. The intricacies of
imports, exports, shipping and operational logistics are affected by international laws, trade
deals and other complex legislation. For example, if you’re shipping goods from North
America to Europe, you have to deal with both cost and time - plus the risk of environmental
factors.
International expansion is not something to be rushed. You need to take the time to develop a
solid strategy for your supply chain and any changes that may affect it in the future. For
example, you may find yourself contending with a competitor who can fill the shelves quicker
than you can because they source their materials from a closer place. Supply chain strategies
aren’t a one-size-fits-all process. Your organization needs to develop them relative to the
location you’re expanding into. This means getting an understanding of local trade laws,
common external influences and local material sources.
Talent Acquisition and Onboarding
Acquiring or retaining talent is a big part of international expansion. Talented staff provide a
foundational knowledge base, influencing success within a certain region. Without
experienced employees acting as an anchor within that locale, your expansion process might
run out of momentum. This is especially true within any mergers or acquisitions venture.
Hiring staff on the ground is also a challenge - involving a unique onboarding process that
you might find difficult to implement as it's carried out remotely. Hiring staff involves
increases in overheads, a range of HR responsibilities and ultimately, the creation of trust.
When hiring overseas, you don’t have the same access to these individuals, making it harder
to gauge whether they're a good fit.
Compliance Issues
Another challenge of international expansion is tax and compliance. Operating in more than
one country means dealing with more than one set of business regulations. Taxes, fees, trade
tariffs - these are obstacles that need a keen eye and experience to operate compliantly with.
Organizations also need to be well aware of any specific trading standards that apply to their
procedures. Failure to comply with the necessary regulations can halt your expansion and
create possibly detrimental additional costs for your business.
New Market Competition
Similarities in services, products and business models can create fierce competition between
organizations. If you’re expanding into a new market, have you considered whether there are
any companies who offer the same as you? If so, the challenge is to differentiate your
products and services enough to remain competitive or even gain an edge. Similarly, you’re
having to deal with two separate sets of regulatory, payroll and transaction obligations -
whereas the competitor may only be working in one. It’s a good idea to prepare yourself by
providing a unique service to your new market, as well as developing good working
relationships with local businesses, shipping companies, material suppliers and other
organizations that can make or break your supply chain. Try and develop a working
knowledge of the market. This may require external input or hiring talent from that market
itself. Through this, you can gain the sort of knowledge that you might have otherwise
missed, giving you a better understanding of what that market is looking for.
These are only the main four issues - also need to consider any barriers of language and
culture, HR complications and obligations, immigration and employee screening.

