In today’s highly competitive business environment, expanding globally can be a very profitable venture. But choosing the right strategy can be a difficult task — whether it’s exporting, establishing a joint venture or strategic alliance in a foreign market, acquiring a firm through direct investment, or by licensing technology abroad.

The benefits and risks associated with each method are contingent on many factors. These include your type of product or service, the need for support, and the foreign economic, political, and cultural environment you are seeking to penetrate.

However, your decision ultimately will be dependent on the level of resources and commitment, and degree of risk you are willing to incur. In addition to exporting, consider the following alternative methods.

Is a Joint Venture Right for You?

A joint venture is a cooperative business venture established by two or more companies. Prior to commencing operations, partners usually allocate resources, consign risks and potential rewards, and delegate operational responsibilities to each other while preserving autonomy. Upon completion of the project, the joint venture is usually disbanded.

This approach may enable you to establish a marketing or manufacturing presence abroad with the assistance of a local foreign partner, who may provide you with knowledge of government workings, regulations, internal markets, and distribution know-how.

A joint venture is an ideal strategy if you have limited capital, manpower and knowledge of the foreign market, or wish to mitigate your risks.

On the downside, your profits will be shared, and disagreements over marketing efforts and management philosophies can create difficulties. Consequently, the level of compatibility between you and your partner is extremely important.

Investigate a Strategic Alliance

A strategic alliance is similar to a joint venture — yet different. It may be formed by granting a foreign company the authority to exploit your technology, research and development knowledge, marketing rights, etc. It does not create a separate entity.

A simple strategic alliance can be a basic manufacturer-foreign sales representative relationship. To solidify this arrangement, a simple written agreement may suffice. This market entry method is often less formal and used as a preliminary step to creating a joint venture. Importantly, it allows partners to quickly respond to a changing environment and contribute complementary strengths to seize opportunities.

Is a Foreign Company Interested in Your Technology?

Through a strategic alliance or joint venture, you may wish to license your technology, know-how or designs to a foreign company for use in a geographic area for a limited period of time. This may include patents, trademarks, production techniques, and technical, marketing and managerial expertise.

Licensing is particularly attractive to small- and medium-size firms because it affords international expansion while limiting risks. It rarely requires capital investment and does not require the parties to work closely together or demand your continuous attention.

In many cases, licensing is the only viable strategy to securely enter a foreign market that lacks hard currency, severely restricts the repatriation of profits and foreign direct investment, maintains unreasonable trade barriers, and/or is economically or politically unstable.

As with each market-entry method, licensing has its disadvantages. For example, the licensor loses control over the quality, distribution and marketing policies, and essential support services employed for the purpose of selling the product or technology.

If compensation is based on sales volume, the licensor may have to rely on the honesty of the licensee to report units sold.

A typical licensing agreement may call for an up-front fee, royalties based on a percentage of future earnings, and consulting and training assistance. Many licensing agreements evolve into joint ventures, while some joint ventures or strategic alliances are eventually converted to simple licensing agreements when one party’s interests diverge from the original purpose.

Is a Foreign Acquisition Best?

Through foreign direct investment, you can acquire an interest in another firm located abroad. More often, a company will complete a foreign acquisition once a market is proven, usually after years of exporting or if a high degree of success has been experienced through a preexisting joint venture.

If you obtain controlling interests, you’ll have full authority over all policies, including marketing strategies, financing, cost cutting, expansion programs, production, and quality control. However, keep in mind that a very successful acquisition strategy is one where the new owners study preexisting management styles and seek to understand what management thinks of proposed policy changes, and then incorporate this input.

Foreign acquisitions usually require an abundance of resources, and the exposure to risk is higher as compared to other methods of foreign market entry. Thus, changes in government policy can adversely affect your company’s operations. On the other hand, foreign acquisition benefits often exceed other methods of market entry.

Choose The Strategy That Best Satisfies Your Long-Term Needs

Different strategies will satisfy different needs. To determine what may work best for you, study your options on an in-depth basis. This may include seeking legal and/or expert advice on the methods and markets that interest you.

Importantly, look at the long-term ramifications, especially the level of resources required and risks involved, and analyze this in terms of your expected returns. In many cases, a combination of strategies, employed one after another, may be the right mix.

This article appeared in October 1998. (NB)
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, competitive strategies and the latest economic trends. He also is CEO of World Trade Center BN, chair of the Upstate New York District Export Council, and founder of The Manzella Report and Manzella Trade Communications Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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