PBL Trigger 4

Fourth trigger is about barriers and challenges international businesses face when entering new markets. 

What barriers international businesses meet when entering new markets or expanding into other countries?

Learning objectives

1. How to analyze business environment in a foreign market?

The PESTLE analysis is a useful tool for companies when analysing the potential new markets. This concept is used as a tool by companies to track the environment they’re operating in or are planning to launch a new project/product/service etc.

The abbreviation stands for Political, Economic, Social, Technological, Legal and Environmental factors. It gives a bird’s eye view of the whole environment from many different angles that one wants to check and keep a track of while contemplating on a certain idea/plan.

What is the political situation of the country and how can it affect the industry?

What are the prevalent economic factors?

How much importance does culture has in the market and what are its determinants?

What technological innovations are likely to pop up and affect the market structure?

Are there any current legislations that regulate the industry or can there be any change in the legislations for the industry?

What are the environmental concerns for the industry?

(What is PESTLE Analysis? A Tool for Business Analysis, 2017.)

The advantages of using the PESTLE tool are:

The tool is simple and easy to understand and use.

The tool helps understand the business environment better.

The tool encourages the development of strategic thinking.

The tool helps reduce the effect of future business threats.

The tool enables projects to spot new opportunities and exploit them effectively.

The disadvantages of using the PESTLE tool are:

The tool allows users to over-simplify the data that is used. It is easily possible to miss important data.

The tool needs to be updated regularly to be effective.

The tool is most effective when users come from different perspectives and departments.

The tool requires users to have access to data sources which could be time consuming and expensive.

Much of the data used by the tool is on an assumption basis.

The business environment is changing drastically. Thus, it is becoming increasingly difficult for projects to anticipate developments. (Dcosta 2017.)

https://www.nibusinessinfo.co.uk/content/pestle-analysis-example

2. How can the government support and attract international investment?

There are many steps government can take to help influence the choices made by international investors. According to the Levin Institute (2017) these include:

- The creation of new infrastructure and other facilities to attract foreign investment. An array of services can help promote foreign investment in a country, ranging from basic services such as the provision of electricity and clean water, to fair and effective dispute resolution systems.

- The ability of governments to prevent or reduce financial crises also has a great impact on the growth of capital flows. Steps to address these crises include strengthening banking supervision, requiring more transparency in international financial transactions, reducing the risk of moral hazard, and ensuring adequate supervision and regulation of financial markets. Although many countries have imposed limits or taxes on capital outflows, another creative way to address volatility was applied by Chile, which imposed a small transaction fee on capital inflows. This measure served to limit the amount of short-term investment, but did not create a risk of deep concern to investors, namely, of having trouble getting their money out of the country at some point in the future.

- Working with developing country governments in particular to help establish more stringent labor and environmental standards to prevent either one from being exploited.

- Protecting domestic infant-industries only long enough to allow them to become competitive internationally. This step remains controversial, but some economists have pointed out that a number of developing countries—indeed many of the countries that have recorded the highest long-term growth rates—have done so after resorting to some protection of sectors of domestic industry.

In addition, political events such as the large protests in 1999 at the Seattle WTO meeting or in 2001 at the G8 meeting in Genoa, Italy, have led some political leaders to conclude that certain kinds of market interventions or regulations are necessary to assist those who are endangered by globalization, simply to sustain political support for continued liberalization. (The Levin Institute 2017.)

Government can also affect for example interest rates, tax incentives and trade policies. Foreign trade policies, such as tariffs and import quotas, can be lowered or eliminated to encourage foreign trade. (Ingram 2017.)

3. What aspects should companies take into consideration when entering into a new market?

1.    Economic Factors

Not all countries will be attractive for all companies. Some companies may discover that some markets cannot afford the products that they sell and they should refrain from entering those markets, whereas there may be some markets which would readily accept a slightly different version of their existing product. Companies should be aware that terms like ‘middle class’ have different meaning in the developed world and developing countries. For example, India has a large middle class but if a US company assumes that the spending power of a middle class family in US and India would be same, it can make strategic blunders by over-investing in India.

2.    Social and Cultural Factors

Countries are different from one other in terms of language spoken, religion practiced, food eaten and in many other ways. These differences are very real and significant, and marketers should consider how these differences can hinder or facilitate the marketing efforts of the company in the new market. Even marketing and other business practices may have to be tailored to suit the social and cultural nuances of the country. A company would do well to pack a troop of sociologists and anthropologists into the target market before it sends its product developers and marketers.

3.    Political and Legal Factors

It is important to know the attitude of the government and the people of the host country before a company decides to commit resources. Nationals of countries who have been dominated by foreign powers in the past are wary of anything foreign. Political stability indicates continuance of policies. Changes in government policies could spell difficulties for the profitability potential of the firm. It is also important for multinational corporations to assess the tax structure and other legal systems and procedures before starting operations in other countries. In many developing countries legal systems are not stringent, and multinational firms find it extremely hard to implement and enforce their policies and contracts.

4.    Market Attractiveness

The attractiveness of a market can be assessed by evaluating the market potential in terms of revenues that can be generated, access to the market in terms of the host country being warm to investments by multinational companies, and potential competition and dynamics of the industry in the prospective market.

5.    Capability of the Company

Before a company decides to go global it should conduct an audit of its resources and capabilities. The company should have clear competitive advantages in terms of market knowledge, technology, portfolio of products, reliable partners and other relevant parameters. The company should also have people with experience in foreign markets. The learning of the home market is largely not applicable in foreign markets. At such times of incursion, it helps to have a chief executive with extensive international exposure to guide the adventure. (Chand 2017.)

Other important things are analysing the local competition and choosing the right local partner. If the competition is particularly fierce, then perhaps a better foot in the market would be to form a partnership with one of the local companies. (Institute of export & international trade 2016.)

Sources:
Chand, S. 2017. 5 Factors You Must Consider While Your Company is Entering to a New Market.http://www.yourarticlelibrary.com/business/5-factors-you-must-consider-while-your-company-is-entering-to-a-new-market/13162. Accessed: 23.10.2017
Dcosta, A. 2017. Components of a PESTLE Analysis. http://www.brighthubpm.com/project-planning/51754-components-of-a-pestle-analysis/. Accessed: 24.10.2017
Ingram, D. 2017. In What Ways Can the Government Encourage Business Activity? http://smallbusiness.chron.com/ways-can-government-encourage-business-activity-2282.html. Accessed: 23.10.2017
Institute of Export & International trade 2016. https://opentoexport.com/article/10-things-to-consider-before-entering-a-new-market/. Accessed 23.10.2017
The Levin Institute 2017. The Role of Government. http://www.globalization101.org/the-role-of-government/. Accessed: 23.10.2017
PESTLE analysis example. https://www.nibusinessinfo.co.uk/content/pestle-analysis-example. Accessed: 24.10.2017
What is PESTLE Analysis? A Tool for Business Analysis 2017. http://pestleanalysis.com/what-is-pestle-analysis/. Accessed: 23.10.2017