Free trade agreements
As you consider which country might be right for your company to expand to, it’s worth checking whether there is a free trade agreement (FTA) between your home market and the market you’re targeting. That’s because FTAs can provide you with a competitive edge over companies from other countries which are also targeting the market.
FTAs are designed to reduce the barriers to trade (typically tariffs and trade quotas) between two or more countries. When countries sign an FTA, they agree to give preferential access to each other’s markets by exempting each other from the tariffs and quotas that apply to countries that are not party to the agreement. This could mean that tariffs and quotas are reduced or removed entirely. Take for example, the Australia-Japan FTA, which cuts Japan’s tariff on Australian beef, from 38.5% to 19.5% cent over 18 years. The agreement allows Australian beef producers to sell their product in Japan with 50% less tariff cost than producers from countries that have not negotiated a preferential rate with Japan.
- banning discrimination against foreign firms or limits on how much business they can do,
- seeking to reduce the cost to business of complying with multiple regulations,
- at least partly opening up government purchasing to bids by foreign business, and
- requiring countries to have at least a specified level of protection for intellectual property - patents and copyright.
Intellectual Property Protection
Knowing whether you’ll be able to protect your IP in any country you do business in is a very important consideration. For example, there’s not much point selling your state-of-the art medical device into China (which is notorious for high rates of IP theft and copy-catting) if you know that the device will be copied, manufactured and sold to your potential for a fraction of its real value by a Chinese competitor. It’s even worse if there is nothing you can do to address and redress the theft of your IP.
IP frameworks vary wildly from place to place, so as a starting point check whether your target market is covered by international IP conventions, such as the Madrid International Trademark System. That way, you’ll be aware of what protections are available if your IP is infringed in a foreign market.
If the market you’re targeting has an FTA in place with your home country, this agreement may also provide additional protection for your IP.
Infrastructure
Depending on the business you’re in, the quality of a country’s infrastructure could be a defining factor of how easy it is for you to do business there and how likely you are to succeed in that market.
‘Infrastructure’ is an umbrella term for a nation’s basic physical systems — for example transportation, communication, sewage, water and electric systems – which can have a positive or negative impact on your ability to do business there.
Poor countries often suffer from a low level of trade-related infrastructure like telecommunications and transportation infrastructure, which can make doing business in those places hard.
Inadequate road, rail, sea or air transportation networks can be a brake on trade, especially when moving goods across a large territory from inland facilities to coastal ports. For example, significant opportunities exist to export halal beef and lamb products into markets in the Middle East, but not all countries in the region have the infrastructure to readily store and transport chilled or frozen meat products once they arrive at a sea or air port. While the United Arab Emirates is well-equipped with good roads and sophisticated cold supply-chain facilities, countries like Egypt, or even the UAE’s near neighbour, Kuwait have limited cold storage facilities and underdeveloped transport infrastructure, which makes supplying large volumes of meat to those countries a challenge.
Unreliable communications and technology infrastructure can also add uncertainty to a company’s supply chain by, for example, making it difficult to track containers at ports or forcing shippers to rely on paper documentation instead of electronic customs processing.
Infrastructure also includes so-called ‘soft’ infrastructure, – institutions such as the healthcare system, financial institutions, governmental systems, law enforcement and education systems that help maintain the economy. These usually require human capital and help deliver certain services to the population.
If you are planning to work in a country which has weak ‘soft infrastructure’, think about how this might affect your business. You may find it challenging to repatriate capital if financial institutions are not robust and if you run into a legal dispute, obtaining and enforcing judgments in your favour could be a lot more difficult if the country’s legal frameworks and processes aren’t transparent. If you’re thinking about going somewhere with a patchy education system and low levels of general education, consider whether you will be able to find qualified staff to work for you in-country, or whether you may need to bring in staff with specialist skills from abroad.
Distribution Channels
You’ll also need to think about whether the markets you’re considering have the appropriate distribution channels in place to let you get your products and services to the market. This might seem straightforward in a developed economy, but it’s not always the case.
Let’s suppose you sell software, online games or other virtual products that require lots of bandwidth and high download speeds to get them into the end user’s hands. Don’t hold your breath for stellar adoption rates in Australia, where internet speeds ranked 51st in the world in 2017 and 55th in the world in 2018, despite the fact that the country is a G20 nation.
