trade. Exporting typically generates substantial foreign-exchange earnings for nations. Companies internationalise for a variety of reasons.
Advantages and Disadvantages of an export strategy
In this report we are going to examine the different export strategies that are available to a firm internationalising for the first time. With reference to specific examples, we will analyse the advantages and disadvantages of an export strategy.
Market entry strategies available to a firm internationalising for the first time consist of exporting, sourcing (importing), foreign direct investments, licensing and joint venture. Each strategy places its own demands on corporate resources and capabilities, and has advantages and disadvantages.
To select a market entry strategy, mangers must consider the following:
The firm’s resources and capabilities
Conditions in the target country
Risk inherent in each venture
Competition from existing and potential rivals, and
Characteristics of the products and services to be offered.
Expansion into foreign markets can be achieved via the following mechanisms:
1.1 Exporting is the entry strategy responsible for the massive inflows and outflows that constitute global trade. It generates substantial foreign-exchange earnings for nations. China is now the leading exporter of various goods such as computers, mobile phones and other information technology products. Britain has been one of the biggest entertainment exporters in history with shows such as Britain’s Got Talent and Pop Idol-X Factor.
1.2 Global Sourcing (importing) is the strategy of buying products and services from foreign sources.
1.3 Foreign direct investment (FDI) is an internationalisation strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labour, land, plant, and equipment.
1.4 Licensing is a strategy that makes an arrangement where the owner of intellectual property grants a firm the right to use that property for a specified period of time in exchange for royalties or other compensation.
1.5 Joint Venture is a strategy that is a form of collaboration between two or more firms to create a jointly owned enterprise.
This is the strategy of producing products and services in one country (often the producer’s home country), and selling and distributing them to customers located in other countries.
It is a traditional and well-established method of reading the foreign markets. Exporting does not require that the goods be produced in the target country; no investment in foreign production facilities is needed. Most of the costs associated with exporting take the form of marketing expenses.
Exporting requires the coordination of four players
Firms venturing abroad for the first time usually use exporting as their entry strategy as it is very flexible compared to more complex strategies such as foreign direct investments. The exporter can enter and withdraw from the markets fairly easily with minimum risk and expense and is most favoured by small and medium-sized enterprises (SMEs) such as Vellus Products a small company in the United States that make pet grooming products like customized shampoos, conditioners, brushing sprays and detanglers. All types of firms beyond the initial entry large and small, use exporting regardless of their stage of internationalisation. For example, Lockheed Martin, Northrop Grumman and Boeing are some of the largest exporters in the United States, employing 400,000 people, their combined revenues accounts for 1% of the United States’ $10 trillion gross domestic product (GDP).
Exporting entails limited risk, expense, and knowledge of foreign markets and transactions, most firms prefer exporting as their primary foreign market entry strategy. The focal firm retains its manufacturing activities in its home market but conducts marketing, distribution, and customer service activities in the export market. It is the entry strategy responsible for the massive inflows and outflows that constitute global trade. Exporting typically generates substantial foreign -exchange earnings for nations. Japan has benefited from massive inflows of export earnings for years. Zambia export plays an important role in the economy of the country. It is an important foreign exchange earner. The primary product of Zambia export is copper and accounts for 50% of the total exports.
Zambia exports commodities in two categories, traditional and non traditional. Traditional export commodities comprise of:
Non traditional category includes:
Zambia export goods to Democratic republic of Congo, South Africa, Tanzania, United Kingdom, Zimbabwe and Switzerland.
Global sourcing (also known as importing, global procurement, or global purchasing) refers to the strategy of buying products and services from foreign sources.
It can also be defined as the commercial activity of buying and bringing goods from a foreign country.
While sourcing or importing represents an inbound flow, exporting represents outbound international business.
2.2 FOREIGN DIRECT INVESTMENT
Foreign direct investment (FDI) is the direct ownership of facilities in the target country. It involves the transfer of resources including capital, technology, and personnel. Direct foreign investment may be made through acquisition of an existing entity or the establishment of a new enterprise.
Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.
For example, the case of Euro Disney – different modes of entry may be more appropriate under different circumstances and the mode of entry is an important factor in the success of the project. Walt Disney Co. faced the challenge of building a theme park in Europe. Disney’s mode of entry in Japan had been licensing. The firm chose direct investment in its European theme park, owing 49% with the remaining 51% held publicly.
Besides the mode of entry, another important element in Disney’s decision was where exactly in Europe would the theme park be located. There are many factors in the site selection decision, a company must carefully define and evaluate the criteria for choosing a location. The problems with the EuroDisney project illustrate that even if a company has been successful in the past, as Disney had been with its California, Florida and Tokyo theme parks, future success is not guaranteed, especially when moving into a different country and culture. The appropriate adjustments for national differences always should be made.
