International Trade and Entry Strategies to New Markets

free essayNowadays, when globalization poses brings many positive, as well as negative changes to the society, international trade only strengthens its positions. Products, raw materials, services, and capital continuously circulate and borders become transparent, especially between the developed countries. International trading, which has been a powerful influencing and controlling tool for ages, now gets a new shape. The financial differences in GDP of developing countries and the developed ones is constantly increasing; therefore, several entry strategies have been developed to access the new markets. In fact, international trade needs entry strategies to the new markets which for a long time, were not available.

One can define international trade as an exchange of goods, capital, and services between the countries, firms, corporations, organizations etc. across international territories and borders. As far as countries are concerned, international trade represents a significant share of Gross Domestic Product (DGP) in every country (Tielmann 14).

Advanced transportation, industrialization, multinational corporations, globalization, and outsourcing strongly influence international trade system nowadays. The particular importance of international trade is, first of all, in that the nations are not limited to their national services and goods produced only by their national providers within their own borders. Second of all, countries have access to all resources, products, and services all over the world, which immensely deepens globalization process in the world (Cunningham 9).

In fact, international and domestic trades are not principally different, as behavior and motivation of the parties of the trade do not change significantly with regards to whether the trade crosses the border or not. The most significant difference between them is that domestic trade is cheaper than the international trade. The border usually imposes more costs and expenditures, such as time costs because of border delays, tariffs, fees, and costs associated with national differences, such as culture, language, legal system etc. Other difference between the international and domestic trade is that production factors such as labor and capital are less mobile across the countries than within a country. Therefore, international trade is mostly restricted to trade in services and goods, and to the lesser extend to labor, capital, or production factors (Tielmann 16).

Hence, instead of importing a factor of production, countries import goods and products that are intensively used as production factors. It can be seen from an example of the U.S. import of labor-intensive goods from China. The USA imports goods produced by the Chinese instead of importing the Chinese labor into the country. Some scholars suggest that international trade increases when countries host immigrants, but the trade effect is weakened when immigrants assimilate into their new country. In a diverse country like the United States, Chinese immigrants would easily assimilate which would negatively affect the country and the trade (Root 56).

It is the general idea that international trade is effective when the countries and corporations widely cooperate and have effective financial partnerships. Therefore, nowadays countries and corporations all over the world are seeking for the new markets and partners in order to boost their national income and trade. When a corporation or a country decides to enter a new overseas market, there is a variety of options to take. These options differ with risks, costs, and degree of control that can be used over them. Therefore, countries and companies develop different market entering strategies. A market entry strategy is mainly a planned method of goods or services delivering to a foreign or other target market and distributing these products or goods there. The market entry strategy mainly refers to managing and establishing contracts in a foreign country (Welch, Benito, and Petersen 37).

Cunningham (45) identifies five main strategies which can be applied by firms when planning to enter new foreign markets: technical innovation strategy, availability and security strategy, product adaptation strategy, total conformity and adaptation strategy, and low price strategy. In product marketing, from developing to developed countries, availability and security strategy poses the main problems. Buyers and investors who are interested in investing or cooperation with foreign countries are usually rather careful, as this usually means the new problems with currency, transport, and quantity and quality problems will arise. Furthermore, entry strategies are often known for “lumpy investments.” Enormous costs may be undertaken as the investor usually pays a high risk price before he/she gains the profit. For instance, this might happen when building food processing and freezing facilities or port facilities. Moreover, equipment might not be proper to be used for other processes. Such asset of specific equipment which is only to be used for a specific purpose may make the owner quite vulnerable to the raw material supplier’s bargaining power and product buyers. For example, the Zimfree Company in Zimbabwe is now experiencing such financial difficulties. The company has built a freezing plant for vegetables, but has no raw suppliers. Therefore, it has serious difficulties in seeking contracts and establishing itself as a serious producer in the world.

