6.4.2 Market Entry Modes

Furthermore, in the process of forming a strategy on internationalisation, a manager should be aware of the main market entry modes

Foreign market penetration can be achieved through the following expansion mechanisms which are: (1) exporting, (2) licensing, (3) joint ventures, (4) direct investment.1

(1) Exporting: Exporting is treated as the most traditional form of internationalisation. All related costs to exporting have to do mainly with marketing, so it is not only the oldest but also the safest way to reach a foreign market, since it does not require your company to move its premises and everything can be done directly in the country of origin. However, there are a number of associated risks and costs, mainly to do with transport with the most important factor being, inability to be close to the foreign market (indirect access to market data etc.).

(2) Licensing: The term is defined as an official or legal permission to do or own something specific. In business terms, licensing is the procedure whereby a company (i.e. the licensor) gives the right to another company in the target country it wishes to enter, to use its own property. A well known form of licensing is also franchising, but it is done on a longer term basis, whereas licensing has to do with short-term commitments. 2
Licensing is another form of "safe" market penetration, since it does not require much from the licensor, apart from handing the right to the respective foreign country to use intangible property of their company, such as the brand name for example.

(3) Joint Ventures: A joint venture presupposes the cooperation between two companies, hence in such cases you need to locate a partner abroad and build a common strategy based on negotiations. A common strategy implies that each company will seek fulfilment of its own goals to the maximum and you should bear in mind that this form of market penetration bears some risks. The risks can take the form of cultural differences, difficulties in management or the risk of your partner becoming a competitor to your own firm (clash of interests and ambiguity on profits).3 Nonetheless, a 50/50 joint venture will give you access to your partner´s knowledge of their market and vice versa, without much effort, so you can basically exploit each others expertise, cultural differences and local networks for the accomplishment of your goals.4

(4) Direct Investment: OECD defines Foreign Direct Investment (FDI) as a form of investment which reflects the objective of establishing a long term interest by a resident enterprise (i.e. the direct investor) in an economy other than that of the direct investor themselves.5 In other words, FDI is the process whereby one company from one country makes a physical investment into building e.g. a factory in another country; in short, it is the establishment of an enterprise by a foreigner.6 The process involves the transfer of resources, including capital, technology and personnel, and thus a greater amount of resources to be invested. This implies that this form of investment bears a greater amount of risk and higher level of commitment from your side in contrast with the aforementioned methods, as well as a higher level of managerial skills.7

An international penetration strategy would of course be incomplete with the absence of a marketing programme, so it would be a good idea to start considering which strategic course you will follow.

1 www.quickmba.com/strategy/global/marketentry/ , last accessed Sep. 2009.
2 Internationalization Process of SMEs: Strategies and Methods, Mohibul Islam Masum Alejandra Fernandez, June 2008, p. 17.
3 www.quickmba.com/strategy/global/marketentry/ , last accessed Sep. 2009.
4 Internationalization Process of SMEs: Strategies and Methods, Mohibul Islam Masum Alejandra Fernandez, June 2008, p. 10.
5 Glossary of foreign direct investment terms and definitions, OECD, 4th edition (http://www.oecd.org/dataoecd/56/1/2487495.pdf, last accessed September 2009).
6 Sullivan, Arthur; Steven M. Sheffrin Economics: Principles in action. Upper Saddle River, New Jersey, 2003. p. 551.
7 www.quickmba.com/strategy/global/marketentry/ (Last accessed, September 2009).