International Business

Selecting a foreign entry mode and market is a crucial component of any international expansion strategy. The significance of pertinent analysis and subsequent decisions intensify with the increase of organizations’ dependence on global business for both growth and survival. In the same light, increasing competition compels companies to adopt an effective mode of entering foreign markets (Blomstermo, Deo Sharma, & Sallis 2006). Some of the decisions regarding foreign entry market modes include a need for control, a marketing plan required for entering the market, a selection of the entry mode for entering the foreign market, business objectives and goals regarding the target market, and a selection of the target market and product among others. These decisions play an integral role in influencing the mode of entry that an organization adopts when entering foreign markets. In the present day global economy, companies are faced with the challenge of choosing the best approach of going global, expanding their operations beyond their national borders and entering untested markets in the most practical and profitable manner (Brouthers & Nakos 2004). This paper compares the advantages and disadvantages of using exports, wholly-owned foreign direct investment, and international ventures as a method of doing business overseas.

Exporting

Exporting involves the distribution of goods/services in another country. There are two types of exporting strategies, which include direct exporting and indirect exporting. Direct exporting is considered the simplest form of exporting that involves an organization that capitalizes on economies of scale, concentrating the means of production in the home nation and securing efficient control in terms of distribution in foreign markets. According to Arregle, H?bert, & Beamish (2006), direct exporting is efficient in situations characterized by small export volumes, owing to the fact that large export volumes are more likely to result in protectionism.

The primary attribute associated with direct exporting is the absence of intermediaries in the distribution process. Intermediaries, sometimes referred to as agents, have the responsibility to undertake downstream value chain operations with respect to the target foreign market. In situations where the organization is in a position to access a significant portion of the target market, direct exporting is considered the most viable option of expanding operations to foreign markets (Cavusgil, Knight, Riesenberger, Rammal, & Rose 2014). However, when the company is operating in less familiar markets, characterized by unfamiliar regulatory and legal requirements, business customs and practices and consumer preferences, direct exporting is not a good option. In such a case, for instance, a domestic partner may come in handy in dealing with those complex issues and be in a better position to address the needs of the organization’s customers (Chiao, Lo, & Yu 2010). Passive exporting is a form of direct exporting characterized by a company taking overseas orders, like orders from the domestic market. Passive exporting is often linked with low risk since the company focuses on realizing foreign orders. Most small and micro enterprises (SMEs) rely on passive exporting as a means of expanding into foreign markets. Passive exporting is also considered a natural outcome associated with growth. It is often realized when a company has exploited all its capabilities in the home market and is reporting the appropriate and surplus production, and has the objective of market expansion. Such firms are motivated by the need to make profits in foreign markets in order to supplement the profits made in the home market (Chiao, Lo, & Yu 2010).

Direct exporting can be executed with the help of sales representatives and importing distributors. Sales representation involves the use of overseas manufacturers or suppliers operating in various domestic markets for an agreed sales commission. They also offer support to the firm in terms of domestic advertising, sales demonstrations, requirements (legal), and bureaucracies for custom clearance. Sales representatives, as a form of exporting, are best suited for firms involved in the manufacturing of extremely technical products (Chiao, Lo, & Yu 2010). On the other hand, importing distributors buy the product, seeking ownership, and resell the purchased commodity in their domestic markets. Direct exporting has a number of advantages, including having control over choosing of international markets as well as the selection of the sales representatives in these foreign markets; efficient information feedback regarding the target foreign market, enhancing buyer relationships; improved protection of intellectual rights such as goodwill, trade patents, and trademarks; and likelihood of higher sales resulting in improved profitability. However, direct exporting also has a number of disadvantages such as the need for higher costs for startups as well as higher risks when compared to indirect exporting; the need for more investments in terms of personnel, resources, time and changes in the organizational structure; access to vast information. Additionally, marketing indirect exporting takes much more time when compared to the use of indirect exporting (Cuervo-Cazurra & Genc 2008).

