Four different modes of business offer a company entry into foreign markets: (a) exporting, (b) contractual agreement, (c) joint venture, and (d) manufacturing.

Exporting

Acompany may minimize the risk of dealing internationally by exporting domestically manufactured products either by minimal response to inquiries or by systematic development of demand in foreign markets. Exporting requires minimal capital and is easy to initiate. Exporting is also a good way to gain international experience. A major part of overseas involvement among large U.S. firms is through export trade.

Contractual Agreements

There are several types of contractual agreements:

• Patent licensing agreements These agreements are based on either a fixed-fee or a royalty basis and include managerial training.

• Turnkey operations These operations are based on a fixed-fee or cost-plus arrangement and include plant construction, personnel training, and initial production runs.

• Coproduction agreements These agreements are most common in socialist countries, where plants are built and then paid for with part of the output.

• Management contracts Currently widely used in the Middle East, these contracts require that a multinational corporation provide key personnel to operate a foreign enterprise for a fee until local people acquire the ability to manage the business independently. For example, Whittaker Corp. of Los Angeles operates government-owned hospitals in several cities in Saudi Arabia.

• Licensing Licensing works as a viable alternative in some contractual agreement situations where risk of expropriation and resistance to foreign investments create uncertainty. Licensing encompasses a variety of contractual agreements whereby a multinational marketer makes available intangible assets such as patents, trade secrets, know-how, trademarks, and company name to foreign companies in return for royalties or other forms of payment. Transfer of these assets usually is accompanied by technical services to ensure proper use. Licensing, however, has some advantages and disadvantages as summarized below.

Advantages of Licensing

1. Licensing requires little capital and serves as a quick and easy entry to foreign markets.

2. In some countries, licensing is the only way to tap the market.

3. Licensing provides life extension for products in the maturity stage of their life cycles.

4. Licensing is a good alternative to foreign production and marketing in an environment where there is worldwide inflation, shortages of skilled labor, increasing domestic and foreign governmental regulation and restriction, and tough international competition.

5. Licensing royalties are guaranteed and periodic, whereas shared income from investment fluctuates and is risky.

6. Domestically based firms can benefit from product development abroad without incurring research expense through technical feedback arrangements.

7. When exports no longer are profitable because of intense competition, licensing provides an alternative.

8. Licensing can overcome high transportation costs, which make some exports noncompetitive in target markets.

9. Licensing is also immune to expropriation.

10. In some countries, manufacturers of military equipment or any product deemed critical to the national interest (including communications equipment) may be compelled to enter licensing agreements.

Disadvantages of Licensing

1. To attract licensees, a firm must possess distinctive technology, a trademark, and a company or brand name that is attractive to potential foreign users.

2. The licensor has no control over production and marketing by the licensee.

3. Licensing royalties are negligible compared with equity investment potential. Royalty rates seldom exceed 5 percent of gross sales because of government restrictions in the host country.

4. The licensee may lose interest in renewing the contract unless the licensor holds interest through innovation and new technology.

5. There is a danger of creating competition in third, or even home, markets if the licensee violates territorial agreements. Going to court in these situations is expensive and time-consuming, and no international adjudicatory body exists.

Joint Ventures

Joint venture represents a higher-risk alternative than exporting or contractual agreements because it requires various levels of direct investment. Ajoint venture between a U.S. firm and a native operation abroad involves sharing risks to accomplish mutual enterprise. Once a firm moves beyond the exporting stage, joint ventures, incidentally, are the next most common form of entry. One example of a joint venture is General Motors Corporation’s partnership with Egypt’s state-owned Nasar Car Company, a joint venture for the assembly of trucks and diesel engines. Another example of a joint venture is between Matsushita of Japan and IBM, a joint venture established to manufacture small computers. Joint ventures normally are designed to take advantage of the strong functions of the partners and to supplement their weak functions, be they management, research, or marketing. Joint ventures provide a mutually beneficial arrangement for domestic and foreign businesses to join forces. For both parties, the venture is a means to share capital and risk and make use of each other’s technical strength. Japanese companies, for example, prefer entering into joint ventures with U.S. firms because such arrangements help ensure against possible American trade barriers. American firms, on the other hand, like the opportunity to enter a previously forbidden market, to utilize established channels, to link American product innovation with low-cost Japanese manufacturing technology, and to curb a potentially tough competitor. As a case in point, General Foods Corporation tried for more than a decade to succeed in Japan on its own but watched the market share of its instant coffee (Maxwell House) drop from 20 to 14 percent. Then the firm established a joint venture with Ajinomoto, a food manufacturer, to use the full power of Ajinomoto’s product distribution system and personnel and managerial capabilities. Within two years, Maxwell House’s share of the Japanese instant coffee market recovered. Joint ventures, however, are not an unmixed blessing. The major problem in managing joint ventures stems from one cause: there is more than one partner and one of the partners must play a key dominant role to steer the business to success. Joint ventures should be designed to supplement each partner’s shortcomings, not to exploit each other’s strengths and weaknesses. It takes as much effort to make a joint venture a success as to start a grass roots operation and eventually bring it up to a successful level. In both cases, each partner must be fully prepared to expend the effort necessary to understand customers, competitors, and itself. Ajoint venture is a means of resource appropriation and of easing a foreign business’s entry into a new terrain. It should not be viewed as a handy vehicle to reap money without effort, interest, and/or additional resources. Joint ventures are a wave of the future. There is hardly a Fortune 500 company active overseas that does not have at least one joint venture. Widespread interest in joint ventures is related to the following:

