The Internationalisation of Services

Andrew
Linda-Gene
Sinead
Fiona
Introduction

The internationalisation of services is an area largely ignored by academics. However

it can be seen that even though it is underrepresented, it is rapidly growing in
importance “ as an increasing number of manufacturers go global, their service
suppliers must follow” (Vandermerwe & Chadwick, 1989, as cited by Winsted &
Patterson, 1998, p. 294).

1.1 Objectives

The objective of this paper is to outline and discuss the relevant issues and challenges
from a theoretical viewpoint. This paper will analyse the relevant literature proposed
by researchers. The key objective of the paper is to highlight the increasing
importance of the internationalisation of services within the global economy.

1.2 Structure

Firstly, a brief overview of the international services market is given along with the
relevant internationalisation issues. The obstacles faced by marketers in a global
market place are highlighted, and possible solutions are presented. The application of
the ERPG framework is analysed and its relevance in the international service market.
Finally, market selection and market entry modes for services are outlined and their
applicability to firm types are discussed.

1.3 Methodology

This paper concentrates on secondary sources of research regarding the

internationalisation of services. The readings chosen for this paper were sourced from
leading authors in the field, as well textbooks and electronic academic sources.

1.4 Limitations

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As previously mentioned the empirical research in the internationalisation of services
is in its infancy, hence the sourcing of secondary information was challenging.
However the research on market entry modes was quite extensive but due to paper
length restrictions, a summary of the literature was necessary.

2. The Marketing Environment in the twenty first century

Since the nineteen nineties major changes have occurred in the business world. Many
barriers to international trade have been removed, increasing competitiveness in
markets the world over. Changes include the reunification of Germany, the opening
up of Eastern Europe, the single market of the European Union and the globalisation
of many industries (McGee & Segal-Horn, 1990). Environmental changes have
resulted in the development of new goals and strategies by many firms, and a trend of
internalisation was born.

2.1 International Marketing

International business involves the expansion of firms beyond domestic boundaries
(Simmonds, 1999). International marketing is intertwined in the discipline of
International business, and there is no obvious line of demarcation between the two.
According to Bartels (1968), while international trading has existed for many
generations, it is a relatively new concept in the context of marketing. Cateora and
Graham (2002, p.7) define international marketing as “the performance of business
activities designed to plan, price, promote and direct the flow of a company’s goods
and services to consumers or users in more than one nation for a profit”.

International marketing differs from marketing in a domestic market, as there is a

range of unfamiliar problems and a variety of strategies needed to cope with the levels
of uncertainty existing in foreign environments (Cateora and Graham, 2002). While
marketing concepts are universally applicable, foreign environments differ
significantly, which is a fact that cannot be ignored when developing marketing
strategies. Hence international marketing is very different to domestic marketing.

2.2 The Internationalisation trend

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The internationalisation of business operations is a trend which is increasingly evident
in many countries all over the world. The number of firms operating at a global or
regional level, rather than on a national scale is steadily growing (Douglas &
Perlmutter, 1973). Once scale economies and growth opportunities in a domestic
market are exhausted, the next logical step for firms is to expand into foreign markets
(Baker, 1985). . Douglas and Perlmutter (1973) pronounce the internationalisation of
business operations as one of the most significant trends that occurred in the world of
business. According to statistics provided by the World Trade Organisation (2000) the
value of global trade has increased over the past thirty years from $200 billion to over
$7.6 trillion. International marketing as an academic field of study is also growing.
According to Cavusgil (1998) in excess of 1000 articles are published yearly in many
academic journals around the world.

The trend toward international business is fuelled by the increasingly rapid maturation
of domestic markets, which results in firms seeking out new opportunities in foreign
markets (Thomas and Hill, 1999). Modern communications and superior distribution
systems have also served to increase accessibility of foreign markets and accelerated
progress toward internationalisation. Thus, internationalisation is logical for many
firms.

2.3 Opportunities presented by Internationalisation

There is a realisation among many firms that in order to compete with multinationals,
a commitment to entering foreign markets and developing alternative ways of
operating is required (Cateora and Graham, 2002). Terpstra (1985) is also firmly in
favour of internationalisation claiming that firms are progressively more obliged to
internationalise in order to survive.

International markets provide businesses with opportunities to increase share of sales,

profits and future growth ( Furuhashi and Evarts, 1967). Firms may benefit hugely
from global market expansion as many more markets and customers become available
to them. Firms may also become more secure, as they do not depend on one market
exclusively for profit (Czinkota and Ronakainen, 2003). Consumers also benefit from
increasing international trade in terms of service or product choice, availability and
price.

