Direct & Indirect Exporting vs. Foreign Direct Investment

Direct and Indirect Exporting

The problem of choosing a strategy for entering international markets has been given much attention over the past 50 years. The shape of entering strategy can be based on such criteria as strategic goals, speed, required level of investment, and risks of entering the foreign market.

Exporting is a common way to enter new international markets. It does not require establishing operations in other countries but allows to set distribution channels through contractual relationships. Disadvantages of this method may include high transportation costs due to high import tariffs, low control of marketing and distribution, and difficulty in product customization. Another way for a firm to enter a foreign market is to authorize another company to manufacture and sell its products. The licensing firm is paid a royalty on each unit produced and sold. Licensee takes investment risk in manufacturing. However, licensing firm loses control over product quality and distribution. This strategy is the least risky, but it has relatively low-profit potential.

Foreign Direct Investment

The most costly and complex strategy is to create a new wholly-owned subsidiary. This method is potentially the most profitable and allows to achieve the most significant degree of control. However, it may require hiring host country nationals or consultants at a high cost. In this case, acquisitions enable firms to make the most rapid international expansion, but it requires complex and expensive negotiations. In some cases, legal and regulatory requirements may present barriers to foreign ownership. Alternatively, firms can shape strategic alliances, enabling them to share risks and resources to expand into international ventures, which is beneficial as a hosting firm provides access to distribution or knowledge of local customs, norms, or politics. However, firms can experience difficulties in merging disparate cultures or divergent strategic goals.

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