Choosing the Right Market: International Barriers to Entry

In my previous posts on market selection, I’ve talked about some of the common pitfalls to avoid as you embark on the international market selection process, as well as four questions to help you get started.

Once you have narrowed down your list of potential target markets, it’s time to take a closer look at each market and do some real research into the potential challenges and opportunities of expanding there.

One of the key questions you need to answer as you size up a country as an expansion destination, is “Are there any barriers to trading with this country?”

There may be obvious deal-breakers such as a trade embargo or sanctions, but there are other factors to consider too. Here are some of the big ones.

Political stability of the market and region

Political instability in a country or region (coups, multiple rapid changes of government, popular uprisings, civil war, conflicts with neighbouring countries) can have a dramatic impact on general business confidence, investor sentiment, and your ability to do business there.

The effects of political strife can range from bureaucratic obstacles, such as border taxes and trade embargoes, to disruptions in transport networks that threaten supply chains, or property losses that force a halt in trading or production.

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The spat between Qatar and the other Arab Gulf States, which started in 2017 is a case in point. Suspended land, sea and air links with Qatar had an immediate impact on businesses and individuals alike. Shipping costs increased tenfold after the UAE restricted access to its ports for ships transporting goods to Qatar and services professionals from abroad were also badly affected. For William Grieve, a Bahrain-based businessman with consulting work in Manama and Doha, his weekly 40-minute flight to Qatar is now a 10-hour journey via Kuwait. That dispute has only recently begun to resolve itself and has had a profoundly negative impact on regional relations and trade.

Political instability can also reduce customer demand, and make it harder to secure financing, obtain insurance or settle bad debts. It’s also likely to affect the host country currency, potentially reducing the value of assets invested in that country, along with future profits generated by them.

“Qatar crisis: Businesses caught in crossfire as dispute hits companies”, Express, 30 June 2017, Source Accessed 27 April 2018.

In the last decade, emerging markets in particular have experienced diverse changes in their political stability, with important implications for business environments and economic growth. In countries like Indonesia and Chile, improvements in political stability and the business environment have boosted investor confidence and led to increased foreign direct investment (FDI), while in places like Egypt and Ukraine, persistent political turmoil has shaken investor and consumer confidence.

Political stability is also worth keeping in mind because it tends to be linked to the business environment, particularly in emerging markets. Emerging markets which are politically stable – such as the UAE, Chile, Hungary and Poland – often offer favourable business environments for firms. That’s because good governance facilitates reforms and investments.

This doesn’t mean that you should never consider operating in a politically unstable region – companies like Haliburton, Kellogg Brown & Root (KBR) and numerous security firms made fortunes in Iraq and Afghanistan during the early 2000s, specifically because they offered services that were in high demand in politically volatile places. However, if you do want to target a politically unstable market, think carefully about what kind of risks political instability might generate for your business, whether you have the appetite to deal with those risks and how you will mitigate and manage risk as it arises. Political instability in an area where a firm operates will mean that the company has to be very flexible and adaptable; ready to change its operations at very short notice to reflect changes in the political environment.

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Other political risks

Even in countries which seem politically stable, political change can have a significant impact on business. Political change can happen when government changes the legal framework, or when a change of government changes political attitudes towards business, with flow-on consequences.

For example, the trade tensions that have escalated between the US and China during the past four years of Donald Trump’s presidency have wreaked havoc on many industries that trade between the two countries. Even though Democratic President Joe Biden has taken office and will seek to re-engage more friendly global trading terms, the damage that has been done won’t be reversed overnight. Both the U.S. and China have imposed tariffs on a wide range of goods including steel and aluminium, pork, fruit and nuts, steel pipe for the oil industry and/p ethanol, just to name a few.

“Dealing with political instability in foreign markets, Powelinx, by Hassan Spruill, 6 July, 2016, Source Accessed 26 April, 2018.

“What’s at stake in the looming US-China trade war: the full list”, The Financial Times, Joanna S Kao, Ed Crooks and Jane Pong APRIL 18, 2018, Source Accessed 25 April, 2018.

The US government has also banned US companies in some sectors, including the ICT sector from working with Chinese companies, putting partnerships at risk. The most high profile of these is the partnership between Google and Chinese company ZTE Corp, which was working with Google to manufacture a low-cost Android phone, which would have put Google’s Android technology into the hands of millions of less-affluent smartphone users around the world. For the time being at least, that partnership appears to be on shaky ground.

Trade conflicts can also have less obvious consequences for companies doing international business. A colleague of mine ran a craft beer business in California. He was in negotiations with investors to expand the brand into China, by establishing a number of breweries across the country, when the US-China trade tensions blew up early in 2018. Investing into foreign joint ventures became a ‘sensitive’ topic in a number of Chinese provinces and investors became concerned that they might be sanctioned for dealing with American firms while the disputes were ongoing. They were also concerned about the impact of the tariffs on the cost of producing the beer. Both of the groups which had planned to fund breweries in China decided to pause progress for at least six months, as a result of which the client’s crowd-funding round collapsed. His company ended up filing for bankruptcy.