5. Factors for choosing a distribution method.

Some of the factors to consider while selecting a channel of distribution are: The Nature of
the Product, The Nature of the market, The Nature of Middlemen, The nature and size of the
manufacturing unit, Government Regulations, Policies and Competition.
Distribution of goods is as important as production. Existence of an organization largely
depends upon a proper and well organized system of distribution. It is therefore, necessary
than utmost attention should be paid in selecting a channel of distribution.
Various constituents of the marketing mix like promotion etc., are closely related to the
channels of distribution. A wrong choice of distribution channel ultimately increases the price
of the product. Deciding a proper channel of distribution is not an easy task. It involves a
careful study and consideration of many factors stated below.
a. The Nature of the Product:
These factors include physical characteristics of a product and their impact on the selection of
a particular channel of distribution.
Various factors under this category are:
1. Perishability: Products which are perishable in nature are distributed by employing a
shorter channel of distribution so that goods could be delivered to the consumers
without delay. Delay in distribution of these products will deteriorate their quality.
2. Size and weight of product: Bulky and heavy products like coal and food grains etc.
are directly distributed to the users involve heavy transportation costs. In order to
minimize these costs a short and direct distribution channel is suitable.
3. Unit value of a product: Products with lesser unit value and high turnover are
distributed by employing longer channels of distribution. Household products like
utensils, cloth, cosmetics etc. take longer time in reaching the consumers. On the other
hand, products like jeweler having high product value are directly sold to the
consumers by the jewelers.
4. Standardization: Products of standard size and quality usually take longer time by
adopting longer channel of distribution. For example, machine tools and automobile
products which are of standard size reach the consumer through the wholesalers and
retailers. Un-standardized articles take lesser time and pass through shorter channels
of distribution.
5. Technical Nature of Products: Industrial products which are highly technical in
nature are usually distributed directly to the industrial users and take lesser time and
adopt shorter channel of distribution. In this case after sales service and technical
advice is provided by the manufacturer to the consumers. On the other hand, consumer
products of technical nature are usually sold through wholesalers and retailers. In this
manner longer channel of distribution is employed for their sales. After sales services
are provided by the wholesalers and retailers. Examples of such products are
televisions, scooters, refrigerators, etc.
6. Product Lines: A manufacturer producing different products in the same lines sells
directly or through retailers and lesser time is consumed in their distribution. For
example, in case automobile rubber products this practice is followed. On the other
hand, a manufacturer dealing only in one item appoints sole selling agents,
wholesalers and retailers for selling the product. For example, in case of ‘Vanaspati
Ghee’ longer distribution channel in undertaken.
b. The Nature of the market:
This is another factor influencing the choice of a proper channel of distribution. In the words
of Lazo and Corbin “Marketing managements select channels on the basis of customer wants-
how, where and under what circumstances. The number of buyers of the product affects the
choice of a f channel of distribution.
Following factors are considered in this regard:
1. Consumer of industrial market: In case of industrial markets, number of buyers is
less; a shorter channel of distribution can be adopted. These buyers usually directly
purchase from the manufacturers. Marketing intermediaries are not needed in this
case. But in case of consumer markets, where there are a large number of buyers, a
longer channel of distribution is employed. Distribution process cannot be effectively
carried out without the services of wholesalers and retailers.
2. Number of prospective buyers: If the number of buyers is likely to be more, the
distribution channel will be long. On the other hand, if the number of consumers is
expected to be less, the manufacturer can effectively sell directly to the consumers by
appointing salesmen.
3. Size of the order: If the size of the order placed by the customers is big, direct selling
can be undertaken by the manufacturer as in case of industrial goods. But where the
size of the order is small, middlemen are appointed to distribute the products.
4. Geographic concentration of market: Where the customers are concentrated at one
particular place or market, distribution channel will be short and the manufacturer can
directly supply the goods in that area by opening his own shops or sales depot. In case
where buyers are widely scattered, it is very difficult for the manufacturer to establish