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2.4 Strategic issues of Internationalisation
The trend of internationalisation presents marketing managers with a new set of
strategic issues and unique problems, when doing business across borders. Many
firms experience difficulty in attracting and maintaining custom in the intense
competitive environments of foreign markets (Thomas and Hill, 1999). New
considerations must be taken into account, which involves a change in organisational
strategies and planning processes (Douglas and Perlmutter, 1973).

More sophisticated management approaches are called for as there are many
differences between marketing in the home market and marketing abroad.
International Marketing managers are confronted with several important and complex
decisions, such as market selection and service range and scope decisions for the
overseas market. Marketing managers must also develop specific skills relating to
international business, including technical, managerial, developmental and diplomatic
( Furuhashi and Evarts, 1967).

2.5 The International Environment

International marketing is similar to domestic marketing in the fact that marketers
must alter controllable factors of product, price, promotion and place according to
corporate objectives, market conditions and consumer tastes (Cateora and Graham,
2002). The complexity of international marketing lies in the fact that marketers must
deal with two levels of uncontrollable uncertainty.

Uncontrollable factors in the domestic environment include political and legal forces,
competitive structure and economic climates. Uncontrollable factors in the foreign
environment include economic forces, political and legal forces, competitive forces,
level of technology, distribution structure, geography and infrastructure, and cultural
forces (Cateora and Graham, 2002).

The more countries in which the firm operates in, the greater the range of problems
encountered. Solutions and policies are not automatically transferable between
countries, as the equation of uncontrollable factors is different in the case of each

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country. When making business decisions each market must be looked at separately,
and it is essential for marketers to carefully analyse the uncontrollable political, legal,
economic and cultural factors.

2.6 The ERPG framework

There are four perspectives to international marketing; ethnocentric, polycentric,
regional and geocentric. The ERPG framework affects decision making throughout
the entire internationalisation process (Daly, 23rd March 2004). An ethnocentric
orientation is generally considered to be detrimental, whereby reality is perceived
only from one’s own point of view, and one judges other groups based on ones own
perception of reality (Thomas & Hill, 1999). Thus, ethnocentric marketers will
undoubtedly wrongly interpret meanings about foreign cultures.
The opposite of an ethnocentric orientation is a polycentric orientation. Polycentrism
involves the assumption that each country is unique. Thus entirely unique marketing
strategies are required for each new market a firm enters (Keegan and Schlegelmilch,
2001). Managers with a regiocentric perspective consider different regions within
countries to be unique, and hence develop an integrated regional strategy (Keegan and
Schlegelmilch, 2001). Geocentrism is a fusion of the ethnocentric and the polycentric
perspectives, where the whole world is viewed as a potential market. Marketers strive
to develop integrated world market strategies, which are global yet respond to local
needs and wants (Keegan and Schlegelmilch, 2001).

3. Environmental Analysis
In the last century, the world has experienced change at an ever-quickening pace. In
particular, remarkable political, economic, social and technological change has
occurred that has dramatically altered the landscape of global business. The size and
importance of the services (tertiary) sector have grown beyond all expectations.
Services now accounts for much greater volumes of economic activity than either
secondary or primary industries in the developed world. One common trend around
the world is the increasing levels of international trade. “At current growth rates, trade
between nations will exceed total commerce within nations by 2015”, (Gregerson,
Morrison, Black, 1998). The companies that will succeed in the 21st century will be
those who are sensitive to constant environmental change and who are capable of

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adapting to best embrace change (Cateora, Graham, 2002). A PEST analysis is a
useful tool for developing an understanding of the current environmental situation and
future probable trends.

3.1 Pest Analysis

3.1.1 Political/Legal
The European business landscape has changed considerably since the formation of the
European Union. Political agreements such as the Single European Market (SEM),
and more recently through the European Monetary Union (EMU), which brought
about the introduction of a common European currency, have had dramatic effects on
international business.

Shortly after the Second World War, 23 countries, including the United States, signed
the General Agreement on Tariffs and Trade (GATT). The agreement provided a
process to reduce tariffs and created an agency to serve as a watchdog over world
trade (Cateora, Graham, 2002). A forum for negotiating trade and related issues was
available to member nations. If bilateral trade disputes could not be resolved, special
GATT panels are set up to recommend action.

The WTO is an institution, not an agreement as was GATT. Rules governing trade
between its 132 members are set out by the WTO and it provides a panel of experts to
hear and rule on trade disputes between members. These rulings, unlike those within
GATT, are legally binding.

