Market entry strategies
There are numerous market entry strategies that a business can adopt when setting up offshore. Each has differing levels of risk, legal obligation, advantages and disadvantages. Following is an overview of factors that should be considered when assessing the options.
Under this simple form of foreign direct investment the exporter establishes a local presence through a representative or branch office, rents office space and hires staff (could be just one person).
|Advantages ||Disadvantages |
- Greater control of marketing and distribution
- Direct contact with customers
- Improved credibility in market place with customers
- Access to local venture capital
- Cost of establishing an office is higher than using an agent and/or distributor
- Do not have a local partner with contacts and expertise as in a joint venture
If your company is interested in going beyond the simple export of goods and services, licensing, joint ventures (JV) and offshore operations should be explored. While direct exporting may be a profitable method of market entry for some businesses, licensing manufacturing rights to your product to a foreign company or setting up a foreign manufacturing JV may be viable alternatives. Strategic alliance partners are often identified through bankers, accountants, business consultants, industry associations and networks, and government contacts. Austrade can normally supply lists of such contacts or, through its own network, a short-list of potential partners for Australian exporters at a reasonable cost.
A market entry option which the exporter and a domestic company in the target country join together to form a new incorporated company. Both parties provide equity and resources to the JV and share in the management, profits and losses. The JV be limited to the life of a particular project. This option is popular in countries where there are restrictions on foreign ownership, eg. China and Vietnam.
|Advantages ||Disadvantages |
- Acquire competencies or skills not available in-house
- When market needs to be penetrated quickly, eg. when competitive entry is imminent or technological change is very rapid
- Spread the risk of a large project over more than one firm
- Enable faster entry and payback
- Often forced into JV by government regulation or pressure
- Avoid tariff barriers and satisfy local content requirements
- Partners do not have full control of management
- May be impossible to recover capital invested
- Disagreement on new export markets
- Partners may have different views on expected benefits
The '4Cs' sum up some of the most important factors to think about when selecting a foreign partner:
- Complementary skills
- Cooperative cultures
- Compatible goals
- Commensurate risk
Austrade can assist you by short-listing a number of prospects. Undertake a background check on each to determine if there are any ‘warning bells’. The final judgement on who to partner with will usually come down to a financial analysis of how the joint venture will go with each of the potential partners. It's important to spend time making the decision.
Austrade is well placed to assist Australian companies with any enquiries or assistance needed to do with outward investment. Simply contact Austrade on 13 28 78 or by email.
A merger occurs when an exporter merges with a domestic company in the target market and creates a new entity. Under an acquisition, the exporting company takes over a domestic company in the target market. The domestic company may still trade under its own company name with ownership and direction controlled by the exporting company.
|Advantages ||Disadvantages |
- Decreased time to access and penetrate target market as the existing company already has a product line to be exploited and a distribution network
- Prevents an increase in the number of competitors in the market
- Overcome entry barriers including restrictions on skills, technology,materials supply and patents
- Increased risk – may be a large financial commitment but faces political and market risks
- Poor or slow post-merger integration
- Target too large or too small
- Overly optimistic appraisal of synergies
- Overestimation of market potential
- Inadequate due diligence
- Incompatible corporate cultures
This form of market entry is through establishing a new operation in the market. Examples of this by Australian companies include Village Roadshow cinemas, Westfield shopping malls and Berri processing plants.
|Advantages ||Disadvantages |
- Reduce or eliminate price escalation caused by transport costs, customs, duties, etc
- Guarantee availability of goods to resellers, minimising potential conflicts over allocation decisions and eliminating delays
- Ensure more uniform quality
- Adapt products for local requirements
- Slower entry mode
- Increased risk exposure with the resource commitment on the scale usually required
- Political risks – repatriation of profits etc
- Potential problem if there are country of origin issues – negative impact if manufactured in a low wage country
A franchise is an ongoing business relationship where one party ('the franchisor') grants to another ('the franchisee') the right to distribute goods or services using the franchisor’s brand and system in exchange for a fee. More sophisticated franchise arrangements specify a precise business format under which the franchisee is expected to carry on business and ensuring a common customer experience throughout the network. McDonalds is an obvious example.
Franchising enables rapid market expansion using the intellectual property of the franchisor, and the capital and enthusiasm of a network of owner operators.
