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Deciding How to Enter the Market

The broad choices in entering a market are indirect exporting, direct exporting, licensing, joint ventures, and direct investment, shown in Figure 18.2. Each succeeding strategy entails more commitment, risk, control, and profit potential.

• Indirect and direct export. Companies typically start with indirect export, working through independent intermediaries, and may move into direct export later because this order of entry requires less investment and less risk. Many companies use direct or indirect exporting to “test the waters” before building a plant overseas. Successful companies adapt their Web

FiGURE 18.2 Five Modes of Entry into Foreign Markets

sites to provide country-specific content and services to their highest-potential international markets, ideally in the local language.

  • Licensing. The licensor issues a license to a foreign company to use a manufacturing process, trademark, patent, trade secret, or other item of value for a fee or royalty. The licensor gains entry at little risk; the licensee gains production expertise or a well- known product or brand name. The licensor, however, has less control over the licensee than over its own production and sales facilities. If the licensee is very successful, the firm has given up profits, and if and when the contract ends, it might find it has created a competitor.
  • Joint ventures. Foreign investors may join local investors in a joint venture company in which they share ownership and control, sometimes desirable for political or economic reasons. However, the partners might disagree over investment, marketing, or other policies. One might want to reinvest earnings for growth, the other to declare more dividends. Joint ownership can also prevent a multinational company from carrying out specific manufacturing and marketing policies on a worldwide basis.
  • Direct investment. The ultimate form of foreign involvement is direct ownership: The foreign company can buy part or full interest in a local company or build its own manufacturing or service facilities. One advantage is that the firm secures cost economies through cheaper labor or raw materials, government incentives, and freight savings. Also, the firm strengthens its image in the host country because it creates jobs. In addition, it deepens its relationship with the government, customers, local suppliers, and distributors. Another advantage is retaining full control over its investment, with the ability to develop manufacturing and marketing policies that serve its long-term international objectives. Finally, the firm ensures its access to the market in case the host country insists that locally purchased goods must have domestic content. The main disadvantage is exposure to risks like blocked or devalued currencies, worsening markets, or expropriation. Note that, rather than bringing their brands into certain countries, many companies choose to acquire local brands for their brand portfolio.
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