The importance of services was first recognised during the World Trade
Organisation’s Uruguay Round whose results came into effect in January 1995. The
US was the main mover on this; they wanted to bring services trade under the same
rules and governing body as merchandise trade. About 88 of the 117 nations agreed
reluctantly of the General Agreement on Trade in Services (GATS) to liberalize trade
in a wide range of services. GATTS is the first multi-lateral, legally enforceable
agreement covering trade and investment in the service sector. Services with special
provisions were air transport, labour movement, financial services and the
telecommunications sector.

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GATS distinguishes between four modes of supplying services: cross border trade,
consumption abroad, commercial presence, and presence of natural persons.
GATS established a set of rules and regulations governing the use by WTO member
countries of trade measures in services. These measures include laws, regulations,
administrative actions and decisions affecting purchases, payment or use of a service
or the presence of Foreign Service suppliers.

The two structural features of GATS are the set of general obligations. The first and
foremost is the principle of most favoured nation (MFN) treatment. As the name
suggest it forbids “ any form of discrimination between services and service suppliers
originating in different countries” (WTO, 1992). The basis of the MFN is that the
same conditions are applied to all services and their providers regardless of the
nationality. Transparency is a general obligation whereby members are obligated to
publish all measures of general application and establish national enquiry points to
respond to other member’s information requests. Another structural feature is how
GATS perceive national treatment as an important commitment. National Treatment
implies that the member concerned does not operate discriminatory measures
benefiting domestic services or service suppliers. Finally, GATS fully safeguards the
ability of governments to enact domestic regulations, legislation and other measures
to protect public interest.

The services sector is the single most important economic activity in the EU
accounting for over two thirds of GDP and employment. In July 2002 the EU
presented its requests for improved market access to WTO members. The requests
sought a reduction in restrictions and expansion of market access opportunities for the
European service industry.

3.1.2 Economic
Economic factors play a large influence on decisions regarding the internationisation
process. Every market is characterised by many economic conditions and it is vital
that these characteristics are identified and assessed before investment is committed to
that market. Once an investment has been to enter a foreign market, the primary
economic factors must continually be monitored to enable the company to respond to

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changing market conditions. One of the key issues to analyse in the market selection
process is the level of purchasing power that foreign market has. The strength of the
foreign economy and its prospects for future economic growth are crucial variables
that must be carefully considered. The implications of economic variables are many
and can vastly change the attractiveness of the market to potential exporters.

Economic statistics such as gross national product and gross domestic product are
important indicators as to the strength and performance of the economy. He labour-
force size, structure, average salaries and unemployment rates impact on the
attractiveness of a foreign market. Personal income per capita, average family income
and the distribution of wealth provide information about the purchasing power and
levels of discretionary expenditure of the country. The countries reserves of natural
resources, principle industries (by sector, that is, primary, secondary and tertiary) and
relative importance of each industry are important considerations. The industry
growth trends and ratio of private to public ownership may provide insights also.

The significance of currency values and foreign currency exchange rates cannot be
underestimated. An economic analysis before expansion to foreign markets is not
complete without an analysis of the trade statistics of that foreign market. The balance
of payments and recent trends, along with the currency rate of exchange must be
taken into account. Any economic trade restrictions such as embargoes, quotas,
import taxes, tariffs, licensing or customs duties need to be researched thoroughly.

3.1.3 Socio-Cultural
Socio-cultural factors are perhaps the most variable element of a PEST analysis. Each
national market has a distinctive collection of socio-cultural attributes that permeate
through all aspects of life and business in that country. Economic and political
agreements can be made to make international trade easier, but no agreement can be
signed on culture to make international trade easier. “Trade and commerce have
become easier in Europe since 1992. But all it really boils down to is a truck driver
will have to fill out one common document to pass customs”, (Richards, 2000).

Culture is defined as “a learned, shared, compelling, interrelated set of symbols

whose meanings provide a set of orientations for members of a society” (Kale, 1990).

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National culture encompasses the collective values, attitudes, beliefs and customs of
nations population. These socially accepted normal values and expectations may vary
hugely from one country to another. A service provider must rethink every element of
the service and how the marketing of that service is conducted with a cultural
knowledge of the country he/she is operating in. Sensitivity to cultural issues and an
awareness of social trends will prevent many potential mistakes, which could lead to
failure in that market.

Social institutions and organisations of the foreign market should be analysed. A

comprehensive socio-cultural analysis should include the population size, growth
rates, sex, geographical and age distribution, family size, gender and family roles and
migration/immigration rates. The level of education, its influence on society and
literacy rates needs to be considered. Research on the existing social classes, ethnic
diversity and subcultures should improve the chances of success for any international
marketer. The countries religious beliefs and customs need to be recognised so as to
prevent offending any of their traditions or beliefs. The diet and eating habits of
people change considerably from country to country also. Aesthetics relates to
cultures collective perceptions on beauty and taste. Social variables such as living
conditions (types of accommodation) and home ownership levels may also provide
insights as to the needs and wants of that society. One of the most obvious cultural
variables is language. This can be subdivided into verbal (spoken/written) and non-
verbal (body language and social distance/behaviours).

