How To Enter An Emerging Foreign Market
Do you want to tap into a foreign emerging market, but don't know where to start? Small and medium-sized companies generally do not have the resources they need to successfully work emerging markets on their own. But there is a lot of information out there that companies can draw on, including government agencies, university centers, and private firms. With some key tools and good planning, you can develop the foundation you need to safely export to an emerging market.
Before you begin, ask yourself these questions.
- Why do you want to enter a foreign market?
- Are you financially able to handle risks?
- Why do you believe your company will succeed in an emerging market?
Harvey James, assistant professor of economics at the University of Hartford, says the answers to those questions are key to anyone embarking into an emerging foreign market. "If you want to enter a market because you think everybody is doing it, you will likely fail," James says. "If, however, you are convinced that there is a market for your product or service in Mexico, Argentina, China, or any other emerging country, you have a better chance of succeeding."
Take a little advice from Lou Hoffman, CEO of the Hoffman Agency, a privately held, high-tech public relations firm based in San Jose, Ca. Hoffman determined that there was potentially a good market for his company in China in 1996. Common sense and initial industry research gave him the fuel to investigate the opportunities there. "Just the fact that there's more than one billion people in China awakening to the potential of capitalism and embracing computers caught our attention," says Hoffman. "If the China PC market grows at 29 percent per year through 2002 as firms predict, (the market) will pull even with Japan as the number-two PC market in the world behind the United States. In short, we simply used the Web, magazines and newspapers to understand the buying power in China (today and tomorrow) when it comes to technology-related products." Outline:
- Develop Your Plan
- Research The Emerging Market(s)
- Know Your Classification Systems
- Determine Your Export Potential
- Focus in on Target Markets
- Experience is the Best Teacher
- Questions to Ask
- Detailed Emerging Market Risk Resources
- Country Reports
- Tariff and Customs Information
- Money Conversion
- International Legal Help
- Financial Help
- Payment Systems Links
- Directories of Banks
- Operating Abroad
- Federal Programs
- International Trade Associations
- Consulting Firms
- Shipping Resources
- Go For It!
- Related Tools
I. Develop Your Plan
Once you have figured out that there is a reasonable market potential for your product, it's time to come up with a plan. If you are new to exporting, the U.S. Trade Information Center offers tips for developing an export strategy in the site's FAQ section. These include:
- Evaluating your product's export potential
- Determining if you are really willing to make a commitment to international markets by evaluating whether your company is "export-ready"
- Staying competitive and learning what your competitors are doing in the foreign market
- Being aware of potential competitors
- Identifying key foreign markets for your products through market research
- Assessing distribution and promotional options and establishing an overseas distribution system
- Deciding on export prices, payment terms, methods and techniques
- Familiarizing yourself with shipping methods and export documentation procedures
Joe Durek, who leads the international program at Lintek, a privately held, chemical-free pest control company with offices in Florida and more than 30 countries, recommends calling The Small Business Administration for help. The SBA's VISTA program will provide experienced executives to review your initial marketing plans and advise you on the best strategy to enter a specific market.
II. Research The Emerging Market(s)
Once you have developed an initial plan, you are ready to begin the next phase of hard-core research. If you haven't determined them already, you could figure out the growth potential of a few target areas. For instance, you can focus on regions such as Europe, Latin America and Africa, or you can choose specific countries to research in detail. Some analysts believe it's more efficient to choose a region as opposed to a country. Your best bet is to find and research the largest or fastest growing markets as potential export areas for your products.
The U.S. Agency for International Development provides a comparison of growth rates for five regional groups, including the United States, in its Global Merchandise Trade publication. For instance, the publication indicates that from 1987 to 1997, Asia and the Near East increased import and export rates faster than any other developing regions in the world.
III. Know Your Classification Systems
If you are new to exporting, be aware that most product sites use certain classification systems to group products. As you review the list of systems below, note that each system has various levels of digits and only the HS, SITC, and CPC are commodity-based.
Harmonized System (HS). This is an international system used to classify traded products for both tariff and statistical purposes. Individual product categories are represented by six-digit codes, but any country may append additional digits. The United States uses 10-digit HS codes for collecting merchandise trade data. Examples of the Harmonized System include the codes 020319 for swine meat and 100300 for barley cereal.
