Export mode of entry
Discuss about the Business of Internationalization Process.
This essay will address the concept of business internationalization. Internationalization process is the initiates in an organization when it seeks to expand its venture outside its domestic boundaries. It is the process of designing of the products in such a fashion that it will meet the needs of the users in many countries or can easily be adapted to do so. Various reasons could be spot for an organization to internationalize their business. They can be like, diversification, economics of scale, government incentives, market growth, joint venture opportunities and saturated domestic market. There are a number of methods that can be adopted to expand the retail domestic organizational business into emerging markets. They are export based, non-equity based, and equity based methods. Export can again be divide into direct and indirect exporting. Similarly, non-equity based method is divided into licensing and franchising, and equity based method into joint ventures and green field investment. Different methods are opted by many organizations depending of various factors related to the market of expansion. They can be political, social, environmental, or technological. Using the pest analysis for studying the market situation, organization selects any particular internationalization method that is suitable for the particular market. A brief theoretical analysis of these methods along with the advantages and disadvantages are presented in the essay and highlight how it can maximize the chances of success and minimize the risk. The theories are then connected with the real world case scenarios to provide a better understanding of the concept and recommendation is added in the final part.
Exporting is one of the key and effective market entry modes available to the multinational organizations seeking to enter in a new country. It refers to the process of transporting the items or products to the host country from the home country with the help of the chosen mode of transportation (Cavusgil et al. 2014). In the initiation of the export mode of entry, business organizations do not have any physical presence in the host country, rather than they are only responsible in sending the products in the host market. However, export mode of entry can also be classified in two part based on their approach. One part represents the direct exporting and another is indirect exporting.
Direct exporting refers to the process of exporting the products from the home to the host country directly by the organization. In this case, exporting organizations maintains a separate department to look after the export process (Gubik and Karajz 2014). In addition, in the case of the direct exporting, the particular organization has their own selling representatives in the host country. These representatives act as the face of the exporting organization in the host country. They are also responsible for the generation of revenue as well as volume of sales in the host country.
Types of indirect exporters
Indirect exporting is another type of export mode of entry. According to this strategy, the exporting organization does not take the sole responsibility of managing the export process by own. Rather than they involves various intermediaries such as exporting consultants, third party selling representatives and trade merchants. It helps the exporting organization in reducing the responsibility being associated with exporting of the products. Moreover, one of the key advantages being garnered from the indirect mode of exporting is the expertise being possessed by the third party intermediaries. This is due to the reason that, intermediaries is having more expertise and specialization compared to the exporting organization. The intermediaries have more market information and data than the exporting organization and thus it will be more beneficial and effective for the exporting organization to involve the intermediaries in exporting their products in the host country.
There are various types of indirect exporters such as export merchants, trading houses, trading companies and agents. Export merchants refer to traders who are involved in buying the goods from the exporting organization and sell it in their own in the host country. In this case, the key advantage for the exporting organization is the reduction of the responsibility and risk for them in exporting the products. Export houses buy products from different organization and export those according to the requirement of the host countries. In this case, the key advantage for the exporting organization is the reduction of the risk and less influence of the determining factors for the trend of export (Lehtinen, Ahokangas and Lu 2016). This is due to the reason that, export houses buys in bulk from the manufacturing organizations and stores them, which are being further exported in the host country according to the demand.
Agents or brokers are quite similar of the selling agent for the exporting organization. However, the key differences between them and the selling agents is that, selling agents is the employee of the organization, whereas, agents or brokers performs the selling and marketing activities on the behalf of the exporting organization in exchange of commission. The key advantage with this intermediary is the less responsibility of the exporting organization due to the fact that they do not have to employ anyone permanently in the host country.
There are various researches being done by various authors about the merits and demerits of exporting as an entry mode for the business organizations. According to Handley (2014), export mode of entry is the most effective and secured entry mode strategy for the organization seeking entry in the international business. This is due to the reason that, in the case of exporting the responsibility of the organizations are limited to the transportation of the items to the host country. Thus, they do not have to incur any risk regarding the political, social or legal risk in the host country. Moreover, according to the author, export mode of entry is the most cost effective strategy for the organizations. This is due to the reason that, no huge investment is required in the case of exporting and there is no need of setting up operational facilities in the host country for the organization.
