Resources · International Business
Modes of entering a foreign market
Exporting, licensing, franchising, contract manufacturing, joint ventures and wholly owned subsidiaries compared on control, risk and cost, with Indian cases.
The core trade-off
Every firm going abroad must decide how much of its own money, people and control to commit. The modes of entry sit on a ladder: the higher you climb, the more control and potential profit you gain, and the more investment and risk you take on.
1. Exporting
Producing at home and selling abroad.
- Indirect exporting: through intermediaries such as export houses or trading companies.
- Direct exporting: through the firm’s own export department, overseas agents or distributors.
Advantages: low investment and risk; a good way to test a market. Disadvantages: transport costs, tariffs and trade barriers; little control over marketing abroad.
2. Licensing
The firm (licensor) allows a foreign firm (licensee) to use its intellectual property — patents, trademarks, technology or know-how — in return for a royalty or fee.
Advantages: fast entry with very little capital; avoids trade barriers. Disadvantages: limited control over quality; the licensee may become a future competitor.
3. Franchising
A deeper form of licensing, common in services. The franchisor provides its brand together with a complete business system — operating methods, training and support — and the franchisee runs outlets to those standards in return for fees and royalties.
Example: McDonald’s operates in India through local master franchisees.
Advantages: rapid expansion using franchisees’ capital and local knowledge. Disadvantages: maintaining quality and brand standards across many outlets.
4. Contract manufacturing
The firm contracts a foreign producer to make its products, while it keeps control of design, marketing and sales.
Advantages: low investment; access to cheaper production. Disadvantages: less control over the production process and working conditions; risk to reputation.
5. Joint venture (JV)
The firm shares ownership and control of a new enterprise with a local partner.
Example: Maruti Udyog was set up in the early 1980s as a joint venture between the Government of India and Suzuki Motor Corporation of Japan; it is now Maruti Suzuki India.
Advantages: the partner’s local knowledge, contacts and distribution; shared risk; may be required by host-country rules in some sectors. Disadvantages: conflicts over control, strategy and profit-sharing; partners may part ways.
6. Wholly owned subsidiary
The firm owns 100 per cent of its foreign operation, either by building it from scratch (greenfield investment) or by buying an existing company (acquisition).
Example: Tata Motors acquired the British carmaker Jaguar Land Rover in 2008.
Advantages: full control over operations, technology and profits. Disadvantages: highest investment and risk; the firm bears all losses and must manage an unfamiliar environment alone.
Comparison at a glance
| Mode | Investment | Control | Risk |
|---|---|---|---|
| Exporting | Low | Low | Low |
| Licensing | Very low | Low | Low |
| Franchising | Low | Moderate | Low |
| Contract manufacturing | Low | Moderate | Moderate |
| Joint venture | Moderate to high | Shared | Shared |
| Wholly owned subsidiary | High | Full | High |
Factors that shape the choice
- Firm factors: resources, international experience, how valuable and easy to copy its technology is.
- Market factors: market size and growth, competition, cultural distance.
- Environmental factors: political stability, trade barriers, government rules on foreign ownership, exchange-rate risk.
Exam-style questions
- Distinguish between licensing and franchising. (5 marks)
- What is a joint venture? State its advantages and disadvantages. (5 marks)
- Explain the different modes of entering a foreign market, and the factors that influence the choice of mode. (10 marks)
Questions students ask
What are the modes of entering a foreign market?
The main modes are exporting (direct or indirect), licensing, franchising, contract manufacturing, joint ventures and wholly owned subsidiaries, which can be set up as a greenfield investment or through an acquisition.
What is the difference between licensing and franchising?
In licensing, a firm lets a foreign firm use its intellectual property, such as a patent, trademark or technology, for a royalty. Franchising goes further: the franchisor provides its brand together with a complete business system, training and support, and the franchisee must run the business to its standards. Franchising is common in services such as fast food.
What is a joint venture in international business?
A joint venture is a new enterprise owned and controlled jointly by a foreign firm and a local partner. It gives the foreign firm local knowledge and shared risk, but can lead to conflicts over control and profits. Maruti Udyog, set up by the Government of India and Suzuki, is a well-known Indian example.
Which mode of entry has the highest risk?
A wholly owned subsidiary, because the firm puts in all the investment and bears all the losses, in exchange for full control over operations, technology and profits.
What is the difference between a greenfield investment and an acquisition?
A greenfield investment builds a new operation from scratch in the foreign country. An acquisition buys an existing company there, as Tata Motors did with Jaguar Land Rover in 2008. Acquisition is faster; greenfield gives more control over how the operation is built.