What factors should an international business consider when looking at building a production operation in a foreign country?

In the time of internationalization, the mode of entry that a company must use to penetrate a new market, depends on a series of characteristics according to the conditions of the country of destination, of those relative to the country of origin and those who compete with the company itself. Let’s take a look at it !

·  In relation to the characteristics relating to the country of destination, the most advisable input mode will vary depending on:

1.  The potential for market growth. If the market is small or the possibilities of growth of the market share of the company are low, it is advisable that it starts its process of internationalization with an entry method that involves low risk and investment similar to the exportation. On the other hand, if the country of destination has a high growth projection, the company must consider, if its resources allow it, to settle in the country of destination and to establish production activities in that market in the medium or long term.

2.  The competitive structure of the sector to which the company belongs in that new market. The presence of markets with few competitors, as is the case of sectors with situations of a certain oligopoly, favor acquisitions as a method of entry when entering the new market.

3.  The quality of the infrastructures. A good network of infrastructures favors export (either through own channels or intermediaries) as a feasible entry method due to its low level of risk and investment, since it promotes an adequate distribution of the company’s products in the country of destination and the possibility of increasing sales as the distribution and logistics system is perfected, with a low cost and an adequate service.

4.  The presence of entrance barriers. If there are barriers to entry, it is very likely that the company will not be able to consider as an option exportation, because the tariffs make the product too expensive and not competitive. The company will then be obliged to have to establish some type of establishment that will make some step of the value chain of the product, with sufficient value to qualify the product as originating from the new market, or alternatively, to cede the License to producers of the country of destination. This is the situation that often occurs when you study the Brazilian market, for example

5.  The social and cultural peculiarities of that market. The segmentation of potential clients with certain characteristics in the new market, often dictates whether it may be advisable to adopt input methods that allow the company to have more control in the new market, such as direct investments or alliances with local partners.

6.  The political risk. In certain markets it is advisable that companies look for a local partner who will provide experience and security in the new market, to reduce this type of risk in markets subject to it, for which it is necessary to study in advance the macroeconomic and regulatory structure of the country.

·  In relation to the characteristics related to the country of origin, the chosen mode of entry will depend on:

·  The production costs. If the production costs are relatively lower in the country of origin with respect to the country of destination, an advisable form of entry is exportation, so that products made in the country of origin are more competitive abroad. On the other hand, if the costs in the new country are comparatively lower, the company should consider establishing the production in the new country and take advantage of the cost opportunities offered by the new market. This deterritorialization has been the usual practice of Western companies, displacing their production plants to countries with cheaper labor, which is the case in many Asian countries. However, after the drop in wages caused by the crisis and the increases experienced by some of these markets, such as China, some countries have stopped presenting the same attractiveness for certain sectors. It is therefore necessary to previously study the cost structure involved in each market, before making decisions about the relocation of a production.

·  The degree of competition in the market of origin of the company. If in the country of origin the sector from which the company comes is characterized by a structure with few competitors, it may be advisable to choose fast entry methods such as acquisitions or the search for reliable partners in the new market.

·  In relation to the characteristics related to the company itself, the chosen input mode will depend on:

1.  The size. Larger enterprises have more technical capacity to choose between one mode or another; The smaller ones often however can only access the export.

2.  The capabilities of the company itself in terms of personnel, competitive capabilities, directives, organizational, etc. These capabilities affect the entry mode when it comes to internationalization. In general terms, Comerciando Global advises as a first stage of the internationalization process, that the company uses entry strategies that do not require large resources, nor entail a lot of risk.

3.  The possession of valuable intangible assets such as brands, patents, know-how, etc. In this case, Comerciando Global recommends opting for entry methods that allow the company to have greater control of these assets in the new market, such as direct investment or alliances that allow a high level of control. However, sometimes it is usually the most correct method when you have valuable assets with the potential to be licensed. For example, the transfer of technology is the way of entry we have advised from Comerciando Global to some Spanish companies such as Pascual Quality to start their internationalization strategy, through technology transfer agreements for the manufacture of yoghurts without cold chain. Within our SME clients, we often advise this strategy because it does not demand large sums of money and limits the risk, as was the case with Ipronet.

