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ALTERNATIVES FOR INTERNATIONAL OPERATIONS
Once a company has decided to enter the international marketplace, it must select a means of entry. The option chosen depends on its willingness and ability to commit financial, physical, and managerial resources. Host countries not only seek the benefits of additional products available for sale but are often even more interested in the number of good jobs available for local workers. Let’s consider the alternatives for international operations.
Exporting is producing goods in one country and selling them in another country. This entry option allows a company to make the least number of changes in terms of its product, its organization, and even its corporate goals. Host countries usually do not like this practice, because it provides less local employment than under alternative means of entry.
Indirect exporting is when a firm sells its domestically produced goods in a foreign country through an intermediary. It involves the least amount of commitment and risk, but will probably return the least profit. The kind of exporting is ideal for the company that has no overseas contacts but wants to market abroad. The intermediary is often a broker or agent that has the international marketing know-how and the resources necessary for the effort to succeed.
Direct exporting is when a firm sells its domestically produced goods in a foreign country without intermediaries. Most companies become involved in direct exporting when they believe their volume of sales will be sufficiently large and easy to obtain that they do not require intermediaries. For example, the exporter may be approached by foreign buyers that are willing to contract for a large volume of purchases. Direct exporting involves more risk than indirect exporting for the company, but also opens the door to increased profits.
Under licensing a company offers the right to a trademark, patent, trade secret, or other similarly valued items of intellectual property, in return for a loyalty or a fee. In international marketing the advantages to the company granting the license are low risk and a capital-free entry into a foreign country. The licensee gains information that allows it to start with a competitive advantage, and the foreign country gains employment by having the product manufactured locally.
When a foreign company and local firm invest together to create a local business, it is called a joint venture. These two companies share ownership, control, and profits of the new company. The advantages of this option are twofold. First, one company may not have the necessary financial, physical, or managerial resources to enter a foreign market alone. The disadvantages arise when two companies disagree about policies or courses of action for their joint venture.
The biggest commitment a company can make when entering the international market is direct ownership, which entails a domestic firm actually investing in and owning a foreign subsidiary or division. The advantages to direct ownership include cost savings, better understanding of local market conditions, and fewer local restrictions. Firms entering foreign markets using direct ownership believe that those advantages outweigh the financial commitments and risks involved.
1. What does the option of a means of entry to the international market depend on?
2. What is exporting?
3. What is licensing?
4. What is joint venture?
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