Standard International Trade Classification (SITC). This five-digit classification is used to report aggregated national trade statistics to compare international products. Examples of the system include 01221 for swine meat which is chilled or frozen and 04300 for barley cereal.
Standard Industrial Classification (SIC). This was the former four-digit economic classification system used to describe industries of the U.S. economy. It was replaced by the North American Industry Classification System (NAICS) in 1997. Like the NAICS code, this system is used when comparing trade with employment or shipments.
North American Industry Classification System (NAICS). This is a five-digit economic activity classification jointly created by the United States, Canada, and Mexico. The official NAICS site has a table that shows how the NAICS code is compared to the defunct SIC code. For instance, 0116 is listed "soybean" under the SIC system but 11111 is "soybean farming" under the NAICS system. Another table shows the number of employees and the number of businesses within the industry in the United States. Starting with 1999 data, NAICS trade data replaced SIC data. National implementation normally requires use of a sixth digit to identify industries not recognized by other countries.
International Standard Industrial Classification (ISIC). This is a four-digit economic activity classification published by the United Nations. This classification system is typically used to compare production and trade data for multiple countries. For example, 3111 means slaughtering, canning and preserving meat, and 3119 means manufacturing cocoa.
A. Determine Your Export Potential
Now that we have learned the product identification systems, let's find out if your product is a good fit for an emerging market. Your best bet is to find out what types of products are currently exported to the area. One of the best ways to evaluate a product export potential for a given country is to contact the U.S. Commercial Service and have them do product research, said Lintek's Durek. This research is done for a nominal charge, which in most cases is under $250. Also, consider where your competitors are currently operating. Researching your competitors on the Internet will determine if they have a Web site and whether they list the countries to which they export.
You can also get a good feel for your export potential by evaluating your firm's strengths and weaknesses and by comparing them with qualities of successful exporters. The Are You Ready to Export questionnaire from the Foreign Agriculture Service's site highlights characteristics common to successful exporters. You will receive a score once you complete the questionnaire, which will help you to assess your export readiness and identify areas your business needs to strengthen to improve its export activities.
If you are exporting a product, the U.S. Trade Highlights from the Department of Commerce helps you research U.S. commodity trade for 80 of the world's largest markets. For example, according to the 1998 table, crude oil and leather were the top imports into Argentina. The table lists commodities by SIC codes so you can readily see if your product category is listed in the top 20. For Brazil, data shows that footwear is the country's top import followed by aircraft equipment.
Also, before entering an emerging market, you should find out how strong a presence the United States has in that country. To research how many Western companies were doing business in China at the time or had plans to do business in that country, Hoffman contacted the U.S. Department of Commerce(DOC). He found out that virtually every major Western tech company and many "emerging" tech companies were already physically in China. One good source is the U.S. Department of Commerce's report of the Top 50 Purchasers of United States exports in 1998.
The National Trade Data Bank is often touted as the number one choice to find export and trade statistics. The service is fee based, costing $150 a year to sign up. Although you generally have to have an idea of where you want to export in order to fully use its resources, the site is helpful for learning the standards associated with exporting a particular product to a specific country or region. Here is how you can use the site to research emerging markets:
Country Commercial Guides, located on the Globus and NTDB page of Stat-USA, are useful for obtaining information about a country's commercial environment, market conditions, economic situations, political environment, best export sectors, trade regulations, investment incentives, finance techniques, upcoming trade events, marketing strategies, services for exporters, business travel tips, etc. The CCG also lists important government and trade association contacts.
International Marketing Insight Reports (also on Globus and NTDB) are short profiles of specific foreign market conditions or opportunities prepared by the Department of Commerce's U.S. and Foreign Commercial Service, the Department of State, as well as multilateral development banks in overseas markets. These reports provide information on a dynamic aspect of a particular market. They may focus on specific projects, industry profiles, finance and marketing trends, regulation and import changes, trade show opportunities, or government policy updates.
Industry Sector Analysis Reports (on Globus and NTDB) are profiles of different industries in various world regions. The profiles analyze market opportunities. For instance, with the click of the mouse, you can find out about exporting pet food to Argentina. The information is organized alphabetically according to the country and the product.
