UK: Going Global

Last Updated: 16 October 2012

Entering new markets opens the possibility of increasing revenue and/or decreasing the costs of goods sold, thereby increasing profits. It may also allow a company to follow its existing customers abroad, attack competitors in their home markets, guarantee a continued supply of raw materials, acquire technology or ingenuity, diversify geographically or satisfy stockholders' desire to expand.

Choosing the mode of entry

For many companies, going global may be a matter of survival: there may simply not be enough domestic demand to keep them in business.

Selecting a mode of entry into a foreign market is among the most crucial strategic decisions a company can make. Weighing all factors and choosing the proper method can result in huge competitive advantages or it can cripple the organisation.

Here is an overview of possible modes of entry, each with its own pros and cons.

1. Acquisition of existing company

A merger may mean short-term cash, but not necessarily future stability. Half of merged entities never achieve their projected financial and market goals. Acquiring a company also means acquiring existing business, synergy and staff problems. And, bottom line, should the acquisition be financed by cash or stock?

Pros

  • Established market
  • Skilled workers available
  • Licences are "grandfathered" in
  • Technology, clients and vendors instantly acquired
  • Negotiations usually occur at top level, target handles licensing and compliance
  • Instant branding
  • Reduction of competition
  • Increased knowledge base.

Cons

  • Hidden surprises?
  • Which employees are politically connected, and with whom?
  • "Favours" and concessions are assumed
  • Technology often outmoded, vendors usually chosen for reasons other than merit
  • Branding often not part of HQ's ideals
  • Acquisition often expensive and time-consuming
  • Blending of corporate cultures
  • Necessity to train local management (and HQ's management)
  • Potential tax and legal problems.

2. Greenfield investment

A greenfield investment starts with bare ground and builds up from there. Coca-Cola, McDonald's and Starbucks are great examples of US firms that have invested in greenfield projects around the world.

Pros

  • Economies of scale and scope in production, marketing, finance, research and development, transportation and purchasing
  • Greater control in all aspects
  • Best long-term strategy
  • Commitment to market
  • Vendor financing often available
  • Work with authorities from the beginning
  • Control over your brand
  • Control over staff
  • Press opportunities.

Cons

  • Higher expense
  • Competition in these markets difficult to overcome
  • Entry into markets may take years to happen
  • Costly barriers to entry
  • Governmental regulations may put multinational enterprises at a disadvantage in the short term.

3a. Licensing

Licensing is a contractual arrangement whereby a company transfers (via a licence) the right to distribute or manufacture a product or service to a foreign country, or the right to use any type of expertise that may include patents, trademarks, company name, technology and technological know-how, design and/or business methods. The licensee pays a fee and/or percentage of sales in exchange for the rights.

This approach works best where there are barriers to import and investment, where legal protection is possible in the target environment, and where there is a low sales potential in the target country.

Pros

  • Quick, easy entry into foreign markets; allows a company to "jump" border and tariff barriers
  • Lower capital requirements
  • Potential for large ROI, returns realised fairly quickly
  • Low risk, since you enter with established product and have fewer financial and legal risks.

Cons

  • Control by licensor is low
  • Licensee may become a competitor
  • Intellectual property may be lost
  • Licence period usually limited
  • Poor quality management can damage brand reputation in other licence territories.

3b. Technology licensing

A licensor's patents, trademarks, service marks, copyrights, trade secrets or other intellectual property may be sold or made available to a licensee for compensation negotiated between parties in advance.

Pros

  • Provides "reverse flow" of technology in which original licensor shares in technical improvements developed by the licensee
  • Licensee uses intangible property and receives technical assistance.

Cons

  • Can yield loss of control over technology
  • Loss of intellectual property
  • Weakened control over technology because it's been transferred to unaffiliated firm.

3c. Franchising

This type of licensing agreement offers an efficient model for distributing goods and services. The franchisee gains control over operations in exchange for some type of payment and the promise to abide by the terms of the contract.

Pros

  • Market entry with less financial, legal and political risk
  • Economies of scale through ordering with owner and other franchisees
  • Partners can see the business up close, first hand.

Cons

  • Licensor has little direct control.
  • Licensee has lower profits than if it owned business or exported its own goods.

4a. Direct exporting

One option is sale of the product or service by the home-country firm directly to a foreign firm. Costs and prices are lowest if production occurs in only a few locations around the world and efficiently produced goods are exported to most markets. This approach works best where there is limited sales potential in the target market; little product application is required; and distribution channels are close to plants.

