Entering International Markets

Introduction:
Once the firm has decided to establish itself in the
global market, the marketing manager has to study
and analyse the various options available and select
the most suitable one.

The selection of the entry mode is one of the most

significant decisions, as it involves commitment of
resources with long-term financial and structural
implications.

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 The concept of IM entry
• Mode of entry may be defined as “an institutional
mechanism by which a firm makes its products or
services available to consumers in international
markets”.
• Root (1994) defines the market entry strategy for
IM as “a comprehensive plan which sets forth the
objectives, goals, resources and policies that
guide a company’s international business
operations over a future period long enough to
achieve sustainable growth in world markets”.

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 International Market Entry
• In order to succeed in international markets,
the decision to select an appropriate entry
mode id crucial and integral part of a firm’s
international marketing strategy.
• The mode of entry varies from low-
commitment indirect exports to high
commitment wholly owned subsidiaries in
foreign markets depending upon the
following criteria:
- The ability and willingness of the firm to
commit resources
- The firm’s desire to have a level of control
over international operations
- The level of risk the firm is willing to take
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 Entry Modes
There are various modes of entry available to a firm
to enter international market.
A firm may have a production facility in its home
country or locate it in a foreign country. It has to
choose the alternative most suited to its needs and
requirements.
Production in Home Country
Selling goods and services produced in the
home country to overseas customers is the most
common form of international marketing activity.
Production in the home country requires
relatively lower levels of commitment of resources
and minimum risk for entering international
markets.

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 I. Production in Home country
Modes:
I: Exports – Indirect, Direct, Complementary
(Piggybacking)
II: Providing offshore services

Export:
In case of exports as a mode of entry, production is
carried out in home country and finished goods are
shipped to the overseas markets for sale.
Although exporting is a low-risk mode of entry, which
requires minimum foreign market operational
experience, it generates the lowest level of profit.
Bilkey and Tesar have identified the some stages in
the export development process
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 Export Development Process
S1: Firm is not interested in exporting; ignores
unsolicited business
S2: Firm supplies unsolicited business; does
not examine the feasibility of active exporting
S3: Firm actively examines the feasibility of
exporting
S4: Firm exports on experimental basis to a
country of close business distance
S5: Firm becomes an experienced exporter to
that country
S6: Firm explores feasibility exporting to
countries with greater business distance.
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 Indirect Exports
When a firm does not have much exposure to
foreign markets, and has limited resources to
invest in export development, indirect
exporting is a recommended strategy for
entering international markets.
Indirect export can be defined as the process of
selling products to an export intermediary in
the company’s home country who would in
turn sell the products in overseas markets.
Indirect export may occur by way of:
- Selling to a foreign firm or a buying agent in
the home country and
- Exporting through a merchant intermediary,
i.e., an export house, a trading house.
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 Indirect export – cont…
Trading houses are service companies, which
provide an exporting firm with the agility and
flexibility needed to operate simultaneously in
multiple markets and in handling more than
one line of merchandise.
Functions carried out by trading houses:
- Market selection and market research
- Customer identification and evaluation
- Commercial and technical negotiations
- Vendor development
- Product/packaging adaptation and
technology up gradation
- Financial arrangements including securing
credit 8
Functions of trading house- cont...
- Imports, particularly of items required for export
production
- Counter- trading
- Provide protection against export risks, including
insurance
- Ensure timely payments
- Export documentation and shipping
- Manage crisis and disasters
- Deal with claims
- After-sales service and spare parts availability
- Project exports, consortia and tender business
- Create distribution networks abroad
- Foster special relations with the government
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Advantages of using a merchant exporter
- Firms mainly operating in domestic markets
with limited volumes for export
- Since a merchant exporter consolidates
shipment, he may get more competitive price
for exports
- A merchant exporter often takes care of
various risks associated with exports, such
as commercial risk, transit risk and credit risk
etc.,
- Savings in operational cost per unit
- Manufacturer’s capital is not blocked
- A merchant exporter has better negotiating
capability
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 Direct Export
Introduction:
- In direct exports a firm’s products are sold
directly to importers in overseas markets
- Direct exporting is far more complex than
indirect as a firm has to carry out its own
market research, select markets, identify
buyers, establish contacts, handle
documentation and transportation, and
decide on the marketing mix for different
overseas markets.
- Direct export does not mean selling products
directly to the end users. 11
 Direct exporting – cont…
- Direct exports are accomplished through
foreign-based independent market
intermediaries such as agents and
distributors
• Agents generally work on a commission
basis, do not take title to the goods, and
assume no risks or responsibilities.
• An agent represents the exporting company
in the given market and find wholesalers and
retailers for its products.
• Agents may be i) Exclusive, ii) Semi-
exclusive and iii) Non-exclusive 12
 Direct Export- kinds of Agents
• An exclusive agent has exclusive rights to
sell the company’s products in the specified
sales territories.
• A semi-exclusive agent handles exporters’
goods along with other companies’ non-
competing goods, and
• A non – exclusive agents handles a wide
variety of goods including competing
products
A overseas distributor is a foreign-based
merchant who buys the products on his own
account and resells them to wholesalers and
retailers to make profit.
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 Advantages of Direct Exports
• As no intermediary is involved, the exporter gets
more profit
• Eliminates the possibility of receiving lower prices
from the merchant exporter
• Over a period of time, the firm involved directly in
exports develops in-house skills for export
operations
• It establishes its own rapport / brand image in the
foreign market
• The exporting firm gain knowledge about markets,
competitors and competing products.
Disadvantages: Higher commitment of resources and
higher risk exposure.

