So, your business is faced with the need to enter the international market. But how to do that? In this article, we consider several ways and examples of product promotion in the markets of other countries. As a rule, they single out three basic strategic methods of this process:
- Setting new business structure
Let's take a look at each of these ways to expand business and reveal their advantages, disadvantages, and risks for a company.
Local business development strategy
This international market entry method is also called direct investment. It assumes full control of the business in the foreign market, that is, full ownership of the subsidiary in the target country. This may be a branch or a separate legal entity, but the parent company fully controls it. Here you can go in two ways: buy an existing business or build a new company from scratch.
- Buying an existing business. The purchase of a ready-made company in the target foreign market can be implemented through the merger process or the purchase of a controlling stake in a company. In any case, this foreign market entry strategy will be faster than building a similar business from scratch and can immediately provide a company with a certain share in the target market. Acquiring a business also reduces future competition, since it is a potential competitor usually being acquired. When buying a ready-made business, one has to know all the legal restrictions and rules of this process; have an excellent staff of specialists who will correctly conduct a merger and organize integration processes between companies; perform a full analysis of the purchased object.
- Settgin business from scratch. This international market entry strategy is called the "green field strategy," which means expanding the company's business to the external market by building a new facility (production, sales, service, etc.). This path represents the minimum risk and maximum control for a company (after all, it can do everything in such a way as to optimize business processes between two companies as much as possible), but this solution takes quite a lot of time.
Also among the modes of entry in the international market, we can distinguish export activities. With this approach, the production of goods and services is held in the main domestic market of the company, and the sale of these goods and services goes in the target foreign market. If a company has chosen export activities as its international market entry strategy, it is necessary to decide which functions of goods promotion a company will perform itself, and what will be transferred to intermediaries in foreign markets. The degree of delegation of authorities determines the level of responsibility and risks. There are several options for organizing export activities:
- direct export,
- indirect export,
- joint export.
|Type of export activity||Description|
|Direct export||A company sells its goods to the external market by entering into direct contracts with dealers and resellers of the external market. In this case, a company undertakes all operational activities for work, for finding intermediaries, documentation, and certification of products.|
|Indirect export||A company finds a reseller in the domestic market; such a reseller sells goods in a local market. This intermediary knows all the subtleties of work in the target region and has an established set of dealers for selling.|
|Joint export||A company cooperates with other companies in the domestic market in order to organize direct deliveries to the target external market. This approach is especially good for small companies which do not have sufficient resources and production level to enter foreign markets. Therefore cooperation allows them to fill the missing resource gap.|
The main advantage of selecting this international market entry strategy is the minimal risk and cost that a company bears when implementing this method of entering foreign markets. The main disadvantage of export activity is the low level of control of selected resellers in the target country.
Export activity is often a test approach which helps a company to assess the real demand for its product, to understand the shortcomings of the product, taking into account the local specifics of consumption. If the product is in demand, a company may move to more controlled activities in foreign markets.
Another foreign market entry strategy is mediation. Mediation is a type of work with international markets, which does not imply full ownership of a company operating in a foreign market but sharing with it some responsibility and control over the process. As a result, the main company transfers to the intermediary its knowledge, experience, skills, and part of the resources, and in return, it receives a guarantee of broadcasting a defined strategy and a certain guarantee of sales to the target external market. There are four types of cooperation: licensing, franchising, contract manufacturing or a joint venture.
- Licensing. Licensing is such a type of cooperation according to which a company in one country transfers the right of a company in another country to use its unique production processes, patents, trademarks, technological achievements, and other valuable skills for a fee, which is established as part of an agreement.
- Franchise. Franchising is a type of licensing activity for which a franchisor company transfers to its intermediary (franchisee company) a license to operate under its trademark. It is possible to transmit both the possibility of using the company's trademark or products and the whole business process (as McDonalds or KFC do).
- Contract manufacturing. Contract manufacturing involves the transfer of the company's production in the local market, and the preservation of the remaining functions (marketing, sales, distribution) of the parent company. IKEA uses this type of market entry strategy. It finds small local companies for the production of its goods within the target market and significantly saves on transportation costs (export of goods to the external market).
- Joint venture. Joint ventures are separate companies created by two or more enterprises in which the degree of responsibility and risk between owners is divided. A company may establish a joint venture with one of the players in the target external market in order to gain access to resources, knowledge, contacts or technologies. In this case, the company shares the risks with its partner but also divides the future income from the activities in the industry.
Choice of jurisdiction for entering international markets.
An important step in the development of strategies for expansion in international markets is the choice of the right jurisdiction for registering a company, brand, or finding partners. Naturally, it is logical to assume that the best jurisdiction for registering a business is your target market; that is, you are registering at the place where you are going to work. But things are not so simple. Firstly, the tax rate in a selected country can be so high that it will negate the potential benefits. This is especially true for developed countries in Europe and North America. Secondly, the conditions for doing business in the selected country can be very unfavorable, for example, due to the high level of corruption, or the lack of the necessary infrastructure. Third, there may be an unfavorable legal framework in your jurisdiction that does not protect against encroachment on your business or prevents its normal operation through various prohibitions and restrictions. In this regard, assessing the available options for entering new foreign markets, we advise you to pay attention to the UAE, in particular, its economic zones. It offers quite a lot of advantages for foreign investors:
- No corporate and personal taxes. In addition, the country has signed over 70 treaties to avoid double taxation, so you will not have to pay extra taxes.
- The ease and speed of business registration. It will take from two days to two weeks to register a company in the free zones of the UAE, depending on the structure of the business. The requirements for the investor here are much milder than in other countries
- The possibility of full ownership of a company and the smooth withdrawal of capital.
- A well-developed legal framework that reliably protects foreign entrepreneurs.
- Availability of all necessary infrastructures (offices, warehouses, and other premises, building land, transport, communications, labor).
- Security and stability. There are no wars, revolutions, or other upheavals in the country, there is practically no corruption here, so a foreigner may well feel safe here.
Given the above advantages and broad potential opportunities, we can say that the choice of the UAE as a jurisdiction for registration and expansion of business is a win-win solution.