Before expanding into a foreign market, careful consideration must be made regarding the type of business entity with which the firm will enter that market. Each organization type has specific strengths and weaknesses that should be carefully weighed according to the business and legal climate of the country we are entering and our business strategy. Following are three types of business organizations typically utilized when entering a foreign market: joint venture, distributorship, and wholly-owned subsidiary.
Joint Venture
A joint venture is a business partnership between our firm and another. Typically (but not always) this type of business partnership is forged with a firm already in the market which will be entered.
A joint venture with a company in the target country would allow our firm to enter that foreign market capitalizing on the pre-existing business network/systems and reputation of that business partner. In addition to deferring part of the risk involved in this type of business endeavor, a joint venture market entry allows minimal entry costs as the joint venture partners’ pre-existing presence can be exploited by our firm. The customer base, reputation and distribution network of our partner firm will allow our firm rapid market penetration with a minimum of supply chain and marketing problems. Additionally, our joint venture partners’ access to suppliers and local financing will ease potential problems associated with a foreign business operating in that country.
However, a joint venture endeavor does have potential risks and drawbacks. In addition to sharing profits, a joint venture business partner will likely be involved in the management of our business concerns in that country to some extent. This could potentially lead to conflicts in business/management priorities. These conflicts could include issues which affect profitability, ethics, and situations that could potentially lead to litigation. As a part of performing due diligence, our firms’ “exit strategy” (i.e. the expected length of this business relationship and the terms of its termination and contingencies should problems with the venture partner arise) should be fully explored with an attorney experienced in joint ventures between the
Distributorship
A distributor is a local business entity that agrees to purchase our goods and, in turn, re-sell them locally. Typically, the distributor is responsible for carrying inventory for the market and is the local service provider for warranty claims. As far as the buyer is concerned, the distributor is the “face” behind our products.
This type of relationship allows market entry with yet lower entry costs, and offers the added benefit of deferring direct costs of doing business in the foreign country to the distributor. As a result, start up costs are nearly non-existent; the distributors existing business operations are used exclusively. Because of this, this arrangement allows immediate market penetration.
It should be noted that distributors do typically take a larger percentage of profits than partners in a joint venture relationship. Therefore, over time the distributorship relationship will be more costly. Further, with this type of market entry, our firm will have no contact with the market and no control over how our products are represented there. Other unrelated products sold by the distributor may also compete with ours for representation, especially if they have higher profit margins. If our products are poorly represented in a situation like this, our firm may have little or no recourse to remedy the situation. Worse yet, it may be costly and time consuming to end a distributorship should our firm choose to alter our presence in that market. Again, an attorney with experience with
Wholly-Owned Subsidiary
A wholly-owned subsidiary is a new business entity in the foreign market owned completely by our firm. The manner of organization of the new business entity (i.e. LLC, Corporation, or a different legal organization specific to the foreign country) would be determined by the needs of our firm and the laws and regulations of the foreign country.
A wholly-owned subsidiary presents the best option for greatest control over market entry. It also allows for greater profitability as profits will not be disbursed between business partners or consumed by a distributor. Our firm will have direct contact with customers, the distribution chain, creditors and the local industry. As a result, this presents the best opportunity for long term growth in the foreign country and will allow for easier future expansion in the region.
Entering the foreign market does increase risk considerably, however. Our firm would have to bear 100% of the expenses involved in market entry, and should the entry fail, 100% of the losses. Further, local regulations may restrict or even prevent a foreign business from entering the market without a local business partner. As a result, delays in entering the foreign market due to legal problems could be lengthy and costly. Further, entering as a wholly-owned subsidiary may present potential conflicts between local law and
Each form of business structure has strengths and weaknesses. In deciding which structure to utilize in entering a foreign market, careful consideration should be made regarding both our firms’ strategy and the legal risks and ramifications associated with that strategy. It is imperative that competent, experienced legal counsel be consulted to examine that strategy prior to committing to any action.
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