As direct investment into foreign markets continues to face increasing challenges, many companies have had no choice but to pivot and opt instead for an indirect presence. Popular solutions include exporting goods and services through non-exclusive representatives, transferring technology knowledge abroad, selling trademarks – as well as giving away the majority ownership over certain assets. Whatever the case with these strategies come vast opportunities amidst ever-evolving global landscapes.
- Transferring technology
One of the most common indirect strategies used by multinational companies in foreign markets is transferring technology. This strategic approach requires a multinational company (MNC) to transfer certain know-how and technology from its home country to a foreign market, in order to establish an indirect presence there. For example, Nestle, one of the world’s leading food and beverage companies, established an indirect presence in Turkey by transferring its know-how and technology for the production of ice cream. As a result, Nestle now has majority shares in a Turkish ice cream manufacturer based on the transferred technology.
Samsung Electronics has partnered up with a Turkish electronics company called Vestel to produce and market high-quality televisions in Turkey. Samsung has provided Vestel with its technology such as LCD manufacturing and its proprietary UHD Video Picture Engine, allowing Vestel to capitalize on the experience and brand recognition of Samsung.
Another example of transferring technology is the case of IBM in Turkey. IBM, as a leader in technology and services, transferred its technical know-how to Turkish entrepreneurs by establishing solid partnerships with local IT companies and offering strategic consulting. As a result, these local IT companies were able to provide world-class services and products to customers in Turkey.
- Selling trademarks
Another popular approach for indirect presence is selling part or all of an MNC’s trademark rights in a foreign market. In this case, the foreign company will use the trademark under license from the MNC but have full control over manufacturing and sales activities within that particular market. For example, McDonald’s sold its trademark rights to a local partner in India back in 1997; as a result, McDonald’s products are still available in India through their local partner but they do not own any of their Indian outlets directly.
Another popular strategy is selling trademarks. KFC, an American fast food chain, has sold its trademark to the Iranian restaurant chain Sam’s Cafe in exchange for an undisclosed amount of money. This allowed Sam’s Cafe to gain access to KFC’s recipes and brand recognition while allowing KFC to expand its reach without taking any direct investment risk in Iran.
A representative example of selling the trademark is seen with Coca-Cola’s entry into Morocco. Coca-Cola partnered with Maroc Beverages to distribute its product throughout Morocco, allowing them to avoid investing large amounts of capital into a local production facility while still building brand recognition among Moroccan consumers.
- Giving away majority shares
An MNC can also enter into foreign markets by giving majority shares of their subsidiary company to a local business partner or investor group. This strategy provides an easier entry into new markets while allowing the MNC to keep some level of control or influence over production or sales activities within those markets. For instance, Coca-Cola Co., gave Union Miniglass Ltd., an owner of several glass factories across Morocco, majority stakes in its Moroccan division back in 2006; Union Miniglass has since acquired a nearly 50% ownership stake of Coca-Cola’s Moroccan subsidiary company as well as exclusive production rights for all Coca Cola products sold within Morocco.
Apple Inc., for example, gave a majority stake in their Apple Stores China venture to the Chinese e-commerce giant Tencent in order to gain better access to the generally closed Chinese market. This move allowed Apple Stores China stores to leverage Tencent’s vast customer base while also providing Tencent with valuable retail experience.
Pfizer Pharmaceuticals used the same strategy in India. Pfizer decided not to open its own generic medicine production facility in India but instead entered into an agreement with Aurobindo Pharma Ltd., where Aurobindo took 51% shares of the company, allowing Pfizer access to the Indian market without investing large amounts of capital or resources into their own operations.
- Exporting
The traditional form of indirect presence is exporting goods from the home country into other countries around the world with no direct investments made locally except for marketing activities undertaken by partners or agents located abroad. Unilever is one of many companies that employ this strategy; they export numerous consumer goods such as shampoos and soaps from Europe and North America into Arab Emirates, Saudi Arabia, Iran, etc., where these products continue to be manufactured according to Unilever standards despite no direct investments being made locally by Unilever itself.
Motorola Solutions entered the Moroccan market by exporting its products instead of investing directly in the country due to political instability issues. The company was able to generate new revenue streams by exporting its products instead of investing directly in Morocco.
Exporting is good not only as a risk-avoiding strategy but also as a prerequisite to testing a foreign market. Samsung for example focused on exporting its products from South Korea to China for many years before eventually investing more heavily in setting up manufacturing plants there. By exporting first, Samsung was able to test the Chinese market and determine whether it was a viable place for them before making larger investments down the line.
- Licensing agreements
Many multinational companies also use licensing agreements as a way of entering foreign markets indirectly. McDonald’s recently signed a licensing agreement with Apparel Group, one of the leading retailers in the Arab Emirates and Saudi Arabia, which allows them exclusive rights over franchising McDonald’s restaurants within those two countries without having any direct investments there.
- Franchising
Franchising is also another popular indirect strategy used by multinational corporations when entering foreign markets such as the Arab Emirates or Iran. McDonald’s is one popular example of this; they have franchises that are owned and operated by local business owners who pay royalties and fees back to McDonald’s HQ while focusing on adapting McDonald’s menu items and marketing campaigns to suit local tastes and preferences. This allows McDonald’s access to new markets without spending large amounts of capital or resources on setting up new branches around the world.
After taking all the necessary considerations into account and analyzing them, it becomes clear that direct investments in foreign markets are becoming increasingly challenging for companies worldwide. Nevertheless, indirect entry strategies such as technology transfer, trademark sale, local ownership of the majority of the shares, export, etc. can help businesses succeed in their endeavors abroad. Businesses must be aware of this and plan their expansion wisely. The costs associated with seeking an indirect presence instead of a direct one can be balanced with potential success in prospects from such strategies over a long-term period. Ultimately what matters is wise decision-making focused on mitigating risks associated with treading unknown territories.
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