Q.In what ways is exporting a better way of entering international markets than setting up wholly owned subsidiaries abroad.

Exporting is better for entering foreign markets because it is the easiest and least complex mode, needs less commitment of time and money, and carries little or no foreign-investment risk. A wholly owned subsidiary needs a 100% equity investment (unsuitable for small/medium firms), makes the parent bear all losses if it fails, and faces higher political risk. So for a firm just entering, exporting is far less demanding and risky.

Why exporting is a better way to enter international markets

• Easiest mode — Exporting/importing is the easiest way to enter international markets; it is far less complex than running joint ventures or wholly owned subsidiaries abroad.
• Less involving — The firm need not commit as much time and money as when setting up plants or subsidiaries abroad.
• Low investment risk — Since exporting requires little investment abroad, the firm's exposure to foreign investment risk is nil or much lower than with other entry modes.
• Best for beginners — For these reasons, exporting/importing is the most preferred mode for firms beginning their international journey. Firms typically start with exports and imports and, once familiar with foreign operations, move on to other modes.

Why a wholly owned subsidiary is more demanding

• Heavy investment — It requires a 100 per cent equity investment, making it unsuitable for small and medium firms that lack the funds to invest abroad.
• Bears all losses — Owning 100 per cent equity, the parent alone must bear the entire losses if the foreign operation fails.
• Higher political risk — Some countries are averse to fully foreign-owned subsidiaries, so this mode carries higher political risk.

Comparison in short

• Ease — Exporting: easiest. Subsidiary: most complex.
• Commitment — Exporting: low time/money. Subsidiary: very high (full plant/operation abroad).
• Investment risk — Exporting: negligible. Subsidiary: bears all losses.
• Political risk — Exporting: low. Subsidiary: high.

(A fair note) A wholly owned subsidiary does give full control and no need to disclose technology — but for a firm simply entering foreign markets, exporting's ease and low risk make it the better first step. Its limitation (transport, insurance and customs costs, and less direct market contact) is minor compared with the huge commitment and risk of a subsidiary.