What's the Best Way to Enter a Foreign Market?

Scenario: Your US company has come up with a way to produce a computer that is just as good as your competitors but can be manufactured at half the cost. Now you would like to sell these computers in the EU. What should you do?

Option A: Export computers to the EU from the US.

This mode of entry falls under the category of international trade.

Pro: The greatest benefit of exporting is that it does not require a lot of additional investments and it is the least risky of all given options. Because the manufacturing stays within the US, it is not necessary for the company to have foreign employees or to directly invest in any foreign country. The company must decide whether it will choose to export directly, via a separate foreign sales company or a foreign sales division within the existing company, or to export indirectly via manufacturing export agents, export commission agents, export merchants, or international firms. Indirect exporting requires less investment than does direct exporting, and is often the initial mode of exportation (Ball et al., 2006, 431). Exporting also allows for a relatively inexpensive trial run to see how well the computers sell in the EU.

Con: The main drawbacks of exportation are that it requires a lot of paperwork, knowledge of trading laws and restrictions, and the payment of taxes and fees associated with goods leaving and entering various countries. However there are many well known shipping companies that are able to handle these requirements for the company for a fee.

Option B: License a EU firm to manufacture and market the computers in the EU.

This mode of entry falls under the category of transfers.

Pro: Like exporting, licensing requires very little investment capital. The company can grant an already existing firm in the EU the rights to manufacture, market, and sell the computers in exchange for an initial licensing fee and between 2-5% royalties for every computer sold in the EU for the duration of the contract (Ball et al., 2006, 433). This method is inexpensive, profitable, and does not require the company to exert a lot of effort or spend a lot of time on the project once a suitable EU firm has been found and is under contract.

Con: The main drawback to licensing these rights to another firm has to do with the intellectual and financial risks involved, both during the duration of the contract as well as after its expiration. Under this agreement the company will have to divulge its computer manufacturing techniques to the EU firm and must trust that the EU firm will pay the correct amount in royalties to the company. There is always the possibility that the EU firm will not uphold the terms of the contract, making it necessary for the company to sue the EU firm for any unpaid royalties and patent/copyright infringements. This process can be expensive and time consuming. After the contract has expired there is also the possibility that the EU firm will continue to use the knowledge gained from the company to produce competitive computers, and could possibly take over any market share that the company may have gained during the duration of the contract. Furthermore the EU firm may begin to export the competitive computers to the US, where it will have the opportunity to gain market share from the company in its own domestic market (Ball et al., 2006, 433). Lastly, by licensing these rights to an EU firm the company is giving up its control over almost all aspects of the computers, from manufacturing to marketing to distribution. Disputes over any of these processes may arise and the company will have little sway in determining how any of these aspects are handled in the EU.

Option C: Set up a wholly owned subsidiary in the EU.

This mode of entry falls under the category of foreign direct investment.

Pro: The advantages to setting up a wholly owned subsidiary are great in terms of keeping control over the entire production and distribution process. Because the company would own the subsidiary completely, it would be able to oversee all aspects of the business and be able to run the company much like it runs the one in the US. The only necessary changes would be those needed to uphold the laws of the host country. There are also three different ways to set up a wholly owned subsidiary, each of which has its own benefits and drawbacks. For the scope of this post, however, I will simply list the various options; build a new plant from scratch, buy a plant that already exists, or purchase a distributor that already has an established distribution system and market (Ball et al., 2006, 434).

Con: The main disadvantages to this method are that it is very costly regardless of which option is chosen, it is time intensive, and it requires a large investment in human capital abroad such as employees. It is also very risky since a foreign market must be established, without the benefit of a ‘trial run‘ that is possible via the method of simple exportation.

Suggested Course of Action:

Because I do not have any information about the computer company in question, such as its financial status, marketing history, etc., I do not believe it is possible to make an educated suggestion on which option the company should choose to sell computers in the EU. Therefore my decision would be to choose the method that is the least expensive, least risky, and least time consuming - simple exportation to the EU from the US. This way the company would be able to quickly stop selling its computers in the EU if they were not selling well, increase the amount of computers exported if sales are high, and have the ability to move further into the foreign market later on if conditions prove favorable in the EU.

Sources:

Bell, Donald A. et al. (2006). International Business: The Challenge of Global Competition. Mc-Graw-Hill Irwin. New York, New York. P. 431-34.

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