Understanding the methods businesses use to enter international markets is essential for evaluating strategic options in a global context.
Exporting
Exporting is often the first international strategy businesses adopt, especially when testing demand for their product in a foreign market without making a major investment.
What is Exporting?
Exporting involves producing goods or services in a company’s home country and then shipping them to another country for sale. This method does not require physical presence in the target market and is generally the least risky and least resource-intensive way to enter a new market.
Features of Exporting
Low risk: The business does not need to establish operations or infrastructure abroad.
Limited control: The firm often relies on foreign agents, distributors, or independent retailers.
Indirect or direct: Exports can be handled indirectly (via intermediaries) or directly (by the business itself).
Common entry strategy for SMEs: Exporting is widely used by small and medium enterprises looking to internationalise with minimal exposure.
Advantages
Minimal capital investment: No need to acquire property, build facilities, or hire large numbers of employees overseas.
Faster entry: Allows companies to enter markets quickly, especially where speed is important for competitive advantage.
Lower exposure to local business risks: Political instability, economic fluctuation, and regulatory challenges in the target market are less impactful.
Potential for increased revenue: Especially beneficial when domestic markets are saturated.
Disadvantages
Lower profit margins: Intermediaries often take a share of the profits.
Limited market knowledge: Businesses can struggle to understand local consumer preferences and market dynamics.
Reliance on local partners: Lack of control over the marketing, distribution, and customer service processes.
Trade barriers: Exposure to import tariffs, quotas, and non-tariff barriers that may limit access or increase costs.
Example
A British skincare brand exports its products to retailers in the UAE through a third-party distributor, allowing access to the Middle Eastern market with minimal investment.
Licensing
Licensing is a strategy where a business allows another company in a foreign market to use its intellectual property in return for royalties or fees.
What is Licensing?
Licensing is a contractual agreement where the licensor grants rights to a licensee in another country to use its brand name, product formulation, technology, or process. It is commonly used by firms with well-established brand identities or innovative technologies.
Features of Licensing
Royalty-based model: The licensee pays the licensor based on sales or usage.
Local production and distribution: The licensee manufactures and sells the product using the licensor’s brand or methods.
Lower risk and capital requirement: The licensor avoids direct investment and operational responsibilities.
Advantages
Rapid expansion: Allows fast access to international markets without needing a physical presence.
Low financial risk: The local licensee assumes the investment and operational burden.
Income through royalties: Provides an income stream without requiring active management.
Access to local knowledge: The licensee brings insight into customer preferences and regulatory compliance.
Disadvantages
Risk of IP theft or misuse: Protecting brand value and proprietary information can be challenging across jurisdictions.
Less control over brand representation: The licensee may not uphold the same standards as the licensor.
Limited profit potential: Compared to operating independently, royalty income is often lower.
Difficulty in enforcement: Legal enforcement of licensing agreements can be difficult, especially in countries with weak legal systems.
Example
UK-based fashion retailer Marks & Spencer enters the Indian market by licensing its brand to a local retail conglomerate that operates M&S stores.
Strategic Alliances and Joint Ventures
Forming partnerships with foreign firms is a way to share the risks and rewards of entering new markets, especially where local knowledge or regulatory approval is required.
What is a Strategic Alliance?
A strategic alliance is an informal or formal collaboration between two or more companies that agree to pursue mutual goals while remaining independent. Unlike a joint venture, it does not involve creating a new entity.
What is a Joint Venture?
A joint venture (JV) is a legally established, jointly-owned business formed by two or more parent companies. Each partner contributes capital, resources, and expertise and shares profits and decision-making authority.
Features
Shared ownership: Typically 50/50 or proportionate to contributions.
Resource pooling: Combines capital, technology, and market expertise.
Defined scope: Often focused on a single project or regional market.
Legally binding structure (in the case of JVs): Requires careful negotiation and documentation.
Advantages
Access to local expertise: Helps navigate unfamiliar cultural, legal, and economic environments.
Risk sharing: Both partners absorb part of the financial and operational risk.
Combining strengths: Enables partners to benefit from each other’s competencies.
Improved market entry chances: Particularly in countries that limit foreign ownership or favour local partnerships.
Disadvantages
Cultural differences: Conflicting corporate cultures or business practices may lead to tension.
Misaligned goals: Partners may pursue different strategic objectives.
Complex management: Requires strong governance and communication structures.
Risk of conflict or dissolution: Disputes can arise over profit sharing, decision-making, and resource allocation.
Example
Starbucks partnered with Tata Group in India through a joint venture to enter the Indian coffee market, benefitting from Tata’s retail experience and supply chain in the region.
Direct Investment (Foreign Direct Investment – FDI)
FDI represents the most resource-intensive but potentially most rewarding form of international market entry.
What is FDI?
Foreign Direct Investment involves a company investing directly in facilities, operations, or acquiring controlling stakes in a foreign business. This often includes establishing manufacturing plants, sales offices, or fully owned subsidiaries abroad.
Features
Full operational control: The firm manages all aspects of its foreign operations.
Long-term commitment: Suitable for firms planning sustained growth in the target market.
High entry cost: Involves large capital expenditure and complex planning.
Advantages
Greater profit retention: No need to share margins with intermediaries or local partners.
Strong brand presence: Full control over marketing, branding, and customer experience.
Better integration with global operations: Easier to align production, supply chain, and management systems.
Enhanced understanding of local markets: Facilitates customer insights, regulatory navigation, and innovation.
Disadvantages
High risk and capital investment: Particularly risky in volatile political or economic climates.
Complex regulatory environment: May require compliance with local laws, employment regulations, and industry-specific rules.