As a matter of fact, time is a crucial factor in building the market entry strategy. Building the infrastructure and creating image takes a lot of time and effort. Geographical distance, logistic costs, and language barriers limit direct monitoring of trade. Therefore, enforcement of contracts between the trade partners may be costly, and insufficient legal integration between the cooperating countries may be difficult due to political reasons. Thus, governments rather than private corporations often get involved in the trading process (Tielmann 17).

It is the general idea that effective ways of expanding markets are by geographical development, expansion of product line, or both. In fact, the more the geographic area and product line expands, the more advanced will be the managerial complexity. Global trading strategies include local market approach, where the marketing mixes with specific local or foreign market, country centered approach which relates to limited and highly decentralized international coordination, and lead market approach, which is about developing the market to be the best predictor of other markets (Welch, Benito, and Petersen 37).

As far as the main entering strategies to the foreign markets are concerned, there are three main ways of entering the foreign market: indirect export, direct export, and production in a foreign country (Root 63).

Indirect Export

The technique of entering foreign markets that offers the least market control and the lower level of risk is indirect export. Within this strategy, products are transported to foreign countries by others. The company which sells the product or service is not engaged in international marketing. In fact, no special activities are realized by the company, and the sale is handled only as domestic sale.

There are various methods of indirect exporting. The simplest one is dealing with foreign sales through internal domestic sales company. Products are sold in the country where the company which produces the product is situated, but resold or used abroad. This type of exporting may arise if, for instance, a foreign store owns a buying office in the country. If the exporting company loses a contact with the sustained marketing effort, it will hardly gain any sales in the future (Root 66).

The second form of indirect export is using international trade companies with offices in different countries all over the world. Two of the best known trading companies of such type are the Mitsubishi or Mitsui in Japan. The market coverage and the size of these companies make them attractive in the eyes of other foreign companies, especially because of their information network and credit reliability. Trading companies which have European origin are significant primarily in trade with former African colonies and Southeast Asia. However, one of the drawbacks to the use of trading companies is that they tend to bring competing products to the market, and the firm’s products may not receive the support and attention the firm seeks (Tielmann 20).

The third form of indirect export is cooperation with the export management company situated at the same country as the producing company, and which plays a role of an export department. The company can have an export department performance without having such department in the company. On the one hand, it brings a lot of economic advantages because the export company can perform export functions for many various companies at once. On the other hand, the producer is able to establish reliable cooperation and gain instant foreign market contacts with other foreign companies. Moreover, the company can avoid the burden of developing internal expertise in exporting. The method of payment in such form of internal export is the commission, and all the costs are variable. In fact, export managing companies have to handle different but complementary lines of the product which often may receive better foreign representation and image than the product of only one manufacturer (Root 66).

It is important to mention that indirect export can open new markets in different countries without requiring any specific investment or expertise. However, both the sales and international know-how achieved by indirect export are generally limited. Therefore, the commitment to the international markets is rather weak.

Countertrade

So far, the largest method of indirect exporting is countertrade. It is well-known that competitive intensity increases investment in marketing. In such conditions, the organization can expand its operations by cooperating within markets with less intense competition, but where currency based exchange could not be accomplished. Moreover, countries may want to trade, notwithstanding the degree of competition, but the problem of currency will still remain. Countertrade is often used in such situations to stimulate home industries or places where raw materials are in rather short supply. Moreover, it can provide the basis for reciprocal trade (Welch, Benito, and Petersen 50).

Statistics varies, but the countertrade accounts for more than 20% of the world trade, involve more than 90 nations and around $100-1500 billion in its value. The United Nations Organization defines countertrade as a commercial group of transactions in which provisions are made in series of contracts for payment for the delivery of products and/or services in place of, or in addition to the financial settlement. In other words, it is a modern form of barter, but the contracts of it are not legally established and covered by GATT (Tielmann 25).

