International Market Selection - Issues and Methodologies

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					International Market Selection – Issues and Methodologies

A Global Marketing Paper

Conducted by      Kai F. Mahnert, 03113060

                  Sarah McGauley, 00359157

                  Laura McGrath, 00453340

                  Liz McGrath, 03113094

Conducted for     Dr Aidan Daly, Lecturer in Global Marketing, NUI Galway

Date              22nd March 2004



                                    1
TABLE OF CONTENTS

ABSTRACT .................................................................................................................. 3
INTRODUCTION........................................................................................................ 3
OBJECTIVES .............................................................................................................. 5
LIMITATIONS ............................................................................................................ 5
RATIONALE FOR INTERNATIONAL TRADE.................................................... 6
  Objectives of an organisation .................................................................................. 6
  The creation of stakeholder value .......................................................................... 6
INTERNAL FACTORS IN FOREIGN MARKET SELECTION .......................... 7
 Personnel ................................................................................................................... 7
 Management ............................................................................................................. 8
 Customers ................................................................................................................. 8
 Capital requirements ............................................................................................... 8
 Social assessment ...................................................................................................... 9
 Corporate social responsibility ............................................................................... 9
 Time and research .................................................................................................. 11
METHODOLOGIES ................................................................................................. 11
 Preliminary screening ............................................................................................ 12
 In-depth screening ................................................................................................. 12
 Final selection ......................................................................................................... 13
EXTERNAL FACTORS IN FOREIGN MARKET SELECTION ....................... 14
   Market potential..................................................................................................... 14
    Market size ........................................................................................................... 14
    Market growth...................................................................................................... 15
    Competitive intensity............................................................................................ 15
    Competitive entry ................................................................................................. 15
    Entry barriers ...................................................................................................... 16
   Political environment ............................................................................................. 16
     Political issues for consideration in market selection ......................................... 17
     Risk assessment .................................................................................................... 17
   Legal environment ................................................................................................. 19
     Legal systems ....................................................................................................... 19
   Economic environment .......................................................................................... 20
     Economic development ........................................................................................ 20
 Culture .................................................................................................................... 22
 Infrastructure ......................................................................................................... 23
CONCLUSION .......................................................................................................... 23
REFERENCES ........................................................................................................... 25




                                                               2
          International Market Selection
                             Issues and Methodologies

    Kai F. Mahnert, Sarah McGauley, Laura McGrath & Liz McGrath

                         MBS in Marketing, NUI Galway



ABSTRACT

International market selection is one of the most important decisions to be made by
organisations engaging in international trade. Yet, despite its importance, the
approaches taken by many organisations in identifying profitable and servable
markets in the international context are often based on ad hoc decisions and intuition,
rather than a formalised attempt to match the organisation with appropriate foreign
target markets. This paper attempts to clarify some of the issues arising in
international market selection. A rationale for international trade is outlined, followed
by an assessment of firm-related factors that need to be considered before market
selection and market entry can occur. An overview of current methodologies for
market selection based on the literature on international marketing is then given.
Subsequent to the presentation and evaluation of these models, salient elements within
the models are discussed in more detail. The conclusion will provide a short executive
summary to identify the key elements to be considered by management in choosing
international markets.



INTRODUCTION


            “Few of us know even simple facts about the geography,
            culture, and economics of countries other than our own. Even
            fewer people have at their fingertips details that tell whether
            their goods will sell in a particular market.”

                                                      (Cavusgil, 1985, p. 28)



                                            3
Business in the age of globalisation has both facilitated and necessitated a move
towards the internationalisation of organisations of all sizes (Wood & Robertson,
2000). However, while globalisation is indisputably occurring in a variety of shapes
throughout the world, there is as yet a considerable gap in the literature regarding the
internationalisation   of    businesses.   Consequently,   organisations   engaging in
international business frequently find themselves utterly unprepared for the
environments they are entering and unaware of the potential risks involved in the
internationalisation move.


This lack of preparation is already evident in the criteria applied to discriminate
international markets against one another in order to select suitable countries for
market entry. Often, countries for international business activity are chosen according
to “soft” factors, i.e. factors such as proximity or personal preference, rather than
“hard” factors such as market size, growth rate or accessibility (Cateora & Ghauri,
2000). Yet, country selection is a step of crucial importance in the internationalisation
process, given the impracticality of entering all 192 nation states due to financial and
resource constraints on the one hand and the multitude of potential risks arising from
poor market selection on the other hand (Alon, 2004).


