There are five main modes of entering a foreign market: exporting, licensing, franchising, entering into a joint venture with a host country company, and setting up a wholly owned subsidiary in the host country. Each entry mode has its advantages and disadvantages, and companies must weigh these carefully when deciding which mode to use.
Many manufacturing companies begin their quest for global expansion as exporters and then switch to other modes. Exporting has two distinct advantages. First, it avoids the costs of establishing manufacturing facilities in the host country, which are often quite substantial. Second, by manufacturing the product in a centralised location and then exporting it to foreign markets, the company may be able to realise substantial economies of scale from its worldwide sales. For instance, many Indian companies in the floriculture business export their entire production to Europe to take advantage of the lower cost of production and the favourable climatic conditions in the country.
On the contrary, there are a number of negative aspects to exporting.
First, exporting from the company’s home base may not be appropriate if there are low-cost manufacturing locations abroad.
A second drawback is that high transport costs can make exporting uneconomical, particularly for bulk products. One way of overcoming this problem is to manufacture bulk products locally. This strategy allows a company to realise economies from large-scale production and at the same time minimise transport costs. Thus, many multinational companies manufacture their products from a base in a region and serve several countries in that regional base.
Third, tariff barriers can make exporting uneconomical. In fact the threat of tariff barriers by a country may sometimes force a company to set up manufacturing facilities in that country. Finally, the practice of delegating marketing activities to a local agent among companies that are just beginning to export also poses risks since there is no guarantee that the agent will act in the company’s best interest. Moreover, many foreign agents also deal with the products of competitors leading to divided loyalties.
Therefore, company would perform better if it manages marketing on its own. One way to do it is to set up a wholly owned subsidiary in the host country to handle marketing locally. This can lead to huge cost advantages arising from manufacturing the product in a single location and controlling the marketing activities in the host country.