a direct link with the consumers, services of wholesalers and retailers will be used.
5. Buying habits of customers: This includes tastes, preferences, likes and dislikes of
customers. Customers also expect certain services like credit and personal attention
and after sales services etc. All these factors greatly influence the choice of
distribution channel.
c. The Nature of Middlemen:
Marketing intermediaries are vital components in the distribution of goods. They greatly
influence the marketing of goods.
Important factors relating to the selection of a particular middleman are explained as under:
1. Cost of distribution of goods: Cost of distribution through middlemen is one of the
main considerations to be taken into account by the manufacturer. Higher cost of
distribution will result in the increased cost of product. The manufacturer should select
the most economical distribution channel. In finalizing the channel of distribution,
services provided by the intermediaries must be kept in mind. It may be pointed out
that the manufacturer can select an expensive marketing intermediary because that
may ensure various marketing services which cannot be offered by others.
2. Availability of desired middlemen: Sometimes desired middlemen may not be
available for the distribution of goods. They may be busy in dealing with the
competitive products. Under such circumstances the manufacturer has to make his
own arrangements by opening his branches or sales depots to distribute the goods to
the consumers.
 3. Unsuitable marketing policies for middlemen: The marketing policies of the
manufacturer may not be welcomed by the middlemen the terms and conditions may
not favor the middlemen. For example, some wholesalers or retailers would like to act
as sole selling agents for the product in a particular area or region.
4. Services provided by middlemen: The manufacturer should select those middlemen
who provide various marketing services is, storage, credit and packing etc. At the
same time the middlemen should ensure various services to customers.
5. Ensuring greater volume of sales: A manufacturer would like to appoint that
middlemen who assure greater sales volume over the long run.
6. Reputation and financial soundness: In appointing middleman, the manufacturer
must take into consideration the financial stability and reputation of the middleman. A
financially sound middleman can provide credit facilities to customers and make
prompt payment to the manufacturer.
d. The nature and size of the manufacturing unit:
The nature and size of manufacturing unit has a great impact on the selection of a distribution
channel. The various considerations in this regard are as follows:
1. Manufacturer Reputation and Financial Stability: Reputed and financially sound
manufacturing concerns can easily engage middlemen as compared to lesser reputed
and newly established units. Usually a manufacturing unit having a sound financial
base can easily distribute the goods without appointing middlemen by opening their
own sales depots and branches. A financially weaker unit cannot operate without the
help of middlemen.
2. Ability and Experience of the Undertaking: Industrial undertakings having ample
marketing ability and experience can effectively manage their distribution activities
themselves. They have lesser dependence on undertaking intermediaries. On the other
hand, marketing units possessing lesser marketing ability and experience depend more
on middlemen for the distribution of goods.
3. Desire for Control of Channel: A manufacturer may resort to a shorter distribution
channel in order to exercise effective control over distribution. This is suitable in case
of perishable goods and is helpful in establishing direct link between the manufacturer
and the consumer. The cost of distribution may be more by adopting such a channel of
distribution.
4. Industrial Conventions: Industrial conventions followed influence the selection of
distribution channel. If a particular mode of distribution is adopted in an industry, the
same will be followed by every manufacturing unit in that industry in distribution their
products.
5. Services Provided by the Manufacturers: The selection of marketing intermediaries
is also influenced by various services provided by the manufacturer. These services
include extensive advertisement for the product, after sales services and facilities of
credit. The manufacturers providing these services can easily avail the services of
reputed retailers and wholesalers.
e. Government Regulations and Policies:
Government policies and regulations also influence the choice of distribution channels. The
Government may impose certain restrictions on the wholesale trade of a particular product
arid takeover the distribution of certain products. All these restrictions have a direct impact in
selecting the channel of distribution.
f. Competition:
The nature and extent of competition prevalent in an industry is another detrimental
consideration in selecting a distribution channel. Different manufacturers producing similar
products may employ the same channels of distribution.

