Factors motivating firms to venture into foreign markets
Disclaimer: This work has been submitted by a student. This is not an example of the work written by our professional academic writers. You can view samples of our professional work here.
Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.
Published: Mon, 5 Dec 2016
In the modern business environment characterized by increasing trend to globalization, many firms are expanding their business operations beyond their domestic boundaries. Many firms are continually in search for new business opportunities which they belief can be achieved by venturing into foreign markets. A foreign market offers the firm opportunity for growth and increase of sales by capturing new markets and customers. In order to take up and explore opportunities offered by foreign markets, firms needs to invest substantial resources, both in time and money as well as human capital in planning and driving operations.
Before moving in to expand resources in the expansion strategy, it is always necessary that the firm has properly assessed the potential offered by the new market. The size and opportunities offered by the new markets should be capable of justifying the resources and efforts to be used up in expanding to that particular market. In addition, expansion into a foreign territory always presents added challenges to the firm not present in the domestic market. A success story by a similar firm operating in that foreign environment does not mean the firm or other firms entering the market will be capable of achieving similar success. Like in the domestic market, operating in a foreign market requires excellent understanding of the new market environment (Dibb and Simkin, 2004, pg 218). For instance, different countries have different cultural dimensions which affect behavior of both firm and the consumers and ultimately determine success of the firm in that territory. Understanding of the foreign market environment must also be supplemented by effective organizational and marketing strategies (Thorelli and Cavusgil, 1990 pg 558). To ensure success in the modern global market, firms must develop analytic competence to assess foreign market opportunities, environmental competence to understand the marketing environment, and functional competence to devise effective strategies to operate and manage the market.
The move to venture into a foreign market by a firm is not a decision that is taken subconsciously but rather one behind some motivating factors. These factors can either be good or bad ones depending on whether the firm is pursuing new opportunities in new markets or alternative markets. Forces motivating the firm to seek foreign markets can be classified into two. These are; 1) those pulling the firm to pursue exciting opportunities in foreign markets or the market pull motivations and 2) those factors pushing the firm to seek alternative opportunities or markets to safeguard its business interests or the market push motivations (Doole and Lowe, 2008, pg 364; Bruce, Moore and Birtwistle, 2004, pg 9).
Market pull motivations refer to those exciting characteristics exhibited by the foreign markets that make the business environment favorable. These motivations are therefore associated with the identified foreign market rather than the firms own competitive advantages or domestic market conditions. According to Campbell and Craig (2005, pg 321), countries with attractive and better conditions for doing business attracts foreign investments much easier than other countries.
Conducive business environment will be determined by the countries political, legal and economic environments. Politically and economically stable countries are much more desirable to invest in due to their relatively low risks. Other factors that are also likely to make a country attractive for foreign investment include the availability of resources, better technology, low labor costs and population. However, massive populations do not always imply attractive business environments (Boone and Kurtz, 1992, pg 85). In addition, foreign firms prefer destinations which are not much culturally distant from their domestic countries. As such, firms will tend to be attracted to foreign markets that exhibit similar cultural environments. Firms entering foreign markets as a result of these motivations are mostly pursuing growth strategies.
Market push motivations
Market push motivations on the other hand are those pushing the firm to seek alternative markets as the conditions in the domestic market become hostile (Campbell & Craig, 2005, pg 320). Factors that may lead the domestic market be unfavorable pushing firms to seek alternative markets include a saturated or declining market, limited market size, rivalry, tough regulatory environment, end of a product lifecycle and high production costs (Etemad, 2004, pg 231; Dawson, 2003, pg 12; Albaum,1994, pg 37; Alexander, 1997, pg 16). In addition, a firm may pursue a foreign market to follow suit its rival competitor for fear of losing out or rival attaining a competitive advantage (Newman and Cullen, 2002, pg 452; Hollensen, 2007, pg 38). Firms seeking foreign markets due to these factors are often pursuing defensive strategies to safeguard their sales and market share.
Understanding foreign markets
International and host country economic environment
In the modern global economy, countries are abandoning their earlier restrictive and protectionist closed economies to open up to international trade. International pressures and technology are seeing even the more reluctant countries open up to foreign businesses and agree to free trade. Although there is yet to be achieved completely free trade globally, there have been increased integration and formation of regional trade blocs and arrangements. These trading blocs include the European Union and the European Free Trade Association in Europe; North American Free Trade agreement (NAFTA), Common Market of the South (MERCOSUR), The Andean Community, Central American Common Market and others for American region; Association of Southeast Asian Nations and Asia Pacific Economic Cooperation for Asian region; Common Market for East and Central Africa (COMESA) and others for Africa. There are also agreements such as the African, Caribbean and Pacific nations Lome convention that grants 70 member nations access to the EU markets. All these arrangements and agreements have implications for international business.
Apart from the international economic environment, there is also the host country business environment (Rajagopal, 2007, pg 114). These will comprise of economic policies being adapted by the host country such as taxation policies, fiscal and monetary policies which will affect the countries business environment. There are also micro factors such as industry size, completion, income and behavior patterns. The host countryââ‚¬â„¢s economic environment will determine interest rates, exchange rates, inflation and pricing of the firms product which affects competitiveness and hence success in the foreign market.
Culture refers to the learned and shared patterns of behavior, interactions and includes beliefs, values, norms, language, religion, institutions and other consequences of human work and thought. Operating in a foreign market environment demands the firmââ‚¬â„¢s knowledge of the impact of cultural differences between the host country and domestic country (Peter and Donnelly, 2004, pg 191). Culture affects the behavior of persons and as such their consumption habits. The awareness and knowledge of foreign market culture holds the key to increased competencies and success in the new market.