If you are thinking about providing a service rather than a product to a country, unfortunately a greater volume of data is available for products, simply because it is easier to track products than services. However, the Bureau of Economic Analysis' "Survey of Current Business" Web site presents data on cross-border trade in private services. Also, check with the U.S. Department of Commerce's Office of Service Industries. The site includes the "Top Ten U.S. Services Exports." The office also has a 20-page report titled U.S. Services Trade Highlights on its Web site.
B. Focus On Target Markets
Now that we have found out if our product is a good fit with current exports to the emerging market, we are ready to research the emerging markets in greater detail. A great online source is Emerging Markets Companion. The site's news and research on developing countries, such as its Country Profiles, can help you narrow down your list of emerging markets. Here you can explore the demographics, geography and politics of countries located in Latin America, Eastern Europe, Eurasia, Asia, and Africa.
As you research each country profile, look for social or cultural patterns or behaviors that will make your product a good fit for your region of research. Contact the consulate offices in your target areas and find out if their regions have trade offices in other countries.
C. Experience is the Best Teacher
Experts agree that nothing beats real life experience within a culture when it comes to export know-how. If you can network with people who have lived in or have some type of connection in your emerging country, the information they provide will be invaluable.
Some of the most important issues concerning entering into an emerging market are experience-based rather than research-based. For instance, only a consultant or an associate who has conducted business in South Africa can shed light on discrimination issues, professor James says. You can read about it in books, but that isn't the same as experiencing it yourself or having a conversation with someone who has seen it first-hand. "A black business owner from the United States may have a difficult time doing business in 'white' areas of South Africa, even though legally apartheid has ended," he says. "Similarly, a white business owner trying to sell products in black areas of South Africa may have trouble." James supposes that most companies fail because of the difficulties they have with these "softer" issues: culture and ethics. "It is reasonably easy to draw up a business plan, get funding, and even begin manufacturing products for sale abroad," he says. "It is more difficult to learn about the cultural aspects of what makes business work in different countries."
While it is important to understand the cultural and business nuances of a country, it is also important to realize that you should not change your business practices if the new practice will result in a loss, says Lintek's Durek. "If a country's business practices require 'net 90' on an order and you can only extend 'net 30' and make a profit, don't change your policy in expectation of changing the country's net policy in a few months. It will not happen."
There's no question for any company entering an emerging market that unexpected roadblocks will surface, says Hoffman. "Instead of viewing these roadblocks as a negative, we viewed them as a positive in the sense that they would make it tougher for other companies to follow in our path, and our competitors would likely lack our strength of conviction which ultimately enabled us to break through each and every roadblock," he adds.
A manageable business task in the United States could turn into a complicated matter in a foreign country. Each region conducts business differently, and in many cases the only way to learn these nuances is to experience the area during cultural trips. "There is a tendency for Americans to look at the world with a Western mentality," Hoffman says. It's helpful to consciously remind yourself to remove this type of thinking and see the situation with fresh eyes. For example, Zong Li, a Chinese national who opened the China office for the Hoffman Agency, tried to buy an advertisement for the company in China. This is a routine experience that takes less than 30 minutes in the United States. However, in China, an ad must gain approval stamps from the proper government agencies before the newspaper is allowed to run it. Here's what happened.
Step 1: Li started off with a meeting with the Foreign Enterprises Service Bureau, where she was told that the ad was missing required "verbiage." The ad required adjustments.
Step 2: Li went back to the hotel business center to redo the ad.
Step 3: Li went back to the Foreign Enterprises Service Bureau where they reviewed and approved the ad.
Step 4: Li went to the Beijing Commercial and Industry Bureau (Talent Market Section) to get this agency's approval, but this agency said the ad was wrong and needed to be redone.
Step 5: Li went back to the hotel business center to redo the ad for the second time.
Step 6: Li had to go back to the Foreign Enterprises Service Bureau. Since the ad was changed, its stamp of approval was no longer valid. Li explained about the different requirements from Beijing Commercial and Industry Bureau and after much discussion and multiple meetings at the Foreign Enterprises Service Bureau, they finally approved the most recent ad.
Step 7: Li went back to the Beijing Commercial and Industry Bureau and received the seal of approval.