3.1.4Technological
The emergence of technology is eliminating the borders and distance issues that once
separated different parts of the world and organisations. The trading environment is
becoming a “borderless World” (Ohmae, 1989, p.152). Technology changes the
logistics of services far more significantly than for goods. “In the case for goods
marketing, at some point a physical object has to travel from the maker to the
consumer” but “services however, do not necessarily require a physical presence”
(Samiee, 1999, p.329).

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The three categories of the classification of services described by Lovelock (1983)
can be examined under the focus of technology. The categories were people
processing services; possession-processing services and information based services.
Namely the possession-processing services and the information-based services are
affected the most by technology. Possession-processing services tend to be
geographically bound. “A local presence is still required when the supplier must
come to the service objects in a fixed location, such as buildings or large items of
installed equipment” (Lovelock, 1999, p.282). Information based services rely on the
transmission or orchestration of data in order to create value. “The advent of modern
global telecommunications, linking intelligent machines to powerful databases, makes
it increasingly easy to deliver information based services around the world”
(Lovelock, 1999, p.282).

Fisk (1999) proposes the long-term challenges of technology for international service
marketers are improving services productivity, increasing service quality,
strengthening relationships with customers, offering new services and adapting to
employee and customer needs. Improving service productivity and increasing service
quality would be considered as investments in technology. Many organisations have
invested heavily in technology in order to try improving productivity.

Service quality can be divided into static and dynamic. Static quality is “preserving
or maintaining a way of doing something” (Fisk, 1999, p.315). Improving the
proficiency of existing systems is the aim of static quality. At the opposite end of the
spectrum is the dynamic quality, which is concerned with “discovering new ways of
doing things” (Fisk, 1999, p.315). Technology would be used in this instance to
create new and improved methods and systems of doing business. By using
technology it can give the organisation a competitive advantage over its nearest rivals.

Technology helps improve the service offering through the strengthening of

relationships with customers, the offering of new services and adapting to employee
and customers needs. Developing the service offering, supplying more service
delivery choices and good communication can all lead to a superior relationship with
the customer. “The use of computerized communication allows the service marketer
to establish an ongoing relationship with the customer at each stage of the

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consumption process. Online databases of customers can show consumption patterns
and help track demand fluctuations” (Fisk, 1999, p.315). Mechanisms are also been
put in place with the use of technology as a means of increasing the role of the
consumer if the delivery process for example, self-service ATMs.

Organisations can now offer new services on a worldwide scale with the help of
technology. Technological tools such as the Internet are making the worldwide
market accessible to organisations in what is termed a “market-space”. However one
must consider the limitations that still exist regarding technology. Many undeveloped
and developing countries have extremely limited access to technologies. They often
have particularly low levels of technological literacy (skills, abilities and knowledge)
and may be very slow to adapt to technological change. Slow diffusion rates allied
with poor technological infrastructure (such as mobile phone masts, broadcasting
stations, telecommunication lines etc) can pose many challenges to service operating
relying on technology to export their service

4. Market Selection
Firms that decide to internationalise their operations screen potential target markets
on criteria such as size, growth rate, fit between customer preferences, existing
product line and competitive rivalry (Johansson 1997). Unlike manufacturing firms,
service firms do not have the choice of entering the market in various stages and may
have to do so all at once, therefore it is necessary to carefully analyse the choice of
markets in which to pursue (Gronroos 1999). Barriers to the international marketing
of services are largely related to the cultural relationships between the society and the
services offered (Dahringer 1991).

The inclusion of both tariff and non-tariff barriers influence the market selection
choice as does the level of physical and psychological closeness to the international
market (Hollensen 1998). European firms may easily consider exporting to their
neighbouring countries due to the relative proximity of these markets. Incentives and
assistance offered by foreign governments, such as tax benefits or favourable trade
policies all positively impact the choice of market selection (Hollensen 1998).

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A firm must consider which markets best fulfil their objectives so they undertake
international market research, to analyse market compatibility. Analysising numerous
markets involve large time and resource costs due to the scale of individual markets
(Terpstra and Sarathy 1997) Problems can also occur with primary and secondary
data, as it may not be as reliable as in the home market and can vary due to language,
education and cultural influences. Dissimilar forms of measurement and
documentation are employed in different countries causing gaps, which may appear in
the data. Poor infrastructure such as inferior communication and transport
infrastructure can hinder the implementation of research.

4.1 Market evaluation process

Johansson (1997) divides the market evaluation process into four categories.

(1) Country identification: a firm may decide to enter a particular trade area, such
as Europe or Asia, and then the candidate countries are identified and listed.
The choice of selection is principally influenced by data such as population,
GNP, growth rates, and media reports on political and economic
developments.

(2) Preliminary screening: the identified countries are rated on macrolevel

indicators, which consist of economic development, political stability,
geographic distance, and delivery infrastructure. The objective is to shorten
the list of candidate countries and anticipate the costs of entering the market.

(3) In-depth screening: this process of in-dept screening is expensive and time
consuming and limited to countries that show apparent potential. In-depth
screening involves assessing market size and potential, the rate of market
growth, the strengths and weakness of potential competition, and the height of
entry barriers, and segmentation.

(4) Final selection: forecasted revenues and costs are compared to find the market
which best leverages the resources available. The objectives formulated by the

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 firm can be weighted and the final selection can be ranked according to certain
criteria.

Johansson (1997) believes the final decision regarding market selection should not be
made until management undertake personal visits to the target country to get hands on
feeling of the market. Papadopoulos & Denis (1988) classify qualitative models as
decision-making frameworks and quantitative models into market estimation models
and market groupings.

4.2 Influential Factors

Firms face many constraints when entering the foreign market, which include
language barriers, rules and regulations, climate and economic conditions, race,
topography and political stability (Van Mesdag 2001). Thus, firms must pay careful
attention to the culture in which it will operate. Van Mesdag (2001) believes the most
difficult constraint to overcome and measure is cultural differences “ rooted in
history, education, economics, and legal systems”. (Van Mesdag 2001, pp. 71.).

The language of a country is the most distinctive aspect of a nation’s culture and links
all the other elements of the cultural environment together (Terpstra & Sarathy, 1997).
Swift (2001) emphasises the importance of foreign language knowledge when
entering an international market, especially in high context cultures where
negotiations are lengthy and contact between buyer and seller is extensive.

Religion in a candidate country will also influence the selection process as it

influences the choices and way of life within a culture (Chee & Harris, 1998). What
may be acceptable practice in one country may be regarded as distasteful or
inappropriate in another and can lead to failure or rejection in the international
market. (Cateora & Ghauri 1999).

The values and attitudes of the international market which are deeply rooted within a
country and will influence the person in how they think and behave (Mulbacher et al,.
(1999). The laws and politics in a society define the rules and regulations that are
followed by businesses and customers alike. It is imperative for any business that is
considering candidate countries to carry consider the political environment as it may

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adversely impact on the company’s ability to operate and will determine the long term
viability of the company (Keegan 2003). Education and technology will also influence
the market choice, as education and technical know-how are imperative to create
economies of scale and increase efficiency (Mulbacher 1999).

Managing demand, price and distribution in the international market is paramount to

the success of the organisation as many services are perishable and cannot be stored
(Gronroos 1999). Organisations that decide to pursue a global marketing strategy
must choose the type of presence they want to maintain in the markets in which they
compete. This market selection decision tends to be of medium to long-term
importance and is difficult to change without the loss of time and money (Jeannet &
Hennessey 2001). Market and customer potential, country attractiveness and risk
factors all influence the choice of market (Javalgi et al,. 2002).

Most service firms require some degree of direct involvement resulting in a narrow
choice of options when internationalising (Clark & Rafaratnam 1999). It is possible to
export services that are separable, where production and consumption occur
independently whereas inseparable services cannot be exported (Erramilli & Rao
1993).

4.3 Conclusion
Erramilli (1991) concludes less experienced service firms prefer entering markets that
are similar to their home country, but as their experience increases they may seek out
new markets that are culturally and geographically distant. An inappropriate market
selection can result in financial losses for the firm, including exit from the market and
can also block opportunities and limit the range of strategic options open to the firm.
On the other hand an appropriate choice of market will affect the performance and
longevity of a foreign operation, in addition to determining the amount of resources
the firm will commit to the foreign market (Ekeledo & Sivakumar 2003). A firm will
attempt to choose leading markets that are typically strong and free from government
regulations and clustering techniques may be employed to categorise the similarities
and differences of candidate countries (Johansson 1997). A firm must weigh up the
risk versus return from entering a particular market and weigh up the criteria.

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5. Market Entry Modes
5.1 Exporting
“The modes of entry into foreign markets are likely to differ on key dimensions such
as the amount of resource commitment, the extent of risk, the potential for returns and
the degree of managerial control” (Westhead, 2001, p.9).
Exporting can take two forms, indirect and direct exporting. Indirect exporting is best
suited to small firms with limited resources who have only a passing interest in
exporting, while direct exporting is a strategy used by a firm that wants to establish a
greater presence in foreign markets. The characteristics, merits and limitations of each
are outlined below.