Some of the components of culture that the firm needs to have increased awareness of include religion and language. Religious beliefs do affect consumption habits such as dressing modes as well as shopping habits. Hindus, Muslims and Christians will have differing beliefs and views on consumption of some specific products. These views will also vary depending on the country in question. Recent examples include illegalizing women wearing trousers by claiming it as indecent and unacceptable dressing behavior in the Muslim dominated Sudan. Language on the other hand affects communication and thus the firm marketing strategies and efforts.
Other factors include education and the family. Education affects both potential customers and shapes potential employees in the foreign environment. Due to cultural factors such as language barrier and other beliefs, the firm cannot rely entirely on expatriates even on less skilled demanding tasks. In addition, the firm does not always have to maintain physical presence and even if it has, expatriates are very costly because of the expenses and special allowances for working abroad. Again, the customers need to feel and embrace the firm as one of their own. Family characteristics also such as gender roles, family structure and size of concern in the firms marketing efforts vary across countries and the firm must be aware of them. All these issue means that the firm has to alter its organizational culture and strategy to suit the market environment characteristics.
Political and legal environment
When a company makes the decision to enter into a foreign country, it does not only have to deal with the domestic political and legal forces but as well as those of the host country where it is seeking entry and those operating internationally. The firm will be concerned about the political and legal forces as well as the policies being taken up by the host government (Paliwoda and Ryans, 2008, pg 211). These forces determine the regulatory environment and as such things like ownership, property rights and enforcement of contracts. In addition, policies touching on international trade and foreign investments such as tariffs and other non tariff barriers and issues like the political stability will be determined by the government of the day. Political development and changes in the domestic country on the other hand will also have a great impact on the firmââ‚¬â„¢s foreign operations. The mix of all these factors means that the firm will have to accommodate differing laws and policies from different countries which may need alteration of corporate strategies.
Assessing Foreign Market Potential
There is always the assumption that market potential can be solely be informed by looking at the population size in a given foreign market and the per capita consumption. However, as Cavusgil, Ghauri and Agarwal (2002, pg 268) point out, these two measures alone are not adequate measures of the foreign market potential. According to them, there are at least seven dimensions to be looked at when assessing market potential in a foreign environment. These measures include market size, market growth rate, market intensity, market consumption capacity, commercial infrastructure, economic freedom and market receptivity (Cavusgil, Ghauri and Agarwal, 2002, pg 268/9, 270).
According to Cavusgil, Ghauri and Agarwal (2002, pg 268), population is just mere indication of market size and the relative importance of the foreign market to the firm. It is only a rough estimate rather than a total estimate of the potential offered by the market. For a company targeting to enter into a completely new market, the aim is not only to capture a portion of that market but also to grow that market size with time so as to increase profitability. Certain population characteristics and not only numbers must be considered when entering or assessing the market potential of a foreign market. To this note, (Cavusgil, Ghauri and Agarwal, 2002, pg 268) proposes the market consumption capacity as an additional dimension to be considered when looking at the population to determine potential demand. The basis for this measure is the percentage of the total population or size of the middle class. This is the indicator of the consumption base and in most cases it is the target segment of many businesses.
Population characteristics or this market dimension varies from country to country and may make even same size markets differ in attractiveness. For example, although India and China or else the whole of Asian region are known for their massive population, they have not been able to consume as much as is consumed per individual in United States or in Europe. The growing middle class in this region thanks to the blossoming economies is already attracting foreign firms and promising to be the next battle ground for marketers in years to come. Age also although not included in this market dimension plays an important role in terms of determining potential consumption in the future. With estimated 13 to 20 percent of the world population today over 65, the size of the so called grey consumers considered better off financially and hence their propensity to consume will get on increasing in coming years. For instance, the elderly is said to account one of four by 2025 in Japan while currently in the United States there are 4.5 workers for every pensioner a figure estimated to improve to 1.7 by 2030 (Lee and Carter, 2009, pg 5).
The other factor apart from population to consider is per capita consumption. While this is an important indicator of demand this measure is heavily influenced and dependent on income. As such (Cavusgil, Ghauri and Agarwal, 2002, pg 270) couples per capita consumption with per capita income to proposes another market dimension the market intensity. For instance, employing this market dimension, Cavusgil, Ghauri and Agarwal (2002, pg 265) ranks Hong Kong number 1, Poland 7, Mexico 14 South Africa 13 and India 23 out of 23 emerging markets from all over the continent.
Apart from these factors associated with population and per capita consumption, other factors as identified in the other market dimensions ill also affect market potential. These include the market growth rate as indicated by the trend in industry annual growth, and the market receptivity indicated by the growth and flow of trade from the domestic country to the foreign country under consideration. Other factors used to assess foreign market attractiveness such as infrastructural development and degree of economic freedom will also determine market potential. Infrastructure will affect the market through distribution and communication channels while economic freedom has much to with policies adopted and will include factors operating in the political, legal and economic environments.
In order therefore to ensure success in foreign markets, all these factors must be put into consideration. Per capita consumption and population size though play a role in terms of determining potential demand are too shallow to assess demand when considered alone. There are a lot of risks when operating in foreign markets which can only be disclosed when all the factors are considered. Firms contemplating going foreign must commit to undertake proper research of the market before jumping into establishing operations. Many firms have established foreign operations without doing proper research thereby exaggerating prospects only to be disappointed and probably withdraw operations a few years later. It is only with proper research or knowledge and good strategies that a firm can thrive in a foreign environment
Cite This Work
To export a reference to this article please select a referencing stye below: