Five Modes of Entry Into Foreign Markets

Joint Venture

One of the most popular modes of entry is the establishment of a joint venture, in which two businesses
combine resources to sell products or services. Many countries with tightly controlled economies, such as
China, often require foreign companies to partner with a local company if they wish to sell products to their
residents. Although joint ventures provide foreign companies with a partner experienced in the foreign market,
these partnerships can be difficult to manage and require a splitting of profits.

Licensing Agreement

In the licensing mode of entry, companies sign contracts with foreign businesses, called "licensees," that allow
the foreign companies to legally manufacture and sell the company's products. The foreign companies will
either purchase the license outright, pay a regular licensing fee or pay a percentage of their revenue over time in
the form of royalties. Often used by manufacturing firms, licensing allows a company to enter a market quickly
and inexpensively, but provides little control over the product's foreign marketing and sales.

Exporting Directly

Rather than attempt to partner with or provide a license to foreign companies, some companies will simply sell
their products to distributors overseas, who will sell the products to consumers. Exporting means the company
avoids having to invest the money in developing manufacturing facilities in the foreign market, but
transportation costs and restrictive tariffs may make this mode uneconomical for certain products.

Online Sales

Many companies will attempt to enter foreign markets indirectly, by targeting foreign consumers on the
internet. Similar to exporting, companies retain their physical operations in their native countries, but ship
products overseas. However, whereas in exporting, companies contract with local businesses, with the Internet
they take orders directly from consumers. One advantage to this mode is that it is relatively cheap, entailing
only the cost of a website and marketing. The downside is that it is often less effective than establishing a
physical presence in the foreign market. Consumers may be deterred due to shipping costs, duties and taxes that
may be levied by their government and the length of time it takes for their order to arrive.

Purchasing Foreign Assets

Many companies, rather than launching an entirely new venture in a foreign market, will simply purchase or
invest in a foreign company. While often more expensive, direct investment allows the investing company to
reap the profits of a business that is already well integrated into the local market.