Page 67 - DMGT546_INTERNATIONAL_TRADE_PROCEDURE_AND_DOCUMENTATION

International Trade Procedures and Documentation

Notes 3.5.3 Basic Entry Decisions

In this section we discuss at three basic decisions that a firm contemplating foreign expansion
make (a) which markets to enter; (b) when to enter those markets; and (c) on what scale.

Which Foreign Markets

There are number of nation-states in the world, and all of then do not hold the same profit
potential for a firm entering foreign markets. The choice must be based on an assessment of a
nation’s long-run profit potential. This potential is a function of several factors such as:
1. Detail of the economic and political factors that affect the potential attractiveness of a
foreign market.
2. Balancing of benefits, costs, and risks associated with doing business in that country.
With regard to political factors the cost of doing business in a country can be increased by
a need to pay off the politically powerful to be allowed by the government to do business.
With regard to economic factors, one of the most important variables is the sophistication
of a country’s economy.
As for legal factors, it can be more costly to do business in a country where local laws and
regulations set strict standards with regard to product safety, safety in the work place,
environmental pollution, and the like.
As with costs, the risks of doing business in a country are determined by a number of
political, economic and legal factors.
3. Study of factors such as the size of the market (in terms of demographics), the present
wealth (purchasing power) of consumers in that market, and the likely future wealth of
consumers.
4. Potential long-run benefits bear little relationship to a nation’s current stage of economic
development or political stability. Long-range benefits depend on likely future economic
growth rates, and economic growth appears to be a function of a free market system and
a country’s capacity for growth (which may be grater in less developed nations).
By following the above process a firm can rank countries in term of their attractiveness and long
run profit potential. Preference is then given to entering markets that rank highly.

Timing of Entry

Once attractive markets have been identified, it is important to consider the timing of entry. The
advantages frequently associated with entering a market early are commonly known as first-
mover advantages. One first mover advantage is the ability to preempt rivals and capture
demand by establishing a strong brand name. A second advantage is the ability to build sales
volume in that country and ride down the experience curve ahead of rivals, giving the early
entrant a cost advantage over later entrants.
There can be disadvantages associated with entering a foreign market which are often referred
to a first-mover disadvantages. These disadvantages may give rise to pioneering costs, which an
early entrant has to bear that a later entrant can avoid. Pioneering costs arise when the business
system in a foreign country is so different from that in a firm’s home market that an enterprise
has to devote considerable effort, time and expense to learning the rules of the game, e.g. costs
of business failure due to ignorance of the foreign environment, certain liability associated with
being a foreigner, the costs of promoting and establishing a product offering including the costs
of educating customers, change in regulations in a way that diminishes the value of an early
entrant’s investments.

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