Business growth is desirable to investors, shareholders, and owners of the business. A business might grow to cross national borders and therefore, requires planning to determine the optimum entry mode into the foreign market. This paper will critically examine the various entry modes used in business.
A greenfield venture is a type of foreign direct investment (FDI) where a company creates new facilities (manufacturing plants, sales department) from scratch in a foreign country. It is preferred where a company wants to exercise the highest level of control in a foreign market.
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Advantages
• Gives the company complete and utter control of business practices e.g. fabrication process can be tightly controlled
• Reduces the risk of the firm losing control over core competencies
• Developing countries may offer tax breaks and subsidies to set up greenfield investments which may lead to low revenues from the corporate tax.
Disadvantage
• The company bears the full risk and financial obligations to set up the company e.g. if the host country, pulls out of the deal prematurely, it can be devastating to the company.
Exporting products to foreign markets is a common entry mode for many businesses because it is a low-risk strategy. It can be grouped into indirect, cooperative and direct exporting. Indirect exporting is where a company uses a middle man based in the home country to export products on their behalf. Cooperative exporting is where a company contracts another company (home or foreign country) to use its distribution network to export their goods. In direct exporting, the company in question owns an export department that utilizes its agents situated in the foreign market (Cavusgil et al., 2014).
Advantages
• Avoids the costs of setting up local manufacturing operations in the foreign country
• Helps the business achieve experience curve and location economies i.e. from producing in a central location
Disadvantage
• It may be costly to manufacture in the host country compared to manufacturing in the foreign market.
• High transportation costs may prove it uneconomical
• The middlemen in the foreign country may not always act in the exporter’s best interests e.g. they may have mixed loyalties.
Franchising is a type of arrangement where the franchisor extends the franchisee the authority to use the franchisor’s name, trademarks and business model in a region for a stipulated period (usually ten years). The franchisor benefits by getting royalty payments and other payments.
Advantages
• Both franchisor and franchisee can utilize their shared knowledge or technical know-how to grow the business
• Avoids costs and risks of setting up in foreign markets.
• The company(franchisor) can quickly develop a global presence.
Disadvantages
• It limits the ability of the franchisor to take profits from one country to aid competitive drawbacks in another county
• It limits the franchisor from detecting sub per quality by the franchisee.
Licensing is a contractual agreement between a licensor and the licensee. The person offering the license puts gives intangible assets in turn of royalty fees in the foreign market.
Advantage
• Avoids the costs and risks of penetrating foreign markets e.g. political and economic risks Compared to other entry modes like exporting,
• It allows the licensor to avoid trade barriers
Disadvantage
• The licensor lacks tight control necessary for realizing the experience curve and location economies.
• Revenue from licensing is not as much compared to other entry modes, e.g. exporting.
• The licensee may not be fully committed to the licensor proprietary information hence limiting the sale of the licensed product.
In conclusion, there is no right way to enter into foreign markets. It all comes down to making the right decisions based on the varying risk and reward factors associated with the different entry modes.
References
Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014). International business . Pearson Australia.
