Investment Entry Modes for Business

Many businesses reach a point in their growth where they want to expand internationally and enter markets in other countries. There are several significant barriers to entry that present problems for these businesses. Often, there are already established markets in other countries that sell similar products or services and businesses may have a difficult time competing. In situations like this, many companies decide to pursue an investment strategy to enter the market successfully.

A joint venture is a contractual partnership with another company that operates in the country the business wants to enter. Joint ventures work well when both companies have specialties that, joined together, make the whole stronger.

Foreign Direct Investment (FDI) is a direct investment of funds into the foreign market. Businesses that have significant funds often pursue FDI by creating a new business plant in the foreign country. This is expensive, but allows the business to organize operations the way it wants and use its own people the run the business.

FDI acquisition involves taking over a company that was already running in the foreign country. Since this company already has a market share, this makes it easier for the entering company to find a place in the market. Speed is important in this case, since employees must be replaced or retrained swiftly before competitors can react.

Exportation is a simple form of direct investment where businesses establish just part of their operations in the foreign country. For instance, the business may make its products in its home country, then ship them to a business center in the foreign country. Businesses may also make parts in other countries and ship them internationally for assembly.

Licensing requires less investment than other investment entry modes, but also works in reverse, allowing a business to enter new home markets by using the brand, patents and other materials from another company, possible foreign. In this case, the entering business pays only licensing fees and possibly extra expenses for technical assistance.