Market entry modes
Market entry modes refer to the strategies used by firms to enter international markets. These strategies can include direct export, foreign direct investment, joint ventures, franchising, and other forms of strategic alliances. Direct export involves selling products directly to customers in another country, while foreign direct investment involves a company setting up a subsidiary or other legal entity in the target market. Joint venture and franchising involve partnering with a local firm to enter a foreign market, and strategic alliances involve formal and informal agreements with other companies to access new markets.
Example of market entry modes
- Direct Export: This method involves selling a company’s products directly into the international market, without establishing a physical presence in the target country. For example, a US-based company may export its products to customers in other countries through online sales channels, or by using a distributor or agent based in the target market.
- Foreign Direct Investment (FDI): This involves a company setting up a subsidiary or other legal entity in the target market. For example, a US-based company may enter the Chinese market by establishing a subsidiary in Shanghai and production facilities in other parts of the country.
- Joint Ventures: This approach involves partnering with a local firm to enter a foreign market. For example, a US-based company may enter the Indian market by partnering with an Indian firm to form a joint venture, allowing both companies to benefit from the skills, resources, and local knowledge of the partner.
- Franchising: This approach involves allowing a local firm to use the brand and other resources of the parent company to open a franchise in the target market. For example, a US-based fast food chain may enter the Russian market by allowing a local firm to open franchises in Moscow, St. Petersburg and other cities in the country.
- Strategic Alliances: This approach involves establishing formal and informal agreements with other companies to access new markets. For example, a US-based company may enter the Japanese market by entering into a strategic alliance with a local firm, allowing both companies to benefit from each other’s resources and expertise.
Steps of selecting market entry modes
The following are the steps of market entry modes:
- Identify the target market: This involves researching the target market and developing an understanding of the local environment, customer needs, competitors, and other factors that will influence the success of the market entry.
- Develop a market entry strategy: This involves deciding how to enter the market and selecting the most appropriate market entry mode.
- Research and select a partner: If using a partner-based market entry mode, such as franchising or a joint venture, it is important to research potential partners and select the most suitable one.
- Negotiate the terms of the agreement: Once a partner is selected, the terms of the agreement should be negotiated and finalized.
- Prepare to enter the market: This involves setting up the necessary legal structures, obtaining permits and licenses, arranging financing, and other steps necessary to enter the new market.
- Launch the market entry: This involves executing the market entry strategy, including launching any necessary advertising and promotional campaigns, as well as managing any operational and logistical issues.
- Monitor and adjust: It is important to monitor the market entry and adjust the strategy as needed in order to ensure success.
Advantages of market entry modes
The advantages of market entry modes include:
- Increased reach: By using market entry modes, companies can gain access to new markets, customers, and economies of scale.
- Reduced risk: Market entry modes can reduce the risk of operating in foreign markets by pooling resources with local partners or by leveraging the resources of established companies.
- Improved understanding of the local market: Market entry modes can help companies gain a better understanding of the local market and its dynamics.
- Lower costs: Market entry modes can reduce costs associated with entering a new market, such as start-up costs, legal costs, and marketing expenses.
- Improved access to resources: Market entry modes can provide access to local resources, such as skilled labor, suppliers, and distribution networks.
Limitations of market entry modes
Market entry modes can provide a viable way for companies to enter foreign markets, but there are several key limitations to be aware of. These include:
- High costs: Market entry modes often involve high initial and ongoing costs, such as the cost of setting up a subsidiary or other legal structure, or the cost of entering into a joint venture or strategic alliance.
- Time-consuming process: Establishing an effective presence in a new market involves a significant amount of time and effort, from researching the local market and setting up the necessary infrastructure to marketing and sales.
- Risk of failure: As with any form of market entry, there is always the risk that the venture will not be successful. This risk can be mitigated by thorough research and planning, but it is always present.
- Limited control: Depending on the entry mode chosen, the company may have limited control over operations in the target market, which could have a negative impact on the success of the venture.
- Compliance with local regulations: Companies must ensure that they are compliant with all applicable local regulations, which can be a challenging and time-consuming task.
- Differences in culture: Understanding and adapting to the local culture can be a major challenge, as business practices and attitudes may differ significantly from those in the home country.
In addition to the market entry modes described above, there are other approaches companies can take to enter foreign markets. These include:
- Licensing: This strategy involves granting the right to another company to produce and market a product in a foreign market.
- Contract Manufacturing: This involves outsourcing the production of the product to another company in the target market, who will then produce the product and distribute it to local customers.
- Strategic Alliances: This involves forming formal or informal agreements with other companies in the target market to gain access to new markets.
- Online Presence: This involves setting up an online presence in the target market, such as a website or social media pages, to reach customers in the new market.
In conclusion, there are numerous strategies companies can use to enter foreign markets, including market entry modes such as direct export, foreign direct investment, joint ventures, and franchising. Other approaches include licensing, contract manufacturing, strategic alliances, and creating an online presence in the target market. Each approach has its own advantages and disadvantages, so it is important to carefully consider which one is most suitable for the company’s goals and objectives.
|Market entry modes — recommended articles|
|International business strategy — Export management — International marketing strategy — Process of internationalization — Inorganic growth — Global value chains — Distribution channel strategy — Transaction cost theory — Internationalization|
- Datta, D. K., Hemnann, P., & Rasheed, A. A. (2002). Choice of foreign market entry modes: Critical review and future directions. Advances in Comparative International Management, 14, 85-153.