What’s the best mode of entry into a foreign market? Should a business first establish an export base to gain insight and experience in a target market? Or, does the potential payoff of being first-to-market justify a bolder move, such as a merger or wholly-owned subsidiary?
This guide breaks down the eight most common modes of entry into foreign markets, including exporting, franchising, acquisitions, and more. Find out the pros and cons of each method, discover the risks to avoid, and learn how to select the right approach for your business.
8 modes of entry into foreign markets
The most common modes of entry into foreign markets include low-cost, low-risk approaches, such as exporting and engaging contractors, and higher-risk, higher-investment modes, such as establishing joint ventures and wholly-owned subsidiaries.
We discuss the eight most common routes for entering foreign markets and outline the pros and cons of each below.
Exporting
Exporting involves selling products or services from your home country to customers or clients abroad. Companies can export directly or through an intermediary, such as a distributor or agent.
Exporting is one of the easiest, fastest, and lowest-risk ways to enter a foreign market. By exporting, you avoid the costs and risks of establishing a legal business entity abroad. Still, firms that choose this route often face high costs in the form of tariffs, transportation charges, and distributor fees and can’t control the marketing and distribution of their products overseas.
Plus, they struggle to develop the necessary understanding of the target market and its consumer base to establish a competitive position.
Licensing and franchising
Licensing and franchising involve granting licenses or franchise rights to foreign companies to produce, distribute, or sell your products or services in their market.
Licensing usually involves intangible assets, such as patents, trademarks, and production methods—an entity pays your company to use these assets. While this approach requires minimal investment, it offers limited control and low returns.
Franchising involves granting a foreign entity the right to use your brand name and products or services according to your business model. As the franchisor, you provide advertising, training, and product-related assistance.
Through franchising, you can expand with little debt, strengthen your brand overseas, and share the burden of expansion with another business owner (the franchisee). However, you can still lose brand control and face reputational risks. Businesses that choose this route must also perform due diligence to ensure regulatory compliance and protect their intellectual property (IP).
Joint ventures
Establishing a joint venture involves forming partnerships with local companies in your target market to create a new business entity or collaborate on specific projects. Joint ventures allow companies to share costs, reduce upfront investments, and leverage local knowledge, resources, and expertise.
With a joint venture, key partners and consumers in the target market view you as a local entity, which can build trust and strengthen your brand over time. Still, this approach involves greater costs than exporting or franchising. Joint ventures also require a strategic approach to integrating the organizational structures, cultures, and practices of each company involved in the joint venture.
Wholly-owned subsidiaries
Establishing a wholly-owned subsidiary involves acquiring full ownership of an existing company in your target market or establishing a new legal business entity there.
Completely taking over another business or establishing an entity from scratch in a foreign market is a time-consuming, complex, and costly process involving serious compliance risks, large upfront investments, and ongoing maintenance costs.
Companies that choose this route must also practice extra due diligence to ensure regulatory compliance with employment and tax regulations in their target market. Despite high costs and substantial risk, this approach gives the parent company complete control over local operations, reduces long-term hiring costs, and offers the greatest potential for sizable returns.
Strategic alliances and partnerships
A strategic alliance or partnership involves joining forces with one or more enterprises in your target market to cooperate in a particular way for a set period to achieve a unique goal. The participating entities collaborate on specific initiatives, share resources, and leverage complementary strengths to achieve a common purpose.
By partnering with a local firm, you can leverage their understanding of the local culture, market, and business practices and competitively position yourselves in that locale. This approach is especially valuable if your partner has a well-known, reputable brand in the market and strong relationships with key industry players.
However, the challenges of this approach include a lack of direct control over operations, potential conflicts over asymmetric investments, performance ambiguity between partnering firms, and cultural integration.
Mergers and acquisitions (M&A)
The term “mergers and acquisitions” refers to various corporate transaction types where one firm acquires or merges with another to access a greater consumer base, new distribution networks, fresh technologies, or other strategic assets.
This type of inorganic growth allows companies to quickly establish a presence in a new market, enhance expertise, improve competitiveness, attain stability, and achieve cost savings. However, it requires sizable upfront investments, can create employee distress, and involves complex regulatory hurdles.