Another example of foreign direct investment is Toyota, they have used foreign direct investment to build factories in key locations in Asia, Europe, and North America. Toyota uses these production bases to export cars to neighbouring countries and regions.
Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks for rights to use the intangible property and possibly for technical assistance. Due to the little investment on the part of the licensor is required; licensing has the potential to provide a very large return on investment (ROI). However because the licensee produces and markets the products, potential returns from manufacturing and marketing activities may be lost.
2.4 JOINT VENTURE
Joint venture is a strategy that is a form of collaboration between two or more firms to create a jointly owned enterprise.
There are five common objectives in a joint venture:
Risk /Reward sharing
Technology sharing and joint product development
Joint product development
Conforming to government regulations
Other benefits include political connections and distribution channel access that may depend on relationships.
Alliances are often favourable when:
The partner’s strategic goals converge while their competitive goals diverge.
The partner’s size, market power and resources are small compared to the industry leaders.
Partners are able to learn from one another, while limiting access to their own proprietary skills.
The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources and government intentions.
Potential problems include:
Conflict over asymmetric new investments
Mistrust over proprietary knowledge
Performance ambiguity – how to split the pie
Lack of parent firm support
If how and when to terminate the relationship
Joint ventures have conflicting pressures to cooperate and compete. Strategic imperatives; the partners want to maximize the advantage gained for the joint venture, but they also want to maximize their own competitive position.
The joint venture is controlled through negotiations and coordination processes while each firm would like to have hierarchical control.
Characteristics of Firm Internationalisation
There are five characteristics associated with international expansion.
Push and pull factors serve as initial triggers – Push factors include unfavourable trends in the domestic market such as declining demand, falling profit margins, growing competition at home and reliance on products that have reached a mature phase in their life cycle, that compel firms to explore opportunities beyond their national borders. In other words a firm is actually pushed / force out of the domestic market to try / venture out to markets in other countries. Pull factors are favourable conditions, in foreign markets that make international expansion attractive, such as management desiring faster growth and higher profit margins, or the will to enter markets that have fewer competitors, foreign government incentives. For example, Zambia offers very liberal investment environment. Currently, foreign direct investment is governed by the Zambia Development Agency Act of 2006, which does not stipulate any requirements for local content, technology transfer, equity, employment or use of subcontractors, although foreign investor are encouraged to commit to local participation. The act allows investors to repatriate any capital investments freely, repatriate profits, dividends, interest, fees. It also allows transferring out wages earned in the country. Or opportunities to learn from competitors. Both factors push and pull combine to motivate the firm to internationalise.
Initial involvement may be accidental – initial international expansion for most firms is unplanned as most companies internationalise by accident or because of events. For example DLP, Inc., a manufacturer of medical devices for open-heart surgery, made their first major sale to foreign customers that the firm’s manager met at a trade fair. Without necessarily meaning to the firm got started in international business right from it’s founding. Vellus Products, Inc. internationalised quickly because a foreign distributor showcased the firm’s products at a dog show in Taiwan. Unplanned internationalisation was typical to many firms prior to the 1980s but today due to the growing pressure from internationalisation competitors and the ease with which internationalisation can be achieved, firms tend to be more deliberate in their international ventures.
Balancing risk and return – managers weigh the potential profits, revenues, and achievement of strategic goals of internationalisation against the initial investment made in terms of money, time, and other company resources. Risk-taking preferences of mangers determine what initial investments the firm will make and its tolerance for delayed returns. Risk-averse managers tend to prefer more conservative international projects that involve relatively safe markets and entry strategies. For example a risk-averse U.S. company would favour Canada over India. A risk-averse Australian company would prefer Britain over Egypt that’s because mangers target foreign markets that are culturally close; they have similar culture and language to the home country. With greater anticipated returns, the more likely management will pursue an international project and commit resources necessary to ensure its success. Due to increased costs and greater complexity, international ventures often take longer to become profitable than domestic ventures.
An ongoing learning experience – internationalisation is a gradual process that can stretch over many years and involve entry into numerous national settings and active involvement in international business provides the firm with many new ideas and valuable lessons that can be applied to the home market and to other foreign markets. For example, in the process of developing fuel-efficient automobiles for United States, General Motors turned to its European operations, where it had been marketing smaller cars for some time. General Motors leveraged ideas that it had acquired in Europe to develop fuel-saving cars for the United States market.
