Firms wanting to enter global trade have many options. The six strategies most
commonly used include: foreign outsourcing and importing, foreign exporting, licensing,
franchising, and direct investment.
Foreign outsourcing involves contracting with foreign suppliers to produce products,
usually at a fraction of the cost of domestic production.
Importing is the buying of products overseas that have already been produced
overseas to be consumed in the domestic market, rather than contracting with
overseas manufacturers to produce special orders.
Exporting is the most basic level of international market development. It simply
means producing products domestically and selling them abroad.
Foreign licensing involves a domestic firm granting a foreign firm the rights to
produce and market its product or to use its trademark/patent rights in a defined
geographical area. The company that offers the rights, or the licensor, receives a fee
from the company that buys the rights, or the licensee. This approach allows firms to
expand into foreign markets with little or no investment, and it also helps circumvent
government restrictions on importing in closed markets.
Foreign franchising is a specialized type of licensing. A firm that expands through
foreign franchising, called a franchisor, offers other businesses, or franchisees, the
right to produce and market its products if the franchisee agrees to specific operating
requirements—a complete package of how to do business. Franchisors also often
offer their franchisees management guidance, marketing support, and even financing.
In return, franchisees pay both a start-up fee and an ongoing percentage of sales to
the franchisor. A key difference between franchising and licensing is that franchisees
take over the identity of the franchisor.
Foreign direct investment in foreign production and marketing facilities represents
the deepest level of global involvement. The cost is high, but companies with direct
investments have more control over how their business operates in a given country.
Joint ventures involve two or more companies joining forces—sharing resources,
risks, and profits, but not merging companies—to pursue specific opportunities. A
formal, long-term agreement is usually called a partnership, while a less formal, less
encompassing agreement is usually called a strategic alliance. Joint ventures are a
popular, though controversial, means of entering foreign markets.