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CHAPTER 3
AVENUES OF ENTRY INTO FOREIGN MARKETS
When a domestic company decides to enter into international business, it has several options not necessarily mutually exclusive - to do so, depending, however on the nature and degree of
involvement the company wishes to have in foreign business. These avenues are
1. EXPORTING:
A domestic company can sell its products to foreign buyers directly or indirectly. For direct
exports, it establishes direct contact with foreign customers (actual users or importer
distributors) and ships the goods as per the customer's orders and requirement. The exporting
firm takes upon itself the entire responsibility concerning packing, documentation, shipment,
credit exchange risks, the Government regulations etc., A company can carry direct export in
many ways:
(i) Domestic based Export Department or Division:
An export sales manager with some clerical assistants, carry on actual selling and draw on
marketing assistance as needed. It might evolve into a self - contained export department or
sales subsidiary carrying out of all the activities involved in export and possibly operating as
profit centre.
(ii) Foreign based Sales Branch or Subsidiary:
An overseas sales branch allows the manufacturer to achieve greater presence and
programmed control in the foreign market. The sales branch handles sales distribution and
may handle warehousing and promotion as while. It also serves as a customer service centre.
(iii) Travelling Export Sales Representative:
The company can send home - based sales representatives abroad at certain times to promote
business.
(iv) Foreign based Distributor or Agents:
Foreign based distributor would buy and own the goods. Foreign based agent would sell the
goods on behalf of the company. They may be given exclusive rights to represent the company
in that country or only general rights.
In the case of indirect exporting, a firm can use a variety of middle men who operate in the
international markets. Three types of domestic middle men are available for the company.
(i) Domestic based Export Merchant:
The middleman buys the manufacturer's product and sells it abroad on his own account.
(ii) Domestic based Export Agent:
The agent simply agrees to seek foreign buyers for a commission. He may also render certain
services but does not take title to the product.
(iii) Resident Agent / Representatives of Foreign Buyers:
- who buys in the exporting country on behalf of Importers abroad.
(iv) Co-operative Marketing Organizations:
A co-operative organization carries on the exporting activities of its members and may be
partly under their control. This form is used usually by producers of primary products, fruits,
vegetables, nuts and so on.
(v) Combination Export Manager (CEM): who acts as an overseas selling agent for a number of Principals and practically acts as the
`export department' for the firms he represents. Indirect exporting is more common in
companies just beginning their exporting. First it involves less risk and investment and second
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it does not have to develop an overseas sales force. However, Exporters who have grown
sufficiently large would like to undertake their own exporting (direct). The investment and risks
are obviously higher but so is the potential return.
2. JOINT VENTURING :
Joint venturing involves the setting up of enterprises in collaboration with a foreign-based
company, for the manufacture and marketing of specific product lines. Such collaborations can
take various forms covering such areas as managerial, technical know-how and technology
transfer, equity participation, R & D activities, manufacturing & marketing facilities, or
combinations thereof. For political or economic reasons, joint ventures may become the only
possible technique of entry in a potential export market. Joint venture projects set up in
developing host countries could be an important means of import substitution and also help
the local industries to benefit from industrial and technological progress of the advanced
countries.
Joint ownership has certain drawbacks. The partners may disagree over investment, marketing
or other policies and also in matters like reinvestment.
Regardless of these short comings, joint ventures are increasing and for many countries are
frequently the only chance of direct investment.
3. LICENSING ARRANGEMENT :
Licensing arrangement represents signing of a franchisee agreement with a foreign based
enterprise which grants under the terms of agreement the right use the patents, processing
know-how, trade marks of the licenser company etc., usually in exchange for a fee or royalty.
Through this agreement, licenser can enter the foreign market at little risk and the licensee
gets the benefits of gaining the manufacturing technology and marketing of a well known
product or brand. Licensing does not involve foreign investment risk since the licensee sets up
his own production and marketing facilities. If the cost of production is comparatively lower in
the licensee's country, the licenser can import the product from the licensee to improve its
competitive position in its own market of a third country, thus opening a new avenue of export
for the licensee.
4. CONTRACT MANUFACTURING (ALSO MANAGEMENT CONTRACTING):
Contract manufacturing represents various kinds of tie-ups of manufacturing facilities and
arrangements agreed upon between two or more manufacturers located in different countries.
Such manufacturing activities could be carried on under sub-contracting arrangements for the
fabrication of components and accessories and even finished products in a foreign country.
The international sub-contracters perform similar functions as the domestic ancillary does for
the end-user industries. Management contracting is a low risk method since no capital is
invested. The domestic firm is exporting only the management services.
5. FOREIGN INVESTMENT :
Direct and unilateral investment abroad involves establishment of assembly, processing,
packaging or even complete manufacturing, distributing and marketing facilities in foreign
countries, usually under the finance and management of the holding company. Such a
subsidiary established in the host country becomes the part of that country's economic life and
can contribute to the economic growth of the country. This also enlarges the profit base of the
investing company.
The main disadvantages are that there are risks associated with it such as blocked currency or
devalued currencies, worsening markets, etc., and the firm has no choice but to accept these
risks if it wants to operate in the host country.
6. CONSULTING / TURNKEY PROJECTS :
Entry into foreign markets can be made by offering various kinds of consulting services to the
foreign customers (Government or private), starting from feasibility studies and eventually
entering into contract for setting up turnkey projects. Thus project export could open up yet
another avenue not only for supplies of machinery, components and equipments for
installation but also for continued supply of spares and replacements over a long period.
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CONCLUSION :
There could however be numerous variations and combinations of the arrangements and
techniques for entering and conducting foreign business, with corresponding financial and
investment risks and managerial and organizational responsibilities. The choice of a particular
type/technique for doing foreign business by a company will depend on a number of factors both external and internal, and on the kind of involvement the company wants to have in
international operations. Foreign market entry decision is, therefore, related to the foreign
marketing involvement decision of the company.
Exporting can be accomplished by selling your product or service directly to a foreign firm or
indirectly through the use of an export intermediary, an export management or trading
company.
There are two basic ways to export: Direct or Indirect. The direct method requires your
company to find a foreign buyer and then make all arrangements for shipping your products
overseas. If this method seems beyond the scope of your business in-house capabilities at this
time, do not abandon the idea of exporting. Consider using an export intermediary.
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Export Management Companies (EMCs)
EMCs act as your 'off-site' export department, representing your product along with the
products of other companies to prospective overseas purchasers. The management company
looks for business on behalf of your company and takes care of all aspects of the export
transaction. Hiring an EMC is often a viable option for smaller companies that lack the time and
expertise to break into international markets on their own.
EMCs will often use the letter head of your company, negotiate export contracts and then
provide after sales support. EMCs may assist in arranging export financing for the exporters
but they do not generally assure payment to the manufacturers. Some of the specific functions
an EMC will perform include:
Conducting market research to determine the best foreign markets for your products.
Attending trade shows and promoting your products overseas.
Assessing proper distribution channels
Locating foreign representatives and/or distributors
Arranging export financing
Handling export logistics, such as preparing invoices, arranging insurance, customs
documentation, etc.
Advising on the legal aspects of exporting and other compliance matters dealing with
domestic and foreign regulations.
Piggyback Exporting
Allowing another company, which already has an export distribution system in place, to sell
your company's product in addition to its own is called piggyback exporting.
Piggyback exporting has several advantages. This arrangement can help your gain immediate
foreign market access. Also, all the requisite logistics associated with selling abroad are borne
by the exporting company.
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