What is internationalization?
Internalization is a growth alternative which entails selling your products and services into new markets overseas. An internationalization effort sets your sights on countries and cities where local markets show strong fundamentals that make them attractive for an extension of your business.
Some of the factors that can help you decide whether or not a particular country (or city within a country) is attractive may include the growing demand for a given set of products, language preferences, competition (or lack thereof) in the product category, industrial affinities, access to distribution channels, presence of known solid partners, availability of qualified labor, a favorable regulatory environment, the risk profile of the host country and economic growth.
In general, there are three ways to enter a new market overseas:
- By exporting the goods or services,
- By making a direct investment in the foreign country,
- By partnering with local companies, or
- Reverse Internationalization
Each strategy entails particular ways to approach the business that must be discussed to increase the chances of success. Let’s briefly review each of them.
Exporting products and services
This is by far the most common way to internationalize a business. It involves transportation of final products (or the delivery of services) from the country where they are produced into the host (now importing) country.
Exporting finished products allows you to take full advantage of economies of scale in the originating country and is a good idea when costs or speed to market are critical factors for the success of your business.
You could, for example, set up a large operation in a country with low cost of labor or favorable tax incentives and serve multiple markets from there with proven products through a centralized manufacturing operation.
A downside of exporting finished products is that as an exporter you don’t have a lot of flexibility to customize the offer to the particular preferences of the target market, which along with the costs of transportation and import duties may put you at a disadvantage with respect to local players.
Another issue is that distribution partners (the importers in the host country) will prioritize their efforts based on their own interests, which may change over time and without notice.
An obvious upside is that you keep full control of the intellectual property that goes into the product and its production process, and that you can exit the market quickly if it doesn’t work out as expected, without the burden of a high sunk investment.
Companies looking for a more permanent approach to entering a foreign market should consider a direct investment to set up operations there. By direct investment I mean doing business directly in the host country.
For a company that makes physical products, for example, this would mean building a manufacturing facility in the target country to compete with local players on a similar cost basis.
For a service company like a consulting firm, a direct investment would entail opening a local office (or a number of them) to serve clients in that country locally.
Direct investment allows full “location” of your products (i.e. adapting your product to local preferences), tight control of intellectual property and complete discretion over marketing, sales and stakeholder management efforts.
A downside related to this approach is obviously the higher risk associated with an investment in a foreign country, and the inability to transfer all the benefits of economies of scale and experience from your host country.
Finally, when entering a market as an international player, you must consider additional stakeholder and marketing efforts to mitigate any natural rejection by locals of a foreign company and a disproportionate retaliation from local incumbents.
Partnerships and alliances
If you’re looking for more control over local efforts but aren’t willing or ready for a direct investment in a foreign country, then you should consider partnerships or alliances with locals.
The structure of an internationalization alliance varies depending on your goals and those of your partners, but this option offers a good middle point that offers benefits from both the exportation and direct investment alternatives.
These partnerships can take many forms; for example, it could be an exclusivity agreement with a distribution partner where they only promote your products within a given category, or a specific region, or could take the form of a licensing agreement where the local partner manufactures or sells your product under particular specifications.
A franchising agreement, where a local company buys the rights to operate under the foreign company’s brand, is another special case of a partnership.
One advantage of partnering a local company as an entry strategy is that you usually don’t require a heavy upfront investment, and that you get to leverage the established infrastructure of the local partner, which allows a quick “test of the waters” before engaging in a direct investment.
The obvious downside of an entry partnership is that the profits generated by the joint effort must be split between the partners.
When there’s intellectual property involved that needs to be shared with the local partner, it puts you in a difficult position since that partner could use that information to compete against you later, if for some reason the partnership dissolves and you decide to make a direct investment instead.
Nonetheless, a partnership with a local is in most cases a less risky alternative when compared to a direct investment and offers better commercialization results than an exporting plan.
|What it is?||Example||Advantages||Disadvantages|
|Export||Delivery of finished goods and services to foreign country.||Selling and shipping finished gadgets from the US to Asia.||Quick market entry. Low investment risk for seller. Full control of Intellectual Property.||Cost associated with shipping and distribution. High localization is impractical.|
|Direct Investment||Owning operations in host country.||Building a manufacturing plant in a foreign country to enter that market.||Full product localization. Retain control of Intellectual Property. Compete with local companies on the same competitive grounds.||High investment risks; must write off capital investment if business goes bad. Higher costs than competitors for being a foreigner.|
|Partnership||Partnering a local company to market our products.||A manufacturing partner makes our product locally under license.||Low upfront investment. Leverage partner’s infrastructure and networks.||Must share profits with local partner. May put IP at risk.|
Table: Comparing international entry options
Before we go, let’s briefly cover what I call “reverse” internationalization. That is, helping a foreign company enter a market where you have presence.
Strategically, this move could have multiple exploitable angles. For example, you may decide to import a product that’s used as a complement to your own products, gaining more control over the complement’s distribution and eliminating potential speculation by other local vendors.
Another strategic reason could be to test the solution with customers you have access to, just to learn more about its intellectual property (its “special sauce”), to later decide whether or not you should make something similar locally.
As a final comment about internationalization in general, you should never skip thorough market research when evaluating entry into a foreign market, paying special attention to any precedent where international players previously tried to enter that market and how the preferences of locals may be different from those in the markets where you currently have a presence.
We all know a story of an international company that failed miserably when it tried to enter a foreign market even when the fundamental success factors seemed to be in place.
To mention one case as an example, the widely successful international coffee chain Starbucks failed for a long time in its efforts to win in the Australian market, mainly because its menu didn’t fit the preferences of the locals, who preferred a variety of espresso options over sugary drinks.
The classic advice here will never get old: Think globally, act locally.