Modes of Entry — Exporting, Licensing and Franchising

A firm that wants to do business internationally does not have to choose only one method; several distinct modes of entry exist, differing mainly in how much investment, control, and risk the firm is willing to commit to the foreign market. These modes are generally arranged from the least committed and least risky, to the most committed and most risky.

Exporting is usually the simplest and least risky way to enter international business, because the firm continues to manufacture in its home country and merely sells the output abroad. Exporting can be direct or indirect. In direct exporting, the firm deals straight with the foreign buyer or sets up its own sales office or distribution arrangement in the foreign market, keeping closer control over pricing, promotion, and customer relationships, but also bearing more of the administrative and documentation burden itself. In indirect exporting, the firm sells its goods to an export intermediary or merchant located in its own home country, who then handles the actual sale abroad; this is simpler and requires less foreign-market knowledge, but the firm has less control over how, where, and at what price its goods are ultimately sold, and generally earns a smaller margin because the intermediary takes a share.

Licensing is a step further in commitment. Under a licensing arrangement, a firm (the licensor) permits a foreign firm (the licensee) to use its brand name, patent, technical know-how, or production process in the foreign market for a specified period, in return for a royalty or licence fee. Licensing lets the licensor earn income from a foreign market without having to invest in manufacturing facilities there itself, and lets the licensee benefit from an established brand, technology, or process without having to develop it from scratch. The risk to the licensor is that the licensee gains access to proprietary knowledge that, if the relationship ends, could be used to compete against the licensor in the future. …