Firms may evolve through stages of internationalisation – firms opt to internationalise in stages, by employing relatively simple and low-risk internationalisation strategies and progress to more complex strategies as the firm gains experience and knowledge.
2.6 ADVANTAGES OF EXPORTING
Serving foreign customers through exporting has been a popular internationalisation strategy throughout history because it offers a way to accomplish the following:
Increase overall sales volumes, improve market share, and generate profit margins that are often more favourable than in the domestic market.
Increase economies of scale and therefore reduce per-unit cost of manufacturing.
Diversify customer base, reducing dependency on home markets.
Stabilise fluctuations in sales associated with economic cycles or seasonality of demand. For example, a firm can offset declining demand at home due to an economic recession by refocusing efforts towards those countries that are experiencing more robust economic growth.
Minimize risk and maximize flexibility, compared to other entry strategies, the firm can quickly withdraw from an export market.
Lower cost of foreign market entry since the firm does not have to invest in the target market or maintain a physical presence there. The firm can use exporting to test new markets before committing more resources through foreign direct investment.
Leverage the capabilities and skills of foreign distributors and other business partners located abroad.
2.7 DISADVANTAGES OF EXPORTING
Exporting as an entry strategy also has some draw backs.
Firstly, exporting does not require the firm to have a physical presence in the foreign market (in contrast to foreign direct investment), management have fewer opportunities to learn about customers, competitors, and other unique aspects of the market. With a lack of direct contact with foreign customers means that the exporter may fail to perceive opportunities and threats, or may not acquire the knowledge that it needs to succeed in the market in the long term.
Exporting usually requires the firm to acquire new capabilities and dedicate organisational resources to properly conduct export transactions. Firms that are serious about exporting must hire personnel with competency in international transactions and foreign languages. It requires management to expend the time and effort to learn about freight forwarders, documentation, foreign currencies and new financing methods. Acquisition of such capabilities puts a strain on firm resources.
In comparison to other entry strategies, exporting is much more sensitive to tariff and other trade barriers, as well as fluctuations in exchange rates. For example in 2005 the U.S dollar gained 12 percent against the euro and 15 percent against the yen, this led to slower growth of U.S export, harming those firms that rely heavily on exporting for generating international sales. A shift in exchange rates makes the exported product too costly to foreign buyers.
Trade barriers and tariffs add to costs
Limited access to local information and the firm is viewed as an outsider
2.8 ADVANTAGES OF FOREIGN DIRECT INVESTMENT
Conditions that favour this mode are:
Greater knowledge of local market
Can better apply specialised size
Minimum knowledge spill over
Can be viewed as an insider
2.9 DISADVANTEGES OF FOREIGN INVESTMENT
Has higher risk than other modes of entry
Requires more resources and commitment
May be difficult to manage the local resources
2.10 ADVANTAGES OF LICENSING
Has minimum risk and investment
Speed of entry
Is able to circumvent trade barriers
Has high return on investment
2.11 DISADVANTAGES OF LICENSING
There is lack of control over use of assets
Licensee may become the competitor
There is knowledge spill over
The license provided is limited
2.12 ADVANTAGES OF JOINT VENTURE
Overcomes ownership restrictions and cultural distance
Combines resources of two firms
There is potential for learning
Viewed as an insider
Less investment required
2.13 DISADVANTAGES OF JOINT VENTURE
Difficult to manage
Dilution of control
Greater risk than exporting and licensing
There is knowledge spill over
Partner may become competitor
In conclusion, exporting is a popular entry strategy for firms venturing abroad for the first time and it is an entry strategy responsible for the massive inflows and outflows that constitute global trade. Exporting generates substantial foreign-exchange earnings for nations. It can be entered into through different strategies, that is; exporting, importing, foreign direct investment, licensing, and joint venture. Exporting, licensing and joint venture require relatively low level of managerial commitment and dedicated resources. On the other hand foreign direct investment needs a high level of commitment and resources.
It is best for managers to use a systemic approach to exporting that is by:
Asses global market opportunity – that is mangers asses the firm’s readiness to internationalise and choose the most appropriate country markets and partner.
Organise for exporting- managers make the decisions about the degree of the firm’s involvement, resources to be committed, and the type of domestics and foreign intermediaries to hire.
Acquire needed skills and competencies – the firm acquires skills and competencies to handle export operations, trains staff, engage appropriate facilitating firms (such as freight forwarders, bankers, and international trade lawyers.
Implement export strategy – managers make decisions about product adaptation, marketing communications adaptation, pricing and support to foreign intermediaries or subsidiaries.