Strategic outsourcing and offshoring
Instead of establishing a full business entity abroad, some companies simply outsource certain operations to third-party suppliers or service providers. One of the most common examples of outsourcing is when a company moves its customer service operations to a more cost-effective locale.
Outsourcing is a general term that refers to contracting a particular internal business process to a third-party service provider either domestically or internationally, such as customer service, analytics, or digital marketing. Offshoring is a form of outsourcing that specifically refers to relocating operations to an overseas market.
The benefits of outsourcing include accessing skilled talent, capitalizing on advantages in various geographies, and cost savings. The disadvantages include cultural clashes, time differences, data security concerns, loss of quality control, and rigid contract agreements.
Independent contractors
Another quick and low-cost mode for entering a foreign market is to hire independent contractors overseas for time-bound or unique projects.
This approach allows you to easily test new markets while forgoing costly and lengthy entity establishment procedures. It can also provide insight into your target market to help you decide if you want to establish a long-term presence there.
Despite these benefits, hiring contractors is not an effective long-term strategy. It involves a serious misclassification risk and prevents you from establishing a cohesive, committed team of full-time employees to support long-term, stable growth.
How to select the right mode of entry into foreign markets
Choosing the right mode of entry into a foreign market is a critical decision that requires careful consideration of various factors, including company resources, objectives, market dynamics, and more.
Below, we provide key steps business leaders can take to determine the best approach for their organization.
Conduct market research
Any business considering global expansion must first conduct thorough market research to understand the target market’s characteristics, including the following:
- Customer preferences
- Demographics
- Purchasing behavior
- Competitive landscape
- Regulatory environment
- Cultural nuances
Different regulatory environments, competitive landscapes, and other factors will warrant different modes of entry. Developing a deep understanding of your target market will help you identify opportunities based on your unique circumstances and goals.
Clarify business objectives
Clarify your company’s strategic objectives and goals for market expansion. Do you want to access new customers? Enhance your global presence? Reduce costs? Leverage specific resources or capabilities?
Narrow down your choice by determining which modes can best serve your goals and which cannot.
Imagine a pharmaceutical company that wants to enhance its research and development capabilities while expanding its global reach. Acquiring a foreign entity with the desired capabilities in a lucrative market would be a wise approach, as long as the pharmaceutical company has the resources to support such a move.
Evaluate company resources
Evaluate your company’s internal resources, capabilities, and constraints, including the following:
- Financial resources
- Managerial expertise
- Technological capabilities
- Brand strength
- Risk tolerance
Determine whether you have the resources to support your preferred mode of entry and consider which approaches align best with your capabilities. Are you considering an acquisition? If so, be sure your organization has deep enough pockets and the risk tolerance to handle seismic growth.
Perform a risk analysis
Assess the risks associated with each mode of entry, including the following:
- Financial risk
- Operational risk
- Legal and regulatory risk
- Political risk
- Cultural risk
- Competitive risk
For instance, is your target market politically and economically stable? Could an economic crisis in the region impact critical supply chains? Evaluate the likelihood of various risks in and around your target market and their potential impact on your business.
Conduct a cost-benefit analysis
Conduct a cost-benefit analysis for each mode of entry to determine the anticipated costs, benefits, and returns on investment. Consider the following factors:
- Upfront investment
- Ongoing operational costs
- Revenue potential
- Market access
- Scalability
For instance, if you plan on establishing a wholly-owned subsidiary, you’ll want to ensure the market offers enough revenue potential to justify the costs.
Identify market entry barriers
Identify barriers to entry in the target market, such as:
- Trade barriers
- Regulatory restrictions
- IP protection
- Cultural barriers
- Competitive barriers
Choose a mode of entry that allows you to navigate or overcome these barriers effectively. For instance, establishing a legal entity in the United Arab Emirates (UAE) is relatively simple. Many organizations interested in doing business in this market could opt for entity establishment without facing significant entry barriers.
Analyze competitive positioning
Analyze the competitive landscape in the target market, including existing competitors’ strengths, market saturation, and your competitive advantages. Consider how each mode of entry positions your company relative to competitors and how it will impact your market share and competitiveness.
