"How about, he's thinking of quitting the exporting, and just focusing in on the importing. And this is causing a problem, because, why not do both?" - Elaine Benes creating the fictional character Art Vandelay in the Seinfeld Episode, The Cadillac
There are four main business models to expand your business abroad and one brand new model that people are still trying to understand .... more on that one later. Each of these business models has pros and cons. Therefore, there isn't a right or wrong way to expand your business abroad. However, you have to pick the right entry strategy that will work for your business. The strategy chosen by an organization will depend on its level of experience in international business and its appetite for risk. One market entry strategy may evolve into another, or companies can try to blend these market entry strategies together.
Exporting is when goods produced in one country are shipped to another country for future sale or trade. The sale of such goods adds to the producing nation's gross output. According to the U.S. Census Bureau, the United States exported about $186 billion worth of goods and services in November 2016. It is unclear how much of this can be attributed to Art Vandelay.
Pros: Minimal costs and requires the least amount of global experience.
Cons: Less control over the product's distribution and lower margins compared to other entry models.
Licensing is when a firm, called the licensor, leases the right to use its intellectual property - technology, patents, work processes, copyrights, brand names, or trademarks - to another firm, called the licensee, in return for a fee. This is a contractual arrangement where a company transfers the right to manufacture a product or distribute a service in a foreign country. For example, Nintendo manufactures electronic video game consoles and game discs. It licenses dozens of firms worldwide to design, and, in some cases, to manufacture game discs to be used in its consoles. As part of its licensing arrangements, Nintendo provides game designers with technical specifications for how its game consoles work. The design firms create the games and then pay Nintendo a fee to manufacture the game discs. Through this symbiotic licensing strategy, Nintendo not only generates new revenues; it also nurtures the creation of new video games, which in turn stimulates demand for its Nintendo game consoles.
Pros: There is lower risk, because you enter a new market with an established product so you take fewer financial and legal risks.
Cons: Poor management could damage your brand’s reputation in foreign markets.
Joint ventures are strategic business arrangements where two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture, each of the participants is responsible for profits, losses and costs associated with the new enterprise. However, the venture is its own entity, separate and apart from the participants' other business interests. For example, last year the Shanghai Disney Resort opened in the Pudong area of Shanghai as a public-private venture. The Walt Disney Company owns 43% of the resort and the Shendi Group, a joint venture of three companies controlled by the local Shanghai government, owns the remaining 57%.
Pros: Ease of market entry, shared risk, shared expertise, and competitive advantage.
Cons: Incompatibility of the partners, access to information, conflicts over distributing earnings, loss of autonomy, and changing circumstances that affect the viability of the joint venture.
FOREIGN DIRECT INVESTMENT
In the foreign direct investment (FDI) model, your business provides all the investment, your business provides the capital to hire the people, and your business builds the local presence. As a result, you own 100% of the success or 100% of the failure. According to statistics gathered by the Select USA Office at the U.S. Department of Commerce, the FDI in the United States is responsible for about $6 million American jobs, $57 billion in research and development, and $425 billion in exports originating from the United States.
Pros: You have the most control compared to the other models and you retain most of your profits.
Cons: This is the most expensive market entry model because you have to provide all of the investment.
You won't find this last market entry opportunity in a textbook because it is so new, but it is coming. Today, thanks to 3D printing, we live in a world where printing a product and printing a document take the same amount of effort. For example, instead of going through global supply chains to build cars, someday you will be able to download a design for a car and print it in your garage. There is infinite potential with this technology, but it also raises an infinite amount of questions. According to the most recent Global Trends report by the National Intelligence Council, "Advances in manufacturing, particularly the development of 3D-printing from novelty to a routine part of precision production will influence global trade relations by increasing the role of local production at the expense of more-diffuse supply chains."
Pros: Unique customized products on demand.
Cons: Creative destruction and circumvention of traditional supply chains, technology is in the early stages, and public policy has not caught up to the technology.