Chapter 2: Methods of establishment in a foreign market

What is the best way to enter a new market? Should a company first establish an export base
or license its products to gain experience in a newly targeted country or region? Or does the
potential associated with first-mover status justify a bolder move such as entering an alliance,
making an acquisition, or even starting a new subsidiary? Many companies move from
exporting to licensing to a higher investment strategy, in effect treating these choices as a
learning curve. Each has distinct advantages and disadvantages. In this section, we will
explore the traditional international-expansion entry modes. Beyond importing, international
expansion is achieved through exporting, licensing arrangements, partnering and strategic
alliances, acquisitions, and establishing new, wholly owned subsidiaries, also known as
greenfield ventures. These modes of entering international markets and their characteristics
are shown in Table “International-Expansion Entry Modes”. Each mode of market entry has
advantages and disadvantages. Firms need to evaluate their options to choose the entry mode
that best suits their strategy and goals.

1. Exporting
Exporting is the marketing and direct sale of domestically produced goods in another country.
Exporting is a traditional and well-established method of reaching foreign markets. Since it
does not require that the goods be produced in the target country, no investment in foreign
production facilities is required. Most of the costs associated with exporting take the form of
marketing expenses. While relatively low risk, exporting entails substantial costs and limited
control. Exporters typically have little control over the marketing and distribution of their
products, face high transportation charges and possible tariffs, and must pay distributors for a
variety of services. What is more, exporting does not give a company firsthand experience in
staking out a competitive position abroad, and it makes it difficult to customize products and
services to local tastes and preferences.
Exporting is a typically the easiest way to enter an international market, and therefore most
firms begin their international expansion using this model of entry. Exporting is the sale of
products and services in foreign countries that are sourced from the home country. The
advantage of this mode of entry is that firms avoid the expense of establishing operations in
the new country. Firms must, however, have a way to distribute and market their products in
the new country, which they typically do through contractual agreements with a local
company or distributor. When exporting, the firm must give thought to labeling, packaging,
and pricing the offering appropriately for the market. In terms of marketing and promotion,
the firm will need to let potential buyers know of its offerings, be it through advertising, trade
shows, or a local sales force.
Among the disadvantages of exporting are the costs of transporting goods to the country,
which can be high and can have a negative impact on the environment. In addition, some
countries impose tariffs on incoming goods, which will impact the firm’s profits. In addition,
firms that market and distribute products through a contractual agreement have less control
over those operations and, naturally, must pay their distribution partner a fee for those
services.
Firms export mostly to countries that are close to their facilities because of the lower
transportation costs and the often greater similarity between geographic neighbors. For
example, Mexico accounts for 40 percent of the goods exported from Texas.5 The Internet
has also made exporting easier. Even small firms can access critical information about foreign
markets, examine a target market, research the competition, and create lists of potential
customers. Even applying for export and import licenses is becoming easier as more
governments use the Internet to facilitate these processes.
Because the cost of exporting is lower than that of the other entry modes, entrepreneurs and
small businesses are most likely to use exporting as a way to get their products into markets
around the globe. Even with exporting, firms still face the challenges of currency exchange
rates. While larger firms have specialists that manage the exchange rates, small businesses
rarely have this expertise. One factor that has helped reduce the number of currencies that
firms must deal with was the formation of the European Union (EU) and the move to a single
currency, the euro, for the first time. As of 2011, seventeen of the twenty-seven EU members
use the euro, giving businesses access to 331 million people with that single currency.

2. Licensing and Franchising

A company that wants to get into an international market quickly while taking only limited
financial and legal risks might consider licensing agreements with foreign companies. An
international licensing agreement allows a foreign company (the licensee) to sell the products
of a producer (the licensor) or to use its intellectual property (such as patents, trademarks,
copyrights) in exchange for royalty fees. Here’s how it works: You own a company in the
United States that sells coffee-flavored popcorn. You’re sure that your product would be a big
hit in Japan, but you don’t have the resources to set up a factory or sales office in that country.
You can’t make the popcorn here and ship it to Japan because it would get stale. So you enter
into a licensing agreement with a Japanese company that allows your license to manufacture
coffee-flavored popcorn using your special process and to sell it in Japan under your brand
name. In exchange, the Japanese licensee would pay you a royalty fee. Licensing essentially
permits a company in the target country to use the property of the licensor. Such property is
usually intangible, such as trademarks, patents, and production techniques. The licensee pays
a fee in exchange for the rights to use the intangible property and possibly for technical
assistance as well.
Because little investment on the part of the licensor is required, licensing has the potential to
provide a very large return on investment. However, because the licensee produces and
markets the product, potential returns from manufacturing and marketing activities may be
lost. Thus, licensing reduces cost and involves limited risk. However, it does not mitigate the
substantial disadvantages associated with operating from a distance. As a rule, licensing
strategies inhibit control and produce only moderate returns. Another popular way to expand
overseas is to sell franchises. Under an international franchise agreement, a company (the
franchiser) grants a foreign company (the franchisee) the right to use its brand name and to
sell its products or services. The franchisee is responsible for all operations but agrees to
operate according to a business model established by the franchiser. In turn, the franchiser
usually provides advertising, training, and new-product assistance. Franchising is a natural
form of global expansion for companies that operate domestically according to a franchise
model, including restaurant chains, such as McDonald’s and Kentucky Fried Chicken, and
hotel chains, such as Holiday Inn and Best Western.

3. Contract Manufacturing and Outsourcing

Because of high domestic labor costs, many U.S. companies manufacture their products in
countries where labor costs are lower. This arrangement is called international contract
manufacturing or outsourcing. A U.S. company might contract with a local company in a
foreign country to manufacture one of its products. It will, however, retain control of product
design and development and put its own label on the finished product. Contract
manufacturing is quite common in the U.S. apparel business, with most American brands
being made in a number of Asian countries, including China, Vietnam, Indonesia, and India.
Thanks to twenty-first-century information technology, nonmanufacturing functions can also
be outsourced to nations with lower labor costs. U.S. companies increasingly draw on a vast
supply of relatively inexpensive skilled labor to perform various business services, such as
software development, accounting, and claims processing. For years, American insurance
companies have processed much of their claims-related paperwork in Ireland. With a large,
well-educated population with English language skills, India has become a center for software
development and customer-call centers for American companies.