Step 8: Li took the ad to the Beijing Youth Daily newspaper. Seeing that the ad had the proper stamps, they allowed the company to pay for the advertisement, but the payment had to be processed before they would take the ad for publishing.
Step 9: Li went back to a different department at the Beijing Youth Daily newspaper. Before the ad actually runs, this department checks the validity of all the stamps of approval and processes payments.
Li's advertising ordeal shows that even being a native won't teach you all you need to know about the way a country does business. However, this example can give you an idea of what you should expect.
Quite a bit of this kind of research can be conducted on the Internet. The Global Emerging Market Data Base provides overviews of emerging markets as well as economic, political and financial information. Use the database to access information about a country's political situation, economic overview, trade information, or cultural information.
Next, check the general economic and business conditions in the areas you have chosen. Pay attention to dramatic inflation levels or currency exchange fluctuations. Note if the economy is expanding or contracting. Identify if the economy is dependent upon specific trading partners and in turn, their economic or political stability.
The Federation of International Trade Associations provides links to detailed resources for countries and regions. Check the section called "Regional Resources and Multilateral Trading Areas," where you will find subheadings for the following areas and regions:
- North America
- Latin America and the Caribbean
- Australia, New Zealand and Oceania
- Middle East/Africa
Under each subheading there are pull-down menus for countries in each region, or you can select the entire region for research.
D. Questions To Ask
As you conduct your research, try to answer the following questions:
- What is the inflation outlook of your target market?
- Are there any political or social problems?
- Is the currency exchangeable?
- What is the outlook for the currency exchange rate?
- Are there any tariff barriers that could restrict imports or raise prices?
IV. Detailed Emerging Market Risk Resources
The most important risks for entering an emerging market are political and market stability.
If you would like to get free, thorough data from a financial analyst, check out Duke University Professor Campbell Harvey's Country Risk Analysis Web site. Among other things, this site has an updated chronology of important financial, economic, and political events in emerging markets. The chronologies are organized in linked charts for 28 countries, including emerging markets such as Argentina, Brazil, China, India, and South Africa.
For a general snapshot of an emerging country, visit The World Fact Book. This site has information on geography, government, cultural, communications, transportation, military, and transnational issues for dozens of countries.
V. Country Reports
The Louisiana State University Web site , voted one of the best sites by faculty members at the Harvard Business School, also has its share of country reports. If you haven't been able to answer questions on a country's economic stability, inflation outlook, political or social concerns, or currency issues, this site may provide the answers.
The U.S. Department of Commerce's Big Emerging Markets page provides information indexed with an overview, statistics and links for several key emerging markets.
The World Bank has two-page summaries of major indicators for 190 countries. The E-Conflict World Encyclopedia also offers extensive info on many countries. Some of the material is from the CIA World Fact Book. Additionally, the United Nations' Infonation allows you to select up to four indicators for up to seven countries and view the results. The UNESCO site provides 11 of the 75 indicators per country, published in the "Statistical Yearbook." The U.N. provides profiles of employment and wages by country for three-digit ISICs in its statistics area.
VI. Tariff and Customs Information
In the planning stages, you should find out if tariff restrictions that could significantly raise the price when exporting to an emerging market. Next, find out how to determine the tariffs and taxes for your export.
First, classify your product according to the Harmonized System (HS) code. The numbers, also called Schedule B numbers, are used by customs officials. Use the U.S. Census Bureau's site to classify your products in the HS system. Now, you can use the number to determine the tariff and tax information at the following sites:
- The International Trade Administration's Office of Technology and Electronic Commerce at the Department of Commerce maintains a Web site which contains information on duties and taxes applied by nearly 120 countries on imports of U.S. computers and software.
- A tariff Web site is available for members of the Asia Pacific Economic Cooperation (APEC). Members of APEC include many Asian economies, the United States, Canada, Mexico, and Chile. Although the service is free, you will be asked to register in order to use the site.
VII. Money Conversion
Other sources of risks include currency fluctuations. For instance, to do business in Mexico, you must convert dollars to pesos. If the dollar/peso exchange rate fluctuates dramatically, a low cost investment in Mexico could become expensive when measured in U.S. dollars. Here are some monetary conversion links to help you:
- Universal Currency Converter. Simply type the area of the currency you wish to convert from in the input box and put the destination you wish to convert to in the destination field. Press the "perform currency conversion button" and the results are displayed.