Countertrade, however, can take a lot of forms. In fact, two different contracts are involved in the countertrade: one for the payment for and the delivery of the goods and the other for the payment for and purchase of the goods imported. The performance of one contract is neither connected to nor dependent on the other; however, the seller is in partial or total responsibility for his exports. Some scholars define various forms of countertrade such as barter, compensation, counter purchase, and switch trading. For instance, in 1986, Albania started offering items such as tomato juice, chrome ore, and spring water in exchange for a contract of building a $60 million methanol complex and fertilizer (Root 70).

Barter is known to be the direct exchange of one product for another with regards to the currency used to underpin the value of the item. In fact, barter itself can take various forms. Simple form of barter is an oldest form of non-monetary and bilateral trade. Shadow prices in such form of barter are approximated for the products flowing in both directions. In the simple form of barter, no middlemen are usually involved.

Closed end barter deals are modified from straight barter, and buyer of the goods is found before the contract is even signed by the trading parties. In such form of barter, no money is involved and product quality risks are immensely reduced.

Clearing account barter, known as clearing agreements, bilateral clearing, or bilateral clearing accounts is the barter when the principle is for the trade to balance without acquiring hard currency. In this form of barter, every party agrees on a one contract to buy specified goods and services of equal value. This transaction type commonly lasts for one year; although sometimes, it can extend to a longer period. The value of the contract is usually expressed in clearing account, non-convertible units (named also as clearing dollars) which effectively represent its value in the central bank without any involvement of money. Clearing account units are, by far, universally accepted in trade between the parties and countries which commercial relations are based on bilateral agreements. The contract between the parties defines the goods to be exchanged, the length of transaction time, and the rates of exchange. Limited import or export surpluses might be accumulated by any of the parties for quite short periods. Usually in one year many imbalances take place when taking the clearing account barter: acceptance of unwanted goods, credit against the following year, paying the difference in currency, or payment of penalty (Welch, Benito, and Petersen 67).

Some trading specialists are also practicing buying the clearing dollars with a discount in order to use them for buying the saleable goods. In return, traders may forfeit their discount in order to sell the products for hard currency on other market. As compared to the simple barter, clearing accounts suggest stronger flexibility for drawdown on the lines of types of products and credit.

Counter Purchase

Counter purchase is the purchase when the customer agrees to buy products on the condition that in return seller will buy some customer’s own products (compensatory products). If such exchange is organized at the national level, the seller agrees to buy compensatory goods from other organization up to a specified value. The main peculiarity is that contractual obligations which relate to counter purchase can be extended over a longer period, and the contract requires that each party settles most of their account with trade credits or currency.

If the seller has no need in the bought item, he or she may sell the product to the third party at a discounted price. Such process is called a switch deal. In the past, a number of tractors were brought to Zimbabwe from the European countries by the switch deals (Welch, Benito, and Petersen 45).

Compensation

Compensation is the process when the supplier agrees on taking an output of the facility over a period of time or to the volume of payment specified earlier. For instance, a foreign company may decide to build a firm in Zambia. Accordingly, an output over a specified period of time or specified volume is usually exported to the builder until the building process is over. After that, the firm becomes the Zambian property (Welch, Benito, and Petersen 76).

Having analyzed different forms of countertrade and their advantages, one can still define some disadvantages. One of the problems is the product marketability received within the countertrade. In fact, this problem can be solved by the use of specialized trading companies that can provide trade-related services such as marketing, transportation, credit extension, financing etc. for a fee range of 1-5% value of transaction. Other disadvantage is that quality of the product is not internationally standardized, so it is costly both to the trader and to the customer. Moreover, if the trade is not covered by GATT, “dumping” may occur. Furthermore, in case of countertrade, it is difficult for the parties to set prices and service quality, as well as to revert to the trading currency. Consequently, it may lead to a further quality decline and inconsistency of specification and delivery (Root 74).

Direct Export

In direct export, the company becomes involved directly in marketing of its products in the foreign markets as the company itself performs exporting activities, instead of delegating it to other parties. It seeks for the creation of an export department which is responsible for the tasks such as market research, market contact, export documentation, physical distribution, and pricing.