Indirect exporting involves exporting via intermediaries based on the domestic market. As a result, the exporting firm exercises no control over the distribution of its products and services in the target foreign market. In addition, under the indirect exporting arrangement, the manufacturer does not have the opportunity to directly contact its international partners and customers due to the fact that business transaction is perceived to be domestic. Indirect exporting can take various forms, including the use of export trading companies, export management companies, export merchants, conforming houses, and non-confirming purchasing agents. Export trading companies offer support services regarding the whole export process for at least a single supplier (Huang & Sternquist 2007). This option is suitable for exporting firms that are not acquainted with the exporting process since the export trading companies often undertake all the requires tasks, including the identification of foreign trading partners, product presentations, and quotations among others. Export management companies are the same as export trading companies in the sense they often export for producing companies. However, they refrain from taking risks associated with credit export and often focus on a single product; therefore, they are involved in export of competing commodities. Export merchants refer to wholesale firms that embark on purchasing unpackaged commodities from supplying companies or manufacturers for the purpose of reselling them in foreign markets via their own brands (Keller 2010). The primary advantage associated with the use of export merchants is promotion; nevertheless, it is characterized by the possibility of having identical commodities characterized by dissimilar pricing and brand names, which implies that the activities of the export merchant are likely to hamper the exporting activities of the manufacturer. Confirming houses refer to intermediate resellers working for buyers in foreign markets. They are involved in getting the product specifications from their customers, delivering and then paying the manufacturer. Indirect exporting has a number of advantages, including fast access to the foreign market; ensuring that resources are concentrated on production; minimal financial commitment; reduced risk levels for firms placing more importance on local markets; outsourcing of export management relieves the pressure put on the management unit; and indirect handling of export processes (Gripsrud & Benito 2005). Despite these advantages, there are a number of disadvantages associated with indirect exporting such as minimal control regarding the marketing, sales and distribution of the products; prospect of wrong distributor selection that may result in insufficient and ineffective feedback concerning the market; and likelihood of lower sales relating to direct exports (Dikova & Van Witteloostuijn 2007).

Overall, the first advantage associated with exporting is the requirement for minimal finance. In this respect, when the firm chooses another firm operating in the host nation to be in charge of distribution and sales, then the manufacturing company can gain entry into the foreign market with minimal financial resources when compared to other modes of entry. The second main advantage of exporting is reduced risks. This can be explained by the fact that in exporting there is no need for the manufacturing company to rapidly understand the market, including its consumers and their culture. Also, exporting eliminates the need for investment in foreign production facilities, which additionally lessens the risk in case of failure. Firms are mainly involved in exporting for the primary reason for increasing their sales revenue. Nevertheless, exporting can help the firm achieve economies of scale and facilitate diversification through export diversification (Cavusgil, Knight, Riesenberger, Rammal, & Rose 2014). Exporting is often perceived as a low-key strategy for gaining entry into foreign markets because it evades significant costs associated with the establishment of manufacturing operations in foreign countries. In spite of these advantages, exporting is also characterized by a number of disadvantages. For instance, cultural and language differences are likely to hamper the firm’s success in entering foreign markets. Moreover, exporting is subject to tariff barriers, which are likely to reduce profitability. Taking into consideration the fact that exporting firms lack a physical presence in a host market, they may develop a bad reputation associated with taking money from the economy and not putting it back into the host economy. Transportation costs are also a significant drawback, which reduces the ability of the exporting company to compete in costs. A company may be successful if it implements an exportation strategy characterized by the use of regional distributors in various international markets across the globe (Chiao, Lo, & Yu 2010).

Wholly Owned Foreign Direct Investment

Wholly owned FDI simply refers to a foreign subsidiary that is under the full ownership of the parent company. This subsidiary is charged with generating its own revenue and it is in charge of its operations. However, the implementation of trademark and policies are dictated by the parent company. Wholly owned FDI is not like a branch; instead, it only submits a particular percentage of obtained profits to the parent organization. In business terms, a subsidiary denotes an entity under control by a more powerful and bigger business entity. The entity that is being controlled is known as the company, which may be a limited liability company or corporation, whereby the controlling business entity is known as the parent firm. This differentiation is important due to the fact that alone the company cannot be referred to as a subsidiary of a firm. Wholly owned FDI is considered a distinct and separate legal entity in order to facilitate regulation and taxation. As a result, it is not the same as a division (Luo & Tung 2007).

Wholly owned FDI is characterized by a number of core features. The first feature of wholly-owned FDI is higher resource commitment. This stems from the fact that the establishment of wholly-owned FDI requires the highest commitment from the investment firm with respect to capabilities and resources. The second feature of wholly-owned FDI is localized operations and presence. In this context, through the establishment of wholly-owned FDI in various nations, the investing company makes the decision to have a local presence with the main aim of ensuring contact with local actors like government bodies, suppliers, intermediaries, and customers among others (Raff, Ryan, & St?hler 2009). The third feature of wholly-owned FDI relates to efficiencies on a global scale. With respect to this, the establishment of wholly-owned FDI plays a crucial role in helping multinational corporations improve their performance in the selected location based on its competitive advantages. For instance, research and development operations can be situated in knowledge-intensive nations, whereas production facilities can be situated in countries with labor efficiency (Rasheed 2005). Wholly owned FDI is also marked by significant uncertainty and risk. In this respect, wholly-owned FDI denotes the highest risk level as it entails significant local investment typified by the fixed and permanent presence in the foreign market. As a result, the investing company is exposed to various local risks such as inflation and government regulations. This method also lessens the flexibility of the firm. Another feature of wholly owned FDI is the significant emphasis on socio-cultural variables of the host market. Due to the fact that wholly-owned FDI requires a high commitment to the host market, the investing company has to deal more comprehensively with socio-cultural factors to reduce likely problems.