5.1.1 Indirect Exporting

(Terpstra and Sarathy 1997) state “The firm is an indirect exporter when its products
are sold in foreign markets but no special activity for this purpose is carried on
within the firm” (1997, p. 514). This method of foreign market entry involves the
exporter hiring an independent organisation, which becomes, in effect, the export
department for the service organisation. Indirect exporting is often said to be like a
domestic sale (Terpstra and Sarathy 1997); (Hollensen 1998). The producer
completes a domestic sale that, in turn, results in an export sale by someone else
(Walvoord 1982). Simply put, indirect exporting involves selling to others who
export. Thus the firm is not engaging meaningfully in global marketing as the firm’s
products are being carried abroad by others.

This market entry mode is more likely to be exercised by a firm with limited
resources available for international expansion (Hollensen, 1998). Indirect exporting
often becomes the natural first step for newcomers to the international scene, as it
requires minimal financial and management commitment, when compared to direct
exporting. Authors differ on what they consider to be the most important methods of
indirect exporting. Doole & Lowe (2001) offer domestic purchasing, piggyback
operations, and Export Management Company (EMC) or Export Houses and trading
companies to be the main methods. After examination of the literature EMC’s are
most commonly highlighted. Consequently this method of indirect exporting will now
be discussed.

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5.1.2 Export Management Company (EMC) or Export Houses
EMC’s or Export houses are specialist companies established to act as the export
department for an array of companies (Hollensen, 1998; Doole & Lowe, 2001). The
EMC carries out business in the name of each firm it represents. EMC’s take care of
the necessary exporting documentation. Their knowledge of local buying behaviour
and government regulations are specifically useful in hard to penetrate markets
(Hollensen, 1998). EMC’s are particularly advantageous in helping small to medium
sized firms with little international market experience as they allow individual firm’s
to gain far wider exposure of their services in foreign markets at much lower costs
than they could achieve on their own. By carrying a large range of services, EMC’s
can spread their selling and administration costs over more companies
5.1.3 Direct Exporting
According to Hollensen “direct exporting occurs when a manufacturer or exporter
sells directly to an importer or buyer located in a foreign market” (1998, p.225).
The difference between indirect and direct exporting is that in the latter, the
manufacturer performs the export task rather than delegating it to others. The
exporting firm handles every aspect of the exporting process from market research
and handling documentation to collections of payments.

As indirect exporters grow more confident they may venture to undertake their own
exporting operations (Hollensen 1998). These operations include building up overseas
contacts; undertaking market research, handling documentation, designing and
implementing marketing mix strategies. A company may engage in direct exporting if
they wish to establish a more permanent role in international market Hollensen (1998)
identifies the two main modes of direct exporting to be agents and distributors. These
will now be discussed.

5.1.4 Agents and Distributors

The use of agents is the most frequently used method to initially penetrate a foreign
market. An agent is an individual or a company that represents a foreign organisation
in the target market. Services are sold into the target market through this third party.
The agent is usually from the foreign market, however this is not essential. Agents
usually work on a commission basis and within a clearly defined geographical area.

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Agents usually represent a number of firms and are not exclusively promoting the
firm’s services.
Distributors are different from agents in that they generally purchase the exporter’s
products with a view to reselling them in the foreign market. The distributor is
responsible for the marketing, promotion and distribution of the firm’s product in the
target market. A commission is not paid to the exporter because the exporter has
already received payment for the services. As distributors are established in the
market they generally good market knowledge, contacts and an established
distribution network.

5.2 Contractual Agreements

Contractual agreements take the form of licensing and franchising. Licensing as a

form of market entry is beat suited to a firm that wishes to participate in
international marketing but do not have the resources or know-how to do so.
Franchising is a form of licensing that offers a company a chance to develop
a presence in a foreign market while retaining a significant amount of control
over their operation. Licensing and franchising will now be discussed in
greater detail below.

5.2.1 Licensing
According to Johansson (1997, p.154) licensing involves “offering a foreign company
the rights to use the firm’s proprietary technology and other know-how, usually in
return for a fee plus a royalty on revenues”. The licensor may give the licensee the
right to use the firm’s patent on a particular product or a process, Service know-how,
technical advice and assistance, marketing advice, or the use of a trademark or the
company’s name (Hollensen 1998). The time periods for licences may vary, as noted
by (Jeannet and Hennessey 2004), depending on the level of investment required by
the licensee to enter the market. As it is usually the licensee who makes all the
necessary capital investments with regard to equipment, marketing expenditure etc.,
this party may insist on a lengthy agreement in to recover the cost of investment.

