When it comes to expanding your business into international territory, entering new markets can be a daunting task. There are several entry modes that you can consider, each with its own set of advantages and disadvantages. One such mode is a contractual agreement, which is a popular strategy used by companies that want to enter new markets while minimizing risks. In this article, we’ll discuss the different entry modes and explain what a contractual agreement entails.
Modes of Entry
There are various modes of entry that businesses can adopt to expand their operations into new markets. These include:
1. Exporting: This involves selling products or services to foreign markets without physically establishing a presence in the target country.
2. Licensing: This involves granting permission to another company in a foreign market to produce and sell your product under a license agreement.
3. Franchising: This entry mode entails granting a franchisee the right to use your business model and brand name in a foreign market.
4. Joint venture: This entry mode involves partnering with a foreign company to jointly own and operate a new business in a foreign market.
5. Direct investment: This involves establishing a physical presence in a foreign market through the acquisition of an existing business or the creation of a new one.
Contractual Agreement
A contractual agreement is an entry mode that involves a contract between two companies, whereby one party (the licensor) allows the other party (the licensee) to use its intellectual property, technology, or know-how in a foreign market. The licensor retains ownership of the intellectual property, while the licensee is granted the right to use it in the foreign market.
A contractual agreement can take different forms, including:
1. Licensing agreements: These are agreements that grant a foreign company the right to use a company’s intellectual property, such as patents, trademarks, and copyrights.
2. Distribution agreements: These are agreements that allow a foreign company to distribute a company’s products or services in a specific market.
3. Supply agreements: These are agreements that allow a company to supply its products or services to a foreign company for sale in a specific market.
4. Management agreements: These are agreements that allow a foreign company to manage a company’s operations in a foreign market.
Advantages of Contractual Agreements
Entering a new market through a contractual agreement has several advantages, including:
1. Low risk: Contractual agreements allow companies to enter new markets with minimal financial risk, as the contracts are usually short-term and can be terminated if necessary.
2. Low cost: Compared to other entry modes, contractual agreements are relatively inexpensive, as they do not require large capital investments.
3. Local knowledge: By partnering with a local company, a company can benefit from its partner’s knowledge of the local market and cultural practices, which can help it avoid costly mistakes.
4. Flexibility: Contractual agreements can be customized to fit the specific needs of both parties. This allows companies to tailor their approach to the local market and adapt to changing market conditions.
Conclusion
Expanding your business into new markets requires careful consideration of the different entry modes available. Contractual agreements offer a low-risk, low-cost way to enter a new market and benefit from local knowledge while retaining ownership of intellectual property. However, contractual agreements may not be suitable for all businesses, as they require a high degree of trust and communication between the parties involved. It is important to carefully consider your options and consult with experts before deciding on an entry mode.