Entry Mode

An entry mode is the manner in which a company decides to enter into foreign markets. International market efforts take many forms. There are various strategies an organization may implement once it has decided to enter the global market. Ways to enter a foreign market include licensing, franchising, joint ventures, exporting, and direct investment.

Licensing occurs when a target country grants the right to manufacture and distribute a product under the licenser's trade name in a target country. The licensee pays a fee in exchange for the rights. Small and medium-sized companies tend to grant licenses more often than large companies. Since there is little investment required, licensing has the potential to provide a large return on investment. However, it is seen as the least profitable way to enter the market because most companies use licensing to supplement manufacturing and exporting. Licensing tends to be a viable option to enter a the market when (1) the exporter does not have sufficient capital, (2) when foreign government import restrictions forbid other ways to enter the market, or (3) when a host country is not comfortable with foreign ownership.

Advantages of this method to a multinational corporation (MNC) are (1) there is no capital expenditure requirement, (2) it is not risky, and (3) payment is a fixed percentage of sales. Disadvantages are (1) the multinational does not have any managerial control over the licensee because it is independent, and (2) the licensee can give the multinational's trade secrets to a potential competitor.

Exporting is the marketing and direct sale of domestically produced goods in another country. It is a traditional and established method of reaching foreign markets. New companies tend to enter international markets through exporting. One reason may be because this type of entry does not require the organization to produce the goods in the targeted country, which means that the organization would not have to invest in foreign production facilities. Marketing expense is the biggest cost with exporting. There are two ways an organization can make sales in exporting—directly or indirectly. Direct sales can be made via mail order or through offices set up abroad. Indirect sales are made via intermediaries who locate the specific markets for the organization's products. The four players in the exporting business are the exporter, importer, transport provider, and the government. Many organizations are able to successfully establish themselves abroad and do not have to expand beyond exporting.

Direct investment occurs when there is direct ownership of facilities in the target country, and it requires a high level of resources and a high degree of commitment. This type of market entry may be made via the acquisition of an existing entity or the establishment of a new enterprise. It requires the transfer of resources such as capital, technology, and personnel. Direct ownership can provide a high level of control in the operations as well as provide the opportunity to better know the potential customers and competitive environment. MNCs may select this method when they want to (1) grow: the organization reaches a point where it realizes that it is not growing; therefore, there in an initiative to identify new markets so that it can continue to make profit; (2) bypass protective instruments in the target country. American MNCs avoid set-up subsidiaries in order to avoid the common external tariff imposed by the European market; (3) prevent competition: MNCs may buy a foreign company so that it will not become a competitor; and (4) reduce costs: labor costs tend to be different in countries. Many MNCs will attempt to identify countries that have qualified workers that will work for lower wages. For example, many American MNCs [Page 605]have outsourced their customer service and technology functions to India.

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