Current models for market selection are limited and few and far between (Alon,
2004). This is partially due to the heterogeneous nature of international markets in
general as well as the nature of the industry an organisation proposes to pursue
internationally and the various foci an organisation may have on business objectives
(Wood & Robertson, 2000). Furthermore, the application of such models is
surprisingly underutilised. Particularly with respect to small and medium-sized
companies (SMEs), evidence suggests a high degree of perceived complexity of such
models, leading to selection based on intuition and / or qualitative market data only
(Papadopoulos & Denis, 1988). With a view to the prevalence of ethnocentric cultural
views and the implications of the self-reference criterion, such intuition-based
decision may not only impede organisational progress but cause serious harm to a
business (Cateora & Ghauri, 2000; Keegan & Schlegelmilch, 2001).


This paper will discuss some of the salient issues and the methodologies employed in
the process of international market selection. The research methodology of the paper


                                             4
is based on secondary desk research, drawing from the available and relevant
marketing literature on international marketing. The findings of the literature review
will be presented in the paper as they relate to the following research question: what
are the issues and methodologies involved in the selection of internal markets? The
discussion will be followed by a summary and conclusion.



OBJECTIVES

The main objective of the paper is to evaluate the current status quo of the literature
on international market selection. This primary objective consists of two specific sub-
objectives. These are:


       To gain a greater understanding of the issues relating to market selection for
        an organisation.


       To outline the methodologies proposed in the current literature for
        international trade.



LIMITATIONS

In conducting this paper, the authors were faced with a number of limitations. The
relative scarcity, reliability and validity of the available literature on international
market selection required the researchers to draw from only a limited amount of
literary sources. Thus, the literary support for some of the research findings may not
be as strong as in other areas of international marketing and trade.


Furthermore, given the nature of the paper as a requirement for a university course in
global marketing at the Masters level, certain time and space constraints limited the
amount of detail the researchers could devote to particular issues in the topic. Further
information on the issues addressed herein can be obtained through a further
examination of the literature listed in the reference section.




                                              5
RATIONALE FOR INTERNATIONAL TRADE

When an organisation is deciding whether to keep their trading on a local level or
whether the organisation should contemplate moving their products and services to
new markets on a geographical level, there are many factors which will influence their
decisions. These decisions can be broken into two distinct areas, namely internal
factors and external factors.


From an internal viewpoint, the organisation will look at various aspects, which will
influence the decision on whether to move into international markets and which of
these markets will be chosen. The issues which arise are as follows:



Objectives of an organisation
The objectives of an organisation determine what an organisation should achieve,
both in the long term and short term. If the objectives of an organisation call for an
increase of 10% in sales or profits, it is from this an organisation may initially seek
out new markets in which to increase their sales (usually occurring if the market is
saturated or the company currently holds the market leader position, as outlined by
Aaker (2001). An organisation may not be able to achieve such objectives in their
current market, which will prompt them into considering new target markets which
may exist in another country, therefore the organisation will consider whether to trade
in an international capacity or not.



The creation of stakeholder value
An important objective set out by an organisation is to increase stakeholder value. The
stakeholders of an organisation are “those individuals or groups who have an interest
in a firm‟s internal and external activities” (Keegan & Schlegelmilch, 2001, p. 6).
The stakeholders of an organisation include the employees, management,
shareholders, banks and government. The organisation is obliged to facilitate all
stakeholders‟ interests and more importantly; they are obliged to increase the
stakeholder value for them (Keegan & Schlegelmilch, 2001). Profitability therefore, is
a critical means of creating stakeholder value. To increase profitability, in today‟s‟




                                          6
environment, an organisation must consider the feasibility and possibility of
international trading.



INTERNAL FACTORS IN FOREIGN MARKET SELECTION

Before considering the methodologies of foreign market selection and the related
salient elements in market selection proposed in the literature, a number of internal or
firm-related factors need to be considered. These factors are personnel, management,
customers, capital requirements, social assessment, corporate social responsibility,
and time and research. The factors will be discussed in turn below:



Personnel
This section includes not only that of management but also employees. “An
organisations‟ response to global market opportunities depends greatly on
management‟s assumptions or beliefs, both conscious and unconscious, about the
nature of the world” (Keegan & Schlegelmilch, 2001, p. 17). The authors outline how
the attitude of personnel will determine how the organisation will compete globally
and this in turn will affect the choice of market in which to compete in. Keegan and
Schlegelmilch (2001) outline the different management orientations there are in the
global area. These include:


Ethnocentric Management of an organisation see the home market as superior, but
               see similarities in other markets to their own.
Polycentric    Management view each country as unique and outline the differences
               associated with each new country.
Regiocentric Both the similarities and differences are viewed of each country in
               relation to the world.
Geocentric     Management have a worldwide view and can see the differences and
               similarities in home and host countries.