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Hollensen (1998) describes licensing as a two-way process where both parties bring
substantial benefits to the relationship.
(Hollensen 1998) outlines the various licensor-licensee arrangements. When a
licensing agreement involves a service, the licensee is usually responsible for the
production, delivery and marketing of the service in an agreed area. The licensee
bears all the risk associated with investment in the venture. Royalties or fees are the
licensor’s main source of income resulting for the licensing agreement and may
involve a combination of an initial lump sum paid at the start of the contract and an
on-running loyalty based on licensee sales.

5.2.2 Franchising
(Doole and Lowe 2001) state franchising is a means by which a company can market
its goods and services by granting the franchisee the legal rights to use their business
format. According to (Keegan and Schlegelmilch 2000) it differs from licensing, in
that there is an entire business concept transferred between parties and a greater
degree of control over operations is maintained.

There are two major types of franchising. Firstly there is service and trade name
franchising. This type of franchising involves a distribution system where suppliers
agree contracts with dealers to buy or sell services. The dealer uses the trade name
and trademark of the company. There is the business format ‘package’ franchising.
International business format franchising “is a market entry mode that involves a
relationship between the entrant (the franchisor) and a host country entity, in which
the former transfers, under contract, a business package (or format), which it has
developed and owns, to the latter” Hollensen (1998, p.242).

5.3 Cooperative Agreements

Joint ventures and strategic alliances are two forms of cooperative agreements that
may be undertaken between firms to develop a presence in a foreign market. Joint
ventures are best suited to two companies with complementary products or services,
thus enabling a good strategic fit. Strategic alliances may be used by a firm that have
a desire to enter foreign markets but lack the ability or confidence to do it alone, thus

18
seeking the assistance of a player in the foreign market. These will now be discussed
in greater detail.

5.3.1 Joint Ventures

“ A joint venture is any kind of cooperative arrangement between two or more
independent companies which leads to the establishment of a third entity
organisationally separate from the “parent” companies.” (Buchel et al., 1998, pg. 6).
A joint venture with a local partner represents a more extensive form of participation
in foreign markets than either exporting or licensing. A joint venture is differentiated
from other forms of strategic alliances and collaborative agreements as the partners
create a separate legal entity. (Cateora and Graham 2002) highlight four factors
associated with joint ventures:

1. “JVs are established, separate, legal entities.”

2. “They acknowledge intent by partners to share in management of the JV.”
3. “They are partnerships between legally incorporated entities such as
companies, chartered organisations, or governments, and not between
individuals.”
4. “Equity positions are held by each partner.”

A joint venture may be the only way to enter a country or region if government
contract negotiation practices routinely favour local companies or if laws prohibit
foreign control but permit joint ventures. Besides operating to reduce political and
economic risk, joint ventures provide a less risky way to enter markets with regards to
legal and cultural issues than would be the case in an acquisition of an existing
company (Keegan and Schlegelmilch 2000). The strategic goals of a joint venture are
focused on the creation and exploitation of synergies as well as the transfer of
technologies and skills. The equity share of the international company can range
between 10% and 90% but is generally 25-75% (Terpstra and Sarathy 1997). There
are six types of joint ventures are complementary technology ventures, Market
technology joint ventures, sales joint venture, Concentration Joint venture, Research
and Development joint ventures and Supply joint ventures..

19
Strategic Alliances

(Cateora and Graham 2002) define a strategic alliance as “a business relationship

established by two or more companies to cooperate out of mutual need and to share
risk in achieving a common objective.” Alliances differ from joint ventures because in
an alliance both firms pool their resources directly in a collaboration that goes beyond
the bounds of a joint venture (Jeannet and Hennessey 2004). The use of strategic
alliances as an international market entry mode has increased as firms increasingly
recognise the necessity to internationalise and feel the need for foreign help. (Jeannet
and Hennessey 2004) outline three different types of strategic alliances: 1)
Technology-Based Alliances 2) Production-Based Alliances 3) Distribution-Based
Alliances:

5.4 Establishing Wholly Owned Subsidiaries

Companies, wanting to enter foreign markets while retaining ultimate control and
avoiding the related costs of other entry strategies, may pursue a wholly owned
subsidiary approach. Greenfield operations is one such approach where the company
establishes a completely new operation in the foreign market, while strategic
acquirements may be used to establish a position in a foreign market by purchasing an
existing business.