Common, but not essential, features of franchised businesses are:
- group purchasing arrangements
- an exclusive territory for each franchisee
- group advertising programs
- initial and ongoing training and support from the Franchisor
- assistance from the Franchisor with equipment specification, site selection and premises fit-out and signage
Australian franchisors have concentrated on expansion into Western countries with New Zealand and UK the most common destinations. There has also been a trend to expand into Asian countries including Hong Kong, Singapore, Malaysia and Indonesia with some expansion also into USA and Canada. Australian franchises overseas include Dymocks, Donut King, Cash Converters, and Snap Printing.
Contracting and licensing
Firms may decide to enter a market by contracting the manufacture of its product in the target market, eg. clothing manufacturers. Products can be tailored to the conditions and specific requirements of the local market.
Market entry through licensing involves one company (the licensor) agreeing to permit another company (the licensee) to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor for a fee.
Global supply chains
As part of the trend towards globalisation, the largest engineering and construction (E&C) firms are pre-qualifying firms and purchasing equipment and services through global supply chains (GSC).
Advances in e-business and online procurement are playing a major role in the development of GSC. You should develop ‘e-literacy’ in order to enter the GSC market. Targetting GSC is a new and exciting way to enter global markets, because it is efficient and cost effective. You can supply to any project anywhere being undertaken by the GSC operator. Regional procurement centres for large E&C companies such as example Singapore are able to forward capability information to projects outside their region at no extra cost to the supplier.
You need to be internationally competitive and possess global capability to access GSC. It's important to be aware that pre-qualification does not guarantee success. You need to follow up with project specific marketing and promotion.
Once registered, and with proactive marketing firms, you can benefit from stable, long-term partnerships with project execution managers. You need to be able to provide competitive, quality equipment or services to strict timelines and exact specification.
Management issues with market entry strategies
- Uniqueness of product
- International experience and knowledge of cultural issues
- Barriers to entry
- Designing a good business model
- Is it cheaper to produce locally overseas or to export?
- Is it better to license to infiltrate more markets faster?
- Have you insured against non-payment?
- How to address legal issues or conflicts with partners
- Have you got a plan for a currency increase?
Key success factors for market entry strategy for service firms
- long-term commitment - CEO and Board (local office, training, promotional activities)
- relationship development (distributors, local government, JV partners)
- patience (government, culture, realistic time frames and budgets)
- prove the concept in Australia first
- strong domestic client base to leverage (especially if internationally recognised)
- cheaper to get finance from domestic market
- uniqueness of product and IP protection
- strong reputation/confidence in ability
- prior international experience or recruit internally experienced people
- in market presence – closeness to customer
- good interpersonal skills of staff/cultural understanding
- website up-to-date and informative to boost credibility
Australian investment overseas
Australian foreign direct investment abroad reached a level of $156.3 billion in 2002, reflecting a four-fold increase over the past decade. According to the Australian Bureau of Statistics, the most popular locations for Australian firms offshore were:
- USA $ 73.66 bn
- UK $ 28.14 bn
- NZ $ 17.59 bn
- EU (excl. UK) $ 6 bn
- HK $ 3.89 bn
- Canada $ 1.42 bn
- Singapore $ 1.29 bn
Small and large Australian companies from diverse industries are choosing to set up operations overseas.
