by Merlin Hernandez

 

Companies make the decision to enter the global arena when forces in the domestic trade threaten profit margins and some overseas location presents opportunities for higher profits.  The company may need to reduce costs, expand its customer base, or wants to spread its competitive risk and reduce its dependency on a single market. By going international many companies have sourced cheaper raw materials, reduced their labor costs, and established centroid and logistic efficiencies that have exponentially increased profit margins. In finding an overseas market with needs that match its product mix with limited adaptability and similar client profiles, a business might hedge its risk and increase returns.

Some of the most common assumptions made by US businesses seeking to enter an international market, and issues that have proven problematic, are that conditions of operation and the rights and privileges enjoyed domestically would apply. But different social, cultural, economic, legal, and political systems often characterize the unfamiliar territory encountered, and the customer profile or manufacturing conditions can very different from the domestic environment. In doing business overseas, differences in language, religion, ideology, living standards and even acceptable attire may be so divergent from what is known as to necessitate a period of cultural immersion and sensitivity training in the “SLEPT” factors before employees are sent abroad. SLEPT is an acronym for the socio-cultural, legal,economic, political and technological differences in the new workspace.

An understanding of the proposed venture in terms of lifestyle options, business culture, regulatory climate especially with regard to foreign investment and property ownership, profit repatriation, as well as tax regimes, is necessary before entry. Issues of intellectual property protection, grey markets, and level of crime are also important considerations in overseas manufacturing. A company must also possess the management expertise to do business in an international market, the assurance of compatible currency usage and financial flows, and stable exchange rates that are tied to international currency markets.

Many overseas markets have regulatory and cultural climates that are vastly different from the way business operates in the US. US companies would be subject to the laws and regulations and cultural norms of host countries as well as whatever special arrangements or treaties are established. Those arrangements are usually a feature of some kind of compromise between the business practices of the host country and the US. Before entering an overseas market, it is important for US companies to have an understanding of the environments and business protocols of these countries and operate their business in compliance with both formal and informal practices. Google learned that the hard way in China and was forced to step back and re-strategize before re-entry, losing momentum and potential revenue in the process.

There may be various technical and administrative regulations that apply to goods entering a foreign country – legal requirements regarding the technical specifications of a product may mean changes made to the product before it meets the import standards of an overseas market. The same may apply to goods manufactured abroad and being imported into the US for domestic distribution. Businesses also need to factor dual taxation, ground transportation, shipping, and warehousing. Goods (raw material, finished product) entering or exiting  a foreign country are subject to the added costs of customs control and import duties (where applicable) and  there are further complexities associated with payment and foreign exchange, transportation logistics, distribution, and insurance.  The role of documentation and good communication assumes added importance to prevent misunderstanding and costly litigation. There is generally more extensive use of the fax and e-mail than the telephone because of different time zones and the challenges of different languages. All of these issues in addition to fluctuating exchange rates and exchange control regulations can increase costs and affect profit projections. 

New market entry involves substantial resource expenditure that factors market needs, product, geography, income and population demographics, political, and economic issues among other things, and may require unconventional marketing and product development options in response to cultural differentials. Marketing programs depend on the type of entry option chosen, the degree of product standardization or adaptation indicated, familiar modes of communication, and efficient distribution channels suited to the market. Strategies will need to recognize unique consumer behavior and expectations in the new market, level of brand development needs, competition, and the political/legal environment. In short, cultural differences and target market within the culture determine the kind of marketing program to be applied. Setting up operations in an overseas territory or outsourcing manufacturing can face even greater hurdles. 

Operating internationally can be as complex as it is rewarding and it demands the management and technical expertise of international business professionals. It is a decision that requires great investment of time and resources to gain the desired competitive advantage which may be obtained through one or a combination of several options: 

• Direct Investment – Setting up production facilities in the new market which may  bring competitive and regulatory advantages in labor and material costs,  taxation, pricing, and market penetration.

• Joint Ventures – Establishing a partnership with a local firm that will offer similar  benefits as well as immediate expertise on the business climate.

• Licensing – Selling the right to produce and market the company’s product(s) in the new market according to specifications.

• Direct Exporting – Goods produced in the home market and exported directly to retailers or large clients like hotels.

• Indirect Exporting – Finished goods exported to intermediaries/distributors and dealers for re-sale.

• The E-commerce Option – Direct marketing using country-specific content and  

services via the Internet.

 

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• Intellectual Property

• NAFTA

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