4. Partnerships and Strategic Alliances

Another way to enter a new market is through a strategic alliance with a local partner. A
strategic alliance involves a contractual agreement between two or more enterprises
stipulating that the involved parties will cooperate in a certain way for a certain time to
achieve a common purpose. To determine if the alliance approach is suitable for the firm, the
firm must decide what value the partner could bring to the venture in terms of both tangible
and intangible aspects. The advantages of partnering with a local firm are that the local firm
likely understands the local culture, market, and ways of doing business better than an outside
firm. Partners are especially valuable if they have a recognized, reputable brand name in the
country or have existing relationships with customers that the firm might want to access.
Strategic alliances and joint ventures have become increasingly popular in recent years. They
allow companies to share the risks and resources required to enter international markets. And
although returns also may have to be shared, they give a company a degree of flexibility not
afforded by going it alone through direct investment.
There are several motivations for companies to consider a partnership as they expand
globally, including (a) facilitating market entry, (b) risk and reward sharing, (c) technology
sharing, (d) joint product development, and (e) conforming to government regulations. Other
benefits include political connections and distribution channel access that may depend on
relationships.
Such alliances often are favorable when (a) the partners’ strategic goals converge while their
competitive goals diverge; (b) the partners’ size, market power, and resources are small
compared to the industry leaders; and (c) partners are able to learn from one another while
limiting access to their own proprietary skills.
What if a company wants to do business in a foreign country but lacks the expertise or
resources? Or what if the target nation’s government doesn’t allow foreign companies to
operate within its borders unless it has a local partner? In these cases, a firm might enter into a
strategic alliance with a local company or even with the government itself. A strategic alliance
is an agreement between two companies (or a company and a nation) to pool resources in
order to achieve business goals that benefit both partners. For example, Viacom (a leading
global media company) has a strategic alliance with Beijing Television to produce Chinese-
language music and entertainment programming.
An alliance can serve a number of purposes:
 Enhancing marketing efforts
 Building sales and market share
 Improving products
 Reducing production and distribution costs
 Sharing technology
Alliances range in scope from informal cooperative agreements to joint ventures—alliances in
which the partners fund a separate entity (perhaps a partnership or a corporation) to manage
their joint operation. Magazine publisher Hearst, for example, has joint ventures with
companies in several countries. So, young women in Israel can read Cosmo Israel in Hebrew,
and Russian women can pick up a Russian-language version of Cosmo that meets their needs.
The U.S. edition serves as a starting point to which nationally appropriate material is added in
each different nation. This approach allows Hearst to sell the magazine in more than fifty
countries.
Strategic alliances are also advantageous for small entrepreneurial firms that may be too small
to make the needed investments to enter the new market themselves. In addition, some
countries require foreign-owned companies to partner with a local firm if they want to enter
the market. For example, in Saudi Arabia, non-Saudi companies looking to do business in the
country are required by law to have a Saudi partner. This requirement is common in many
Middle Eastern countries. Even without this type of regulation, a local partner often helps
foreign firms bridge the differences that otherwise make doing business locally impossible.
Walmart, for example, failed several times over nearly a decade to effectively grow its
business in Mexico, until it found a strong domestic partner with similar business values.
The disadvantages of partnering, on the other hand, are lack of direct control and the
possibility that the partner’s goals differ from the firm’s goals. David Ricks, who has written a
book on blunders in international business, describes the case of a US company eager to enter
the Indian market: “It quickly negotiated terms and completed arrangements with its local
partners. Certain required documents, however, such as the industrial license, foreign
collaboration agreements, capital issues permit, import licenses for machinery and equipment,
etc., were slow in being issued. Trying to expedite governmental approval of these items, the
US firm agreed to accept a lower royalty fee than originally stipulated. Despite all of this
extra effort, the project was not greatly expedited, and the lower royalty fee reduced the firm’s
profit by approximately half a million dollars over the life of the agreement.” Failing to
consider the values or reliability of a potential partner can be costly, if not disastrous.
Foreign Direct Investment and Subsidiaries
Many of the approaches to global expansion that we’ve discussed so far allow companies to
participate in international markets without investing in foreign plants and facilities. As
markets expand, however, a firm might decide to enhance its competitive advantage by
making a direct investment in operations conducted in another country.

