What are some incentives for firms to use international strategies What are the three basic benefits firms can derive by moving into international markets?

Types of Entry

International expansion is accomplished by exporting products, participating in licensing arrangements, forming strategic alliances, making acquisitions, and establishing new wholly owned subsidiaries. Each means of market entry has its advantages and disadvantages. Thus, choosing the appropriate mode or path to enter international markets affects the firm’s performance in those markets.

Many industrial firms begin their international expansion by exporting goods or services to other countries. Exporting does not require the expense of establishing operations in the host countries, but exporters must establish some means of marketing and distributing their products. Usually, exporting firms develop contractual arrangements with host country firms. The disadvantages of exporting include the often high costs of transportation and tariffs placed on some incoming goods.

Licensing is an increasingly common form of organizational network, particularly among smaller firms. A licensing arrangement allows a foreign company to purchase the right to manufacture and sell the firm’s products within a host country or set of countries. The licensor is normally paid a royalty on each unit produced and sold. The license takes the risks and makes the monetary investments in facilities for manufacturing, marketing, and distributing the goods or services. As a result, licensing is possibly the least costly form of international expansion.

In recent years, strategic alliances have become popular means of international expansion. Strategic alliances allow firms to share the risks and the resources required to enter international markets. Moreover, strategic alliances can facilitate the development of new core competencies that contribute to the firm’s future strategic competitiveness.

As free trade has continued to expand in global markets, cross-border acquisitions have also been increasing significantly. Acquisitions can provide quick access to a new market. In fact, acquisitions often provide the fastest and the largest initial international expansion of any of the alternatives. Thus, entry is much quicker than by other modes.

The establishment of a new wholly owned subsidiary is referred to as a greenfield venture. The process of creating such ventures is often complex and potentially costly, but it affords maximum control to the firm and has the most potential to provide above-average returns.

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