Discuss the different ways to enter a foreign market. What are the advantages and disadvantages of each?

Question

What will be an ideal response?

Answer 1

There are several ways to enter into a foreign market depending on the goals of the enterprise and its current strengths. The methods of entry are:
• Exporting – Good initial entry mode to learn more about a market with limited risks. High transportation costs and potential trade barriers could make this more difficult though.
• Turn-key contracts – Allows the entrepreneur to earn returns in countries where FDI is restricted, however it could be creating a long term competitor as the skills and knowledge of the enterprise are transferred to a local agent.
• Licensing – This option entails lower development costs and risks, however the entrepreneur has limited control over his product or technology.
• Franchising – Similar to licensing but franchising agreement could also limit the potential upside to the entrepreneur if the venture is successful.
• Joint ventures – Gives access to a local partner’s knowledge of the market and network of existing relationships. This can be very beneficial in some markets where relationships are a very strong part of local business. However this also limits the control available over the operations because the partner can exert stronger power. This also reduces the ability to coordinate among foreign offices.
• Wholly-owned subsidiaries – This often takes place after a business has established itself in a market and has developed a client base. It allows complete control of the business by the entrepreneur, lets them build the local knowledge, and capture all of the profits from the market. It also allows for the coordination of activities among different locations and markets. The disadvantage of this is the high cost and risks that are assumed by opening a wholly-owned subsidiary. This is a capital investment that requires a longer term perspective and prevents a venture from quickly exiting the market if the conditions do not favor it.