- Money Converter. In addition to performing the same function as the Universal Currency Converter, this Web site allows you to choose the date of the conversion.
VIII. International Legal Help
During your country research, take note of local laws concerning licensing and intellectual property in your chosen country and investigate the region's copyright laws. Find out if the laws are enforced and be aware of any laws that may make it difficult to sell your goods.
The Hieros Gamos Comprehensive Law and Government Portal has information about the laws and intellectual property. You will also find law information that's country specific on the Hieros Guide to Corporate and Business Organizations site.
Lawyers have the most comprehensive checklist of considerations on the Web for entering an emerging market. To make certain that you have all the bases covered in your research, answer all the questions in Lex Mundi World Reports. For additional legal advice, search for a lawyer anywhere in the world using the Martindale-Hubbell Lawyer Locator.
The Lex Mercatoria international commercial law and e-commerce monitor Web site provides information and links related to international trade law. The site presents the full texts and relevant country implementation details for the most important conventions and documents used in international trade.
IX. Financial Help
After two years of repeated economic crisis in some emerging markets, the largest challenge facing companies wishing to invest or trade with these regions is the reduction in available bank financing, says analyst Elizabeth Morrissey, managing partner of Kleiman International Consultants, Inc., a Washington, D.C. independent analyst of emerging banking and securities markets. Most U.S. banks have scaled down their lending to these regions following losses resulting from previous exposure, she says.
"Emerging countries are not cash rich but they can sometimes give nice incentives to outside investors," adds Karen Jeffery, president of Pacific Island Investments, a brokerage firm with headquarters in Waikola, Hawaii. "I came down here and created alliances with people. The Internet is a good resource. I contacted investment boards and chambers of commerce for information. I also got to know government personnel and Prime Ministers," Jeffery says.
"Eye on Banking" lists banks worldwide, including the biggest emerging markets. The Geographical List is easy to maneuver just click on the region or the area on the map for a listing of banks in the area. There is also an alphabetical list if you have a specific bank in mind.
X. Payment Systems Links
Get information on the basics of bartering, using letters of credit, counter-trading or electronic payments from the Federation of International Trade Associations site. The site provides links to the Trade Compass Site, which provides an explanation of what letters of credit are and how are they used. The FITA site also includes links to other sites that provide professional bartering services.
XI. Directories of Banks
Export-Import Bank of the United States offers programs on loans and guarantees, working capital, export credit insurance, project financing and other programs to U.S. companies. The Web site has a special section on country information, including country fact sheets.
The European Bank has information on financing and export programs to/from countries located in the former Soviet Union and Eastern Europe.
A member of the World Bank Group, the International Finance Corporation (IFC) is the world's leading multilateral source for loan and equity financing for private sector projects in developing countries.
The Multilateral Investment Guarantee Agency, also a member of the World Bank Group, encourages the flow of foreign direct investment to its development member countries. Its primary means of facilitating investment is through the provision of investment guarantees against the risks of currency transfer, expropriation, and war and civil disturbance (so-called "political risks").
The Overseas Private Investment Corporation provides political risk investment insurance to U.S. companies.
XII. Operating Abroad
A final consideration is how your U.S. business will operate abroad. Should you produce in the U.S. and export, or do build a manufacturing operation in the host country? Should you go it alone, or establish a local business partner through a joint venture, strategic alliance, or licensing agreement?
Each of these different options have advantages and disadvantages. As an overly generalized rule, the more risky the expected business operation is in the foreign country due to political, economic and economical reasons the greater are the advantages of finding a "local" partner. For U.S. firms, doing business in the United Kingdom is generally easier than doing business in China. The reason is obvious the local partner can help bridge the cultural gaps, and also help hedge against the harder political and economic risks. Of course, the disadvantage is simply the effort required to find an appropriate partner.