An organisations‟ orientation will determine how each prospective country is
perceived; it is from this orientation that the views regarding a specific country will be




                                            7
determined, which can in turn lead the modus operandi for the selection of certain
countries.



Management
Madsen and Servais (1997 as cited in Chetty & Campbell-Hunt, 2004) outline how
the management or the owner of the organisation will be an influencing factor in
selecting a specific country for international trading. If the management have specific
knowledge of operating in a global context, their experience and market knowledge
will reduce the fear of international trading in certain countries. Their experience may
also dissuade the organisation of competing in a certain market because of some
feature that market research may neglect to portray.         This knowledge will be
invaluable to the organisation in their selection process and will minimise risk and
uncertainty.   Chetty and Campbell-Hunt (2004) also argue that present day
management are from a better-educated generation and are less likely to be dissuaded
from international trading and will generally possess a greater experience in global
trading.



Customers
Organisations customers‟ may influence the market in which an organisation will
select to compete in. After extensive marketing research carried out by the
organisation, analysis may conclude that the target market reached by the firm may
include a specific domination which, correlates with another country‟s‟ population.
Moreover, if the customers of the product are international, and from a specific origin,
this too may be a determining factor in the selection of a specific market (Oviatt &
McDougall, 1995 as cited in Chetty and Campbell-Hunt, 2004).



Capital requirements
The capital requirements of entering a specific market are also another consideration
for an organisation (Alon, 2004). Post market research, the organisation will outline a
cost-benefit analysis on each specific country and more importantly the capital
requirements that will be required for the initial outlay of a global orientation, into



                                           8
this country. The results of which will be clear and help management determine the
market they will select.     Some markets the organisation may enter, even if the
potential for profitability is great, as the capital required may be too high for them.


Tylecote (1987) outlines three areas in which an organisation can raise the necessary
capital requirements for such a venture. Firstly, the organisation should analyse
liquidity and the cost of capital. This includes; the time rate of discount, the rates of
interest proposed, and the inflation rates expected. Secondly, Tylecote (1987, p. 52)
proposes for an organisation to look at other avenues, besides borrowing at interest,
such as self-financing out of retained profits, “most attractive method, so long as there
is enough profit left over after satisfying shareholders‟ minimum demands for
dividends”. The third avenue for gaining capital is through the stock market in the
form of ordinary share capital. This has long been a major source of finance for
company‟s who wish to raise capital. This method is attractive to firms who are
currently successful as “the new shares were issued at the same price as existing
shares” (Tylecote, 1987, p. 53).



Social assessment
Another area in which, management should include in the cost benefit analysis, is the
social impact of the company entering a specific market. Social impact assessment is
rarely given the same time as the economic assessment of a country (Ziller & Phibbs,
2003). The authors outline how an organisation should treat the social assessment as
a tangible determinant and therefore, include it in the cost-benefit analysis. An
example of its use, as outlined by Ziller and Phibbs (2003) would include if the
organisation plans on purchasing a community building in a specific country in which
to operate, what would the social impact of this be and how would this country
respond to the product. The authors outline a practical matrix and guideline of how
the organisation should deal with the area of social assessment.



Corporate social responsibility
The organisation before entering a specific country must also consider the element of
corporate social responsibility (CSR) and how each specific country views the



                                            9
concept. The concept of CSR is still vague and ambiguous and many writers have
attempted definitions, such as Carroll (1979, p.500 as cited in Schwartz and Carroll,
2003, p.501) “the social responsibility of business encompasses the economic, legal,
ethical and discretionary expectations that society has of organisations at a given point
in time”. To clarify this definition, the author has offered a diagram for management
to assess decision regarding corporate social responsibility.


   Figure 1: Dimensions of corporate social responsibility




                    Be a good                 Philan-
                 corporate citizen                                Desired
                                              tropic


                 Be ethical                   Ethical                  Expected



                                               Legal                          Required
      Obey the law


 Be profitable                              Economic                                Required



   From: Carroll, A. (1979) A three-dimensional conceptual model of corporate performance.
   Academy of Management Review, 4(4), pp. 497-505 as cited in Schwartz, M.S. and Carroll, A.
   (2003) Corporate social responsibility: a three-domain approach. Business Ethics Quarterly, 13
   (4) October, pp. 503 - 531.



Social responsibility also incorporates the environment and the pollution restrictions
(Gidengil, 1977) imposed by each specific government.                  Management should be
aware of the populations attitude towards such issues, as those countries who are strict
in their environment protection will not tolerate shoddy products and so on.
The organisation should also take care of the nature of product being exported and the
country they are targeting and whether that country is economically developed
enough to receive their product. An instance of this type of exporting disaster can be
seen with reference to Nestle and their exportation of powered baby milk to a third




                                                 10
world, under-developed country. The result of which, was a global boycott (Garrett,
1987).



Time and research
Time is a valuable commodity in the business environment. The decision on which
country to select for international trading has an effect on the strategic development of
an organisation, yet this decision will be affected by the element of time allotted for
the decision. If management is under pressure to make a decision, then the country,
which seems the easiest to trade in, may be selected, thus giving rise to risky decision-
making (Alon, 2004).


Closely associated with the factor of time is the question regarding market research in
prospective markets. While it may be preferable for an organisation to conduct
secondary and primary research into prospective markets independently, expertise,
accessibility, time and resources may not allow for such an approach (Wood &
Robertson, 2000). Thus, an organisation may need to outsource some research
activities to avail of the expertise of professional research agencies with a given
market.



METHODOLOGIES

Thus far, two categories of market selection models have been proposed in the
literature (Papadopoulos & Denis, 1988). These are general and context-specific, i.e.
applicable to specific industries, categories of companies and / or business situations.
Most models differ only insignificantly in their approach, usually being composed of
three or four sequential stages. Cavusgil (1985) terms these stages (1) preliminary
screening of markets in attractive countries, (2) assessment of industry market
potential and (3) company sales potential analysis, while Kumar, Stam &
Joachimsthaler (1994) refer to (1) screening, (2) identification and (3) selection. Root
(1994 as cited in Koch, 2001, p. 67) offers an alternative terminology of (1)
preliminary screening, (2) in-depth screening and (3) final selection. In a model of
four stages, Keegan & Schlegelmilch (2001) propose a differentiation between




                                           11
restrictions, a first and a second set of selection criteria and the final selection of
potential foreign target markets.


Despite dissimilarities in terminology, the models offered by various writers in the
literature are virtually identical in content. They consist of a filter, or funnel approach
to market selection, each stage applying a different set of criteria, until a set of
suitable foreign target markets has been identified. For the purpose of this paper,
Root‟s (1994 as cited in Koch, 2001, p. 67) terminology will be employed, with a
view to Keegan & Schlegelmilch‟s (2001) notion of various sets of primary and
secondary selection criteria at the in-depth screening stage.



Preliminary screening
The first stage of international market selection, preliminary screening, is concerned
with the identification and elimination of countries with unsuitable trading climates
by applying macro-level indicators giving clues to disparities between organisational
objectives and the features of a given foreign market (Kumar, Stam & Joachimsthaler,
1994; Koch, 2001). Macro-level indicators are numerous and may include market
size, growth rate, existing product line, competitive rivalry, socio-cultural factors and
basic fit with customer preferences (Kumar, Stam & Joachimsthaler, 1994; Koch,
2001).


The purpose of preliminary screening is a reduction in the number of countries to
receive greater attention by way of more detailed analyses (Cavusgil, 1985). Reasons
for the unsuitability of a country may arise, for example, from political instability,
currency considerations (as in the case where currencies can not be traded in the open
market), hostile weather conditions (for example for particular types of clothing or
fresh foods) (Cavusgil, 1985; Kumar, Stam & Joachimsthaler, 1994) or severe
restrictions within the foreign market (Keegan & Schlegelmilch, 2001).



In-depth screening
During the second stage of international market selection, in-depth screening,
information specific to the industry the organisation is operating in is gathered,



                                            12
analysed and evaluated for each of the potential foreign target markets remaining
from stage one (Kumar, Stam & Joachimsthaler, 1994). Industry market potential is
assessed according to one or more sets of criteria previously established by the
organisation. Determining present and future aggregate demand as well as the
consideration of market accessibility, product potential (in terms of customer needs
and desires, competitive offerings, attitudes towards foreign product offerings et
cetera) and local distribution and production (Cavusgil, 1985) are all part of this stage.
Alon (2004) includes the tracking of the origin of hits on the corporate website as a
potential indicator for suitable foreign markets.