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 Complementary Exporting - Piggybacking
In case of piggybacking exports, overseas distribution
channels of another firm are used by the company to
make its product available in the overseas market.
Piggyback export provides immediate access to the well-
developed distribution channels of another company.
In this arrangements, the exporting company, know as
‘rider’ and the foreign company which has established
distribution network in the foreign market known as
‘carrier’
The carrier either acts as an agent for a commission or
as an independent distributor by buying the products
outright.
This arrangements made for products from unrelated
companies that are complementary but not
competitive.
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 Providing offshore services
A company based in one country can provide
offshore services to overseas clients with the
help of information and telecommunication
technology.
The business process outsourcing (BPO)
includes such activities as maintenance of
accounts, audit sales, telemarketing,
managing human resource databases,
logistics and handling customer complaints.
Slowdown of the global economy has forced
transnational corporations to seek innovative
ways to slash costs.

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 Reasons for the outsourcing
Industry Drivers:
- New forms of emerging global competition
- Obsolete contracting approaches
- Changing success criteria
- Innovation becoming a differentiator
IT Drivers:
- Competitive pressure to improve service levels
- Enhanced IT effectiveness
- Supplementary IT resources
- Shortened implementation time
Business Drivers:
- Focus on core competencies
- Alignment of IT strategy with business goals
- Improvement in overall competitiveness
- Cost savings
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 Scope of offshore services
I. Insurance: Claim processing, call centers
II. Banking and Finance: Loan Processing, call
centers
III. Airlines: Revenue accounting, call centers
IV. Telecom: Billing, customer relations and call
centers
V. Automotive: Engineering and design,
accounts
VI. Other Sectors: Transportation, direct
manufacturing, manufacturing utilities etc.,
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 II. Production in a Foreign Country
Introduction:
Exporting is more suitable when the home
currency is weak.
As the currency of the home country
strengthens, it makes sense to relocate
the production facilities in more cost
effective locations with weak currencies
besides production efficiency.
For Example: Japanese companies have
shifted their manufacturing facilities to
other countries with weaker currencies.
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 Contractual Entry Modes
A company may enter international
markets using the synergistic effect of a
partner firm and make use of its
resources.
This is mutually beneficial for both the
domestic and the international firm as it
provides them access to new technology
and markets.
Firms having high-tech manufacturing
facilities but no access to foreign
markets may use a foreign partner.
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 Types of Entry Modes
Contractual Entry Modes
• International Licensing
• International Franchising
• Overseas Turnkey Projects
• International Management Contracts
• International Strategic Alliance
• International Contract Manufacturing
Investment Entry Modes
• Assembly or Mixing in Overseas Markets
• Wholly Owned Foreign Subsidiaries
• International Joint Ventures

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Factors affecting the selection of entry mode
External Factors
- Market Size
- Market Growth
- Government Regulations
- Level of Competition
- Physical Infrastructure
- Level of Risk- Political, Economic,
Operational
- Production and Shipping Costs
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 Factors affecting the selection of entry
mode
Internal Factors
- Company Objectives
- Availability of Company Resources
- Level of Commitment
- International Experience
- Flexibility

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 International Licensing
Meaning: The process by which a domestic
company allows a foreign company to use its
intellectual property, such as patents, trade
marks, copy right, process technology,
design and specific business skills for a
compensation called royalty.
Licensee functions:
- Production of the licenser’s products covered
by rights
- Marketing these products in the assigned
territory
- Paying royalty to the licenser for using the
intellectual property.

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 Benefits of International Licensing
• Facilitates rapid penetration
• Provides access to markets with high levels of tariff
and non-tariff barriers
• Reduces political and economic risk
• Helps the licenser to rapidly expand
• Helps in curtailing the duplicate products’ market
Limitations
- Lack of commitment on the part of the licensee
may adversely affect the brand image
- It may restrict the licenser’s own marketing
activities in those countries
- The firm may unknowingly create a potential
competitor in the market
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 International Franchising
Meaning: The transfer of intellectual property
and other assistance over an extended
period of time with greater control compared
to licensing.
The home company, known as the franchiser,
an overseas company known as franchisee.
Franchising is also a form of licensing wherein
transfer of intellectual property rights takes
place. But the two processes are different
from each other in a number of ways.

