As a small to midsize business (SMB) wanting to expand into international markets, you’re probably not looking to jump directly into the deep end – as in, setting up your own company in one or more foreign countries, complete with brick, mortar, and staff. Maybe someday – but to get started, smaller businesses usually choose one of four options. In order of increasing complexity, these involve exporting, licensing, franchising, or launching a joint venture. Below is a breakdown of four entry strategies for doing international business, each representing different levels of cost, risk, and control.
Setting the Stage: International Business Trends
When thinking about how to sell products internationally, you’ll first want to look at the big picture. Taking the 30,000-foot view, so to speak, it’s useful to know that two-thirds of the world’s purchasing power is found overseas.
The business benefits of expanding to international markets can be significant: increased sales, less exposure to economic downturns in your home market, and the capacity to tap into different seasonal demands for your products across the globe, to name a few. But challenges can also arise when dealing with different currencies and payments, languages and cultures, transportation modes and costs, and customs and regulations.
Global economic crosscurrents and incidents, such as inflation and supply chain disruptions, can buffet smaller businesses more forcefully than big ones, which tend to have more resources to weather the storms. Still, the growth of e-commerce is among major trends that have weighed in smaller businesses’ favor, enabling them to establish a global digital footprint almost overnight.
After thinking globally, SMBs need to study their target markets to formulate their business plans and analyze the competition, market demand, and trade barriers as closely as opportunities. Business associations and state and federal government agencies, such as the Chamber of Commerce, Small Business Development Centers, and U.S. Commercial Service curate information on these and other fundamentals for smaller businesses seeking opportunities abroad.
The business benefits of expanding to international markets can be significant: increased sales, less exposure to economic downturns in your home market, and the capacity to tap into different seasonal demands for your products across the globe, to name a few.
Strategy 1: Exporting
U.S. exports of goods and services passed the $3 trillion mark in 2022, according to the Chamber of Commerce. About 1.3 million smaller businesses are now involved in exporting, according to the U.S. Small Business Administration, accounting for about a third of all exports in goods.
Exporting lets companies introduce their brands, products, and services into other countries with minimal foreign investment. SMB exporters run the gamut from manufacturers and retailers to digital creators and services companies. Three important entry points for smaller companies to export products overseas involve participating in bigger companies’ international supply chains, selling on online marketplaces, and working through foreign intermediaries.
- Supply chains: Leveraging multinational companies’ supply chains can give smaller companies international visibility, credibility, and customers without having to build their own networks. Among the many examples of how this works are the small, specialty food and beverage producers populating the supply chains of multinational grocery store chains.
- Online marketplaces: When thinking about ways to sell products online internationally, some small companies might look no further than their own websites. Yet, for others, online marketplaces help ease the process. That’s because they can also handle important matters, such as shipping, warehousing, and calculating taxes (sometimes even collecting and paying them). Some online marketplaces provide customer support in multiple languages for vendors.
- Foreign intermediaries: Companies can export indirectly through export agents and trading companies located in their target markets. Intermediaries like these contribute access to local business networks, expertise in national laws, and familiarity with available logistics services.
Strategy 2: Licensing
Licensing represents a deeper level of international business engagement than exporting. The most common licensing arrangements provide companies overseas with the right to make and sell your products, using your brand and intellectual property in exchange for royalties. Similar arrangements can apply to a technology or a service model, such as professional training.
Like exporting, licensing places relatively low demand on a company’s resources. One difference, though, is that licensing may provide better access to markets whose tariffs and trade policies make them inhospitable to imports. At the same time, potential downsides could include quality or reliability issues that reflect poorly on your brand – or even the possibility of creating a future competitor, since the licensee retains direct relationships with their customers.
Such risks make partner selection a critical success factor, requiring due diligence into all aspects of potential associates’ business, plus an assessment from the partner of how they see themselves aligning with your values and vision. Detailed contracts and ongoing monitoring are equally as essential to the success of this international business strategy.
Strategy 3: Franchising
With franchising, a foreign company essentially sets up a replica of the franchiser’s business, paying royalties and other fees to use its intellectual property, brand, and business model.
As with exporting and licensing, international franchising permits expansion into international markets without having to physically set up shop on foreign shores. Benefits accrue from dipping into the local knowledge and networks the franchisee possesses. Any quality, reliability, or legal compliance risks must be managed through thorough vetting of candidates, detailed contracts, and vigilant monitoring – even more diligently than is the case with foreign licensees. Franchisers should also provide training and supportive, well-defined standard operating procedures to ensure brand protection and optimal business outcomes.
The International Franchise Association advises franchising only after you have a proven model in place. Then, strategically define criteria regarding which market to target, based on size, growth rates, stability, and fit with your brand. And be sure to identify the qualities that will make an excellent franchisee, in terms of capital, industry experience, access to real estate, and other attributes.
Strategy 4: Joint Ventures
International joint ventures raise the level of international business commitment even higher than exporting, licensing, or franchising. To embrace this strategy, a U.S. company and its foreign counterpart pledge equity, set common goals and objectives, and share in profits/losses, management, and control.
Joint ventures provide an entry into foreign markets and their customers by leveraging the resources and market expertise of a company that’s already successful in a given location. The two companies can also pool resources, share risk, and reduce cross-border trade barriers, among other benefits. However, joint ventures can falter due to cultural differences, internal accounting issues specific to cross-border operations, and misalignment between partners pertaining to the new venture’s operational control and ultimate goals.
The best joint ventures are built on shared values, transparency, and flexibility. But they also need clarity about who controls what, careful structuring that protects both parties, and contract provisions for the equitable sharing of profits or losses. Experts say they should also have an exit strategy, in case the partners find they need to part ways.
The Bottom Line
U.S. SMBs expanding to international markets can tap new sources of growth while minimizing the worry that they are betting all their chips on a single market. The four strategies they use most involve exporting, licensing, franchising, and joint ventures. Each international business strategy has its pros and cons, calling for careful analysis, planning, and management.
A version of this article was originally published on November 19, 2013.
Photo: Getty Images