4.  From the level of aversion to risk. A company with a strong aversion to risk must avoid making important investments; the advisable thing will be to use methods of entrance that allow you to take advantage of the knowledge of local market and to share risks, like the cession of licenses, the formation of alliances or methods with little risk, like the export.

5.  The objectives that the company wishes to achieve with its internationalization. The company must try to adopt the entry method that allows it to achieve the objectives that are set in the target market. If, for example, a company wants to expose itself to domestic demand, export will be enough. On the other hand, if you want to learn to incorporate differences in tastes and preferences of consumers, you must internationalize marketing, R & D or even production capabilities.

In Comerciando global we develop a diagnosis of the potential of internationalization of your company and we advise on the best strategy to carry out in its process of internationalization in the most appropriate country, depending on the particular characteristics and the needs of your company and those of the target market, starting from the current situation of your company.

It’s a pivotal moment: The business you’ve founded, advise, or are a key employee at has hit its stride in the domestic market and is looking to expand internationally. There are several factors for your organization to consider:

• To what extent will your product or service need to adapt to consumer preferences in new markets?
• Who will the competitors be in those locales?
• Should you go it alone or enter with a local partner?

Before you take the plunge, how do you know which foreign market to enter? What factors can give you a read on the opportunities and risks you might face in your chosen country?

Economic indicators—data used to gauge an economy’s performance and its future direction—can provide you with valuable insights as you weigh your options for international expansion.

Factors to Consider When Entering a Foreign Market

An understanding of key macroeconomic indicators is an essential international business skill that provides a broader context which, when combined with a firm-level analysis, can not only give you greater confidence in the decision to expand internationally, but a handle on the potential benefits and drawbacks of taking that course of action.

Here’s a look at three key economic indicators and what they tell us about the business climate in a given country.

1. Gross Domestic Product

Gross domestic product (GDP) is the value of the goods and services produced in an economy. The lunch you bought at the corner restaurant, the money your government pays to firefighters and teachers, the funds a company spends to build its new headquarters, the value of a vehicle manufactured in your country and sold abroad—all of these are part of GDP.

It’s generally a good sign for business when GDP is growing, but there’s nuance in the number: If a country’s GDP isn’t growing as fast as its population, GDP per capita isn’t rising. That means the standard of living for the people, and their purchasing power, isn’t increasing.

2. Unemployment Rate

A country’s unemployment rate is the number of people who are not working divided by the number of people who are working, or actively looking for work. A high unemployment rate can signal that a country’s economy is struggling and may give you pause when considering an investment.

An unemployment rate of zero, however, isn’t necessarily ideal for business. Considering the way unemployment is calculated, those who are changing jobs for better opportunities within a thriving economy are considered unemployed for any time they spend between positions. With low unemployment, companies have to spend more to lure candidates to work at their firms, and those costs often get passed along to consumers in the form of higher prices, which leads to inflation.

When evaluating potential markets to enter, consider what the country’s unemployment rate could mean for your business.

Related: 5 Common Challenges of International Business You Should Consider

3. Inflation

Inflation represents the rate at which the general price level in an economy is rising. If you operate a business in a country with high inflation, the prices you pay for your inputs will increase, and the value of any cash savings you have, or money you’ve lent to others, will erode.

Despite these drawbacks, rising inflation can be good if you borrowed money at a fixed interest rate to establish or expand your business. Thriving economies often have some inflation. As long as it’s stable and predictable, you’ll be able to plan for it in your budgeting and pricing decisions.

Preparing for Global Expansion

These are just a few of the indicators you might consider when deciding to expand your business globally. With a keen understanding of economics and the intricacies of international markets, you can help your organization expand its reach and thrive.

Do you want to turn the uncertainty of today’s economy into an opportunity for your firm? Explore our four-week online course Global Business, and learn more about how to assess the impact of macroeconomic, political, and social indicators on business decisions.

This post was updated on December 18, 2020. It was originally published on July 30, 2019.