Governments can also change the social agenda and this may impact on foreign firms. For example, a government may introduce, or modify, a minimum wage. Or it may sign on to international agreements that affect employee terms and conditions and significantly increase the costs of doing business in that country. As you choose a market, inform yourself about what’s happening there politically and how political changes could affect your company if you choose to go there.

Regulatory frameworks and non-tariff barriers

Take a look at the regulatory frameworks of the markets you think you want to go to. Companies in any country operate within a governance framework which is set by national law, regulations and codes of best practise. The structure and operation of a country’s regulatory environment can have a big impact on how easy it is for your company to do business there. A weak or badly managed regulatory framework can increase the costs and risks of doing business, create difficulties in hiring foreign workers and make it hard to get trade finance, to give just a few examples.
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Specific topics that you can research to understand a market’s regulatory framework include finding out how easy it is to:

“U.S.-China Trade War Is Bad News for Google’s Expansion“, Wall Street Journal, Douglas MacMillan and Liza Lin, April 22, 2018, Source Accessed 25 April, 2018.

The World Bank’s annual Doing Business report is a great place to start.

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Non-tariff barriers

A non-tariff barrier (NTB) is any measure, other than a customs tariff, that acts as a barrier to international trade. Unlike tariffs, NTBs are not necessarily quantifiable or measurable and are often hidden.

Sometimes referred to as “red tape,” NTBs are often part of a country’s regulatory framework and typically include quotas, boycotts, licenses, standards and regulations, local content requirements, restrictions on foreign investment, domestic government purchasing policies, exchange controls, and subsidies.

NTBs can be more restrictive for trade than actual tariffs and with the exception of a few sensitive products where tariffs remain high, it is NTBs that are the real impediment to international trade today. That’s a great reason to research potential NTBs when you’re choosing an export market – you don’t want to get caught out.

Non-tariff barriers to trade include:

Licenses

A license is granted to a business by the government and allows the business to operate or import goods into the country.

For example, in most countries, professionals including engineers, lawyers and doctors require licenses to practice, and professional firms including engineering consultancies, law firms and medical practices require licenses to operate. These licenses are usually more difficult to acquire if the professional obtained their qualifications in another country or the principals of the firm are not resident or qualified in that country. This creates a restriction on competition from overseas firms.

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Import Quotas

An import quota is a restriction placed on the amount of a particular good that can be imported. For example, a country may place a quota on the volume of imported citrus fruit that is allowed.
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Voluntary Export Restraints (VER)

This type of trade barrier is “voluntary” in that it is created by the exporting country rather than the importing one. A voluntary export restraint is usually levied at the behest of the importing country and could be accompanied by a reciprocal VER. For example, Brazil could place a VER on the exportation of sugar to Canada, based on a request by Canada. Canada could then place a VER on the exportation of coal to Brazil. This increases the price of both coal and sugar but protects the domestic industries.

Local Content Requirements

Instead of placing a quota on the number of goods that can be imported, the government can require that a certain percentage of a good be made domestically. The restriction can be a percentage of the good itself or a percentage of the value of the good. For example, a restriction on the import of computers might say that 25% of the pieces used to make the computer are made domestically, or can say that 15% of the value of the good must come from domestically produced components.
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Tariffs

And lastly, tariffs. In basic terms, a tariff is a tax that adds to the cost of imported goods. Governments levy tariffs to provide revenue for the government. Tariffs also protect domestic firms from foreign competition, by making it more expensive for foreign companies to sell their goods in the domestic market.There are several types of tariffs and barriers that a government can employ.

Specific Tariffs

A specific tariff is a fixed fee levied on one unit of an imported good. This tariff can vary according to the type of good imported. For example, a country could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each computer imported.
calculating shipping cost

Ad Valorem Tariffs

The phrase ad valorem is Latin for “according to value,” and this type of tariff is levied on a good based on a percentage of that good’s value. An example of an ad valorem tariff would be a 15% tariff levied by Japan on U.S. automobiles. The 15% is a price increase on the value of the automobile, so a $10,000 vehicle now costs $11,500 to Japanese consumers. This price increase protects domestic producers from being undercut but also keeps prices artificially high for Japanese car shoppers.

Before you go ahead and choose a market, find out whether there are any tariffs that apply to the products that you sell. If there are, you’ll need to factor that in to the end price that your international customers will pay and work out whether you can still sell your product at a price point that makes sense.

When you’ve sized up the barriers to entering an international market and compared those against the size of the opportunity in that country, you’re getting close to being able to make a decision. But there are a number of other considerations that you’ll still need to get your head around. If you’d like to find out what they are, check my blog Choosing the Right Market: Final Considerations.

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.

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Choosing the Right Market in 2021

Where to after China?

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(3rd & 4th March, 2021) (12th March, 2021)
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Choosing the Right Market in 2021

Where to after China?

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VIRTUAL & IN SYDNEY

(3rd & 4th March, 2021) (12th March, 2021)

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