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Entering into a foreign market
Present Communication technologies have flattened the globe and we all become the citizens of a common global village. This new business paradigm has compelled the manufacturing companies to sell their products in foreign countries to get a global presence and recognition. There are different strategies and models available to enter into a foreign market but selecting the best possible strategy is a challenge. Researchers have claimed that selecting the appropriate strategy to enter into a foreign market is a critical business decision (Chung and Enderwick, 2001; Nakos and Brouthers, 2002)
There are several factors which have a direct impact on the mode of entry decision of a firm into a foreign market. Some of such factors are:
• Transfer of technology (Mattoo, 2000)
• The expatriates (Chung and Enderwick, 2001)
• Size of the company (Leung et al., 2003)
• Cultural differences between the host and foreign country (Gillespie, 2002)
• Political and environmental uncertainty of the new country (Cristina and Esteban, 2002)
• Rate of foreign exchange (Baek and Kwok, 2002) etc.
Entry Modes Available
Following are some of the options available to the firm which is interested to enter into a foreign market:
• Joint Venture
• Wholly owned Subsidiary
• Licensing (Young et.al., 1989)
It is the process of sending locally manufactured products to the foreign country and the foreign agents of the firm take care of the marketing of the product. As the products which are being exported are manufactured locally, thus no investment in manufacturing facilities in target country is required and the manufacturing company has to bear only the marketing expenses.
This mode has several advantages as it minimizes the investment and risk and enhances the speed of entry. However it has some disadvantages also.
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A joint venture is a cooperative business activity, formed by two or more separate organizations for strategic purposes, that creates an independent business entity and allocates ownership, operational responsibilities, and financial risks and rewards to each member, while preserving their separate identity/autonomy. Joint ventures provide a way to combine temporarily the different strengths of partners to achieve an outcome of value to both (Agarwal, 1994).
It requires less investment and firm is considered as an insider having no cultural differences. Disadvantages of joint ventures include loss of control, lower profits, probability of conflicts with partners, and the likely transfer of technological advantage to the partner.
Wholly owned Subsidiary
Sometimes the manufacturing firm establishes a 100 percent owned subsidiary in the target country either through establishing a new operation or through buying an already established firm. This gives a complete control to the firm over its foreign operations and the firm is also considered as an insider.
On the other hand, the manufacturing firm has to bear the full cost of establishing a new operation in the target country.
This is the option in which the firm is able to use the intangible assets of the licensor. This requires a lot less investment as compared to joint venture or wholly owned subsidiary and thus the firm can expect a huge return on investment. Nevertheless, as marketing and distribution is done by the licensee, the grip and control of the licensor may be loosened which would also affect its potential return on investment.
A small Canadian company in pharmaceuticals has developed a new drug and is considering selling it to the European Union market. The company is considering the following options:
a) Manufacture the product at home and let foreign agents handle marketing and sales
b) Manufacture the product at home and set up a wholly owned subsidiary in Europe to handle marketing and sales
c) Enter an alliance with a major European pharmaceutical firm. The product will be manufactured in Europe by the 50/50 joint venture and marketed by the European firm.
In the above case both option a and option b can be adopted as they provide a tight control to the manufacturing firm over the quality and cost of the drug and are lot less risky and expensive than option c. Option c can be considered as a feasible option if the partner pharmaceutical firm can provide better access to the market.
If we compare option a and option b, then option a looks more promising providing the manufacturing firm will succeed in finding such sales agent who can market the product in an effective manner. This will help the company to acquire more market share in less time as compared to establishing a wholly owned subsidiary.