Foreign market conditions should align with organisational objectives in order to be
filtered through to the next stage of selection. Indicators of an organisation‟s own
potential strength within a foreign market as well as statistics from the foreign market
are useful in this analysis where available (Cavusgil, 1985). Furthermore, outsourcing
a foreign marketing research agency more familiar with the foreign market may be
preferential to conducting an own analysis at this stage (Kumar, Stam &
Joachimsthaler, 1994).



Final selection
Koch (2001, p. 67) proposes three types of limitations in the final selection of foreign
markets:


   1. company objectives;
   2. strategies; and
   3. resources


Westhead et al (2001) note the importance of striking a balance between domestic and
foreign market commitments. Furthermore, the reciprocal effects of the one on the
other should not be under-estimated. Thus, a strong domestic presence is capable of
signalling stability to customers in the foreign market, while the ability to export
increases the legitimacy of a company in the domestic market. However, great take
needs to be taken in order to prevent alienation of either target market through
unbalanced organisational commitments.


                                           13
While these stages appear relatively simple, they incorporate meticulous and time-
and money-consuming research work. The scope of research is variable; for example
Alon (2004) reports only three main factors having been analysed in a case study cited
by the author, whereas Wood & Robertson (2000) offer a list of sixty important
factors to be considered. Generally speaking, the more detailed the preliminary and
in-depth screening analyses are, the more accurate the final international market
selection is going to be. However, constraints in terms of finance and time need to be
recognised and weighed against the proposed degree of international trading activity.



EXTERNAL FACTORS IN FOREIGN MARKET SELECTION

After assessing the rationale for international trade, firm-related factors and the
methodologies proposed in the literature to date, a number of salient elements
associated with these methodologies should be discussed in more detail.



Market potential
Here, the central focus is on whether the export market of interest has the necessary
means to purchase imported products, and whether the needs of the market are being
adequately satisfied (Wood & Robertson, 2000). Generally, studies have shown that
almost all entrants use information relating to market size and growth rate, level of
competition, and trade barriers (Johansson, 1997).



Market size
Market size analysis requires an assessment as to what share of the total market in the
country the firm can reasonably expect to obtain, given domestic and other foreign
competition and affordability of the product. In cases where this demand is not
sufficient to justify risk or costs of entry, the market should be excluded from further
consideration (De Burca, Fletcher & Brown, 2004). A direct measure of market size
can be computed from local production, minus exports, plus imports. An indirect
measure can be derived from he widely available GNP measure, population size,
growth in GNP, and imports of relevant goods (Johansson, 1997).



                                          14
Market growth
Getting the market size measures for different years and computing the growth rates
can obtain growth estimates. When deriving the growth rate in this manner, it is
important that cyclical changes in the economy are accounted for (Johansson, 1997).
There are a number if simple ways for estimating likely demand sufficient for a
screening activity. These not only involve assessing current demand but also likely
future demand as well as untapped of unfilled demand, which may exist in a particular
market. Some of the more common techniques are as follows: demand pattern
analysis; international product life cycle; income elasticity measurements; proxy and
multiple factor indices (De Burca, Fletcher & Brown, 2004).



Competitive intensity
The number of competitors in the market, and the relative size distribution of market
shares can measure level of competition. Competition is generally toughest where a
few large domestic companies dominate the market. When existing companies all
have small shares, or when foreign companies have already made successful entry, the
competitors will generally be less concerned about a new entrant (Johansson, 1997).
There are a number of competitive strategies, which might influence selection of
markets. These include entering a market so as to pre-empt the entry of others,
entering a market in which there are already competitors and confronting them, and
entering a market where large competitors do not exist (De Burca, Fletcher & Brown,
2004).



Competitive entry
When the aim of a foreign entry is competitive, the plan can be to attack cash
generating home market for a competitor or another market where a competitor is
dominant. In other cases, the aim is to pre-empt or disrupt a competitor‟s entry into a
new market by entering first or increasing the firm‟s market support. In either case,
the choice of country is often a given. However, the firm must recognise the resource
implications of fighting these kinds of battles. They may not generate much revenue
and could be costly. The firm has to carefully evaluate whether the gains in other


                                          15
countries over time will justify these excursions (Johansson, 1997). The choice of
country is made differently again, in the cases in which a company goes abroad to
learn from customers and competitors in leading market countries. Then the company
aim is primarily to gain further strengths and expand capability, and tapping market
growth is only a secondary goal, at least in the short run.


Leading markets tend to be large, strong at the high end of the product line, free from
government regulation and protective measures, with strong competitors and
demanding customers. Leading markets are generally found in different countries for
different products. Strong domestic competitors emerge because a country‟s location
specific advantages, such as natural resource endowments, technological know how,
and labour skills. Over time, these advantages enable domestic firms to accumulate
experience (Johansson, 1997).