Pros

  • No investment required in foreign production facilities
  • Minimised risk and investment, along with speedy entry
  • Maximum economies of scale prevent competitors from gaining "first-mover" advantage in new markets
  • Sell excess production capacity
  • Gain information about foreign competition
  • Stabilise seasonal market fluctuations
  • Reduce dependence on existing markets.

Cons

  • More expensive due to tariffs, marketing expenses, transport costs
  • Difficulty coordinating cooperation of exporter, importer, transport provider and government
  • Limited access to local information; company viewed as "outsider"
  • Need to develop customer base and logistics of moving goods overseas
  • Difficulty overcoming trade barriers
  • Loss of control over pricing and marketing
  • Task of finding customers.

4b. Indirect exporting

Another option is selling goods and services through various types of intermediary. Foreign agents can be hired for their knowledge of business practices, language, laws and culture in overseas markets. Some points worth noting:

  • Commissioned agents, who are the agents exporters most often use, are paid a percentage only when the sale is made.
  • Retainer agents are paid a fixed amount to do certain work for a specific period of time.
  • Retainer/commissioned agents work on a retainer, but also receive a percentage from each sale. The retainer provides them with funds to help run their business, while the commission provides additional incentive to work harder on the firm's behalf.

Pros

Agents can:

  • identify customers and markets
  • uncover new opportunities/markets for your product
  • translate and act as interpreter in business dealings
  • validate translation of your publicity materials
  • assist with local travel and/or living arrangements
  • provide guidance with local government regulations.

Cons

Agents:

  • often work for numerous businesses, and truly work for the buyer, not the seller
  • prioritise clients based on product, incentives and/or base pay
  • are not guaranteed to make inroads in market share.

4c. Use of an export management company

As an off-site export sales department representing your product, an export management company (EMC) typically:

  • conducts market research
  • develops marketing strategy
  • uses existing foreign distributors or sales representatives to put your product into the foreign market
  • acts as an overseas distribution channel or wholesaler
  • takes ownership of goods
  • operates on a commission basis.

Pros

  • Faster entry into overseas market
  • Better focus on exporting, since most firms give priority to domestic problems
  • Lower out-of-pocket expenses
  • Opportunity to study methods and potential of exporting.

Cons

  • No quality control of export strategies and after-sales service
  • Can create competition from EMC's other products
  • Reluctance of some foreign buyers to deal with a third-party intermediary
  • Added costs and higher selling prices due to EMC's gross profit margin requirements (unless offset by economies of scale).

4d. Piggyback exporting

Piggyback exporting is using a company with an established export distribution system to sell another company's product in addition to its own. The requisite logistics associated with selling abroad are borne by the exporting company.

Pros

  • International experience not required
  • Fast entry to the international market
  • Little or no increased financial commitment.

Cons

  • Low control by exporting business
  • Possible choice of wrong market, wrong distributor
  • Inadequate market feedback
  • Potentially lower sales
  • Higher risk in general
  • Brand erosion.

5. Contract manufacturing

This method involves contracting with a local manufacturer to produce products to the firm's specifications. It works best when the risks of investing in a foreign country are high, when stringent import barriers exist, or when there is a lack of raw materials at home.

Pros

  • Generates employment and foreign exchange for the host country
  • Usually easy access to entry as host country knows laws, politics, customs.

Cons

  • Could lose control of quality; possible low quality workers
  • Not in control of pricing or marketing
  • No equity in the subcontractor
  • Your competition may be a customer!

6. Management contract

Under this type of arrangement, one firm provides management in all or specific areas for another firm, in exchange for a fee. Hilton Hotels, for example, provides management services for non-owned overseas hotels that use the Hilton name. In exchange, Hilton probably earns a fee that is a percentage of sales and, more importantly, gains brand recognition.

Pros

  • Entry to the market rather simple
  • Use business experience to help similar companies in other countries to set up, operate and collect on services
  • Allows experienced company to research the market for other modes of entry.

Cons

  • Lack of profit (a percentage of sales is not typically the largest margin possible when operating a business)
  • Foreign company gains insight into business procedures of the export company
  • Detrimental to the export company in the long run if the foreign firm ever becomes a competitor.

Conclusion

Entering or expanding in a foreign market can be achieved through a wide variety of methods. A business should select the best mode of entry only after carefully analysing each alternative and comparing it with the others.

In general, exporting requires the least amount of resources and allows for the lowest level of control. Wholly owned subsidiaries, on the other hand, require the most resources but allow for the most control. As for technology, exporting is the least risky while licensing is generally the most risky.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.