The pros and cons of entering a foreign market

Expanding your reach into another market is an exciting proposition with huge potential for your business. Done properly, the rewards will far outweigh the risks.

You’ve got your home market nailed, and your business is going full tilt. Now you’ve identified further opportunities abroad and you’re itching to capitalise on them. It makes a lot of sense; suddenly a global market opens up and the benefits that go along with it; sales growth, brand recognition, risk spread over a number of markets, and the ability to take advantage of seasonal variations around the globe. 

WHICH COUNTRY? 

Your first task when looking at modes of entry into international business is to make a list of your target countries. You might already have some in mind, otherwise think about where you feel your product or service might be well received.   
With your list made, take a closer look at your product: does it meet the cultural, religious and legal requirements of your target countries?  

Some countries can be  very conservative in comparison to the UK, so exporting items such as clothes or alcohol could prove tricky. There are also dietary requirements to consider. 
 
With your list narrowed down, consider international business laws in your target countries. If in doubt, reach out to international contacts who might be able to research regional laws and customs to ensure your product or service will be permitted. 
 
Above all, are you likely to sell anything in your chosen territories? This is where market research is your friend, and the more you can do, the better.  

WHEN TO ENTER? 

Another factor when considering modes of entry into a foreign market, is your competition. If you know your competitors are also eyeing your target market, you have two options: aim to be ‘first to market’ or allow your competitors to shoulder the uncertainty and follow them in. 
 
By aiming to be ‘first to market’, you take on all the risk. You have no true guarantee of the customer base regardless of your market research, and also, depending on how you decide to enter the market, you may need to invest capital or meet resistance from potential local partners who are unsure of the viability of your product. 
 
By following your competitors in, you’ll know they’ve established a market and there’s a high likelihood  that local companies will be willing to partner with you. On the flip side, your competitors will have a foothold and you might encounter a degree of loyalty to them.  

SCALE OF ENTRY 

The obvious issue here is cost. When looking at how to enter a foreign market at scale, you’ll need to factor in significant resources. If your market is also new, you need to invest in making a solid impression and  attracting the attention of customers and local businesses alike. Best to go big and get it right, and give your business the best chance of taking off.  
Entering on a smaller scale is a safe option for testing the water and learning the market, but you could go unnoticed, and you only get one chance to enter the room. 

MARKET ENTRY METHODS 

When you’ve worked out your scale of entry, you then need to look at how to take your business abroad. The decisions you make here could significantly impact your results. You have several market entry methods to choose from. 

EXPORTING 

Exporting is the direct sale of goods and / or services in another country. It is possibly the best-known and easiest 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 – you simply ship your existing goods. Export costs will be a factor, though.

Your highest costs when exporting will come from your marketing. Also, exporting will involve four parties: yourself, an importer, a shipper and the government of the country of which you wish to export to.

LICENSING 

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 

Similar to licensing in terms of the sale of intellectual property rights. However, a  franchisee must adhere to very strict rules – for example, any processes must be followed, or specific components 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 to the foreign market). The two companies would then set up a new management team and share control. 
 
There are several benefits to this type of venture. It brings local knowledge of a foreign market to your door and allows you to share costs. However,  take care in 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 

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 how it  continues to run. 

PIGGYBACKING 

Piggybacking involves two non-competing companies working together to cross-sell the other’s products or services in their home country. Low-risk and involving little capital, but it does  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.