Entry barriers
Entry barriers are present to protect domestic industry or to ensure that companies
entering from foreign markets conform to trade relation‟s arrangements with other
countries (Johansson, 1997). These barriers may relate to entry, exit, and the
marketplace. Entry barriers can be both tariff and non-tariff. Such barriers also
include aspects that impinge on the form of international market entry, such as
regulations relating to local content and ownership. Exit barriers may relate to
repatriation of profits, dividends, and capital, taxation issues and technology transfer.
Marketplace barriers can include access to skilled personnel, availability to warehouse
space, transportation, allocation of critical inputs, such as power and water, and
control over prices (De Burca, Fletcher & Brown, 2004).



Political environment
Fundamental to every marketer‟s selection and assessment of a foreign market is an
appreciation of the political environment of the country within which he or she intend
to operate (Cateora & Graham, 2002). An examination of target country‟s political
orientation and environment is part of the preliminary screening stage of market
selection (Cavusgil, 1985). Any company considering doing business outside of their



                                           16
own country should carefully study the government structure of the target market as
well as examine the numerous issues arising from the political environment.


Interest in politics is the first dimension listed in many frameworks examining export
environments. This is largely due to the fact, foreign firms must endeavour to make
their activities politically acceptable or they may be subjected to politically condoned
harassment (Cateora & Graham, 2002).



Political issues for consideration in market selection
The political climate of a country unearths many decision variables according to
Wood and Robertson (2000). The political strength of leaders within the foreign
country, the stability of government policies, the degree of domestic instability within
the target market, the degree of local labour unrest, the number of trade restrictions on
free and open trade due to political frictions, the foreign governments use of
incentives to encourage private business and the ability of the foreign government to
enforce trade restrictions, are all areas which need to be considered when selecting
potential markets in global business strategies. Government involvements in business
and in communication, the country‟s attitude toward foreign business and national
economic and development priorities are further issues worthy of note according to
Cauvisgil (1985). Any firm engaging in international marketing should also be aware
of the importance of sovereignty to national governments and its consequences for
global business (Keegan & Schlegelmilch, 2001).



Risk assessment
Risk assessment is also crucial when selecting target markets as foreign marketers are
faced with high levels of uncertainty, in terms of continuity of government policies,
changing political philosophies (Cateora & Graham, 2002) and government actions
with regard to taxes, dilution of equity control and expropriation (Keegan &
Schlegelmilch, 2001).


There are many ways of assessing risk according to Johansson (1997). According to
this author, risk analysis flows from the first to the fourth level in the table below. If



                                           17
any of the levels uncovers risk, which may be deemed unacceptable, the firm should
immediately reconsider conducting business within the country in question.


   Figure 2: Factors of political risk

   Factors                                       Examples

   Level 1: General Instability                  Revolution
                                                 External aggression

   Level 2: Expropriation                        Nationalisation
                                                 Contract revocation

   Level 3: Operations                           Import restrictions
                                                 Local content rules
                                                 Taxes, Export requirements

   Level 4: Finance                              Repatriation restrictions
                                                 Exchange rates


   From: Kobrin, S. J. (1979) Political risk: a review and consideration. Journal of International
   Business Studies, 10(1) Spring / Summer, pp. 67-80.



A new type of political risk for marketers to consider is that of international terrorism
activities. Although terrorism‟s international reach can make any country seem
unsafe, a prime example being that of the attacks on the world trade centre on
September 11th 2001, terrorism and increasing crime have made some countries and
regions extremely unattractive in terms of global business strategies (Johansson,
1997).


As government‟s change and new philosophies are undertaken a firm may find that
political risk is somewhat temporary. However it is extremely necessary for a firm in
undertaking internationalisation strategies to consider all manner of political risk and
ensure the all indicators are followed closely to ensure acceptable and successful
market selection.




                                                  18
Legal environment
Companies face a vast amount of problems in their efforts to develop successful
global marketing programs. Just as cultural, political, geographical differences pose as
threats to global firms so too do the varying legal systems of the world and their affect
on business transactions (Cateora & Graham, 2002). A country‟s legal environment
can be identified as the rules and principles that nation states regard as binding upon
themselves (Keegan & Schlegelmilch, 2001). The legal environment is an important
variable to consider in international business due to the devastating impacts that court
of law decisions may have upon a company‟s globalisation attempts.



