13: ENTRY STRATEGIES IN FOREIGN MARKETS 1

13
EN T RY ST RAT EGI ES I N FOREI GN M ARK ET S

The content of this supplementary note links with the following chapters:
10 (page 249), 13 (page 300)

The key role of international development is discussed in Chapter 10, in view of the globalisation of
the European and of the world economy. One of the critical questions to examine in establishing an
international development strategy is to select the entry mode in the target foreign country and the
distribution channel. Several alternative entry strategies can be considered, as shown in Figure
Web 13.1, from a base of either domestic or foreign production.

Figure Web 13.1

Entry Strategies in Foreign Markets
Domestic and / or Foreign
production production

Indirect Direct Assembly

exporting exportation

Casual International Contract

exporting representative manufacturing

Trading Licensing and

Local agents franchising
companies

Export management Foreign Joint

company distributeurs ventures

Co-operation Commercial 100 per cent

in exporting subsidiary ownership

th
Source Tepstra and 8 edition

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13: ENTRY STRATEGIES IN FOREIGN MARKETS 2

I ndire c t e x port

The market-entry technique that offers the lowest level of risk and the least market control is
indirect export, in which products are carried abroad by others. The firm is not engaging in
international marketing and no special activity is carried on within the firm; the sale is handled
like domestic sales.

There are several different methods of indirect exporting:

• The simplest method is to deal with foreign sales through the domestic sales
organisation. For example, if a firm receives an unsolicited order from a customer in Spain
and responds to the request on a one-off basis, it is engaging in casual exporting.
Alternatively, a foreign buyer may approach to the firm. Products are sold in the domestic
market but used or resold abroad. This type of arrangement may arise if, for example, a
foreign department store has a buying office in the firm’s home country. If the exporting firm
does not follow up the contact with a sustained marketing effort, it is unlikely to gain future

•
sales.
A second form of indirect exporting is the use of international trading companies with
local offices all over the world. Perhaps the best-known trading companies are the Sogo
Sosha of Japan such as Mitsui or Mitsubishi. The size and market coverage of these trading
companies make them attractive distributors, especially with their credit reliability and their
information network. The trading companies of European origin are important primarily in
trade with former European colonies, particularly Africa and Southeast Asia. The drawback
to the use of trading companies is that they are likely to carry competing products and the

•
firm’s products might not receive the attention and support the firm desires.
A third form of indirect exporting is the export management company located in the same
country as the producing firm and which plays the role of an export department. That is the
firm has the performance of an export department without establishing one in the firm. The
economic advantage arises because the export company performs the export function for
several firms at the same time. The producer can establish closer relationships and gains
instant foreign market contacts and knowledge. The firm is spared the burden of developing
in-house expertise in exporting. The method of payment is the commission and the costs
are variable. Export management companies handle different but complementary product
lines which can often get better foreign representation than the products of just one
manufacturer.

Indirect export can open up new markets without requiring special expertise or investment. Both
the international know-how and the sales achieved by these indirect approaches are generally
limited. In this approach, the commitment to international markets is very weak.

Dire c t e x port

In direct exporting, the firm becomes directly involved in marketing its products in foreign
markets, because the firm itself performs the export task (rather than delegating it to others).
This necessitates the creation of an export department responsible for tasks such as:

• Market contact

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13: ENTRY STRATEGIES IN FOREIGN MARKETS 3

•
•
Market research

•
Physical distribution

•
Export documentation
Pricing.

This approach to export requires more corporate resources and also entails greater risks. The
expected benefits are:

•
•
Increased sales

•
Greater control

•
Better market information
Development of expertise in international marketing.

To implement a direct exporting strategy, the firm must have representation in the foreign
markets. This can be achieved in a number of ways:

• Sending international sales representatives into the foreign market to establish contacts

•
and to directly negotiate sales contracts.
Selecting local representatives or agents to prospect the market, to contact potential

•
customers and to negotiate on behalf of the exporting firm.
Using independent local distributors who will buy the products to resell them in the local

•
market (with or without exclusivity).
Creating a fully owned commercial subsidiary to have a greater control over foreign
operations. (In most cases, the commercial subsidiary will be a joint venture created with a
local firm to gain access to local relationships.)

Fore ign m a nufa c t uring

Under certain conditions, a firm may find it either impossible or undesirable to supply foreign
markets from domestic production sources. For example:

•
•
Transportation costs may be too high for heavy or bulky products

•
Custom rates or quotas on imports can render products non-competitive
Government preferences for local products can prevent entry in the foreign market (see
Table Web 13.1, overleaf).

Any of these conditions could force the firm to manufacture in foreign markets in order to sell
there. Positive factors can also induce the firm to produce abroad – for example:

•
•
The size and the attractiveness of the market

•
Lower production costs
Economic incentives given by public authorities.

Varied approaches can be adopted to foreign manufacturing, as shown in Table Web 13.1
(below). Each implies a different level of commitment from the firm.

