Degrees of involvement in international marketing

Attractive opportunities in foreign countries have led many firms into international marketing, and varying degrees of involvement are possible. We’ll discuss six basic kinds of involvement: exporting, licen­sing, contract manufacturing, management contracting, joint venturing, and wholly-owned subsidiaries. Let’s look at these possibilities.

Many companies get into international marketing just by exporting (selling some of what the firm is producing to foreign markets). Some firms start exporting just to get rid of surplus output. For others, exporting comes from a real effort to look for new opportunities.

Some firms try exporting without changing the product—or even the service or instruction manuals! As a result, some early efforts aren’t very satisfying to either buyers or sellers. When Toyota first exported cars to the United States, the effort was a failure. Americans weren’t at all interested in the Toyota model that sold well in Japan. Toyota tried again three years later with a new design and a new marketing mix. This second effort was a real success.

Specialists can cut through red tape

Exporting does involve some government red tape, but firms can learn to handle it fairly quickly. Or that job can be turned over to middleman specialists. Export agents can handle the paperwork as the products are shipped outside the country. Then agents or merchant wholesalers can handle the importing details. Even large producers with many foreign operations use international middlemen for some products or markets. Such middlemen know how to handle the sometimes confusing formalities and specialized functions. Even a small mistake can tie products up at national borders for days or even months.

Exporting doesn’t have to involve permanent relationships. Of course, channel relationships take time to build and shouldn’t be treated lightly—sales reps’ contacts in foreign countries are «investments.» But it’s relatively easy to cut back on I these relationships or even drop them. Some firms, on the other hand, develop more formal and permanent relationships with nationals in foreign countries, including licensing, contract manufacturing, management contracting, and joint venturing.

Licensing is a relatively easy way to enter foreign markets. Licens­ing means selling the right to use some process, trademark, patent, or other right for a fee or royalty. The licensee takes most of the risk because it must invest some capital to use the right.

This can be an effective way of entering a market if good partners are available. Gerber entered the Japanese baby food market this way but still exports to other countries.

Contract manufacturing means turning over production to others while retaining the marketing process. Sears used this approach as it opened stores in Latin America and Spain.

This approach can be especially desirable where labor relations are difficult or where there are problems obtaining supplies and «buying» government cooperation. Growing nationalistic feelings may make this approach more attractive in the future.

Management contracting means the seller provides only management skills; others own the production facilities. Some mines and oil refineries are operated this way—and Hilton operates hotels all over the world for local owners. This is a relatively low-risk approach to international marketing. The company makes no commitment to fixed facilities, which can be taken over or damaged in riots or wars.

If conditions get too bad, key management people can fly off on the next plane and leave the nationals to manage the operation.

Joint venturing means a domestic firm entering into a partnership with a foreign firm. As with any partnership, there can be honest disagreements over objectives (for example, about how much profit is desired and how fast it should be paid out) as well as operating policies. Where a close working relationship can be developed—perhaps based on a Canadian firm’s technical and marketing know-how and the foreign partner’s knowledge of the market and political connections — this approach can be very attractive to both parties.

In some situations, a joint venture is the only type of involvement that’s possible. For example, IBM wanted to increase its 2 percent share of the $ 1 billion a year that industrial customers in Brazil spend on data processing services. But Brazilian law severely limited expansion by foreign computer companies. To be able to grow, IBM had to develop a joint venture with a Brazilian firm. Because of Brazilian laws, IBM could own only a 30 percent interest in the joint venture. But IBM decided it was better to have a 30 percent share of a business and be able to pursue new market opportunities than to stand by and watch competitors take the market.

A joint venture usually requires a big commitment from both parties. When the relationship doesn’t work out well, it can be a nightmare that causes the Canadian firm to want to go into a wholly-owned operation. But the terms of the joint venture may block this for years.

When a firm feels that a foreign market looks really promising, it may want to take the final step. A wholly-owned subsidiary is a separate firm owned by a parent company. This gives complete control and helps a foreign branch work more easily with the rest of the company.

Some multinational companies have gone this way. It gives them a great deal of freedom to move products from one country to another. If a firm has too much capacity in a country with low production costs, for example, it can move some production there from other plants and then export to countries with higher production costs. This is the same way that large Canadian firms ship products from one area to another, depending on costs and local needs.