5.4.1 Greenfield Operations

Greenfield investments are when a firm attempts to establish operations in a foreign
country from scratch. The main reasons for a Greenfield operation is to acquire raw
materials, to operate at lower operational costs, to avoid tariff barriers, to satisfy local
demand, or to penetrate local markets (Hollensen 1998).

5.4.2 Acquisitions

Rather than establishing a wholly owned subsidiary from scratch the company can
consider an acquisition of an existing company. Acquisitions offer swift entry into a
market and often provide access to distribution channels, an existing customer base,
and, sometimes an established brand name (Hollensen 1998). An existing company
will already have a service to be exploited, much of the distribution network and

20
dealers needed, and a company can simply get on with marketing its new service
(Johansson 1997).

5.5 Electronic Entry Modes

Gronroos (1999) identified three general entry modes for service firms going into
foreign markets. One of these is particular becoming important, it is the electronic
marketing mode. “Electronic marketing as an internationalising strategy means that
the service firm extends its accessibility through the use of advanced electronic
technology” (Gronroos, 1999, p.295). Electronic strategies change the logistics of
services more so than for goods. The reason for this is that at some point a physical
object has to travel from the maker to the consumer but services however, do not
necessarily require a physical presence. Hence the use of technology has reduced the
need to have local physical presence in many downstream and support activities. It
allows networks to concentrate and pool knowledge and resources from separate
locations. “electronic channels are the only service distributors that do not require
direct human interaction” (Zeithaml & Bitner, 2003, p.396

BENEFITS: CHALLENGES:

Consistent delivery for standardised services. Customers are active, not passive.

Low cost. Lack of control of the electronic environment.

Customer convience. Price competition.

Wide distribution. Inability to customise with highly standardised

services.

Customer choice and ability to customise. Lack of consistency due to customer involvement.

Quick customer feedback. Requires changes in consumer behaviour.

Security concerns.

Competition from widening geographies.

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5.6 SUMMARY
To summarize this paper the group have devised a model outlining the advantages and
disadvantage of each foreign market entry strategy discussed. The firms most likely to
use each entry strategy are also highlighted.

Advantages Disadvantages Best Suited To

Indirect • Less complexities • Loss of control over Firms getting rid of
Exporting than direct 4P’s excess capacity.
exporting • Poor Supporting Small firms with
• Less Risk Services limited resources.
Involved • Little Promotion
• Readily Available • Minimal experience
Expertise gained within the
firm.
• Less Profit Potential
Direct • Greater Profit • High risk Firms that wish to
Exporting Potential • More time, establish a more
• Greater control personnel and permanent role in
over marketing corporate resources international markets.
mix. committed.
• Closer to • Substantial
marketplace Investment
• Closer • Distribution,
relationship with administrative and
buyers. marketing costs
• In-house faced by the firm
experience and
knowledge gained
Licensing • Inexpensive way • Limited Companies that wish to
of achieving participation in participate in
foreign market international international markets
entry markets. but do not have the
• Licensor takes • Licensor passes time or capabilities to
minimal risks technology know do so.
how on to other
party.
• Dependent on
Licensee to exploit
products potential.
• Lack of control over
operations.
Franchising • Quick way for • Brand image at Firms with strong a
company to enter threat from poor brand or processes.
foreign market performance from Effective method of
• Relatively franchisee. internationalisation for
Inexpensive • Minimal skill and services firms.
• Reasonable level experience gained
of control. within the firm.
• Profits dependent
for both parties on
performance of
franchise
Joint • May be only way • Significant costs Companies with
Ventures of gaining access • JV vulnerable as it is complementary

22
 to markets reliant on products and
• Improved access relationship between capabilities.
to financial two parties. Companies with a good
resources • Cultural differences “fit”.
• Economies of prominent
scale • JV partner may
• Access to new become dynamic
technologies and competitor.
management
practices.
Strategic • Can rapidly • Not a separate legal Firms that recognise
Alliances expand into new entity. the necessity to
markets • Reliant on positive internationalise but feel
• May offer relationship between the need for foreign
efficient parties involved. help.
marketing and
production
• Access to
additional sources
of capital
Acquisitions • Swift access into • Very high costs Large, heavily
market. • Difficult to find resourced firms that
• Access to suitable company can identify a suitable
distribution for acquisition firm for acquisition.
channels • Compatibility
• Existing customer problems with
base companies’
• High control products.
Greenfield • Access to Raw • Have to establish Large heavily
Operations materials operations from resourced firms.
• Lowers scratch Firms who wish to
manufacturing • Must set up reduce costs,
costs distribution particularly labour
• Avoids tariffs channels, source costs.
• Market penetration suppliers &
• Total control distributors etc.
• Huge resource
commitment

23
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