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 Overseas Turnkey Projects
Companies with core competencies in
setting up composite plants and
manufacturing and engineering facilities
such as dams, bridges, etc., can utilize
their technical expertise to enter
international market.
Here, the firm conceptualizes, designs,
installs, constructs, and carries out
preliminary testing of a production
facility or engineering structure for the
overseas client organisation.

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 Types of turnkey projects
Built and Transfer (BT): The firm
conceptualizes, designs, builds, carries out
primary testing, and transfers the project to
the owner.
Built, Operate and Transfer (BOT): The
exporting firm not only builds the project but
also manages it for a contracted period
before transferring it to the foreign owner.
Built, Operate , Own (BOO): The exporting firm
is expected to buy the project once it has
been built, which results in foreign direct
investment after a certain time period.

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International Management Contracts
• In IMC a company provides its technical and
managerial expertise for a specific duration
to an overseas firm.
• IMC are used in a variety of business
activities, such as managing hotels, catering
services, operation of power plants etc.
• A IMC is a feasible option when a company
provides superior technical and managerial
skills to an overseas company that needs
such assistance to remain competitive in the
market or to improve its productivity.
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 International Strategic Alliance
ISA refers to the relationship between two
or more firms that cooperate each other
to achieve common strategic goals.
Due to increased competitive pressures,
most firms prefer to focus on their core
competencies rather than spreading
themselves too thin.
Therefore, the scope for international
strategic alliances is on the rise.

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 Benefits of Strategic Alliance
 They encourage cooperation with
competitors to make use of their specific
strengths.
 The cost of investment for international
market entry is shared
 They give access to the distribution channels
of the partner firm.
Limitations
o Difference of opinion and conflicts with an
alliance partner
o The alliance partners, which are capable may
become future competitors.
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International Contract Manufacturing
Under ICM the manufacturing operations of an
international firm are carried out at offshore
locations on a contractual basis.
The international firm takes care of marketing
whereas the contracted manufacturer limits
itself to production activities.
A number of global companies outsource their
manufacturing activities to low-cost locations.
Contract manufacturing has also been used as
a strategic tool for economic development in
a number of countries like korea, Taiwan etc.
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 Advantages of ICM
 A firm with a competitive edge in international
marketing may concentrate its resources on
marketing
 The international marketer need not invest its
resources in manufacturing
 The manufacturing operations can be done
at competitive cost –effective locations
 Since the exit cost of contract manufacturing
is very low, the company have an opportunity
to change contract manufactures so as to
improve quality and cost competitiveness.
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 Investment Entry Modes
Assembly or Mixing in Overseas Markets:
In order to avoid the high cost of shipping
and high import tariffs, counter non-tariff
barriers for import and to take advantage of
cheap labour a company exports various
components and assembles them overseas.
In case of medicines and food products, the
equivalent of assembling is mixing the
ingredients while importing from the home
country.
Most of the Japanese automobile companies
entered the European market by establishing
their assembling operations in Europe to
overcome import barriers.
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 International Joint Ventures
A joint venture involves more than two
firms in equity participation.
In joint venture, the two or more
companies involved provide a
complementary competitive advantage
for the formation of a new company.
Thus, in joint ventures the participating
firms contribute their complementary
expertise and resources.

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 International Joint Ventures
Basic Reasons
- To overcome foreign investment barriers
especially in developing and least
developed countries
- To manage emerging new opportunities
with complementary technology
- To overcome operational barriers
- To achieve competitive advantage in
global operations with low investment.

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 Wholly owned foreign subsidiaries
In order to have complete control and ownership of
international operations, a firm opts for foreign
direct investment to own foreign operations.
Major benefits
• It helps in overcoming the import barriers such as
high tariff and quota restrictions
• It gets benefit of the incentives provided by the host
government in foreign markets
• It may help a domestic firm to spread its risks over
various markets
• It avoids conflicts with overseas partners
• It pays the way for domestic companies to become
transnational.

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 Ways of setting wholly owned subsidiary
A. Acquisition:
In this arrangement a domestic company
can acquire a foreign company and all
its resources in a foreign market.
It provides speedy access to the
resources of a foreign company
The opportunistic joint venture often ends
with acquisition of the weaker firm by
the stronger partner

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Ways of setting wholly owned subsidiary
B. Greenfield operations
A firm creates the production and marketing
facilities on its own from scratch. Greenfield
operations are preferred as an entry mode in
international markets under the following
situations.
• For smaller firms with limited financial
resources creating their own facilities is a
more viable option
• Firms that develop their own facilities have
the option of selecting the location on the
basis of their own screening creiteria.
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