If you’re selling physical goods, how will you get them into the customer’s hands? Suppose you want to keep costs low by avoiding distributors and selling directly to customers. If you’re targeting the enormous Chinese middle-class market, you could investigate using the Chinese daigou network and WeChat to reach them, but what if you’re selling to Indonesia, which has millions of consumers, fragmented distribution channels and no daigou network?
How you choose to distribute your products and services can have a big impact on the speed of delivery, end price and general customer experience, so make sure that wherever you’re going, you’ll be able to access distribution channels that make sense for your company.
Time Difference
This one might seem bizarre, but it does matter. As you choose a market to expand to, keep time zones in mind, as a big time difference between your hometown and your target market or the location of your team members can make life difficult.
Time differences become challenging wherever human interaction is involved, and the bigger the time difference, the more people will be inconvenienced. As the number of time zones your operation crosses approaches the double digits, cultural norms and biological imperatives mean somebody–often the business owner–is working all day, every day. Breakfast in Silicon Valley is dinnertime in London, and Sunday is a working day in Saudi Arabia.
If you’re a New Zealand company shipping dairy products to Ethiopia and have no interaction with your Ethiopian customers and only occasional communication with your distributor in-country, a 9-hour time difference may not make much difference. But if you’re an Indian company in the call-centre business with customers on the West Coast of the U.S., the 12.5 hour time difference between Chennai and San Francisco will be problematic the moment your home team and your U.S. team have to start working together real-time.
When I worked as a management consultant, I once led a team that was split between Washington D.C., United States and Baghdad, Iraq. For part of the time that I was leading the team, I was based in Sydney and we were holding team conference calls every second day as an important deadline loomed. For the team members in Washington D.C. the calls started at 8:00am – not great but definitely manageable. For the team members in Baghdad, the calls started at 4:00pm – no problem. For me, in Sydney, the calls started at midnight and went through until 2:00am, every second night. The novelty wore off pretty quickly – I was crashing out exhausted and wired at 3:00 am every second morning and arriving back at my desk by 8:00 am the next morning. After a week, I was feeling a little burnt out. The time difference never became a big problem because the project lasted only a short time, but it would have been a different story if I had been a business owner and had had to work with that kind of time difference over a long period of time.
A while ago, our US office terminated a contract with a service provider in Pakistan, because the 10-hour time difference was having a negative impact on the turn-around of projects and slowing down projects by days. The US team found a new service provider in Jamaica, which has only a 2-hour time difference with San Francisco and the speed and quality of the work product (and the relationship with the provider) improved overnight.
Time differences can matter!
Language and Culture
Language and culture may not be ‘barriers’ to doing business in a particular country, but they can have a significant impact. If you’re planning to work and sell in a market where the language and culture are very different to your own, ask yourself whether you are equipped to deal with those differences … and whether you want to deal with them.
If you’re British, have no aptitude for languages, and hate pickled cabbage, entering the South Korean market may not be an experience you enjoy, especially if you have to spend a lot of time in Seoul, eating kimchi.
If you are going to build a business in a country which has a different language, consider how you will manage this, as communication across languages and cultures can be fraught with misunderstandings, and there is plenty of potential for conflict in cross-cultural business relationships.
Also think carefully about how prepared you are to invest time and energy into learning about and understanding the customs, beliefs, communication styles and etiquette of the country you’re going to. A successful international expansion is going to require you to immerse yourself in your target market, get to know people, make friendships, build alliances and to spend time there. If the culture of a particular place doesn’t gel with you, or you have strong objections about aspects of the culture and government policy, think twice before committing to building a business there.
And there you have it. If, having thought through the size of the opportunity, the potential barriers to entry and any other factors which might sway you for or against a particular country, you should know enough to make a smart, evidence-based decision about which international market you want to target next.
Whether you’re choosing your first international market or leaving the China market and aiming to make smart decisions on market selection, don’t miss our one-day masterclass, Choosing the Right Market in 2021 – Where to after China? We’ll be running a virtual session on 3rd & 4th March, or an exclusive in-person event in Sydney on 12th March – register here.
