Types of Foreign Entry Modes

There are different types of foreign entry modes that an organization can choose from. Moreover, what organizational circumstances, goals, and objectives are best suited to the types of different entry modes is important. There is no specific entry mode that is superior to another; instead the organizations circumstances, missions, and strategies will be tailored to a certain entry mode. An organization’s internal resources and capabilities, and the environment of the country of entry are other important considerations when choosing the foreign entry mode.

Exporting

Exporting is a cross border sale of domestically grown or produced goods (Cavusgil, 2004). There are three types of exporting: indirect exporting, direct exporting and cooperative exporting. Indirect exporting is the least risky mode of entry as the company does not reach out to foreign markets and encounter associated risks (Kotler & Armstrong, 2012). The organization barely sells their product to an agent in the foreign market who then sells the product on to an intermediary; it’s a common method to enter a new market. It is a less risky, method to get exposure to the markets with less commitment as well.

A direct export is similar to an indirect export except that it doesn’t involve an agent who sells the good to the intermediary. Direct exporting is a commonly adapted entry method used by organizations that want exposure to a foreign market, but want to overcome the risks associated with other types of entry modes.

Cooperative exporting is another exporting option that organizations can use as a foreign market entry strategy. Organizations adapt this method of entry by entering an agreement with another foreign or local organization to use its distribution network (Kotler & Armstrong 2012).

Licensing

International licensing is a cross border agreement that allows organizations in the target country the rights to use the property of the licensor (Kotler & Armstrong, 2012). The following property is in most cases intangible and includes: trademarks, patents, and production techniques. The licensee is required to pay a fee in exchange for the rights specified in the contract between the parties. Licensing is adapted because of its low risk and has low exposure to economic and political conditions. Alongside that, it has high return on investment and is preferred by local governments (Agrawal & Ramaswami, 1992).

Microsoft Corp and Walt Disney Co are two examples of large multinationals that have had success in foreign markets using licensing as their entry mode. Whilst licensing in these examples has been a triumphant strategy to enter foreign markets, licensing does have its drawbacks. Licensing can reduce the potential profit of outright ownership, affect the image of the brand due to lack of control over licensee, and nurture a potential future competitor.

Franchising

Franchising is a foreign market entry strategy where a semi-independent business owner (the franchisee) pays fees and royalties to the franchiser to use a company’s trademark and sell its products and/or services. The terms and conditions of a franchise package vary depending on the contract, however it generally includes: equipment, operations and management manual, staff training, and location approval.

Franchising is commonly used and a largely successful method of cross border market entry, however organizations pursuing this entry mode need to consider both the positive and negative aspects of franchising.

The most common advantages of franchising are that it capitalizes on an already successful strategy, the franchisee generally has local knowledge, it’s less risky than equity based foreign entry modes, and the franchisor isn’t exposed to risks associated with the foreign market. Subway, 7-Eleven, Pizza Hut, and McDonalds are just a few examples of organizations that have been successful using franchising as their foreign market entry mode.

Whilst in general, franchising is a popular and successful mode for foreign market entry; there are a few potential shortcomings. These shortcomings include: decreased brand quality due to not having full control over franchises, not maximizing profit as franchisor only receives a royalty fee and not the full profit made, and the possibility of nurturing a future competitor. Whilst these potential shortcomings could be detrimental to an organization, franchising is continually chosen as a foreign market entry mode as franchisors believe that the rewards outweigh the risks.

Joint Venture

An organization may choose a joint venture as their foreign market entry mode for a number of different reasons, for example: to divide the risk with other parties, to leverage of each other’s strengths etc. However if a joint venture is to be successful the two or more organizations that form the joint venture must/should have common objectives in regards to: the market of entry, acceptable levels of risk/reward of the market entered, the sharing of technology, joint product development and the following of local government laws. Joint ventures often thrive if the following conditions are present between the partners: converging goals, small market share compared to the market leader, and are able to learn from one another without surrendering their competitive advantage or intellectual property.

Under the right circumstances, a joint venture can allow an organization to gain access to a new market which it previously wouldn’t have been able to do so by itself. The main restriction in this situation is generally the local government. A local government may choose to impose restrictions on wholly owned foreign investment for a number of reasons, such as: threat to local players, threat to the environment, threat to the long term prosperity of the industry etc. A real life example of this is Singapore Airlines entering the Indian market. The Indian government imposes restrictions on foreign airlines entering the local airline industry as a wholly owned subsidiary. However Singapore Airlines entered a joint venture with the Tata group, and owns a 49% stake in the SIA/Tata alliance.

Conclusion

No one entry mode is considered to be superior to one another. When an organization is choosing to internationalize their operations, they will first need to decide what its optimal levels of: commitment, flexibility, control, presence and risk are in order to select the most appropriate entry mode. An organization’s internal resources and capabilities are another important consideration when choosing the foreign entry mode. The market of entry is also another important consideration for the organization planning to internationalize their operations. A PESTLE analysis of the foreign market will help the firm to gain a better understanding of the market environment. The process for an organization to internationalize their operations is often quite difficult, and so is the process of choosing the foreign market entry mode. It’s for this reason that there is no superior foreign market entry mode. From the examples given it’s clear that each entry mode can be successful if implemented in the right circumstances.