The benefits and drawbacks of international expansion options(Jim Riley)

Selling into international markets is increasingly attractive for  businesses. Reasons may be as follows:

• Stronger economic growth in emerging economies such as China, India, Brazil and Russia
• Market saturation and maturity (slow or declining sales) in domestic markets
• Easier to reach international customers using e-commerce
• Greater government support for businesses wishing to expand overseas

The four main methods of investing in international markets are summarized briefly below:

Exporting direct to international customers:
- The domestic business takes orders from international customers and ships them to the customer destination
Selling via overseas agents or distributors:
- A distribution or agency contract is made with one or more intermediaries
- Distributors & agents may buy stock to service local demand
- The customer is owned by the distributor or agent
Opening an operation overseas:
- Involves physically setting up one or more business locations in the target markets
- Initially may just be a sales office – potentially leading onto production facilities (depends on product)
Joint venture or buying a business overseas:
- The business acquires or invests in an existing business that operates in the target market  
 
The four main methods of expanding a business into international markets each have their advantages and drawbacks.  Some of the key issues are summarised below:
Exporting direct to international customers
Advantages:
Uses existing systems – e.g. e-commerce
Online promotion makes this cost-effective
Can choose which orders to accept
Direct customer relationship established
Entire profit margin remains with the business
Can choose basis of payment – e.g. terms, currency, delivery options etc
Disadvantages:
Potentially bureaucratic
No direct physical contact with customer
Risk of non-payment
Customer service processes may need to be extended (e.g. after-sales care in foreign languages)
Selling via overseas agents or distributors
Advantages:
Agent of distributor should have specialist market knowledge and existing customers
Fewer transactions to handle
Can be cost effective – commission or distributor margin is a variable cost, not fixed
Disadvantages:
Loss of profit margin
Unlikely to be an exclusive arrangement – question mark over agent and distributor commitment & effort
Harder to manage quality of customer service
Agent / distributor keeps the customer relationship
Opening an operation overseas
Advantages:
Local contact with customers & suppliers
Quickly gain detailed insights into market needs
Direct control over quality and customer service
Avoids tariff barriers
Disadvantages:
Significant cost & investment of management time
Need to understand and comply with local legal and tax issues
Higher risk
Joint venture or buying a business overseas
Advantages:
Popular way of entering emerging markets
Reduced risk – shared with joint venture partner
Buying into existing expertise and market presence
Disadvantages:
Joint ventures often go wrong – difficult to exit too
Risk of buying the wrong business or paying too much for the business
Competitor response may be strong