Longer time to market: Due to the need for planning, construction, and regulatory approval.
Difficulty of exit: Disinvestment or plant closure can be costly and reputationally damaging.
Example
Nissan’s car manufacturing plant in Sunderland, UK, is an example of FDI designed to serve the European market with local production capabilities.
Comparing Market Entry Methods
The best method for entering a new international market depends on multiple factors, including the business’s size, experience, resources, strategic objectives, and risk tolerance.
Business Size and Resources
Small firms: Usually prefer exporting due to lower risk and minimal investment.
Medium firms: May choose licensing or alliances to scale efficiently.
Large firms: Often pursue FDI to secure control and long-term growth.
Strategic Goals
Brand control: FDI is ideal when businesses need tight control over how their brand is presented.
Speed to market: Licensing or exporting is quicker and may be more suitable when rapid entry is important.
Learning local markets: JVs and alliances help bridge knowledge gaps and create partnerships with local entities.
Experience and Risk Appetite
Inexperienced businesses: Should consider exporting as a first step into international trade.
Moderately experienced: May find joint ventures or alliances useful to reduce risk while increasing presence.
Highly experienced firms: Are often better positioned to manage complex FDI projects and accept associated risks.
Flexibility and Speed
Exporting and licensing: Offer greater flexibility and faster implementation.
FDI and joint ventures: Require longer lead times but may result in more substantial long-term gains.
Degree of Control
Exporting: Little to no control over distribution and customer engagement.
Licensing: Limited control over brand and production.
Alliances/JVs: Moderate control through shared ownership or agreements.
FDI: Maximum control over all aspects of the operation.
Recap with Examples
Exporting: A craft beer company in the UK begins exporting to France using an online distributor. The business enters the new market quickly and with minimal cost, but has limited influence over how the product is marketed.
Licensing: A UK pharmaceutical firm licenses its drug formula to an Indian firm, gaining access to the market while avoiding complex regulation, but must monitor brand use.
Joint Venture: A British university partners with a Chinese education provider to offer courses locally. They share teaching, facilities, and management.
FDI: A UK-based technology company sets up a research centre in Singapore to tap into the Asia-Pacific innovation market and skilled talent pool.
Choosing the right entry strategy is a strategic decision that balances opportunity with risk and reflects the firm’s ambitions, capacities, and context.
FAQ
A business may choose a joint venture over a wholly owned subsidiary to share financial risk and benefit from the local partner’s market knowledge, distribution networks, and political connections. Joint ventures also help navigate regulatory barriers, especially in countries where foreign ownership is restricted or less culturally accepted. Compared to full ownership, JVs reduce the capital required and can accelerate market entry. While control is shared, this method balances opportunity with a lower initial commitment and less exposure to local market uncertainties.
Cultural differences can significantly influence communication, management styles, decision-making, and customer expectations. For example, in strategic alliances or joint ventures, misunderstandings around work culture, leadership, or negotiation styles can lead to conflict and inefficiency. A product’s branding or advertising might also fail if it ignores cultural norms or language nuances. Businesses must conduct thorough cultural due diligence and may need to adapt products, marketing, or operations to align with local practices, particularly when operating closely with local partners or consumers.
Government policy shapes how businesses can enter a market through tariffs, trade regulations, ownership laws, and investment incentives. In some countries, foreign firms may be prohibited from operating independently, making joint ventures or licensing the only viable options. Others may offer tax breaks or subsidies for FDI to attract foreign capital. Governments may also require localisation of supply chains or employment. Understanding these policies is vital, as non-compliance could result in penalties, delays, or loss of access to the market altogether.
Businesses assess financial feasibility by estimating setup costs, ongoing operating expenses, expected revenues, and time to breakeven for each method. Exporting involves lower upfront costs but may yield smaller margins due to intermediary involvement. Licensing generates passive income but limits revenue potential. FDI demands large capital investment but offers greater control and long-term profit opportunities. Cash flow forecasts, ROI calculations, and risk assessments help firms compare methods, considering the scale of the opportunity and alignment with strategic goals and available resources.
To succeed with FDI, a business needs strong internal capabilities in financial management, international law, supply chain coordination, human resource management, and cross-cultural communication. The firm must have the infrastructure to manage remote operations, ensure product or service consistency, and comply with foreign legal and tax systems. A robust understanding of the local market and the ability to adapt business practices are also crucial. Without these capabilities, the high costs and risks of FDI may outweigh its benefits.
Practice Questions
Analyse the benefits and drawbacks of licensing as a method of entering international markets for a UK-based food manufacturer.
Licensing allows a UK food manufacturer to expand quickly with minimal investment, using a local partner’s market knowledge and infrastructure. It reduces risk and costs, especially in unfamiliar or regulated markets. However, there are drawbacks such as loss of control over product quality and marketing, which may damage the brand. Intellectual property may also be at risk if the licensee misuses the brand or formula. Overall, while licensing offers fast and cost-effective entry, it limits the firm’s control and may not be suitable for maintaining consistent standards in global brand positioning.
Recommend whether a mid-sized UK clothing retailer should enter the US market via exporting or foreign direct investment (FDI). Justify your recommendation.
Exporting would be more appropriate for a mid-sized UK clothing retailer entering the US. It allows lower-risk entry with minimal capital investment and quick access to the market. Given the size and limited resources of the retailer, FDI would likely be too costly and risky, especially in a highly competitive market. Exporting also provides flexibility to exit or adjust strategy if the market proves challenging. Although FDI offers greater control and brand presence, the scale of commitment required is more suited to larger firms with global experience and strong financial backing. Exporting provides a safer, scalable option.