Such exporting approach requires more corporate resources, but also entails more risks. If such approach is applied, many benefits are expected, such as more control, increased sales, expertise developments in international marketing, better market information, and the development of expertise in international marketing (Welch, Benito, and Petersen 56).

In order to implement an exporting strategy, the company must have many representations in different foreign markets. As a matter of fact, this could be accomplished by sending international trade and sale representatives into the foreign markets in order to get new contacts and directly negotiate with the partners; by selecting local agents or representatives to the market which has prospects, contacting potential buyers and negotiating on behalf of the exporting company; by using independent distributors who would purchase the products in order to resell them in the local area; by creating a fully-owned subsidiary in order to get a stronger control over the foreign operations (Root 75).

Foreign Manufacturing

Under the certain conditions, a company may find itself either undesirable or impossible to supply the foreign markets with domestic production resources. In fact, transportation costs in such case may be too high for bulky or heavy products; quotas or custom rates can render the non-competitive products; preferences for local products of the government may prevent the entry to the market. Any of the conditions can force the company to manufacture on the foreign market in order to have contracts and sell the product there (Welch, Benito, and Petersen 89).

The advantages of the foreign manufacturing are the attractiveness and the size of the market, low costs of production, and economic incentives given by the local authority.

Different approaches may be adopted for the foreign manufacturing. Each of them implies its own level of commitment from the company.

Assembling

Assembling is a cooperation and compromise between the foreign and exporting manufacturing. The company domestically produces all or almost all ingredients or components of its product, and delivers them to the foreign country to be put together as a finished product. By shipping the components, the company is saving costs for transportation and custom tariffs, as these tariffs are generally lower on components of the equipment than on the finished product. Another advantage is the use of local labor which facilitates company’s integration in the foreign market (Market Entry Strategies n.p.).

Perfect examples of foreign assembling are the farm and automobile equipment industries. In a similar way, the Coca-Cola transports its syrup to the foreign countries where the local bottle companies add water to it and put it in the container. This type of market entering is suitable for the third world countries’ markets for its convenience and low costs.

Contract Manufacturing

During contract manufacturing, the company’s product is manufactured in the foreign country by the local producer under the special contract with the firm. As the contract covers manufacturing only, marketing is realized by a sales subsidiary of the company, which keeps the market in control. Contract manufacturing provides no need for the company investment, custom tariffs, and transportation costs, and the company gets the advantage to advertise its product as locally made. Contract manufacturing also gives an opportunity to avoid human resource and other problems which may arise from company’s lack of familiarity with the local culture and economy (Market Entry Strategies n.p.).

One of the disadvantages of contract manufacturing is the loss of profit margin on the production activities, especially if the labor costs in the foreign country are lower than in the company’s market and country. Moreover, there is a risk of transferring the technological know-how and ideas to a foreign competitor. However, this risk is lessened when the marketing know-how and the brand names are the key success factors. Also, a frequent problem is quality control, which often leaves much to be desired.

Licensing

Licensing is another approach to entering a foreign market with an inconsiderable degree of risk. It is different from contract manufacturing mainly in that it is usually established for a longer period and involves more significant responsibilities for the local company. Licensing is quite similar to franchising, but the franchising organization is prone to be more involved in the control and development of the marketing program (Arnold n.p.).

An international licensing company gives the trademark rights, licensee patent rights, know-how or copyrights on products and processes. The licensee is obliged to produce the licensor’s products, pay royalties to the licensor which are related to the volume of the products to sale, and market the products in his territory (Market Entry Strategies n.p.).

The main benefits of licensing for both of the parties are the same as those for franchising. This type of agreement is always welcomed by foreign authorities, as it brings technology into the foreign country.

The main disadvantage of licensing is controlling the licensee owing to the absence of commitment from the international company granting the license. In a few years after the know-how is transferred to the foreign country, there is an immense risk that the foreign company may start acting on its own and the international company may, therefore, lose that foreign market.

