Companies in record numbers are expanding internationally. Choosing the right strategy to achieve this can really pay off. Choosing the wrong method, however, can result in serious financial loss.
Most companies typically enter foreign markets through exporting, joint ventures (JVs), strategic alliances, licensing technology or through acquisitions that require direct investment. The strategy that is best for you will depend on your commitment, resources and level of the risk you are willing to incur. Of course, your product or service, the degree of technical support, and the economic, political and cultural environment you are penetrating are also critical.
What Is a Joint Venture and a Strategic Alliance?
A JV is simply a cooperative business venture by two or more companies. Typically, partners will allocate resources, risks, potential rewards, and delegate responsibilities while preserving autonomy.
An international JV can enable you to establish a presence abroad with the assistance of a foreign partner who may provide knowledge of government workings, regulations, internal markets and distribution. This can be particularly valuable to you in unfamiliar territory.
A strategic alliance is similar, yet very different. It may be formed when a company gives authority to another to exploit technology, R&D, or marketing rights, but does not create a separate entity. A typical example is the manufacturer-independent sales rep relationship.
To solidify this arrangement, a handshake or simple written agreement may suffice. It is often less formal and a preliminary step to creating a JV. Consequently, both would allow you to quickly respond to a rapidly changing environment and complement strengths in order to seize opportunities.
Limit Your Risks and Compromise
A small company with limited capital, manpower and the need to limit risks often find a JV ideal. It’s generally safer than an acquisition, especially if a host government legislates policies negatively affecting your business. Or, as a result of social unrest, a coup results in business loss.
On the down side, profits are shared. Various factors can also lead to disagreements over efforts, marketing strategies or differences in management philosophies. Your ability to compromise is essential.
You Can Share Your Technology
Through a licensing agreement, you can authorize a foreign company to use your technology or intellectual property in a market over a certain time period. This may include patents, trademarks and production techniques; or technical, marketing and managerial expertise.
Licensing is particularly attractive to small firms because it affords international expansion while significantly limiting risks. It also usually requires a smaller effort than other strategies. It rarely demands capital investment and does not necessitate that the parties work closely together.
In cases where the foreign market lacks hard currency, restricts the repatriation of profits or direct investment, has high trade barriers, or is politically unstable, licensing may be the only viable strategy.
Licensing also has its disadvantages. You can easily lose control of quality, distribution and marketing policies and support services. If compensation is based on sales volume, you may have to rely on the honesty of the licensee to report units sold. Additionally, earnings are usually less than those provided by most other entry methods.
A typical agreement requires an up-front fee, royalties based on earnings, and consulting or training assistance. Many evolve into JVs, while some JVs or strategic alliances are eventually converted to licensing agreements when interests change.
Foreign Acquisitions Require Sizable Resources — But Offer Large Rewards
Through foreign direct investment, you can acquire an interest in a company in your target market. This method is usually chosen after years of exporting or success has been achieved through a pre-existing JV.
Foreign acquisitions usually require an abundance of resources and the exposure to risk is considerably higher. As a result, large companies are usually better suited.
By the end of 1994, U.S. companies had cumulative direct investments of $612.1 billion in foreign countries. The largest investment destination was the U.K., followed by Canada, Germany, Japan, Switzerland, Bermuda, France, Netherlands, Austria and Brazil.
If you desire controlling interests, your stock purchase will range from 51% to 100%. If successful, the revenue can often exceed profits obtained through other types of expansion methods. Ownership can also put you in the position to accept lucrative government incentives.
Perceptions, Reliable Service and Cultural Affinity Make a Difference
It sometimes makes sense to acquire a manufacturing presence in your target country to satisfy consumers’ demand for domestically produced goods. And because of proximity, both acquisitions and JVs generally allow for effective servicing of their products resulting in satisfied customers that are confident in your company and products.
Establishing a foreign base to service a particular region is also beneficial for cultural reasons. It’s predicted that more U.S. companies operating in Mexico will use the country as a base to service smaller Latin countries. The cultural affinity among the Mexicans and Central and South Americans can make assimilation less difficult and sales easier.
Secure Your Future
Regardless of which method of expansion you choose, mistakes will undoubtedly occur. Expanding internationally can be difficult and costly — but very financially rewarding.
Expanding globally has become a primary key to economic growth in the years to come. But this can’t be achieved without a sufficient level of commitment on your part to cope with the new and rapidly evolving global environment.
This article appeared in July 1997. (PN)
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