International expansion is a usual stage of the natural development of the business. Having achieved good results in the domestic market, prosperous companies will always envision new projects abroad. An in-depth analysis of the country is required before implementing any measures aimed at expansion. Root’s model provides experts with a useful instrument used to assess possible political risks in the country of destination. The purpose of this essay is to review five foreign market entry modes in light of Root’s model.
Exporting is one of the first entry modes associated with the process of international expansion. Its indirect variety is considered to pose very few risks as compared to other modes because the exporter simply sells the product to a receiving agent in the country of destination (“Foreign Market Entry Modes,” n.d.) The advantages are evident since the seller does not have to interact with the political landscape of the other country, leaving the risks to the partners. Expenditures can become minimal, and the exporter will be able to optimize the financial side of the process. However, the level of mutual trust and cooperation with foreign partners is not guaranteed.
The buyer may be unable to provide due payment, whereas litigation will be difficult considering the distances and the lack of foreign presence (“Biggest Risks in Export Business,” n.d.) In addition, such an approach to export implies little or no knowledge of the cultural landscape of the importing country, and Hofstede Dimension is an important element of the Root’s model.
Licensing is the second entry mode, which can be utilized for foreign expansion. It implies that the seller company provides an opportunity to purchase its license. The latter will permit local organizations to operate on behalf of the former, using its assets, patents, trademarks, and resources (“The Role of Licenses in International Trade,” n.d.) This way, the exporter is capable of establishing a presence in the new market through a local company, which will provide the necessary expertise and knowledge of its particularities.
In addition, the operational risks are reduced, as the licensee will handle tariffs and taxation. For example, Microsoft actively uses this entry mode to expand its operations to new countries (“Foreign Market Entry Modes,” n.d.) However, while the exporter will profit from selling the license itself, this manner of cooperation limits the revenue, only a portion of which will be received by the seller.
Franchising is an alternative model, which, while resembling licensing, implies a more significant degree of the exporter’s involvement. The franchisee operates under the name of the exporter, paying royalties and fees (“Foreign Market Entry Modes,” n.d.) This mode appears to be well-balanced in terms of risks and profits. The seller is still not directly exposed to the political risks described in Root’s model, and the formation of a competitive advantage becomes easier (Sun, 2019).
Simultaneously, the company can continue developing an already familiar and successful brand. Nevertheless, franchising may lead to a decrease in the brand quality and poorer staff performance, as the exporter does not exercise direct control over the operations (Rosado-Serrano, 2018). Still, this mode of entry is vastly popular among fast-food chains, and the expansion of McDonald’s around Europe is a case in point.
If a company is not satisfied with the level of control exercised through franchising, there is a possibility of a joint venture organization. In this scenario, the exporter collaborates with a local firm, forming a common enterprise with combined efforts. This entry mode can prove highly effective, opening new, previously inaccessible markets with the help of local assets while demonstrating a certain degree of uncertainty (Connelly et al., 2018).
According to Dias and Duzert (2018), Boeing and Embraer discussed a possibility of a joint venture as a means of the aviation giant’s expansion in South America. Nevertheless, the goals and purposes of all participants of a joint venture organization should correspond for the initiative to be successful (“Foreign Market Entry Modes,” n.d.) In addition, this entry mode suggests increased political risks, as some governments may choose to limit the presence of a foreign investment in favor of the local capital.
Wholly Owned Subsidiary
Finally, to ensure complete control over the local operations, the exporter can establish full ownership of a foreign subsidiary. This way, the exporter gains full control over its foreign branch, as well as access to the assets and resources of the acquired organization (Koska, 2019). In this case, the political risks indicated by The Root’s model reach their peak. The exporter has to emerge fully into the political landscape of the other country, an in-depth research is required to compensate for the lack of local knowledge. Additionally, direct foreign acquisitions may face resistance from governments, which often see them as corporate pressure applied to their economic independence. Expansion through establishing new companies is more favorable in this regard, but it requires additional expenditures.
Overall, the reviewed entry modes demonstrate a reversed correlation between the level of exporter’s engagement and potential risks. When compared to Root’s model, it becomes evident that the risk factors serve as a price for an opportunity to exercise control over the exporting business. Franchising and joint ventures appear the most balanced types of foreign expansion, but adequate research would allow an organization to enjoy the benefits of the considerate acquisition of a foreign subsidiary.
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Dias, M., & Duzert, Y. (2018). Boeing, Brazilian federal government, and Embraer: Golden share veto and the anatomy of a joint venture. International Journal of Business and Management Studies, 7(2), 71–80.
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