|Examples in the US are: ||Examples in Europe include: |
- Bresagen (biotechnology)
- Boral (resources)
- Telstra (telecommunications)
- Macquarie Bank (finance)
- MYOB (software)
- P&O Ports (transport)
- Brambles (resources)
- Argyle Diamonds (mining)
- Cochlear (biotechnology)
- Seawise (transport)
- AMP (finance)
- QuikTrak (ICT)
The main reasons given by Australian companies for establishing operations overseas are:
- to establish a global brand
- a physical presence was necessary
- buyers wanted a local contact point
- to access more customers
- to improve customer service levels
- to enable just-in-time delivery
- to gain local knowledge of competitors and consumers
- to establish better relationships with suppliers
- to gain access to local media for promotion
- to encourage diversity and innovation in the company
When Australian firms invest overseas they generate the following advantages for the Australian economy:
- increased demand for home-sourced capital equipment and services
- increased sales and profits for shareholders in Australia
- increased taxation income for the Australian Government
- improved profile and competitiveness of Australia in the global marketplace
Choosing a country
A useful starting point in considering the location of any foreign direct investment is to take a wider view of distance than simply the distance from home measured in kilometres. For example:
- cultural distance - language, ethnicity, religion
- administrative distance - institutional weaknesses, government policies, political hostility
- geographic distance - lack of common border, physical remoteness, size of country
- economic distance - differences in consumer incomes, cost differences
Deciding on a location
The main factor quoted by Australian firms as influencing their location decision is the size of the market. Exposure to a broader range of large and small markets increases the geographical base for revenue generation. Other reasons given as important to the location decision include:
- political stability - political history, fiscal and monetary policy
- economic stability - growth rates, incomes, costs, resources, interest rates and inflation
- geographic borders - remoteness, size of country, population and climate
- infrastructure for transportation and communication
- business ethics - language, ethnicity and culture
- competitors and industry structure
- tax policy, tariffs and other trade barriers, incentives offered by government
- labour costs
- quality of potential local partners
- availability of local suppliers
|Case study: why choose the Netherlands? ||Case study: why choose Fiji? |
- highly productive and qualified workforce
- innovative R&D
- geographic Location
- social, economic, and political stability
- regulatory environment
- base for sales to other EU markets
- Government support, including subsidies, tax and incentives
- geographic closeness to Australia
- tax climate and incentives
- Government support, including subsidies
- favourable labour costs
- similar legal system
- good starting point for moving into Asia-Pacific markets
- preferential access to Australian markets
- Australian financial services established
Information on government incentive schemes in particular countries can be obtained from Austrade or the Investment Promotion Network.
How Austrade can help
Austrade is represented in 140 locations in over 60 countries including an extensive domestic network throughout Australia. Austrade offers practical advice, market intelligence and ongoing support (including financial) to Australian businesses looking to develop international markets. Austrade also provides advice and guidance on overseas investment and joint venture opportunities, and helps put Australian businesses in contact with potential overseas investors.
Austrade can guide clients through some of the factors involved in establishing a physical presence offshore.
Services could include:
- market research - we can provide an initial assessment of markets to indicate which markets are worth investigating further.
- in-market support. Austrade can provide a range of services to assist with in-market activities including interpreting at business meetings, making appointments, obtaining documents, attracting publicity through media channels and providing temporary use of conference rooms.
- location advice - information on what to take into account when deciding where to locate your business. These include location of customers, existing partners or other key relationships, investors, and incentives offered by local investment attraction bodies.
- real estate assistance. Research office accommodation and associated utilities costs, identify rental or purchase options and provide shortlist of potential commercial real estate agents.
- research labour practices and costs. This includes identify local employment practices to cover both legal and cultural issues and provide shortlist of suitable recruitment/personnel agencies.
- identify the incentives available both at the national, state, and/or city level.
- referrals to local experts. Once short lists of qualified service providers have been identified, Austrade could make the introductions and assist in selecting suitable service providers. Areas where referrals would be made include legal, tax, accounting, real estate and staff recruitment agencies.
- introductions to networks and partner searches. Austrade staff in the overseas market can introduce you to the relevant industry bodies and Australian businesspeople. Austrade can also identify, research and verify appropriate people in the market such as agents or joint venture partners.
CIA World Factbook
Search by country to gather information on investment conditions.
Country and US State information available to assist in the investment decision.
An interactive directory of franchising opportunities with direct links to websites.
GlobalEdge – Michigan State University
Provides country profiles, a directory of international business resources categorized by specific orientation and an indexing study of market potential indicators.
This site has legal overviews on certain countries and on all US states.
Business guides to countries in the Middle East. Includes information on economic sectors and prospects, taxation and corporate law.
International Trade Centre (UNCTAD/WTO)
A site that provides information to improve the technical cooperation on trade promotion.
Investment Promotion Agency
IPA is a division of the World Bank and has links to Investment Promotion Agencies from every country. Information includes incentives, legal issues, taxation, business climate and opportunities.
A worldwide business purchasing and marketing directory, which has a database of 1.6 million companies.
Information on human resource costs by occupation and country.
US Library of Congress
This site has country overviews, that give information on investment-related issues, eg. economy, population, religion, politics and education.