Enterprises must constantly innovate technology, improve techniques, and increase labor productivity to create products that meet international standards and have low prices. This is very beneficial for the development of enterprises, forcing enterprises to improve themselves to improve their competitiveness.
- Search for new customers: The foreign market is very large, the needs are diverse, so the products that the business is producing will have a high possibility of meeting the needs of a certain group of customers in the market. The business's products, although familiar to domestic customers, can be very new and attractive to foreign customers, thereby increasing sales and profits for the business.
- Allows businesses to extend product life cycle: A business's product that is in the mature or declining stage in the domestic market when sold in a foreign market can start a new life cycle, prolonging its existence in the market, thereby maximizing sales for the business.
- Allows businesses to reduce production costs : When foreign markets are opened, businesses will be able to produce on a larger scale, thereby gaining economies of scale by taking advantage of the capacity of machinery and factories and exploiting the cost advantages of the experience curve. Therefore, businesses will save costs per unit of product and improve competitiveness. Furthermore, businesses can also seek location advantages by moving production and business activities to places where they operate most effectively.
- Expanding the market to reduce business risks : If a business only operates in a certain market, when that market encounters risks such as: economic crisis, political instability, government policies change in a direction unfavorable to the business, or increased competition... it will cause very serious consequences for business operations.
of enterprises. Therefore, to reduce risks due to the market, enterprises should expand their business scope to many countries. On the other hand, when operating in foreign markets, enterprises can also take advantage of preferential policies that the host country offers to enterprises, reducing the intensity of competition...
II. METHODS OF ENTERING FOREIGN MARKETS
Currently, there are 5 main methods to penetrate foreign markets including:
1. Export
Exporting goods is the first form of international market penetration through the consumption of domestically produced goods in foreign markets. Most companies begin their expansion into the world market by exporting and then move from this method to other methods.
Advantage
The export mode has two distinct advantages. First, it avoids the investment costs of production activities in the host country, which are often quite large. Second, it can realize economies of scale and location by producing products in a centralized location and then exporting to other markets.
Disadvantages
Exporting also has some disadvantages. First, the exported products produced by the company's home base may not be suitable for the needs and conditions of the foreign market. Second, high transportation costs can make exporting inefficient, especially in the case of bulky goods. Furthermore, tariff barriers can also make exporting difficult. Third, the risks that arise from
The reason is the lack of export experience and market understanding of companies that are new to exporting.
Export has two forms: indirect export and direct export:
Indirect export
Indirect export is a form of business exporting to foreign markets through independent domestic organizations. These independent organizations are domestic wholesale centers, trading companies, domestic agents, resident buyers, import-export brokers, export agents of manufacturers, export management companies, etc.
Direct export
Direct exporting is a form of production enterprises exporting directly to buyers or importers in foreign markets. There are many forms of direct exporting such as: the company's export department responsible for selling in foreign markets, commercial branches, traveling salesmen, agents and distributors located abroad...
Table 1.1: Advantages and disadvantages of export forms
Indirect export | Direct export | |
Advantages | - Reduce costs for sales - Low risk level - High flexibility | - Direct contact with the market - High level of product and price control - Higher sales potential |
Limit | - Low ability to seize opportunities - Difficult to control distribution - Little contact with the market | - High cost for sales force - High risk level - Tied to foreign markets |
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Currently, indirect export is commonly applied by Vietnamese enterprises due to their new participation in international trade and the ability to expand markets.
Exporting to the market through other channels still has many limitations. Moreover, this form is suitable for the limited resources and low export experience of our country's enterprises.
Indirect export through export intermediaries also has other advantages:
First , it helps exporters penetrate foreign markets quickly. For example, businesses can use an export management company with extensive experience operating in foreign markets, thereby reducing the risks associated with selling in an unfamiliar environment.
Second , producers can receive immediate financial support once purchase agreements are approved.
Third , specialization of domestic operations can increase the efficiency of those operations and create opportunities for greater profits. When foreign customers are interested in one type of product, they may also want to buy other products produced by the company. Most buyers prefer to work with a small number of suppliers to save on transaction costs and other costs associated with the purchasing process.
2. License transfer
Licensing is the process by which a manufacturer contracts with a foreign partner to grant them the right to use a manufacturing process, a trademark, an invention or a trade secret that has commercial value. A company with advanced technology, know-how and intelligence can use licensing agreements to increase its profitability without making any investment and with very limited costs. In fact, licensing often provides an unlimited return on investment. The costs here include the cost of concluding the agreement and controlling its implementation.
