The forms of organization required to be established in foreign markets for direct exporting include branches and plant, licensing arrangements, joint ventures, exclusive agents and distributors.
Creation of branches and Plants:
The exporting company may establish its own branch or plant in a foreign market. Through its branch, the company will acquire full knowledge about the market. The foreign branch can keep its foreign customers contended by providing effective after sale service. Sufficient stock may be held in the branch to ensure quick delivery of goods to the customers. Working of branches in overseas markets enhances the image of the company both in domestic and foreign markets. It can also understand the competitive trend prevailing in the foreign market and counteract to it. Varying requirements of the customers across a vast region can be effectively satisfied by the establishment of branches in foreign markets. Despite these advantages, establishment of foreign branch involves a high overhead cost. Only when the volume of business in the foreign market is high, establishment of a branch will be viable. Plants may be established in foreign countries either for assembly or for both assembly and manufacturing. Foreign manufacturing offers numerous advantages.
Advantages of Manufacturing in a foreign country:
- Substantial savings in transport costs
- gaining importing country’ s recognition
- taking advantage of locally available raw materials at cheap price
- Non-operation of tariff and non-tariff barriers; and
- catering to the special requirements of consumers.
Under the licensing arrangements, the company permits the importer to manufacture goods with the former’s brand name, patent rights, trademarks and copyrights. The company provides the know-how required for the production of goods by the importer. Licensing involves minimum risks as there is no fear of nationalization by the foreign government.
A joint venture is a partnership of two or more participating companies that have joined forces to create a separate legal entity. There are four important characteristics of joint ventures:
- Joint ventures are established as separate legal entities,
- they acknowledge the intention of the parties to share in the management of the joint venture
- they are partnerships between legally incorporated entities such as companies, chartered organizations or governments and not between individuals and
- equity positions are held by each of the partners.
In joint venture, the exporting company utilities the skills of a local partner. The important advantages of joint venture are
- utilization of partner’s local distribution system
- higher returns than royalties
- control over production and marketing
- less investment of capital
- less risk of nationalization because of the investment of a local company or government.
Appointment of exclusive agents:
Appointment of exclusive agents in the foreign market is quite common in order to enter overseas markets. The manufacturer appoints an exclusive agent in the importing country who acts as the sole representative of the former. This method is very simple and costs less. The agent gets commission for his services rendered in the importing country. He also deals in non-competitive lines of products.
A distributor imports from the manufacturer and holds large stocks of goods for distribution in the importing country. Unlike agents, distributors operate on their own account. By enjoying exclusive rights of distribution, they distribute goods through their own wholesale and retail outlets. They also provide repairs and service facilities in respect of the goods sold by them.
There are five stages of segregating direct exporting into various forms
In the first stage, the company enters the foreign market for direct exporting by appointing either an agent or a distributor in the foreign market. When the market has potential for future growth of trade, the company goes to second stage by establishing its own marketing offices in the importing country. When the exporting company intends to manufacture its product locally, licenses are granted to the overseas partner. Licensing arrangements allow transfer of know-how from the exporting country to the local firm or the right to use its brand names by the local unit. The licensing agreement provides for the area within which such rights can be executed. Joint ventures overcome the limitations of licensing arrangements. The home company and the local firm contribute jointly to the equity capital required for carrying out joint ventures. A strict control, can be exercised over local production without committing very large financial outlays. The final stage is reached where a wholly owned subsidiary is established in the foreign market. However, this arrangement suffers from certain disadvantages. First, a heavy financial outlay is involved in setting up a wholly owned subsidiary. Secondly, setting up of a wholly owned subsidiary is not allowed in many countries. In the absence of unanimity of host country on basic policies and issues, problems will arise in running wholly owned subsidiaries.