Methods for Business Entry into the Global Marketplace
There are a variety of methods businesses can use to enter the global marketplace. Some carry heavier risks than others, and some require firms to give up some of their control. Read about the types of international business and rate them based on risk and control.
When considering strategic entry into an international market, licensing is a low-risk and relatively fast foreign market entry tactic.
Identify the benefits and risks associated with licensing as a foreign market entry model
- Foreign market entry options include exporting, joint ventures, foreign direct investment, franchising, licensing, and various other forms of strategic alliance.
- Of these potential entry models, licensing is relatively low risk in terms of time, resources, and capital requirements.
- Advantages of licensing include localization through a foreign partner, adherence to strict international business regulations, lower costs, and the ability to move quickly.
- Disadvantages to this entry mode include loss of control, potential quality assurance issues in the foreign market, and lower returns due to lower risk.
- When deciding to license abroad, careful due diligence should be done to ensure that the licensee is a strong investment for the licensor and vice versa.
- licensor: In a licensing relationship, the owner of the produce, service, brand or technology being licensed.
- licensee: In a licensing relationship, the buyer of the produce, service, brand or technology being licensed.
When considering entering international markets, there are some significant strategic and tactical decisions to be made. Exporting, joint ventures, direct investment, franchising, licensing, and various other forms of strategic alliance can be considered as market entry modes. Each entry mode has different pros and cons, addressing issues like cost, control, speed to market, legal barriers, and cultural barriers with different degrees of efficiency.
Licensing: The 1933 Fiat 508 was manufactured under a license in Poland by Polski Fiat.
What is Licensing
A licensor (i.e. the firm with the technology or brand ) can provide their products, services, brand and/or technology to a licensee via an agreement. This agreement will describe the terms of the strategic alliance, allowing the licensor affordable and low risk entry to a foreign market while the licensee can gain access to the competitive advantages and unique assets of another firm. This is potentially a strong win-win arrangement for both parties, and is a relatively common practice in international business.
Let's consider an example. The licensor is a company involved in energy health drinks. Due to food import regulations in Japan, the licensor cannot sell the product at local wholesalers or retailers. In order to circumvent this strategic barrier, the licensor finds a local sports drink manufacturer to license their recipe to. In exchange, the licensee sells the product locally under a local brand name and kicks back 15% of the overall revenues to the licensor.
The Pros and Cons
Before deciding to use licensing as an entry strategy, it's important to understand in which situations licensing is best suited.
Licensing affords new international entrants with a number of advantages:
- Licensing is a rapid entry strategy, allowing almost instant access to the market with the right partners lined up.
- Licensing is low risk in terms of assets and capital investment. The licensee will provide the majority of the infrastructure in most situations.
- Localization is a complex issue legally, and licensing is a clean solution to most legal barriers to entry.
- Cultural and linguistic barriers are also significant challenges for international entries. Licensing provides critical resources in this regard, as the licensee has local contacts, mastery of local language, and a deep understanding of the local market.
While the low-cost entry and natural localization are definite advantages, licensing also comes with some opportunity costs:
- Loss of control is a serious disadvantage in a licensing situation in regards to quality control. Particularly relevant is the licensing of a brand name, as any quality control issue on behalf of the licensee will impact the licensor's parent brand.
- Depending on an international partner also creates inherent risks regarding the success of that firm. Just like investing in an organization in the stock market, licensing requires due diligence regarding which organization to partner with.
- Lower revenues due to relying on an external party is also a key disadvantage to this model. (Lower risk, lower returns.)
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