Market-Driven Management: Supplementary web resource material © Jean-Jacques Lambin, 2007

Published by Palgrave Macmillan
13: ENTRY STRATEGIES IN FOREIGN MARKETS 4

Table Web 13.1

Export Price Escalation in Different Channel Structures

Short Long Long Long Channel

Channel Channel Channel with with importer
importer and jobber
Manufact. Price 95 95 95 95
Transport CIF - 15 15 15
Tariifs (20%) - 22 22 22
Importer Cost: - - 132 132
(25%) 33 33
Wholesaler 95 132 165 165
Margin* (33.3%) 47 66 83 83
Jobber Margin: - - - 248
(33.3%) 124
Retailer Margin: 142 198 248 372
(33.3%) 71 99 124 186
Retail Price 213 297 372 558
*Margins are mark-ups

Asse m bling

Assembling is a compromise between exporting and foreign manufacturing. The firm produces
domestically all or most of the components or ingredients of its product and ships them to
foreign markets to be put together as a finished product. By shipping CKD (completely knocked
down), the firm is saving on transportation costs and also on custom tariffs which are generally
lower on unassembled equipment than on finished products. Another benefit is the use of local
employment which facilitates the integration of the firm in the foreign market.

Notable examples of foreign assembly are the automobile and farm equipment industries. In
similar fashion, Coca-Cola ships its syrup to foreign markets where local bottle plants add the
water and the container.

Cont ra c t m a nufa c t uring

In contract manufacturing, the firm’s product is produced in the foreign market by local producer
under contract with the firm. Because the contract covers only manufacturing, marketing is
handled by a sales subsidiary of the firm which keeps the market control. Contract
manufacturing obviates the need for plant investment, transportation costs and custom tariffs
and the firm gets the advantage of advertising its product as locally made. Contract
manufacturing also enables the firm to avoid labour and other problems that may arise from its
lack of familiarity with the local economy and culture.

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A drawback to contract manufacturing is loss of profit margin on production activities,

particularly if labour costs are lower in the foreign market. There is also the risk of transferring
the technological know-how to a potential foreign competitor. This risk is lessened, however,
where brand names and the marketing know-how are the key success factors. A frequent
problem is also quality control.

Lic e nsing

Licensing is another way to enter a foreign market with a limited degree of risk. It differs from
contract manufacturing in that it is usually for a longer term and involves greater responsibilities
for the local producer. Licensing is similar to franchising except that the franchising organisation
tends to be more directly involved in the development and control of the marketing programme.

The international licensing firm gives the licensee patent rights, trademark rights, copyrights or
know-how on products and processes. In return, the licensee will:

•
•
Produce the licensor’s products

•
Market these products in his assigned territory
Pay the licensor royalties related to the sales volume of the products.

The benefits of licensing for the two partners are the same as those described for franchising in
Chapter 13. This type of agreement is generally welcomed by foreign public authorities because
it brings technology into the country.

The major drawback of licensing is the problem of controlling the licensee due to the absence of
direct commitment from the international firm granting the licence. After few years, once the
know-how is transferred, there is a risk that the foreign firm may begin to act on its own and the
international firm may therefore lose that market.

J oint ve nt ure s

Foreign joint ventures have much in common with licensing. The major difference is that in joint
ventures, the international firm has an equity position and a management voice in the foreign
firm. A partnership between host- and home-country firms is formed, usually resulting in the
creation of a third firm.

This type of agreement gives the international firm better control over operations and also
access to local market knowledge. The international firm has access to the network of
relationships of the franchisee and is less exposed to the risk expropriation thanks to the
partnership with the local firm.

This type of agreement is very popular in international management. Its popularity stems from
the fact that it permits the avoidance of control problems of the other types of foreign market
entry strategies. In addition, the presence of the local firm facilitates the integration of the
international firm in a foreign environment.

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13: ENTRY STRATEGIES IN FOREIGN MARKETS 6

Dire c t inve st m e nt s

In this arrangement, the international firm makes a direct investment in a production unit in a
foreign market. It is the greatest commitment since there is a 100% ownership. The international
firm can obtain wholly foreign production facilities in two primary ways:

•
•
It can make a direct acquisition or merger in the host market
It can develop its own facilities from the ground up.

In some countries, governments prohibit 100% ownership by the international firm and demand
licensing or joint ventures instead.

**********

Foreign market entry strategies are numerous and imply a varying degree of risk and of
commitment from the international firm. In general, the implementation of an international
development strategy is a process achieved in several steps. Indirect exporting is often used as
the starting point; if the results are satisfactory, more committing agreements are made by
associating local firms.

Bibliogra phy

Terpstra, V. and Sarathy, R. (2001) International Marketing, 8th edn, Chicago IL, Dryden Press.

Market-Driven Management: Supplementary web resource material © Jean-Jacques Lambin, 2007

Published by Palgrave Macmillan