Thinking of internationalizing your company? You have two ways

This article was translated from our Spanish edition using AI technologies. Errors may exist due to this process. Opinions expressed by Entrepreneur contributors are their own.

The first thing to understand is that going international is a growth alternative for your sales volume, but not a way out when local conditions show that your product is not viable. Before carrying out any internationalization plan, it is necessary to have a validated product or service in the country of origin. Validation, as in any business model, is when you have reached the famous product-market-fit , that is, your product is accepted by the current market.

It is a common mistake to want to go international in the early stages of the company when there is still a lot to do in your home market. Entering another market, especially international, will require the allocation of all kinds of resources (human, financial, physical and intellectual). Do you have the skills that are required? Won’t it affect your local operation? If you decide that you are at your best to devise an internationalization plan then this article is for you.

To begin with, there are companies that are much more aggressive in their internationalization plans, generally the so-called startups since their business model relies on the use of technologies that will leverage exponential growth with the appropriate injection of capital. The best example is the story of Uber , launched in March 2009 in San Francisco, California and by December 2011 it was already launching operations in Paris, France where the idea originated, from there, the technological and investor support of venture capital caused its international growth exponentially. In 2014, Uber already had a presence in 100 cities around the world.

On the other hand, there are a much larger number of Micro, Small and Medium Enterprises (MSMEs) that are not startups that are possibly going to consider going international at some point in their development. According to the World Bank , they represent 90% of companies and contribute to more than 50% of employment in the world. As of today, I am a founding partner of both a MSME operating since 2013 and a startup since 2020. Both established in Mexico beginning their internationalization process, one to the Middle East and the other to North America, each with a different path .

Next, I describe the two ways you have to choose the best alternative that suits your type of company:

1. Direct path

The direct path is one that means establishing a physical presence of your company in the destination country. This path requires making investments to register a commercial affiliate company which can be a sales office or even a production plant. Therefore, it implies creating a company that, depending on your business and the country, can be 100% owned or shared in a Joint Venture with another local company.

When you go international you have to evaluate aspects of the destination country to determine if that location is the best. One of the incentives may be less tax payments, cheaper operating and production expenses, less competitive markets, etc. Everything will also depend on the products you want to take abroad, the entry barriers in the destination country, accessibility of resources and regulations. For example, I am using the Joint Venture alternative to establish a production plant in Qatar since the geographical location gives me access to 60% of the world population in less than 6 hours of flight, there is no payment of income taxes and energy expenditure is one of the cheapest in the world, which makes sense for my sector, which is manufacturing.

Usually this path is taken by more established companies that can meet their financial obligations or that want to protect intellectual resources. In many countries, incentives are offered to attract foreign direct investment to establish this type of affiliate in their countries. There are countries in which it is very easy to open a company abroad, even the process is done online. For example, in Delaware in the United States in a matter of hours online you can have your company registered while, in the Middle East in cities such as Dubai in the United Arab Emirates or Doha in Qatar, they are offering free trade zones for the same purpose. .

2. Indirect path

The indirect path on the other hand means that the company does not need to have a physical presence in the destination country, its sales can be achieved through indirect export, franchising or through an export consortium. In this way, the investment made by your company will be lower, but you are sacrificing profit margins and control of your brands. In my other company, we produce a good under our brand and we market them directly to the client by electronic commerce in eleven digital channels, however, to internationalize ourselves we are producing the same category of products for clients with their own brand in the United States and Canada. they are in charge of distributing it in their countries.

To carry out an indirect export you can look for a specialized consultancy that will help you find a buyer, but you will depend a lot on the intermediary. The advantage of indirect export is that in the negotiation you can ask for advances to cover your production costs. Your job will be to comply with the client’s specifications and the agency or consultancy will be in charge of negotiating prices and logistics. The problem is that there are cases in which most of the profit goes to these types of intermediaries. The export consortium is very similar, but through an alliance with companies in the same sector that are normally micro or small that together create an entity that will carry out the exports of all those who make up this group.

Lastly, franchises offer a business model for companies to finance their growth through a knowledge or intellectual property transfer scheme to a third party who will be in charge of investing and operating the model. Basically you are going to give the know-how of your already proven business model along with permits to exploit your brands in exchange for an initial fee and royalties for using that knowledge. It is a very attractive way of going international, but it requires a higher level of positioning of your brand and business through established branches and verifiable income. Generally, all this intellectual property must be protected in the countries of origin and destination before franchising.