Five Modes of Entry Into Foreign Markets

When you've made the most of opportunities in your own market, it's natural to think about expanding into new ones. Entry into a foreign country's market can be tricky, though, as you adapt a new culture, new regulatory environment and new competition. There are several ways to jump into a foreign market, some easier than others.

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The five main modes of entry into foreign markets are joint venture, licensing agreement, exporting directly, online sales and purchasing foreign assets.

One of the most popular modes of entry is the establishment of a joint venture, in which two businesses combine resources to sell products or services. Many countries with tightly controlled economies, such as China, often require foreign companies to partner with a local company if they wish to sell products to their residents. Although joint ventures provide foreign companies with a partner experienced in the foreign market, these partnerships can be difficult to manage and require a splitting of profits.

In the licensing mode of entry, companies sign contracts with foreign businesses, called "licensees," that allow the foreign companies to legally manufacture and sell the company's products. The foreign companies will either purchase the license outright, pay a regular licensing fee or pay a percentage of their revenue over time in the form of royalties. Often used by manufacturing firms, licensing allows a company to enter a market quickly and inexpensively, but provides little control over the product's foreign marketing and sales.

Rather than attempt to partner with or provide a license to foreign companies, some companies will simply sell their products to distributors overseas, who will sell the products to consumers. Exporting means the company avoids having to invest the money in developing manufacturing facilities in the foreign market, but transportation costs and restrictive tariffs may make this mode uneconomical for certain products.

Many companies will attempt to enter foreign markets indirectly, by targeting foreign consumers on the internet. Similar to exporting, companies retain their physical operations in their native countries, but ship products overseas. However, whereas in exporting, companies contract with local businesses, with the Internet they take orders directly from consumers. One advantage to this mode is that it is relatively cheap, entailing only the cost of a website and marketing. The downside is that it is often less effective than establishing a physical presence in the foreign market. Consumers may be deterred due to shipping costs, duties and taxes that may be levied by their government and the length of time it takes for their order to arrive.

Many companies, rather than launching an entirely new venture in a foreign market, will simply purchase or invest in a foreign company. While often more expensive, direct investment allows the investing company to reap the profits of a business that is already well integrated into the local market.