Foreign Market Entry Without Ownership or Presence

When a company expands its operation abroad, what are the ways they can do it without physical presence or ownership? What are the disadvantages of that? Provide examples.

a) Exporting – It means sending goods or services to other countries for the purpose of selling there. It’s popular and flexible. 

b) Licensing – One company sells another a right to use its brand names, trademarks, patents, etc. It reduces financial exposure in foreign markets.  

c) Franchising – One step forward licensing, franchising allows a firm not only right to use the trademarks and brand name, but also the firms’ methods, procedures, products, marketing strategies, etc. So, it’s more in-depth contract. Longer commitments and tighter controls than licensing 

d) Management contracts – It means exporting your knowledge and know-how, rather than exporting a product 

e) Turnkey contracts – It includes designing, building, and operating large-scale facilities in foreign locations as a contractor, then handing it over to the appointing company or government.  

f) Contract manufacturing – This means outsourcing manufacturing operations abroad.  

Disadvantages

A) Exporting –

Missed location economies. Logistical and communication challenges. Learning compromised due to distance.

Extra Costs. Because it takes more time to develop extra markets, and the pay back periods are longer, the up-front costs for developing new promotional materials, allocating personnel to travel and other administrative costs associated to market the product can strain the meager financial resources of small size companies.

Product Modification. When exporting, companies may need to modify their products to meet foreign country safety and security codes, and other import restrictions. At a minimum, modification is often necessary to satisfy the importing country’s labeling or packaging requirements.

Financial Risk. Collections of payments using the methods that are available (open-account, prepayment, consignment, documentary collection and letter of credit) are not only more time-consuming than for domestic sales, but also more complicated. Thus, companies must carefully weigh the financial risk involved in doing international transactions.

Export Licenses and Documentation. Though the trend is toward less export licensing requirements, the fact that some companies have to obtain an export license to export their goods make them less competitive. In many instances, the documentation required to export is more involved than for domestic sales.

Market Information. Finding information on foreign markets is unquestionably more difficult and time-consuming than finding information and analyzing domestic markets. In less developed countries, for example, reliable information on business practices, market characteristics, cultural barriers may be unavailable.

B) Licensing – Risky where intellectual property protection is weak, especially with complex products. The contract should be clear in terms of the obligations of licensors and licensees. The lack of control. You may be education a “potential” competitor. May create new competitors. 

C) Franchising – Lack of control. Maintaining control can be a challenge. Conflict due to franchise not adhering franchisor’ standards. Disagreements between the franchisor and franchisee can create big issues.

D) Management contracts – No long-term presence. May create competitors. 

E) Turnkey contracts – No long-term presence. Vulnerable to political changes. Some countries can put obstacles in the way of foreign companies.

F) Contract manufacturing – Less control and lower product quality, and less timely delivery.  Learning is compromised.