Market Entry Modes

After a company decides in favour of internationalizing, market entry modes should be chosen, considering external and internal factors. This subchapter describes possible entry modes which can have an influence on further success of the company in a new region. The company needs to evaluate what are the risks, how much time and investments are needed and what is the degree of commitment of each entry mode. "Seen from the perspective of the manufacturer market entry modes can be classified into three groups:

* export modes: low control, low risk, high flexibility;

* intermediate modes (contractual modes): shared control and risk, split ownership;

* hierarchical modes (investment modes): high control, high risk, low flexibility" (Hollensen,2007, p 304).

Export

The quickest mode to enter another market is to export. Exporting means selling of goods produced in the home country to another country. Exporting does not require investments into production abroad, thus the costs are quite low and are mainly associated with transportation and marketing. There are two possibilities in exporting goods: directly and indirectly.

"Direct exporting occurs when a manufacturer or exporter sells directly to an importer or buyer located in a foreign market area" (Hollensen, 2007, p.317). There are two types of direct export: through distributor (importer) and sales agent (representative). Sales representative sells the foreign goods on the local market on behalf of manufacturer for an established commission on sales. Distributor buys goods and has a right to handle them: stock the goods, set the price, choose the customers. Often the importer has established retailer and wholesale chains and warehouses. The profit of distributor arises from the difference between selling and buying prices. Both distributors and agents have knowledge of local market, culture and have business contacts.

"Indirect export occurs when the exporting manufacturer uses independent organizations

located in the producer's country.There are five types of indirect export:" (Hollensen, 2007, p.313)

The main entry modes of indirect exporting are:

* export buying agent is located in the exporter's home country and purchases good for foreign buyer, negotiating the terms of purchase with the latter;

* broker is also based in local country, the role of the broker is to match seller and buyer, he does not manage the goods himself and can be representative for both the buyer and the seller;

* export management company/export house. This company sells the goods on behalf of its suppliers as the export department, export house represents different manufacturers specified by geographical area, product or customer type;

* trading company; Export trading company offers additional services for export companies, such as shipping, warehousing, finance, insurance, consulting, real estate and deal making in general. Besides these type of company assists producer in finding overseas buyers and may manage counter-trade activities (barter - to trade goods in exchange for other goods, services, etc., rather than for money)

* piggyback "In piggybacking the export-inexperienced SME, the 'rider', deals with a larger company (the 'carrier') which already operates in certain foreign markets and is willing to act on behalf of the rider that wishes to export to those markets. The carrier is either paid by commission and so acts as an agent or, alternatively, buys the product outright and so acts as an independent distributor" (Hollensen, 2007, p. 316).

Intermediate modes

Intermediate entry modes are abstracted from export modes because the whole overseas supply is not implemented from domestic factory, knowledge and skills are transferred to the foreign countries as well. Difference between intermediate and hierarchical mode consists in level of ownership, in the letter the full ownership is presented. Thus in intermediate modes control and risk are divided.

Contract manufacturing

If a company decides to be closer to the customer, reducing labor costs and transportation costs it may choose to produce in the overseas market. One way to do it is to outsource production to an external partner. Usually contract manufacturer is paid per unit. It is important that outsourced is only production, while domestic company has full control over R&D, marketing, distribution, sales and servicing of its products in international markets.

Licensing

Another possibility to form foreign production without investing a capital is licensing. Compared