Also known as foreign direct investment (FDI), acquisitions and greenfield start-ups involve
the direct ownership of facilities in the target country and, therefore, the transfer of resources
including capital, technology, and personnel. Direct ownership provides a high degree of
control in the operations and the ability to better know the consumers and competitive
environment. However, it requires a high level of resources and a high degree of commitment.
Foreign direct investment refers to the formal establishment of business operations on foreign
soil—the building of factories, sales offices, and distribution networks to serve local markets
in a nation other than the company’s home country. On the other hand, offshoring occurs
when the facilities set up in the foreign country replace U.S. manufacturing facilities and are
used to produce goods that will be sent back to the United States for sale. Shifting production
to low-wage countries is often criticized as it results in the loss of jobs for U.S. workers.
FDI is generally the most expensive commitment that a firm can make to an overseas market,
and it’s typically driven by the size and attractiveness of the target market. For example,
German and Japanese automakers, such as BMW, Mercedes, Toyota, and Honda, have made
serious commitments to the U.S. market: most of the cars and trucks that they build in plants
in the South and Midwest are destined for sale in the United States.
A common form of FDI is the foreign subsidiary: an independent company owned by a
foreign firm (called the parent). This approach to going international not only gives the parent
company full access to local markets but also exempts it from any laws or regulations that
may hamper the activities of foreign firms. The parent company has tight control over the
operations of a subsidiary, but while senior managers from the parent company often oversee
operations, many managers and employees are citizens of the host country. Not surprisingly,
most very large firms have foreign subsidiaries.
Conclusion
In summary, when deciding which mode of entry to choose, companies should ask themselves
two key questions:
How much of our resources are we willing to commit? The fewer the resources (i.e., money,
time, and expertise) the company wants (or can afford) to devote, the better it is for the
company to enter the foreign market on a contractual basis—through licensing, franchising,
management contracts, or turnkey projects.
How much control do we wish to retain? The more control a company wants, the better off it
is establishing or buying a wholly owned subsidiary or, at least, entering via a joint venture
with carefully delineated responsibilities and accountabilities between the partner companies.
Regardless of which entry strategy a company chooses, several factors are always important.
Cultural and linguistic differences. These affect all relationships and interactions inside the
company, with customers, and with the government. Understanding the local business culture
is critical to success.
Quality and training of local contacts and/or employees. Evaluating skill sets and then
determining if the local staff is qualified is a key factor for success.
Political and economic issues. Policy can change frequently, and companies need to
determine what level of investment they’re willing to make, what’s required to make this
investment, and how much of their earnings they can repatriate.
Experience of the partner company. Assessing the experience of the partner company in the
market—with the product and in dealing with foreign companies—is essential in selecting the
right local partner.
Companies seeking to enter a foreign market need to do the following:
Research the foreign market thoroughly and learn about the country and its culture.
Understand the unique business and regulatory relationships that impact their industry.
Use the Internet to identify and communicate with appropriate foreign trade corporations in
the country or with their own government’s embassy in that country. Each embassy has its
own trade and commercial desk. For example, the US Embassy has a foreign commercial
desk with officers who assist US companies on how best to enter the local market. These
resources are best for smaller companies. Larger companies, with more money and resources,
usually hire top consultants to do this for them. They’re also able to have a dedicated team
assigned to the foreign country that can travel the country frequently for the later-stage entry
strategies that involve investment.
Once a company has decided to enter the foreign market, it needs to spend some time learning
about the local business culture and how to operate within it.
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