Many firms initially enter foreign markets by exporting their products. Exporting is relatively easy and inexpensive compared with establishing a physical presence in a foreign market. In addition, exporting may help a firm realize lower costs because companies can move production to an inexpensive location and then export its product from that location around the world. Exporting also has a few disadvantages. It is not economical for heavy or bulky products with high transportation costs. Exporting may also become uneconomical if foreign trade barriers are unexpectedly imposed.

When firms export their technological know-how in exchange for a fee, they have implemented a turnkey project. Turnkey projects are common in the production of sophisticated and complex manufacturing facilities, such as those involved in petroleum refining, steel, and hydroelectric energy production. Once a facility is up and running and the locals are trained, the keys are turned over to the new foreign owners. For example, the largest traffic control system in China is the Wuhan Urban traffic control system, delivered by the German electronics firm Siemens.11 Turnkey projects allow firms with specialized know-how, like Siemens, to earn higher profits from their technical expertise. The drawback is that a firm may create a viable competitor if their technological expertise is easily accessible.

Franchising involves selling a well-known brand name or a proven method of doing business to an investor in exchange for a fee and a percentage of sales or profits. The seller is the franchisor, and the buyer is the franchisee. Franchising is popular both domestically and internationally. Examples of franchising abound. McDonald’s and Kentucky Fried Chicken (KFC) restaurants are now found all over the world.12 In India, the Walt Disney Company has sold more than 100 franchises for its stores.13 Undoubtedly, all of these franchises must be careful to adapt their goods and services to appeal to their different global customers.

The main advantage of franchising is that the franchisor shifts to the franchisee the costs and risks of opening a foreign market. The disadvantages include enforcing franchise contracts that ensure quality control over distant franchisees and ensuring that the franchised product is properly adapted to appeal to customers abroad.

Licensing is an agreement in which the licensor’s intangible property—patents, trademarks, service marks, copyrights, trade secrets, or other intellectual property—may be sold or made available to a licensee in exchange for a royalty fee. The licensor holds the original patent or copyright, and the licensee is paying a fee to be allowed to use that property. The advantage of licensing is the speed with which the licensor can enter a foreign market and the assumption of risks and costs by the licensee. The disadvantage is the loss of technological expertise to the licensee and the creation of a potential competitor. SRI International is a company that holds patents in the areas of biosciences, computing, and chemistry-related materials.14 They license their vast array of intellectual property around the world.

Joint ventures are formed when two firms team up to better take advantage of a business opportunity than either one of them could alone. Frequently, a company wishing to expand abroad will partner with a local firm that has knowledge of how business is done in the foreign country. The two companies will then share the costs and risks of developing and selling the product the joint venture has to offer.

Sometimes the only way a company can enter a market is via joint venture. India’s market for consumer goods, things like such as soap, detergent, and shampoos, is more than 1.2 billion people. However, to protect small Indian businesses, the country restricts the entry of foreign businesses. So, Walmart has had to enter India through a joint venture with the Indian company Bharti Enterprises, an expansion that proved to be difficult because of the cultural and other differences between the firms and was abandoned after seven years.15

Entering into a joint venture, like entering into a marriage, requires considerable thought in the selection of a complementary partner. The disadvantage of joint ventures is losing control over a company because compromise with the partner is inevitable. The risk of losing proprietary technology in the event of dissolution or divorce of the joint venture is also a major drawback.

Strategic alliances are cooperative arrangements between actual or potential competitors. Unlike a joint venture, in a strategic alliance each partner retains its business independence. Typically, strategic alliances are agreements for a specific period of time or the duration of a particular project. The advantages of strategic alliances include the pooling of unique talents and expertise and the sharing of the costs and risks of a project for mutual benefit. The disadvantages include a loss of technology and initial difficulty in finding a compatible partner.

Microsoft has a strategic alliance with Japanese mobile phone manufacturer Nokia. The companies work together to optimize the mobile phone experience for Microsoft’s Windows software and Nokia’s phone hardware. Together they joined their workforces of talented engineers and their financial clout; now they have the power to compete more effectively.16

Contract manufacturing occurs when a firm subcontracts part or all of its goods to an outside firm as an alternative to owning and operating its own production facility. When doing international business, the subcontractor is a foreign firm. Therefore, contract manufacturing is really a form of offshore outsourcing.

Dell, Apple, and Hewlett Packard all use contract manufacturing to produce their computer products. Although the design for Apple computers is done in the United States, for example, many are shipped directly from Asian manufacturers to customers.17 Contract manufacturing allows business to enter a foreign market by placing its label on the good and selling it in the foreign market where it was produced. Contract manufacturing also enables a firm to test-market its product in a foreign market with little expense compared with the high start-up costs of building its own facility on foreign shores.

The disadvantage centers on the lack of quality control over the subcontractor. For example, when the toy maker Mattel used a contract manufacturer in China to produce Hot Wheels cars and Barbie dolls, Mattel ended up recalling the toys and paying millions of dollars in fines imposed by the U.S. Consumer Product Safety Commission. Why? Because the Chinese manufacturer had used lead paint on the toys, a practice that is banned in the United States.18

A wholly owned subsidiary is a facility owned entirely by the investing firm. For example, Hyundai, a South Korean automotive manufacturer, entered the Russian market by establishing Hyundai Motor Manufacturing Russia, a wholly owned subsidiary.19 The advantages of this entry choice include total control over foreign operations and technological know-how. The disadvantage is that the parent company must bear all the costs and risks of entering a foreign market.