There are five basic options for competing in international markets. These are (1) exporting, (2) creating a wholly owned subsidiary, (3) franchising, (4) licensing, and (5) creating a joint venture or strategic alliance. The option to choose depends on how much control a firm wants to have over its operation, the amount of risk involved, and the share of the operation’s profits the firm gets to keep.
Exporting includes producing goods in the home country and then shipping them to another country. Once the products reach the foreign shores, the exporter’s role is over. A local firm then sells the goods to local customers.
Once the exported products are found to be available in a given country, exporting often becomes undesirable. An exporting firm loses control of the management and operation of goods’ sales once they are turned over to a local firm for sale. Also, an exporter earns money when it sells its goods to a local firm, but it cannot get any profit when the end users buy the goods. Exporting is the easiest way of entering an international market but risky too.
A wholly owned subsidiary is a new business in a foreign country owned by the foreign firm. It can be a greenfield venture, meaning that the organization builds up the entire operation itself. The other possibility is purchasing an existing operation.
Having a wholly owned subsidiary is an attractive option as the firm has complete control over the operation and gets all the profits. It can be quite risky, however, as the firm must pay all of the expenses required to set it up and operate it.
Franchising involves a firm (franchisor) granting the rights to use its brand name, products, and processes to other firms (franchisees) in lieu for a fee (a franchise fee) and a pre-set percentage of franchisees’ revenues (a royalty fee).
Subway, The UPS Store, and Hilton Hotels are just a few of the firms that have done so. Franchising is an easy and attractive way to enter foreign markets because it needs little financial investment by the franchisor. On the downside, the franchisor firm gets only a small portion of the profits made under its brand name. Also, local franchisees may operate against the franchisor.
Licensing includes permitting a foreign company the right to produce a company’s product within a foreign country in return for a fee. The products are usually produced using a patented technology.
The firm that grants a license avoids many types of costs, but also the profits are limited. The firm also loses the control over use of its technology.
In a Joint Venture (JV), the participating organizations contribute to the creation of a new entity. In such an arrangement, organizations work cooperatively, but a new organization is not created. The firm and its partner shares decision-making, control over the operations, and the profits.
JVs are especially attractive when a firm thinks that working closely with locals will provide it important knowledge, enhance acceptance by government officials, or both.
The Hero-Honda automobile firm was a JV between Hero of India and Honda, a company from Japan.