Once the company management decide to engage in international trade they must choose an entry strategy depending on certain criteria (slide 9):
- The company’s financial resources
- Physical and technical characteristics of a product
- Availability of trained and competent personnel
- Political and economic situation at home and in foreign country
- Constraints and barriers
Taking all the factors into account a company can choose any of numerous entry strategies.
I’d like to draw your attention to this table (slide 10) that shows entry strategies commonly used by businesses to penetrate foreign markets.
First is indirect exporting when a company is not involved in the international marketing since the sale is handled like domestic sales through international companies.
The simplest method of indirect exporting is to deal with foreign sales through the domestic sales organization which means the products are sold in the domestic market but are used or resold abroad.
Another method is the use of international trading companies which size and market coverage make them attractive distributors. The drawback to this method is that such companies are likely to carry competing products and the firm’s products might not receive the attention and support the firm desires.
The third method is the export management company located in the same country as the producing firm and which plays the role of an export department. The economic advantage arises because the export company performs the export function for several firms at the same time.
The advantage of indirect exporting is that it opens new markets for a company without requiring special expertise or investment. However weak commitment to international markets and low control over company activity in a foreign country are certainly disadvantages.
If the company wants to have greater control and develop expertise in international marketing it had better choose direct exportation.
To become more involved in marketing its products in foreign markets a company may use various methods such as sending international sales representatives or selecting local representatives to establish contacts and negotiate contracts.
The firm can use independent local distributors who will buy their products and resell then in the local market.
Finally the good way to gain access to local markets is creation of a fully owned commercial subsidiary.
However direct exportation requires more corporate resources and entails greater risks than indirect exporting. Moreover a firm may find it either impossible or undesirable to supply foreign markets from domestic production sources due to transportation costs or customs rates.
In this case firm is encouraged to manufacture in foreign markets. Depending on a level of commitment a firm may adopt any suitable approach to foreign manufacturing.
The easiest ways are assembling, when the firm produces components domestically and ships them to foreign markets to be assembled as a finished product or contract manufacturing when product is produced by local producer under contract with the firm. These way help the firm to decrease transportation costs and custom tariffs, avoid labor and cultural problems.
Licensing is another way to enter a foreign market with a limited degree of risk. The licensor gives the licensee patent, trademark rights or know-how and in return the licensee produces and markets the licensor products and pays royalties related to the sales volume of the product. The major drawback is the problem of controlling the licensee as there is a risk that in several years the foreign firm may begin to act on its own and the international firm may therefore loose the market.
To avoid this problem a firm may launch joint venture where it will have an equity position and a management voice.
Finally a firm may obtain 100% ownership by investing directly in a production unit in a foreign market.
Depending on the criteria I mentioned earlier a company chooses the way to enter foreign market. For example, indirect exporting may be used as a starting point to mitigate risks however it usually faces more barriers than other strategies, so if a company has available resources it had better apply to other strategies to integrate easier in a foreign market.
This completes my description of numerous entry strategies with a varying degree of risk and amount of control.
So in conclusion I’d like to go over the main points of my presentation again.
International trade is a way of increasing welfare for all, because whenever an exchange takes place, both parties are better off as a result.
International trade brings a variety of benefits to all its participants, and this makes businesses market abroad. There are many factors that influence company’s decision to go international, and the choice of entry strategy the company is going to use.
This brings me to the end of my presentation.
Thank you for your attention.
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