Types of Foreign Markets
[This is the fourth in a series of articles on globalization.]
Types of foreign markets
Just as strictly domestic companies must carefully identify and segment the potential U.S. markets for their products and services, firms interested in going global must be mindful of the diversity of foreign markets. In fact, many aspects of how, where and when a company does business overseas will be influenced by a country’s relative development, especially whether the new market is an emerging economy or is an industrialized or technological one.
If the market is an emerging economy, a number of hurdles must be overcome. For example, cash may be limited, consumerism may be unknown or unattainable and transportation and communication may be very difficult and expensive. On the other hand, while the challenges may be greater, competition may be even more limited in emerging economies. Accordingly, if the company can identify and enter an emerging economy just as it takes off, it will be able to enter the market when prices and costs are low and then reap the benefits of rising demand and revenue.
In contrast, an industrialized economy may present fewer potential problems from a regulatory, economic, social, cultural, political and technological standpoint. Unfortunately, this also means that competitors are more likely to have already entered the market. Even if competitors are not already there, business plans must assume that they will eventually be there. Companies may elect to enter the markets in industrialized countries for several reasons, typically because their presence is necessary to remain competitive with other firms and because entry is easier due to the presence of a more mature infrastructure for conducting business activities. However, because of the higher level of competition, the projected return on investment in these areas should be more modest.
A technology economy is essentially a variant of an industrial economy that may be created by the rapid and widespread substitution of technology-based production tools and products for the more traditional modes of manufacturing. The U.S., as well as most of the more affluent countries around the world, is part of the global technology economy. In a technological economy, new technology is likely to be welcomed, and a technology company is likely to feel at home in such an environment. On the other hand, a company from a technological economy that is trying to enter an emerging economy may be perceived as being arrogant and may have to adjust to a different pace of doing business. Also, many emerging economies lack the knowledge base to understand and integrate cutting edge technologies; however, opportunities do exist for companies to introduce those countries to mature technologies that are no longer competitive in the U.S. and other technology economies.
Ways of doing business in foreign markets – Indirect investment
Once the threshold decision to expand globally has been made, the company might decide to cautiously move overseas by an indirect investment. By indirect investment, we mean a method that requires no direct involvement of the company in the foreign market. Rather, the company engages an individual or company in the foreign market to assist it in exporting its products to that market. The most common indirect investment other than receipt of orders is the use of a local agent, typically a sales representative, who locates customers and obtains orders that are forwarded to the U.S. company for review and, if acceptable, fulfillment. The agent receives a commission based on sales generated from its activities. Another alternative is a distributorship. Under this arrangement, the U.S. exporter will actually sell its products to the foreign distributor with the intent that the distributor will resell the products to end users or other resellers located in the target market. The distributor assumes the risk of resale of products purchased under the distribution arrangement; however, the distributor is allowed to keep any spread between the price paid to the U.S. exporter and the consideration received upon resale of the products.
Proper selection and management of indirect investment partners should lead to greater foreign sales and a higher level of comfort with the operational activities necessary in order for products to be prepared for shipment to foreign markets. Moreover, the U.S. company will begin to liberalize its shipment terms to something like C&F (“cost and freight”) or CIF (“cost, insurance and freight”), port of entry, shipping documents D/A (documents against acceptance), 90 or 120 days sight. As the company builds up its reserves, and its confidence, it may decide to extend the terms of sale and provide credit terms to its distributors and selected customers identified through its network of foreign sales representatives.