Some other authors have given the opinion about the deeper understanding of the exporting strategy. According to Seker (2012), exporting of the products in the developing countries holds extra benefits for the exporting organization. This is due to the reason that, in the current business scenario, developing countries are having the growth rate even more compared to some of the developed countries. Thus, the market potential is increasing and along with that, the business opportunity of the organizations is also increasing. In addition, the author also stated that, the products, which are being becoming obsolete in the developed countries, would have huge market potential in the developing countries. This is due to the reason that, developing countries are having the less access of the updated products compared to the developed countries. Thus, exporting of the goods, which are being obsolete in the home country for the organization, will find huge market in the developing countries.
Dyner and Ryabova (2013) stated that there are various demerits for the export mode of entry. According to them, there are many uncertainties in relation of the exporting. This is due to the reason that, in the case of exporting, the organizations have to incur extra cost by the way of import and export tariffs. Thus, eventually the cost of the products is increased and lead to less market potential in the host market. In addition, they also stated that, in the case of the exporting, organizations do not have the physical presence in the host market. Thus, it will affect their market penetration activities.
Non-equity based entry mode is the process that in where the organization directly involves it the market through two main ways. They are Licensing and Franchising. It enables the company to have a partial influence over the market.
It is an agreement between the licensor and licensee where the licensor grants permission to sell the organization’s product in the foreign country. The licensor on the other hand receives a loyalty fee from the licensee based on the mode of operation. In other words, a firm in one county grants permission to a company in another country to use the manufacturing, processing, trademark (Pietrasie?ski 2011). For example, suppose a videogame manufacturer in US wants to expand their business to Africa using the licensing method, they need to make an agreement with an African firm allowing them to use their product patent and giving other resources in return for a payment. The African firm can them manufacture and sell video game in Africa with the US company’s brand name. For example, Lego bought the license of the Batman character and now producing and manufacturing under the brand name of Batman. This way, Batman has expanded their business in US market.
Non-equity based Method
This can be consider as a more sophisticated form of licensing where the franchisor has the greater authority and insists the franchisee to agree to abide by the strict rules as to how it does the business. Here the mother company has the right to make any decision and the franchisee has to obey the proposed decision (Forte and Carvalho 2013). Franchising strategy of McDonald is the best example for explaining where McDonald set rules for the franchisee in their operation. They have the complete control over the menu, staffing policies, design, and location of the restaurant and the cooking method. They also controls the supply chain in any given market.
According to Grünig and Morschett (2012), analyses market entry modes over different industries and came to conclusion that the non-equity mode of entry is the second best entry mode possibly utilized by the organizations next to export. It is due to the risk factors in investing in a foreign unknown market. Licensing and franchising are both are potential entry method that minimizes the risk of entering a new market lowering the capital investment in the market. However, potential threats are observed as they loses their partial power of decision-making. It can sometimes, reduce the quality of the products and services offered under the company’s brand name. Possible conflicts are inevitable in this type of entry method.
Salar and Salar (2014) however, identified various advantages and disadvantages of using franchising as a mode of entry in an unknown culture. The advantages lies in he cost and risk factors. The risk factors that play important role in internationalization is considerable low than the equity mode of entry. The cost and the risk involved in this mode is minimal and near to none. This enables the company to invest in the foreign market. However, there ae some vital risk factors that plays significant role in franchising and licensing. The risk factors in both the cases are quite similar due to their similarities in nature. The company has less control in this process of entry in the international market. The power is vested in the hands of the franchisee to make necessary decision. Hence, there is possible risk in quality compromisation and brand image. Moreover, they cannot utilize the profit generated from one market to support the company in danger in other market. In addition to it, a potential conflict always lies within due to the gap between the ideas and desires of both the franchisor and franchisee.