Advantage
- Enterprises do not bear development costs and bear low risks when entering foreign markets. License transfer is a good choice for enterprises that lack capital to develop abroad. In addition, license transfer is also suitable for enterprises that do not want to invest resources in unfamiliar markets or politically unstable markets. In addition, it is also used when an enterprise wishes to enter a foreign market but is prohibited due to the host country's investment restriction policy, import quotas or high import taxes, etc.
- Licensing can also promote the diffusion of new products and technologies. For example, when Apple Computer introduced its Newton personal digital assistant in the fall of 1993, the company licensed the product to Sharp, Matsushita, and several other companies. Apple managers believed that these companies would create related products and thus promote sales of the Newton.
Disadvantages
- Licensing forces the licensor to disclose its technological know-how to the licensee, thereby risking losing control of the technology. For example, RCA licensed several Japanese companies, including Sony, Natsushita, etc., to produce color TVs. The Japanese companies quickly adopted the technology, improved it, and used it to export it back to the US market.
- This approach does not provide the company with the close oversight needed over production and marketing processes and strategies in foreign markets to realize scale economies, locational advantages, and experience effects.
- To compete in the world market, a business may have to use a global strategy by using profits earned in one country to support competition with rivals in another country. Licensing
This limits the ability of the business to use the profits of this contract to support different transfer contracts.
3. Franchising
Franchising is a commercial activity in which the franchisor agrees to grant rights and provide support to the franchisee to sell goods and provide services under the trademark, system and method determined by the franchisor within a certain period of time and within a certain geographical area. The franchise rights include the right to use professional secrets; methods of organizing sales and service provision; trade names; trademarks of goods and services; business slogans; symbols of the franchisor and the right to use other aids to sell goods and provide services.
Advantage
The advantages of franchising are similar to those of licensing. In particular, the franchisor does not have to bear the costs and risks associated with expanding into foreign markets. Those costs and risks are borne by the franchisee. Thus, franchising allows a service company to implement a global strategy at low cost.
Disadvantages
The disadvantages of this method are also fewer than those of licensing. Franchisors are often service companies, so there is less need to coordinate operations across markets to achieve economies of scale and experience effects. However, franchising may limit a company's ability to coordinate its global strategy. On the other hand, franchising requires strict management and control of the quality of the services provided. In practice, franchisees are often not interested in
service quality and thus, reduce the company's global reputation. To overcome this disadvantage, the company can establish subsidiaries in each market or region in which it is expanding its operations.
4. Joint venture
A joint venture is the establishment of a business by the association of two or more otherwise independent businesses.
Entering into a joint venture with one or more domestic partners can be seen as a more extended form of both exporting and licensing activities when entering foreign markets.
Advantage
The advantage of this option is the combination of the strengths of the parties together, as well as sharing the risks between the partners. However, when choosing this method, a company needs to have a deep understanding of the domestic market, the product distribution system and the ability to access cheap labor and raw materials... In addition, the form of joint venture can be the only way to penetrate the market of a country, if the government of that country has laws to protect domestic companies, prohibit control by foreign companies, but allow joint ventures.
Disadvantages
The disadvantages of entering into a joint venture are considerable. However, the main disadvantage of this form of market expansion is the high costs of management and coordination with the partner. And as with licensing, a joint venture partner can also become a very strong competitor. In addition, in addition to differences in culture or management style, the attitudes of the parties can also be difficult challenges to overcome for both parties.
5. Direct investment
One of the most widely used forms of entering the world market is the 100% capital investment of foreign companies. This can be done through the establishment of new companies or the acquisition of companies. This form requires the tightest commitment to investment efforts, but it has a faster market expansion speed, more control and more profits.
Advantage
100% equity investment also has some advantages similar to the case of joint ventures such as: increased market access, avoidance of tariff barriers and quotas, transfer of experience and production technology... Establishing subsidiaries will minimize the risks associated with the loss of control and supervision of technology. Moreover, it creates for the company a type of tight control over activities in different markets and thus enhances the ability to coordinate globally, realize economies of scale, locational advantages and experience effects as well as support competition between markets.
Disadvantages
Direct investment is the most expensive way to enter a foreign market. The parent company bears all the costs and risks of setting up factories in a foreign country. There are two types of risks: macroeconomic risks and microeconomic risks. Macroeconomic risks are less common but, when they exist, affect all companies. These are economic and political problems that threaten the investment capital that a company has made. They originate from political or military events, or financial instability and are manifested by requisitions or nationalizations or restrictions on the free movement of capital, labor, etc. In contrast, microeconomic risks are a greater threat to revenues and profits than to the recovery of capital invested. These are