Foreign markets offer unique business opportunities for countries. Each country also presents special challenges for overseas businesses trying to enter those markets. Businesses can choose to enter foreign markets either through an equity mode, which can involve joint ventures or direct investment, or a non-equity mode, such as licensing and exporting. The structure of the company, the nature of the foreign market and the regulations in the target country are all factors in deciding which modes will be available.
Advantages of Equity Modes of Entry
The equity modes of entry into a foreign market include both direct investment in facilities in the overseas location, as well as joint ventures with companies in the same industry with a base in the target market. Direct investment allows the investing company more direct control over the operations, while a joint venture allows the investing company to take advantage of its resident partner's knowledge of government regulations, business culture and consumer marketing.
Drawbacks of Equity Modes of Entry
One of the major drawbacks of equity modes of entry is the higher level of investment required from the investing company. The investment requires not only monetary resources, but also time in establishing relationships with either direct investment partners or joint venture partners in the target market. Direct investment can expose the investing companies to high risks if the target market becomes unstable. Companies engaged in joint ventures must often give up some control over operations to their local partners.
Advantages of Non-Equity Modes of Entry
Non-equity modes of entry allow investors to enter overseas markets with minimal investment and reduced risk. Companies can use non-equity modes to enter these markets much faster than with equity modes, as processes such as exporting and licensing are much faster than finding direct investment opportunities or drafting joint venture partnership agreements. Licensing also offers companies a higher rate of return on their investments and reduces the number of trading barriers and regulations the licensee must overcome.
Drawbacks of Non-Equity Modes of Entry
The most noticeable disadvantage of non-equity modes of entry includes the target market's view of the investing company as an outsider. Consumers and business partners may be more hesitant to deal with a company that is not willing to invest the money, time and effort into establishing a physical presence in that market. Exporters also can face high transportation costs and export duties from the source nation. In addition, licensees must deal with lack of control over the product and limitations within the terms of the licensing agreement.