The choice of the how one enters in foreign markets is one of the most important decisions in the international expansion strategy of a company. This decision will have direct effects on the results obtained in the new markets. The resources used in the internationalization process, the risks assumed, the marketing channel used and the degree of control of operations will vary according to the type of access chosen. Knowing the basic criteria that should guide this decision along with the different alternatives to choose from, thus, becomes critical.
Here we present the different modes of entry into a new foreign market, so that you can assess which best fits the needs of your company and the business environment you are expanding into.
Key Variables for Selecting the Entry Method
In order to choose the most suitable entry form in the target market, the company has to analyze a series of variables that will affect, directly or indirectly, its internationalization strategy.
First, it has to quantify the financial, human and management resources of the company, in order to choose the most efficient alternative given the available resources.
On the other hand, the company must set objectives for its international expansion (improving its competitive capacity, covering several markets simultaneously, diversifying risks, etc.) that will condition the chosen form of entry.
The type of product or service offered by the company is another factor to consider. For example, the commercialization of consumer goods requires broader distribution channels with a greater number of intermediaries than in the case of capital goods.
In addition, the analysis of the internal aspects of the company has to include a series of external or exogenous variables as well, which are essential to carry out an analysis of the risks linked to the target market. Some risks that will be higher if the company chooses to implement direct entry, through for example the creation of a subsidiary, in that market. This is because the risky elements associated with that country acquire a greater impact on the resources committed by the company.
In addition to risks, it is necessary to analyze the demand perspectives offered by the market which the company wishes to target, as well as the level of supply concentration (characterization of competition), the existence of barriers and incentives to trade, the movement of capital, among others.
What modes exist?
After analyzing the company's capabilities and the characteristics of the sector in the target market, the most suitable entry alternatives for the company will be analyzed. In this sense, four viable options can be cited:
- Direct Export
- Indirect export (with the intervention of an intermediary that resells the product)
- Establishing alliances or cooperation agreements (with partners that share risks and benefits)
- Direct investment abroad
The most relevant aspects of these different forms of entry into new markets are described below.
Direct and indirect export
Direct export is a useful strategy in the early stages of internationalization, since it allows a first contact with the target market without the need to undertake large investments. However, the main difficulties for its implementation are: the location of potential customers, the control of the quality of the delivery and post-sale services, as well as the loyalty of new customers in some cases, among others.
On the other hand, in indirect export, which is done through intermediaries. The burden of the selection of customers, the storage and distribution of the product, the promotional actions, etc. can be offloaded to the local organization. Intermediaries can be established via import companies in the target market. The success of this strategic mode lies in choosing the right distributor, in the relationships established with them and in their management capacity. Another type of intermediary are the trading companies, which specialized in markets of more difficult access and higher risk.
The establishment of alliances or cooperation agreements
If the company chooses to formalize a strategic alliance with a local partner, it must confirm the existence of complementarities that support a sustainable collaboration. The great advantage of having a local partner is to cover certain shortcomings that the company may have to face in order to operate in the destination market. The pertinent knowledge of the local partner can be very beneficial in this regard.
Different types of cooperation agreements can be established, and joint ventures in the destination country (which will be a direct investment, see below) will also be common. In some cases the most favorable way to overcome certain obstacles to trade and direct investment is through the creation of subsidiaries with 100% foreign capital.
Direct investment entails the creation of permanent establishments in markets that offer better business prospects for the company. This is done through commercial delegations or subsidiaries. There may be different reasons for the implementation of this method in foreign markets: obtaining competitive advantages in factors of production (low production costs in emerging countries), proximity to the potential customer or the need for expansion of production capacity.
Foreign direct investments are usually made when there is an established international trajectory. While for certain sectors (especially in the area of services) as well as projects of external expansion it may be appropriate to approach the new market only via direct investment in it.
In short, the characteristics of the company and the resources available to it, as well as the risks it is willing to manage, the degree of control sought in the implementation of the international commercial strategy along with the possible channels of commercialization of the products will determine the mode of access to new markets. In any case, companies can opt for different modalities for penetration in different markets, within the same business internationalization strategy.