Definition of Foreign Markets

10'000 Hours/DigitalVision/GettyImages

For a business, crossing borders and making the leap to internationalization is a growth opportunity. By selling products and services in another country, you can significantly expand your markets, making you less reliant on a single one. But it also represents a risk because you'll be working in foreign markets outside your country of origin with different rules and ways of doing things.

Foreign and International Market Meaning

Foreign markets are markets outside the home country of a business organization. So, for a U.S.-based company, a foreign market is anywhere outside the United States. By selling your product in a foreign market, you get access to a new base of customers and those customers will provide you with increased revenues even if you have saturated your markets at home.

Selling in foreign markets is not without risk, however. There will be unfamiliar laws, rules and regulations to deal with, and cultural differences add a layer of complexity when it comes to getting your products into the hands of consumers.

Advantages of Entering Foreign Markets

  • Increase sales and profits
  • Diversify your markets, leaving you less dependent on any single one
  • Greater access to resources and talent
  • Exposure to foreign exchange market opportunities
  • Economies of scale and better margins as your production increases
  • Gain brand recognition as an international business

Disadvantages of Entering Foreign Markets

  • Export tariffs and customs constraints may be costly or limit the number of units you can ship to the foreign market
  • Compliance with foreign regulations such as taxation, import procedures, currency dealings and distributorship arrangements.
  • Manufacturing and safety standards may be higher in the foreign market, requiring a product reformulation
  • Cultural and language barriers
  • Political instability, including conflict and economic conditions, can cause shipping delays, defaults on payments or loss of product
  • Unfavorable exchange rate movement means you get less U.S. dollars than expected for your sale

How Do You Enter a Foreign Market?

Selling a product or service abroad involves a lot of challenges and before going headlong into the process, you need to know how to enter the new market. There are several possible entry modes, from direct selling to forming a joint venture with a local company. Each has advantages and disadvantages, and each requires different planning strategies in order to be well prepared.

Research is Key

Once you have decided on a foreign market, the first step us to decide how and when to enter, and at what scale. Some early actions include:

  • Getting advice on the major legal, regulatory and tax issues that might affect your ability to operate in the target foreign market.
  • Assessing the cultural barriers that might restrict your market presence and local perceptions of your product or service

    for example, Hindus do not eat beef, which might impact a frozen meal exporter’s recipes.  Undertaking market research, to ensure that the foreign market is big enough, and consumers within it will want to buy your product or service. Figuring out what resources are available to you

    you will need resources to enter the target market, especially if you adopt a "first to market" approach and attempt to crack markets that your competitors have not discovered yet.* Performing a "SWOT" analysis of strengths, weaknesses, opportunities and threats that affect your company in terms of the foreign market and the product or service offered.

Assuming that exporting is worth it from a cost-benefit point of view, then you must decide how to enter the foreign market. There are four major strategies for entering a market and the key difference between them is whether you wish to keep control of your sales or entrust them to another company.

The Direct Sales Approach

The direct approach is the best-known method of entering a foreign market as it involves exporting and selling your products directly to foreign consumers. There is no intermediary and no other support, save that of an importer and a shipping provider. With this mode of entry, you are responsible for every single action related to the exporting of goods for sale overseas.

Advantages:

  • Direct contact with consumers
  • Control over the price
  • Lower risk and more cost-effective than other market entry strategies as you are not investing in production facilities overseas
  • Better profit margin – you keep all the profit.

Disadvantages

  • Longer to set up because of the freight network to be established
  • Steep learning curve with a high risk of error
  • Rising transportation costs can erode your profit
  • Government regulation in the form of import tariffs and restrictions can put an end to your exporting business. 

Licensing or Franchising your Brand

Franchising is the act of allowing third parties to open their own branches of your store or restaurant in the foreign market under your brand name – McDonald's, KFC and Dunkin' Donuts all operate under the franchise model. You get to specify the products and services that franchisee will offer, and generally will provide them an operating model, brand name and support. Licensing is similar, but you generally give permission for the licensee to use intangible property such as the right to produce goods, technology and trademarks.

Advantages:

  • Requires few resources and investment to enter the foreign market since the licensee/franchisee takes care of any manufacturing, marketing and distribution costs in the foreign country
  • Avoids import/export tariffs and taxes
  • Profits arrive in the form of royalty fees and sometimes a cut of the profits each year
  • Gives access to markets that are closed to imports, for example, due to restrictive customs rules or prohibitive transportation costs.

Disadvantages:

  • Success depends on the licensee/franchisee being fully committed to your product or technology
  • A licensee might also become a competitor by selling its products in places where you have a presence
  • Lower income compared to other modes of entering foreign markets
  • Risk of having the product, trademark and brand reputation ruined by an incompetent partner.

Partners and Intermediaries

Partnering up is a vague term that covers everything from a simple marketing arrangement to a complex alliance for manufacturing, where the partner is invested in every aspect of your business. It can also include alliances with intermediaries, such as agents, distributors or brokers, who can help you with market entry strategies, regulatory compliance, international shipping and cross-border payments. The best partners and intermediaries have good local visibility and know everything that you don't about the local market.

Advantages:

  • Ready-made networks and local business intelligence
  • Tap into skills that compensate for your own weaknesses
  • Reduces the learning curve
  • A necessity in certain markets, including some Asian countries, where it is virtually impossible to break ground on your own.

Disadvantages:

  • An obligation to share profits or pay intermediaries means a lower profit margin
  • An investment of time and resources is required to maintain the relationship
  • Risk of conflicting interests and misunderstanding
  • Little incentive to learn the ropes yourself

Business Acquisition Approach

With a business acquisition approach, you enter a new market by acquiring all or part of a business that's already established in the target market, or by entering into a joint venture with such a company. You'll need substantial resources for this approach. On the plus side, you get the status of being a "local" business and you will inherit local staff, local market knowledge and an established customer base.

Advantages:

  • Instant access to the local market and customers
  • Control over human and other resources on the ground
  • Perceived by customers as a "local" business
  • Presence of local managers allows for faster decision making

Disadvantages:

  • Considerable financial investment required
  • Considerable time and due diligence effort required
  • Risks to the business if the joint venture partner underperforms
  • Can be difficult to exit the arrangement.

References

Resources

About the Author

Jayne Thompson earned an LL.B. in Law and Business Administration from the University of Birmingham and an LL.M. in International Law from the University of East London. She practiced in various “Big Law” firms before launching a career as a business writer. Her articles have appeared on numerous business sites including Typefinder, Women in Business, Startwire and Indeed.com.