1. Seeing market opportunities Companies in mature industries in the United States find joint venture a desirable entry mode to enter attractive new markets overseas.

2. Dealing with rising economic nationalism Host governments are often more receptive to or require joint ventures.

3. Preempting raw materials Countries with raw materials, such as petroleum or extractable material, usually do not allow foreign firms to be active there other than through joint venture.

4. Sharing risk Rather than taking the entire risk, a joint venture allows the risk to be shared with a partner, which can be especially important in politically sensitive areas.

5. Developing an export base In areas where economic blocs play a significant role, joint venture with a local firm smooths the entry into the entire region, such as entry into the European Union through a joint venture with an English company.

6. Selling technology Selling technology to developing countries becomes easier through a joint venture. Even a joint venture with a well-qualified majority foreign partner may provide significant advantages:

1. Participation in income and growth The minority partner shares in the earnings and growth of the venture even if its own technology becomes obsolete.

2. Low cash requirements Know-how and patents or both can be considered as partial capital contribution.

3. Preferred treatment Because it is locally controlled, the venture is treated with preference by government.

4. Easier access to a market and to market information Alocally controlled firm can seek market access and information much more easily than can a firm controlled by foreigners.

5. Less drain on managerial resources The local partner takes care of most managerial responsibilities.

6. U.S. income tax deferral Income to the U.S. minority partner is not subject to U.S. taxation until distribution

Manufacturing

A multinational corporation may also establish itself in an overseas market by direct investment in a manufacturing and/or assembly subsidiary. Because of the volatility of worldwide economic, social, and political conditions, this form of involvement is most risky. An example of a direct investment situation is Chesebrough-Pond’s operation of overseas manufacturing plants in Japan, England, and Monte Carlo. Manufacturing around the world is riskier, as illustrated by Union Carbide’s disaster in Bhopal, India: in the worst industrial accident that has ever occurred, a poisonous gas leak killed over 2,000 people and permanently disabled thousands. It is suggested that multinational corporations should not manufacture overseas where the risk of a mishap may jeopardize the survival of the whole company. As a matter of fact, in the wake of the Bhopal accident, many host countries tightened safety and environmental regulations. For example, Brazil, the world’s fourth-largest user of agricultural chemicals, restricted the use of the deadly methyl isocyanate.

Conclusion

A firm interested in entering the international market must evaluate the risk and commitment involved with each entry and choose the entry mode that best fits the company’s objectives and resources. Entry risk and commitment can be examined by considering five factors:

1. Characteristics of the product.

2. The market’s external macroenvironment, particularly economic and political factors, and the demand and buying patterns of potential customers.

3. The firm’s competitive position, especially the product’s life-cycle stage, as well as various corporate strengths and weaknesses.

4. Dynamic capital budgeting considerations, including resource costs and availabilities.

5. Internal corporate perceptions that affect corporate selection of information and the psychic distance between a firm’s decision makers and its target customers as well as control and risk-taking preferences. These five factors combined indicate that risk should be reviewed vis-à-vis a company’s resources before determining a mode of entry. Computerized simulation models can be employed to determine the desired entry route by simultaneously evaluating such factors as environmental opportunity, risk index, competitive risk index, corporate strength index, product channel direction index, comparative cost index, and corporate policy and perception index.