Exporting: First step towards getting international customers
Venturing into foreign markets requires details inquiries on ground scenario and based on the circumstances prevailing, a company must make choice from different modes of entry – exporting, importing, turnkey projects, licensing, franchising or foreign direct investment in the form of joint ventures or wholly owned subsidiary.
Each of these modes has advantages and disadvantages determined by transport costs and trade barriers, political and economic risks, business risks, cost and firm strategy.
Many firms begin with exporting and later switch to other forms. It is because exporting has many benefits as a result of multiplier effect. Government also proactively encourage exporting. The immediate benefit for the firm would be through economy of scale by expanding the size of market.
For SMEs, exporting might be costly and thus use of exporting agents is the best option. Big companies are proactive in looking for investment in foreign markets while SMEs are reactive as a result of fear for loosing their market share. SMEs tend to be not interested in exporting either because of the ignorance about the opportunities or incapacities to overcome the complexities of export trading.
However, factors such as high transport costs, tariff barriers and absence of trustful agents may have negative impact on exports.
Many countries have shifted their production in countries with low labour and other factor costs , in the form of outsourcing, establishing JV or establishing a new production centre, with the finished goods being imported back to the home country or exported to other countries.
Arrangement letting another entity granting rights to intangible properties such as patents, inventions, formulas, processes, designs, copyrights and trademarks for a specific period of time is called licensing.
The company issuing such licence may not have risk but lack full control over manufacturing, marketing and other strategies.
Franchising is more popular in industrialised nations while it is gaining popularity in developing nations as well. It is another form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business.
Joint venture is the best option, I think, in terms of taking risk, sharing profits, understanding local markets and consumer tastes. But JV might not be fruitful in technology companies if partners are not techno savvy.
Establishing wholly owned subsidiaries through greenfield is risky compared through acquisition. Owning subsidiaries would enable a company to reduce the risk of losing control over core competencies but bear the full costs and risks of setting up the operations.
While selecting an entry mode, a firm must assess its core competency such as technological know-how and management know-how.
Venturing into foreign markets brings in many challenges. The governments might restrict the convertibility of its currency to preserve its foreign exchange reserves or discourage imports in favour of promoting its local industries.
Exporting naturally faces obstacles of countertrade such as barter, counter purchase, offset, switch trading and compensation or buy-backs.