It took intermediary Scott Romeo, president of Arizona-based New Horizon International Consulting, nearly 18 months to reach a deal with a client in Vietnam. Although he has seen many companies who put out feelers for partners on the Internet, he says the best way to build a relationship with an overseas partner for export is through good old-fashioned personal contact. "That contact came not through the Internet but from a personal relationship from an individual who was traveling through Vietnam (who) made the contact, built the relationship and then brought us the project," Romeo says. "We then had to develop the relationship as well. While the Internet helped with communication, we had to fly the two parties to the United States for personal visits before they signed any contract."
If you plan to operate your business within the emerging country, having an insider's knowledge of the area is even more vital to your success. Michael Dalke, president of Resource Pacifica, began his Pacific island architectural firm after his Beverly Hills company landed him a furniture construction job in Indonesia. He didn't want to return to the hustle and bustle of city life after spending time in the island's serenity. He learned about the people and their customs and made his business there by fulfilling a need. He found his niche by building ecologically sound resorts using termite-proof lumber.
XIII. Federal Programs
If you plan to go it alone, lean heavily on the federal government. The U.S. government has several programs to give you the support you need, including foreign experts to put you on the inside track to doing business in an emerging market. For instance, the SBA and the U.S. Department of Commerce provide a variety of services aimed at benefiting small and medium-sized business exporters, including:
Export Working Capital Program (EWCP). Provides short-term, transaction-specific financing. The SBA guarantees up to $750,000 or 90 percent of the loan amount, whichever is less. Exporters may use this program for pre-export financing of labor and materials, financing receivables generated from these sales, and/or standby letters of credit used as performance bonds or payment guarantees to foreign buyers.
The International Trade Loan Program (ITL). Helps small businesses that are engaged or are preparing to engage in international trade, as well as small businesses adversely affected by competition from imports. The SBA can guarantee up to $1.25 million, less the amount of SBA's guaranteed portion of other loans outstanding to the borrower under SBA's regular lending program.
U.S. Export Assistance Centers. USEACs offer a full range of federal export programs and services under one roof. Clients receive assistance from professionals at the SBA, the Department of Commerce, the Export-Import Bank of the United States, and other public and private organizations.
Service Corps of Retired Executives. SCORE provides individual counseling from retired international executives to prospective exporters. SCORE has 400 locations and more than 13,000 members in the United States.
Small Business Development Centers. SBDCs offer in-depth business counseling and training. It operates in cooperation with local colleges and universities.
Export Legal Assistance Network. ELAN provides free, one-time consultation from an attorney experienced in international trade law.
The U.S. Chamber of Commerce. Offers a wide range of information on export potential, international markets, plus trade leads and contacts. It also conducts trade missions and catalog exhibitions, and assists firms participating abroad in trade shows. This organization's Web site offers up-to-date information on issues involving U.S. business.
XIV. International Trade Associations
Many of these associations offer a wide range of services. Most conduct regular meetings with qualified speakers and provide networking opportunities with others involved in international trade. The Federation of International Trade Associations (see Web site below) lists more that 350 member associations.
XV. Consulting Firms
Trade consultants can provide information on domestic and foreign trade regulations and overseas markets, and can assess overseas commercial and political risk. They often specialize in product lines and/or geographical areas. Some small law firms, accounting firms or specialized marketing firms also provide international trade consulting services. GIC Group is one of the best known firms in this arena.
XVI. Shipping Resources
The Federation of International Trade Associations has shipping resources including directories, shipping schedules, airports, seaports and tracking sites.
ClearFreight is a customs broker and freight forwarding company. The company's Air Freight Resources site provides airline cargo links, trade organizations, aviation related links, and a real-time air waybill tracking service. Its Ocean Freight Resources site includes links to worldwide ports, freighter services, ocean shipping, as well as maritime organizations.
XVII. Go For It!
You now have some solid resources and advice for entering into an emerging market. Keep in mind that a new market will present challenges for which you simply can't plan. "It is imperative that each new exporter learn as much as they can about the country," says Durek.
Roger E. Axtell, "The Do's and Taboos of International Trade: A Small Business Primer" (John Wiley & Sons 1994)
Bill Bishop, "Global Marketing for the Digital Age" (NTC Business Books, 1999)
Keith Lewis, Matthew Housden, "An Introduction to International Marketing" (Kogan Prage Ltd., 1998)
Kenneth D. Weiss, "Building an Import/Export Business" (John Wiley& Sons, 1997)
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