Legal systems
The countries of the world can be broadly categorised in terms of four legal systems:
   The common law system derived from English law and found in England, the
    United States, and the British Commonwealth countries, which include Canada,
    Australia and New Zealand and the former British Colonies in Africa and India.
   The civil or code law system derived Roman law and found in most European
    nations, Japan and non- Islamic and non- Marxist countries.
   The Islamic legal system derived from the interpretation of the Koran and
    followed by Pakistan, Iran, Saudi Arabia and other Islamic nations.
   The Marxist legal system, found in Marxist socialist countries such as Russia, the
    republics of the former Soviet Union, Eastern Europe and China, as well as other
    Marxist socialist states who rely on economic, political and social policies as the
    centre of their legal systems (Keegan & Schlegelmilch, 2001; Cateora & Graham,
    2002).


The legal environment of target countries is considered of great importance in terms
of market selection, due to the detrimental impacts court of law decisions related to
issues such as foreign exchange rates, expropriation and intellectual property rights
can have on the foreign investor wood Keegan and Schlegelmilch (2001) highlight
further legal issues significant to market selection in the form of establishment,
jurisdiction, patents, trademarks, licensing, antitrust and bribery.




                                            19
Evidently the global legal setting is very dynamic and complex. It is imperative for
the international marketer to understand the various types of legal systems he/she may
encounter as well as the various threats the company is open to in undertaking global
transactions.



Economic environment
The economic development and performance of a country is a further issue the
international marketer needs to consider in international business. The stage of
economic growth within a country affects numerous facets of firms‟ international
strategies. Economic growth affects a countries attitude towards foreign business
activity, the demand for goods and the distribution system found within the country
(Cateora & Graham, 2002).



Economic development
Cateora and Graham (2002) also highlight that economic development presents a
number of challenges to the international firm. A study of the economic climate is
important especially to gain understanding with regard to developing countries and
secondly in respect to market potential and market growth. The existing level of
economic development allows the firm to estimate the degree of market potential as
well as allowing them to prepare for economic shifts and emerging markets.


Wood and Robertson suggest that in evaluating international markets a firm needs to
consider many issues of development and performance. The gross national product
(GNP) and income per capita in the country needs to be examined. The education and
employment levels of the population need to be analysed, as well as inflation rates
and the country‟s balance of trade.


Walt Rostow (1971, p.10 as cited in Cateora & Graham, 2002) presented a model for
classifying countries by stage of economic development. Each of the five stages is a
function of the cost of labour, technical capability of the buyers, and the scale of
operations, interest rates and level of product sophistication (Cateora & Graham,
2002). The stages are listed below:



                                          20
       Stage 1: The traditional society
       Stage 2: The preconditions for take off
       Stage 3: The take –off
       Stage 4: The drive to maturity
       Stage 5: The age of high mass consumption


Rostow‟s (Rostow, 1971 as cited in Cateora & Graham, 2002) process explains a
countries growth as you move from one stage to the other and it aids marketers by
indicating “the relationship between economic development and types of products a
country needs and of the sophistication of its industrial infrastructure” (Cateora &
Graham, 2002, p. 241).


Another method of classifying a countries economic development is by the degree of
industrialisation as highlighted by Hollensen (1998).                 This categorisation groups
countries under three clusters:


   Figure 3: Categorisation of countries by degree of industrialisation
 Less developed                     This includes underdeveloped countries and
 Countries                          developing countries, the main feature of which is a
                                    low GDP per capita. These countries also have weak
                                    infrastructures and limited amounts of manufacturing
                                    activity.

 Newly Industrialised               These are countries with an emerging industrial base
 Countries:                         just entering world trade.


 Advanced Industrialised            These economies have high per capita incomes and an
 Countries:                         extensive industrial base. They have a developed
                                    infrastructure and are highly industrialised.

   Adapted from Hollensen, S. (1998) Global Marketing - a Market-Respective Approach.
   Hertfordshire, Prentice Hall.



Issues of production strength are also important in foreign market selection (Wood &
Robertson, 2000). The foreign country must be examined in terms of its wealth in
natural resources and extent of which these can be developed. The diversity of



                                                  21
products produced and imported into the country are also important areas for the firm
to note as well as consumption related issues such as per capita ownership of goods,
food consumption, industrial goods consumption and energy consumption.


The economic environment is an important issue for international marketers to
examine in choosing markets in which to expand their business. Economic
considerations are also part of the pre-screening stage and are an important measure
of a country‟s attractiveness.



