Foreign Business Entry Strategies

There are many entry strategies used by firms to enter new foreign markets as a part of their growth process and some of those strategies are:

1. Exporting
2. Turnkey projects
3. Licensing
4. Franchising
5. Joint Ventures
6. Foreign Direct Investments (FDI)

Exporting Exporting is the where the firm manufacture the products locally and ship those goods to the foreign country. This is a commonly used strategy by small to medium business organizations. Exporting has many advantages such as:

• Start up cost involved in establishing production plants abroad is avoided and firm can use the local manufacturing bases to produce goods.
• When the production is done in mass scale for facilitate exports world wide it will result in experience curve effect where the cost of production per unit will decrease.
• Location advantages of the home country such as low labor costs and tax reliefs can be utilized.

Exporting has many disadvantages such as:

• Exporters have to compete with the low cost local manufacturers in the foreign country.
• High transportation cost is involved.
• Barrier to trade such as tariff and non tariff barriers exists and it reduces the competitiveness of exports.
• Exporters have to obtain the service of marketing representatives in the foreign markets and exporter does not have control over those marketing representative.

Turnkey Projects Turnkey projects are foreign projects that are undertaken by local contractors. Local contractor agrees to perform all the tasks of the project for the foreign client for the fee paid. Turnkey projects are mostly carried out in disciplines such as IT and engineering. Turnkey projects has many advantages such as:

• Local contractor can earn fee on the specialized knowledge he possesses.
• There is a less risk involved as the company doesn’t start manufacturing plants overseas.

Turnkey projects has many disadvantages such as:

• After the project is completed firm loses the interest in the foreign country and there will be no long term foreign operations.
• When the knowledge is sold to a foreign country that is similar to selling the competitive advantages that are possessed by the locals.

Licensing

Licensing is an agreement by which a licensor grants the right to another firm use an intangible property  for a specified time period for a royalty payment in return. Licensing agreement will specify the scope of the contract, compensation for the breech of agreement, rights and responsibilities of parties and the duration of the contract.

Licensing has many advantages such as:

• Low financial risk for both parties as they are not making huge investment when compared to FDI.
• Barriers to trade such as tariff and non tariff barriers are avoided as there is no import or export involved.
• Local markets can acquire knowledge from foreign markets with less effort and less cost.

Licensing has many disadvantages such as:

• Both parties will make less profit due to terms of the contract.
• Creates a situation that  licencee has to purely depend on the lincensor to obtain knowledge and it limits the scope.
• Conflicts may arise between parties.
• Upon the completion of the contract there is a potential threat that licencee coming up with a similar product/resource with the knowledge grained from license.

Franchising

Franchising is an agreement by which franchisers sells an intangible asset such as a brand name to the franchisee and impose rules on how to conduct the business. Franchisee has to pay a royalty payment to the franchiser in return.

Franchising has many advantages such as:

• Low financial risk for both parties as they are not making huge investment when compared to FDI.
• Barriers to trade such as tariff and non tariff barriers are avoided as there is no import or export involved.
• Local markets can acquire knowledge from foreign markets with less effort and less cost.
• Franchiser gets access to local market with a lessor cost without establishing manufacturing plants at their cost.
• Franchiser gets more control over operations of franchisee and business standards of franchiser can be expected locally.

Franchising has many disadvantages such as:

• Both parties will make less profit due to terms of the contract.
• Creates a situation that  franchisee has to purely depend on the franchiser to obtain knowledge and it limits the scope.
• Conflicts may arise between parties.
• Upon the completion of the contract there is a potential threat that franchisee coming up with a similar product/resource with the knowledge grained from franchising.
• Foreign capital inflow and outflow is stopped.

Joint Ventures

Joint Ventures is a situation where a foreign firm enter into an agreement with a local firm to conduct business as one entity. Both parties may contribute to the business in many ways such as capital, skills, management, knowledge and brand name.

Joint Ventures has many advantages such as:

• Sharing of costs, benefits and risks among partners.
• Benefits from the local partner’s knowledge about local market.
• Since there are local firms involved government will support the growth of the venture.

Joint Ventures has many disadvantages such as:

• Parties may get into conflicts.
• Deadlock managements can exist.
• Sharing technology gives rise to a risk of unethical use of technology by local firms.

Foreign Direct Investments (FDI)

FDI is the strategy by which firm directly invests in the foreign country and starts up operations overseas. (Refer the article on Foreign Direct Investments for more details)

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