If your business is ready to enter into a new international market, you may be looking for some tips on choosing a market entry strategy.
The type of market entry strategy you choose will depend on your product or service, the results of your research and your objectives in the market. It’s important your strategy for international expansion addresses two criteria: exporting and establishing a local presence.
There are several options to consider regarding exporting as a foreign market entry strategy.
- You can choose direct exporting by selling your products directly to someone in an international market.
- Or, you can choose indirect exporting and sell your products to a third party in your own country, which, in turn, sells your products to an international market.
- You also can indirectly export using buying agents, export management and trading companies, distributors or by piggyback marketing.
The method you choose will depend upon the amount of time, staff and resources you have to distribute and market your product, and the amount of knowledge you have about your international market.
Choosing direct exporting may be a foreign market entry strategy that’s right for your company when you have a unique offering with strong customer appeal and have adapted it to match your targeted international market. When you direct export, you can achieve higher profits without a middleman. Plus, you will gain complete control over your transactions and be able to establish close relationships with your customers.
If entering a new international market poses challenges, such as language barriers, cultural differences or unfamiliar ways of doing business, it may be better to choose indirect exporting via intermediaries who know the local market much better. They can help you find customers, arrange distribution channels, handle documentation, clear your goods through customs and provide after-sales service.
Indirect Exporting Through Buying Agents
One way to indirectly export is to use a buying agent. Buying agents, also known as confirming houses, represent firms in the countries you want to export to that want to buy your product. These agents work on a commission and take orders for your products and forward those orders to you. Your company is responsible for promoting and marketing your products in that country, setting prices, filling the orders, shipping the goods to the customers and collecting payment. You will, therefore, potentially have to bear the credit risk.
Indirect Exporting Through Distributors
You could also indirectly export through a distributor. Distributors buy your product from you and then sell it to end users in another country at a markup that provides them with their profit margin. They handle all distribution, marketing and advertising, and can represent you in all aspects of sales and service. Distributors can represent you either exclusively or non-exclusively, meaning they can purchase and market products similar to yours.
Indirect Exporting Through Management and Trading Companies
Another route to indirect exporting is through management or trading companies. Export management or trading companies can purchase your product outright or take orders for your products and work on commission. They can specialize by product, international market or both. They will handle market research, transportation and advertising. While they can provide immediate and easy access to a market you want to enter, you will typically have less control over sales, brand management and relationship building.
Indirect Exporting Through Piggybacking
Some domestic companies that already have an extensive exporting system and comprehensive international marketing network in place look for other products that complement their lines. If you manufacture such a product, they can make an agreement with your company to sell your product through their international networks.
In this scenario, they would purchase your products and then do all of the marketing and distribution. Your company “piggybacks” on their network to your product to an international market. Piggybacking is often a low-risk type of market entry strategy.
Establishing a Local Presence in International Markets
The second overarching international market entry strategy is to establish a local presence, often known as foreign direct investment. There are a number of ways to establish a presence in your international market of choice, including: opening a branch or subsidiary, partnering with local companies, establishing a joint venture, licensing or taking on turnkey projects.
Opening a Branch or Subsidiary
If you need a basic presence in the market, opening your own sales or marketing office (sometimes called a branch office) may be the answer. Your branch office conducts business just as your main domestic company does, and is responsible to your domestic company.
A subsidiary, however, operates as a separate entity from the domestic company, but reports to a separate holding company. The holding company has no operations of its own, but holds a controlling share of the subsidiary stock. The subsidiary maintains its accounts separately from the domestic parent company and the parent company has no liability for the subsidiary.
Partnering With Local Companies
Another foreign market entry strategy is to partner with a local company in your target market. This strategy can help you get to market much faster and sell your products because you will have a partner who is native to the area. A partner based in the foreign market you target can help you navigate the politics and customs of the area, make connections with customers and find employees. Many countries, including Australia, India, Japan and countries in the Middle East, require that you have some sort of local representation in order to do business.
There are some disadvantages to this arrangement. In an international partnership, you will typically have less equity and therefore less control. There may be an unequal distribution of responsibility and risk. You should also be aware of the risks inherent in such a partnership, including adverse effects on your business due to the country’s economic conditions or policies, property rights differences and currency exchange rates.
Forming a joint venture is also a viable foreign market entry strategy. You can buy into a company or create a new, shared company in a joint partnership with a person in the international community you choose. In a joint venture, you would both share legal ownership and contribute resources to pursue the business opportunity.
Because you can sell your interest back to your partner, a joint venture offers the flexibility to manage risks like changes in the local market or in the relationship between partners. The disadvantages of the joint venture model are that they can be difficult to oversee and, because both partners have an ownership stake, disagreements can happen at any time.
Buying a Local Company
Buying a local company can be a pricey strategy with regard to foreign market entry. However, it comes with a variety of benefits, such as acquiring qualified personnel who are already a part of daily operations, as well as an established foothold in that specific market. Purchasing a local company can also come with a loyal customer base, as opposed to having to compete with that company if you were to enter the market by setting up a new presence. Additionally, purchasing a company also gives you access to a vast knowledge of local markets and customs via the combined experience and expertise of local talent who have been a valued part of the company prior to your acquisition. This can help your organization effectively scale and expand your local presence at a faster pace.
Licensing Your Products
Licencing can be a relatively simple way to enter an international market. In a licensing agreement, you grant a foreign company the right to manufacture your product and sell it, in exchange for a royalty fee. You won’t incur the costs of setting up in a foreign market, but you will lose some control over how your product is manufactured or how your technology is used.
Other benefits to licencing include gaining access to markets that may be closed to imports and avoiding some of the taxes typically made on exporters. However, there are some disadvantages, including the risk of losing intellectual property and lack of quality control.
For companies in the architecture, construction, IT or engineering fields, turnkey projects are another viable international market entry strategy. In a turnkey project, you are contracted by the foreign entity to build a facility and/or fully train operating personnel before turning the facility over to the foreign client. Typically, turnkey projects are financed by the foreign government or an international financial agency. However, your company’s operations within the country are short-term and end once the project is complete.
Consider The Risks Involved In International Expansion
Whichever market entry strategy you choose, keep in mind the financial impact. Entering international markets can involve credit, political and currency risks including non-payment, expropriation of your assets by a foreign government and fluctuation in the value of your currency relative to the target market’s currency.
To mitigate those risks, companies interested in international expansion often turn to trade credit insurance. Trade credit insurance can help mitigate the risk of non-payment from foreign business partners and help you get additional working capital from your financial institution to support your international expansion.