Based on these features, wholly-owned FDI has a number of advantages. The most crucial advantage of wholly-owned FDI relates to the strategic and operational control exercised by the parent firm over the subsidiary. During the first months of operation, the control levels tend to be higher. Nevertheless, the level of control is relatively lower when an acquired subsidiary reports a successful operational history. In addition, it is relatively easier to develop common operational procedures and processes, particularly in cases where the parent firm sends its expatriates to be in charge of managing the subsidiary. Another advantage of wholly-owned subsidiary relates to the reduced risk concerning the loss of intellectual property because the parent firm can opt to adopt common protocols for both securities as well as data access (Terpstra, Foley, & Sarathy 2012). Wholly owned FDI is also likely to benefit from cost synergies due to the use of the same financial systems between the subsidiary and its parent company, the use of the same administrative processes and systems, and joint marketing initiatives. What is more, the parent firm exercises control over the assets of wholly-owned FDI; as a result, the parent firm can make investments of these assets whenever it deems that such an act is suitable (Wei, Liu, & Liu 2005).

Despite these advantages, there are a number of disadvantages associated with this arrangement. The first disadvantage is that establishing wholly-owned FDI is a costly venture. Despite the fact that the acquisition of a local firm may ease entry into the market, the parent firm is likely to make overpayments for the acquired firm’s assets, particularly in the event of a bidding war, which may be used to make the acquisition. Moreover, time is required for wholly owned FDI to establish relationships with local customers and suppliers. Other difficulties that concern wholly owned FDI in the international expansion include the trouble with acquiring skilled employees to help in managing the subsidiaries (Chiao, Lo, & Yu 2010). Also, cultural barriers are likely to limit the success of the subsidiary in the domestic market. An example of successfully wholly-owned FDI is American Airlines, which operates under the AMR Corp.

International Joint Venture

Business alliances enable firms to access international markets in a more effective and economical manner. The differences in currency, language, culture, regulatory and legal environment can make business collaborating through international joint ventures a good alternative for international expansion. International joint ventures have been regarded as an effective means of gaining access to foreign markets quickly. With the help of collaboration, risk-sharing, and exploiting the local expertise and resources of another a firm can enter a foreign market with relative ease, although proper understanding, as well as planning, are required (Blomstermo, Deo Sharma, & Sallis 2006).

International joint ventures have a number of advantages. First, they facilitate faster entry into international markets at relatively lower costs when compared to buying an existing company that has been operational in the target market or launching a new venture altogether. Second, international joint ventures offer quick access to distribution channels as well as ensure that the non-local partner can access the knowledge including the knowhow of the target market. This may enhance the likelihood of the success of the joint venture. Third, the resident partner often has current relationships with core domestic customers and suppliers, and it is acquainted with domestic business customers, culture, and language. These advantages are important for SMEs that lack the expertise, capital, and resources required for pursuing international expansion unless it is in a position to share the costs and risks by entering into an alliance. International joint ventures facilitate faster growth for the partners in a cost-effective and credible way (Blomstermo, Deo Sharma, & Sallis 2006).

Despite these advantages, international joint ventures have a number of disadvantages too. First, international joint ventures can lead to a frustrating outcome and failure in the absence of an efficient strategy and planning. Variables like economic turmoil, uncertainties in the regulatory environment, issues in technology and developments in the market have significant effects on international joint ventures. Second, international joint ventures related to the sharing of profits and the possibility of management issues regardless of having adequate procedures for addressing disputes (Blomstermo, Deo Sharma, & Sallis 2006). An example of a successful international joint venture is the joint venture between Jaguar Land Rover (Britain) and Chery Automobiles (China).

Conclusion

It is evident from the discussion that various forms of entry into foreign markets: exporting, wholly-owned foreign direct investment, and international joint ventures have their strengths and weakness. For instance, exporting requires minimal resources; on the one hand, the potential generated sales revenue is likely to be lower because of the lack of the domestic market. On the other hand, wholly owned foreign direct investment is effective in accessing the local market because of its physical presence; yet it is a costly undertaking. International joint ventures offer a cost-effective means of accessing the local market and guarantee physical presence; however, it requires effective planning as well as a strategy. In addition, some multinational companies use all the three modes of entry because they have expertise, resources, and capabilities to execute the strategies. Moreover, different companies at different stages of international expansion are likely to make use of different entry modes.