Joint Ventures

Foreign joint ventures are quite similar to licensing for having much in common. The main difference is that during joint ventures, the international company has a management voice and equity position in the foreign company. In fact, partnership between the home-and host-country companies is formed, which usually results in the creation of a third company (Root 77).

This type of agreement provides the international company with access to the local market knowledge and better control over the operations. The international company has access to the network of the franchisee relationships and is less prone to the expropriation risk because of the partnership with the local company.

This type of agreement is immensely popular in the international market. Its popularity is influenced by the fact that it gives permission for the avoidance of control problems of the other entry strategies to the foreign market. Furthermore, the presence of the local company facilitates integration of the international company in the foreign environment.

Direct Investments

In this type of arrangement, the international company makes direct investments in a production unit of the foreign business. It is the strongest commitment as there is a full ownership. The international company can obtain all foreign production facilities in the two following ways: 1) by making a merger or direct acquisition in the host market 2) by developing its own facilities (Market Entry Strategies n.p.).

Governments of many countries prohibit 100% ownership by the international companies and demand joint ventures or licensing instead. In fact, 100% ownership and the ability to communicate can outweigh any disadvantages of licensing and joint ventures. However, repatriation of capital and earnings has to be monitored carefully. The more instability in the environment, the less likely the ownership pathway is an option (Market Entry Strategies n.p.).

The entry mode is often summarized as a choice between the companies’ controlled or owned methods: “integrated” or “independent” channels. Integrated channels give the advantages of control and planning of resources, faster market penetration, and flow of information, and are a significant sign of commitment. The main disadvantages are that the risks are high, as they incur many marketing and other costs, cultural differences, and in some cases their credibility among local companies may be lower than that of the main company. Independent channels may offer risks, lower performance costs, less capital, high local credibility, and knowledge. More disadvantages are less market information flow, more control and coordinating difficulties, and motivational difficulties. Moreover, they may not want to spend a lot of money on development of the market, and the selection of decent intermediaries might be difficult and problematic (Tielmann 24).

Once the companies are in the market, they have to make decision on a strategy for the further expansion. One may concentrate on a couple segments in a few countries, or concentrate on only one country, and later diversify into segments. Other activities may include market and country segment concentration typical of Gerber baby foods or Coca Cola and finally, the segment and country diversification. Another way of dealing with it is by identifying three main business stages: international, multinational, and global. The main philosophy behind the international stage is an extension of products and programs; behind the multinational stage is decentralization as far as possible to the local operators; and behind the global stage is integration seeking to synthesize inputs from regional and world headquarters, as well as the country organization. While most of the developing countries are not even in the international stage, within them they have organizations which are in the global stage. It often leads to a “rebellion” against the multinational operations (Market Entry Strategies n.p.).

Export Processing Zones (EPZ)

Being not an entry-strategy, EPZs are becoming an “entry” into a foreign market. They are mainly an investment incentive for investors, but they can also provide the transfer of skills and employment for the host country, as well as to provide a ground for the flow of goods within the country. One of the best exporting zones’ example is the Mauritian EPZ12 in the 1970s (Tielmann 25).

Conclusion

Having analyzed the international trade and main foreign market entry strategies, one cannot but agree that there are numerous entering strategies which imply a different degree of commitment and risk from the international company. In general, implementation of the international market development strategy is a process which should be achieved in several steps. Indirect export is often effectively used at the starting point of entering the foreign market. If the results of it are decent and satisfactory, more agreements are made by the company in order to cooperate more closely with the local firms.

As a matter of fact, many organizations are faced with different strategy alternatives when they decide to enter the foreign market. Each company and business has to be carefully weighed to make the most appropriate choice for investment or license. Thus, every approach requires specific attention to possible risks, marketing issues, matters of management and control. Therefore, a systematic assessment of different market entering methods can be achieved by the use of a matrix.

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