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The adage all that glitters is not gold, is a reality in International Business expansion plans. It is essential to deep dive into a lot more data, as my experience with Global Leaders is that they mostly make two common mistakes:
- Heavy reliance on GDP Growth Rate.
- Taking a gut call or being led by perceptions & investment motivated pitch.
In his model, Michael Porter discussed factors of National Competitive Advantage, also called the Diamond Model. It outlines why specific Industries within a particular Nation are competitive Internationally. He argues that a company’s ability to compete in the International market is based on interrelating location advantages, namely:
- Firm Strategy.
- Firm Structure & Rivalry.
- Factor conditions namely natural, labor, capital, technology.
- Demand conditions.
- Related supporting industries.
The role of the government in this model is of a catalyst. However, beyond this, there is also the luck and chance, which he did not discuss.
What emerges from this model is that success in the home country does not assure business success in a foreign country. There is an adjustment required in strategy to capitalize on the location advantages and thus incurring additional cost to build competitiveness, which is also called the cost of foreignness. Thus, the converse becomes true; a firm may not be as successful in the home country but becomes immensely successful in the host country. Therefore, before we choose to expand overseas, we must test ourselves on the five facets discussed above and build on them to evolve correct business strategies.
While we must set our house in order with a strong intent to succeed overseas, external factors, as indicated below, must also be evaluated:
It is important to note that the factors though unfavorable, may suit specific businesses such as Pharmaceutical companies may do well in environments prone to illnesses while also in countries where social systems prefer health as a value. Defense purchases are likely a priority in Politically volatile scenarios. We need to discuss these factors in more detail.
Political ideologies determine the destiny of Nations. We can have democracies and authoritarian regimes on the extreme of the spectrum. Pseudo democracies may also exist along this spectrum. Though democracies are the best bet, however authoritarian regimes with their business interest may give instant returns. It is all based on the product and the business model that a firm may choose to follow. Loss of IP & control, over the long run, must also be a consideration here specifically in the case of authoritarian regimes.
The economic wellbeing of a Nation is mostly considered as the GDP, which is just one of the parameters. Percentage trends are misleading and absolute terms may also be tricky as the balance of payments and country-specific alliances may dictate the prospect of investments. Cost of living and per capita income with disposable income also become the determinants. Many a time the published data may also be questionable.
Social Environment determines the acceptance of the product & firm and the availability of skill-sets and support for manufacturing or trading. One has to evaluate the cultural and historical biases that determine the affinity or the disaffection to a company, product, or Nation.
A technological system that supports the entire supply chain is a priority determinant in today’s world, as we live in a world of fast-paced technological changes. It may sometimes make sense to take an old technology to a market to extend the product life cycle. At the same time, most developed and economies in transition prefer the latest technologies. Availability of technology and skill-sets thus also is of prime relevance in International Business.
Environmental norms and regulations will also be determinants for the choice of facility locations. The stricter the criteria more expensive it gets to set up a facility, and at times it also makes good business sense to operate on stringent regulations. Ascertaining regulatory provisions are of key importance here.
Legal systems are critical to businesses. Fair laws are essential for the smooth running of the company. Laws operating on whims and fancies of authoritarian regimes may not always suit foreign operations. A study of local laws must determine the entry decision of every firm.
All the factors are essential for in-depth evaluation to take an objective view at hand. So, the pertinent question is, how do we commence the evaluation for shortlisting prospect countries.
The Principal factor is the repatriation of profits. Some countries do not permit repatriation of funds and require specific permissions from the Central Bank, which can be very bureaucratic and frustrating and at times impossible. Thus, this factor of repatriation is the first critical test that a prospective country must pass.
World Economic Forum publishes the Country Specific rankings based on factors for conducive International Businesses. This the Global Competitiveness Report on ease of doing business rankings. This is an ideal report which enables objectivity in decision making. The Global Competitiveness Report is based on 12 Pillars, each having its facets. The main Pillars are as under:
- Pillar 1 Institutions.
- Pillar 2 Infrastructure.
- Pillar 3 Information & Communication Technology (ICT) adoption.
- Pillar 4 Macroeconomic stability.
- Pillar 5 Health.
- Pillar 6 Skills.
- Pillar 7 Product Market.
- Pillar 8 Labor Market.
- Pillar 9 Financial System.
- Pillar 10 Market Size.
- Pillar 11 Business Dynamism.
- Pillar 12 Innovation Capability.
This becomes a comprehensive report for evaluating each country and thus reduces the risk of a business. One can select the parameters based on the goods or service and then determine the best countries to enter. It also helps evolve the host country’s business strategy.
The entry method can be simultaneous or one at a time based on the organization’s capabilities. The strategies typically used are any of the Grand Strategies; however, the most common being:
- Collaborative Partnerships: Do not have equity partnerships and are based on complimenting strengths.
- Joint Ventures: Majority or minority holding based on FDI norms and choices. Control of the firm is the key definer here.
- Licensing: Production and process rights with IP control. Strong IP laws are the key determinant.
- Franchising: Availablity of the ethical partner is the key consideration here with the right entrepreneurial mindset.
- Branch office: This is the safest route of entry of having a local office.
- Strategic Business Unit: This is best for 100% control of the parent organization.
- Using a trading house: These are intermediaries who specialize in specific areas.
- Using borderless technologies and eCommerce: The most cost-effective option with absolute scalability.
Mostly in International Business, companies learn the country’s systems through partnerships and then go directly with their own National presence. It also helps to favorably brand the firm in the local markets as one amongst them and shows the commitment to the local economy.
The simple principle of arbitrage and economies of scale determines International expansion. Import from inexpensive locations and export to profitable areas. Thus, blocs and host country dynamics play a critical role in this, as one has to account for tariff and non-tariff barriers to trade while determining the business model. Blocs motivate FDI while also liberalization, privatization, and globalization support the cause of International Business, as mentioned in my earlier blogs.
Thus, International expansion must be meticulously planned and executed, backed by prudent predictive analysis and research. An exit from any market creates undesirable costs and an unfavorable impact on the brand. As globalization and free-market access evolve and trade barriers, both tariff and non-tariff are done away with; the combined impetus to borderless technology will ensure growth in International Business. ECommerce will make expansion a lot easier as one can operate from developed & economies in transition and export to countries that are evolving.
The above discussions demand efficient and responsive International Supply Chains. This is a discussion I shall take up in the next blog.
Though serendipity is a given principle in International Business, planned expansion is more than a gut call and needs a strong analytical mindset. International presence is the key to building a brand and is not an option anymore.
Copyright 2020 Niket Karajagi International Business Blogs Series.