How to enter a foreign market

Although investing in another market can be risky and require a lot of capital, the rewards can be huge.

By selling your product or service in another country, you can introduce your company to huge markets, increase your sales and profits, gain brand recognition, reduce the risk of only operating in one market (eg, due to economic or seasonal downturns) and extend your product’s life cycle.

Which country?

You may already have a country in mind, or you may simply have the idea of exporting but no idea where to. Start by making a list of countries you are interested in.

When you have a list, consider more carefully your product – is it suitable for any of the countries on your list? The culture, religion and law of each country are extremely important to consider here. Some countries are very conservative in comparison to the UK, so trying to export items such as clothes or alcohol may be tricky. The majority of the population in other countries may have certain dietary requirements – for examples, Hindus do not eat beef.

When you have narrowed down your list, consider international business laws in each country. You may need to consult locals to research regional laws and customs to ensure that you are able to take your product or service into that country.

You will also need to undertake the usual market research, to ensure that people in your target market will definitely want to buy your product or service!

When to enter?

If you know that your competitors are considering entering the same market as you, there are two options: aim to be ‘first to market’ or wait and see how successful your competitors are and follow them into the market.

By aiming to be ‘first to market’, you will be taking several risks. Firstly, regardless of how thorough your market research is, you cannot guarantee that people will buy what you are selling. Secondly, depending on your market entry method, you may have to invest high capital or meet resistance from potential local partners who are unsure that the product will succeed.

By following your competitors should they succeed, you will know that there is a market for your business and it is much more likely that local companies will be willing to partner with you. However, you run the risk that local customers will have become loyal to your competitors’ brand and will not want to buy from another company.

Scale of entry

The obvious issue here is cost. Entering a market on a large scale will require significant resources. Although this is more likely to make an impression on a new market as it will attract the attention of customers and local businesses alike, it may be risky financially if your company does not take off.

Entering on a smaller scale can offer business owners the chance to learn about the new market and limit risks – however, you are much less likely to gain significant amounts of attention.

Market entry methods

When you know the scale of entry, you will need to work out how to take your business abroad. This will require careful consideration as your decision could significantly impact your results. There are several market entry methods that can be used.

Exporting

Exporting is the direct sale of goods and / or services in another country. It is possibly the best-known method of entering a foreign market, as well as the lowest risk. It may also be cost-effective as you will not need to invest in production facilities in your chosen country – all goods are still produced in your home country then sent to foreign countries for sale. However, rising transportation costs are likely to increase the cost of exporting in the near future.

The majority of costs involved with exporting come from marketing expenses. Usually, you will need the involvement of four parties: your business, an importer, a transport provider and the government of the country of which you wish to export to.

Licensing

Licensing allows another company in your target country to use your property. The property in question is normally intangible – for example, trademarks, production techniques or patents. The licensee will pay a fee in order to be allowed the right to use the property.

Licensing requires very little investment and can provide a high return on investment. The licensee will also take care of any manufacturing and marketing costs in the foreign market.

Franchising

Franchising is somewhat similar to licensing in that intellectual property rights are sold to a franchisee. However, the rules for how the franchisee carries out business are usually very strict – for example, any processes must be followed, or specific components must be used in manufacturing.

Joint venture

A joint venture consists of two companies establishing a jointly-owned business. One of the owners will be a local business (local to the foreign market). The two companies would then provide the new business with a management team and share control of the joint venture.

There are several benefits to this type of venture. It allows you the benefit of local knowledge of a foreign market and allows you to share costs. However, there are some issues – there can be problems with deciding who invests what and how to split profits.

Foreign direct investment

Foreign direct investment (FDI) is when you directly invest in facilities in a foreign market. It requires a lot of capital to cover costs such as premises, technology and staff. FDI can be done either by establishing a new venture or acquiring an existing company.

Wholly owned subsidiary

A wholly owned subsidiary (WOS) is somewhat similar to foreign direct investment in that money goes into a foreign company but instead of money being invested into another company, with a WOS the foreign business is bought outright. It is then up to the owners whether it continues to run as before or they take more control of the WOS.

Piggybacking

Piggybacking involves two non-competing companies working together to cross-sell the other’s products or services in their home country. Although it is a low-risk method involving little capital, some companies may not be comfortable with this method as it involves a high degree of trust as well as allowing the partner company to take a large degree of control over how your product is marketed abroad.