Culture
A second aspect to be considered when selecting a market is that of culture. Firms
exporting for the first time generally select foreign markets that have some market
and cultural similarity with the firms domestic market (Erramilli, 1991). In some
instances markets are selected because they are seen as „psychologically close‟ to the
domestic market (Papadopoulos & Denis, 1988; Dow, 2000).


Culture is integral to the marketing concept, which is based on satisfaction of wants
and needs of potential buyers. Not only does culture condition these wants and needs,
but it also impacts on the way messages concerning the ability of the product or
service to satisfy the needs and wants, are received and interpreted (De Burca,
Fletcher & Brown, 2004). This is even more so in international markets, where
cultures differ markedly from one international market to another (Wood &
Robertson, 2000). Culture pervades all elements of the marketing mix-product,
pricing, promotion, and distribution- and the acceptability of each of these elements
will be judged in the context of the culture that they are targeting.


Cultural sensitivity involves being aware of the nuances of the different culture, being
empathetic with it, and viewing it objectively rather than subjectively. It begins with
an acceptance that other cultures in themselves are not right or wrong, and one culture
is not inferior to another, but, rather, is different. Being culturally sensitive will
reduce disharmony, alleviate aggravation, improve communications, and pave the
way for long-term international business relationships (De Burca, Fletcher & Brown,
2004). In order to understand customers in the international market, it is necessary to


                                            22
be aware of their cultural heritage. Appreciating the intricacies of the culture is
imperative in order to be effective in the foreign market. There are a number of key
cultural concepts that assist in clarifying cultures in broad terms and these are
reflected in the way culture manifests itself in an international business setting.
Included in these are time, space, language, familiarity and consumption patterns. The
way in which culture is communicated can be both verbal and non-verbal, and
operating in a different culture will require some degree of adaptation. Cross-cultural
comparisons, be they on a global or bilateral basis, highlight patterns of cultural
difference and their implications for management.


Global marketers who understand and recognise the meaning and substance of
cultures other than their own and the associated behaviours in those cultures will have
a significant global advantage. It is essential for global marketers to avoid a cultural
bias, or the self reference criterion (SRC), when dealing with business operations in
more than one culture (Jeannet & Hennessy, 2004).



Infrastructure
Issues to be considered here include the extent and nature of the export market‟s
physical distribution infrastructure. Reasonable logistics links should exist both
between the domestic and international market and within the international market.
The impact of the cost of logistics on the ability to both compete and satisfy demand
also needs to be considered. Also relevant in selecting a market is whether these links
are reliable and timely, - that delivery can be relied upon; that the time taken for
goods to reach the destination does not adversely impact on the ability to compete;
and that the goods arrive in an acceptable condition (De Burca, Fletcher & Brown,
2004). Further, consideration should also be given to the geography and climatic
conditions that may affect the business enterprise in the export market (Wood &
Robertson, 2000).



CONCLUSION

Market selection is complicated by changes in the international business environment.
These changes involving the formation of regional trade groupings, the creation of


                                          23
strategic alliances between firms and exponential spread of information technology
are resulting in a breaking down of barriers between countries and the need to view
the world as a global entity rather than as a series of national markets. As a
consequence the most appropriate international markets to have become more difficult
to enter (De Burca, Fletcher & Brown, 2004).


Underpinning the selection of markets to enter should be a strategic orientation that
treats market entry selection as part of the firm‟s overall strategy, linked both to its
resource base and a distinctive competence on the one hand and its position in relation
to competitors on the other. Selecting an international market can impact on the other
activities of the firm. This is because the outcome may influence the profitability of
the firm in its domestic as well as in its other international markets. Not only will this
impact be on overall profits but it might also have an impact in other areas such as its
global reputation (De Burca, Fletcher & Brown, 2004).


All the literature points toward two different types of data needs: macro information,
providing mostly knowledge about different environments; and micro information,
providing details about markets, activities within those markets, and the changes
taking place in them (Czinkota, 1991). Furthermore, a firm needs to be aware of its
internal capabilities, competencies and restrictions in order to select appropriate
foreign target markets.


The methodologies proposed in the literature for the selection of foreign target
markets are similar in their approach. Three main stages of preliminary screening, in-
depth screening and final selection have been identified and discussed. The salient
elements within these screening processes have likewise been identified and
discussed.


To conclude on a last, important note, the final selection of the country to enter should
not be made until personal visits have been made to the country and direct experience
has been acquired by management. There is no substitute for on-the-spot information
and the hands-on feeling of a new market (Johansson, 1997).




                                           24
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