According to Asarpota (2014), various issues will be present at all times with the use of franchising as an entry mode. They are similar to the statements of other researchers. However, the potential advantages that lies in front should also be address as they minimalizes the cost of operation in the foreign market. This
Equity based method is nothing but the use of foreign direct investment by the firm for competing internationally in the modern global economy. The firms using this method secure greatest level of control over its proprietary information (Shieh and Wu 2012). There are many types of equity based methods, but the most common are joint ventures and green field investments.
When a company enters in a foreign market making partnership with a local company and brings new product in the market, it is called joint venture. There can be two types of joint venture, which are specialized joint venture and shared value joint venture
When the companies come together with their specific skills and combine them for creating something out of it, it is specialized joint venture. For example, Japanese electronics company Sony and Swedish telecommunication company Ericsson came together to create mobile phones.
On the other hand, in shared vale venture, both the companies contribute to the same function. Example of Fuji-Xerox is best to explain this, where both the companies shared their knowledge of design, production and marketing.
In this mode of entry, the company gets to keep the 100% ownership of stock and share. A company can start their business in a foreign country from the scratch. The cost and the risk factors are potentially high in this kind of internationalization. The company has to establish from factory build stores in the foreign market all by themselves (Meyer and Thaijongrak 2013). Toyota is seeking to apply Greenfield entry mode in the Mexican market.
Various advantages and disadvantages are sited over the past few decades in equity entry mode of business organizations in alien culture. Tseng and Lee (2010) suggested that joint ventures are more preferable mode of internalization than the rest of the equity modes, It is primarily due to the risk factors and cost required in setting up a business in a foreign country. Joint venture reduces the possible risk factors while giving the company a level of influence over the strategies of the business.
Shieh and Wu (2012) in their report shows that the FDI in Vietnam market shows a degree of advantages due to their FDI policies. The multinational companies from the middle Asia finds a fruitful advantage to expand their business in Vietnam because of their favourable political environment. The risk factors in this particular case is comparatively low to other sectors of the world. Similarities can be found in case of Rwanda where the foreign direct policy gives the investors a degree of liberation in their operation (Byigero, Clancy and Skutsch 2010).
According to Rugman’s (2010) analysis of electric theory of internationalization, FDI shows potential advantages in the international business on the grounds of ownership, location, and internalization. The company gets to retain their full authority in their business in the foreign settings. However, potential risk constantly lies in front for the uncertainty in expanding business in the foreign grounds. The cost and risk factors are considerably high in equity based entry mode where the chances of loss is far greater than any other mode of entry (Rugman 2010). López-Duarte and Vidal-Suárez (2010) identified the political and cultural complication in FDI. These dilemmas are capable of bring severe impact on the business organization.
Recommendation and Conclusion
Various political, socio-cultural economic and technological factors play significant role while selecting any mode of entry in specific market in developing country. Different social and political dilemmas significantly influence the foreign investment in the country. Hence, it should be identified prior of making selection of entry mode. For example, there are three factors that influence the selection of entry mode in the fashion retail market that are firm specific, country specific and market specific (Lu, Karpova and Fiore 2011). Hence, the companies should conduct thorough study to develop idea of the required entry mode for any specific market.
The essay could be concluded with the statement, that export method is the best mode that can be used in the process of internationalization. The risk factors incorporated in this type is minimal. However, the companies need to look for FDI in order to sustain in he competitive market. Equity mode of entry favors FDI carries the highest possible risk in for a business with potential to deliver maximum profit. On the other hand, non-equity mode proposes low risk in business, but there is a potential threat of losing unique identity, as they have to share their technology with the licensee or the franchisee. Moreover, not every retail industry can incorporate every entry mode in every developing market. Entry mode is always selected based on several political, economical, socio-cultural factors and the type of retail industry. Example of eh MNC and fashion industry mentioned in the discussion shows that MNC requires a equity mode of entry as the political and socio-cultural effect is low, Whereas, the fashion industry needs enter the market with the franchising mode as the socio-cultural factor plays an important role in clothing. Moreover, the discussion reflects that both Vietnam and Rwanda has favorable FDI policies, which makes the industry to go for it to generate maximum profit.
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