Do you want to be first-to-market, establish a local subsidiary, and capitalize on market share? Or, do you want to pace yourself by engaging international contractors while letting a competitor test the waters?
Determine customer needs and preferences
Understand the needs, preferences, and buying behavior of the consumer base in your target market. Choose a mode of entry that aligns with customer preferences and allows you to reach and serve your target market effectively.
Consider an e-commerce business, for instance. Its customers’ primary needs include fast and affordable international shipping. A sensible strategy would be to establish worldwide distribution centers to expand and streamline global shipping and order fulfillment. In doing so, the company could drastically improve brand awareness and trust in foreign locales.
Identify legal and regulatory challenges
Consider the legal and regulatory requirements governing foreign market entry, including the following:
- Corporate laws
- Taxation
- Import and export regulations
- IP rights
- Labor laws
- Industry-specific regulations
Each market poses unique regulatory challenges for different modes of entry. Take contractor engagement, for example. Hiring contractors abroad involves fewer regulatory complexities than other modes of entry, such as mergers and acquisitions.
While it involves a permanent establishment and misclassification risk, hiring contractors is a wise approach for companies looking to verify a market’s potential ROI before putting down roots.
Consider your long-term strategy
Do you anticipate a long-term presence in your target market? Do you want to test the waters before making sizable investments in physical infrastructure? What do you need to expand your footprint in your target market over time?
Evaluate the long-term strategic implications of each approach on your company’s growth trajectory, market positioning, and competitive advantage. Choose a mode of entry that aligns with your long-term business strategy and supports sustainable growth.
Risks to avoid when entering new foreign markets
Regardless of which approach you choose, mitigating risk is critical for maximizing your chances of success in a new market. Noncompliance penalties can range from nominal fines to limited business opportunities and even imprisonment.
We list the most common risks associated with global expansion below. Consider which ones are relevant to your business, location, and industry, and be sure you have the resources to mitigate them.
- Lack of market understanding. Insufficient understanding of customer preferences, cultural norms, regulations, and the competitive landscape in your target market can lead to missteps and losses that impede success.
- Regulatory compliance issues. An organization must familiarize itself with local laws, regulations, and licensing requirements in its target market to avoid fines, reputational damage, and limited business opportunities.
- IP protection. Businesses must protect their patents, trademarks, copyrights, and trade secrets to avoid infringement, piracy, and unauthorized use in their target market through contractual protections, local registration, and enforcement mechanisms.
- Currency and financial risks. Currency exchange rate fluctuations, economic instability, and financial volatility in a foreign market can impact your firm’s profitability and performance. Consider using risk management strategies, such as hedging currency exposure, diversifying revenue streams, and maintaining adequate fiscal reserves, to mitigate financial risks.
- Operational challenges. Cultural differences, language barriers, talent shortages, and logistical complexities can pose operational challenges when entering a foreign market. Develop cultural competency, invest in employee development programs, offer competitive benefits, and leverage technology and outsourcing solutions to address operational challenges.
- Exit strategy considerations. Prepare for market entry failures and unforeseen challenges that can lead to sunk costs and business losses. Evaluate exit options, such as divestment, restructuring, or strategic partnerships, and incorporate them into your market entry strategy from day one.
Simplify foreign market entry with an employer of record
Global expansion creates incredible value. It also involves complexity. Consider partnering with an employer of record (EOR) to streamline your expansion efforts, mitigate risk, and cut costs.
An EOR is a third-party entity with global reach and international legal expertise that offers businesses an agile approach to expansion. An EOR makes it easy to test new markets cost-effectively and compliantly while supporting your long-term growth strategy.
This could mean serving as a bridge solution during lengthy entity establishment procedures or as a permanent solution for building and supporting a distributed workforce without undergoing incorporation in each market.
With its own economies of scale, an EOR can offer access to affordable and competitive employee benefits worldwide. An EOR can also provide deep market insights, from talent assessments to business environment reports, to help you establish a sound entry strategy.
No matter your size or location, partnering with an EOR helps unlock your international growth potential by giving you more options than you would have on your own.
Read more: What Is an Employer of Record (EOR)?
Interested in learning more? Velocity Global is a trusted and tenured international EOR. Contact us today to learn how we can help you expand into more than 185 countries with ease.
