By Karen Lynch
There are large disparities between high- and low-income economies, particularly in regulatory areas that are central to doing business such as registering a company, trading across borders, getting credit and enforcing contracts, according toDoing Business 2017, a World Bank report.1 Plus, infrastructure, culture and currency issues are among the many practical variables of international trade that can lead a growth-seeking company to focus on one or the other of developed or developing economies.
All companies looking to make a profit carefully weigh each market’s inherent opportunities against its potential costs. But for small and mid-sized enterprises (SMEs), the World Trade Organization (WTO) says there is an additional calculation: the hurdles they face are often higher than those confronted by large multinational corporations.2
GDP in developing countries was expected to grow at 5 percent in 2016 and 5.8 percent in 2017, compared to growth in developed economies of only 1.4 percent and 1.7 percent, respectively.3 “Over the medium term, while we expect that advanced economies will continue along a disappointingly low growth path, emerging market and developing economies should accelerate as most of the large countries with currently shrinking economies stabilize and return to their longer-term growth paths,” according to the International Monetary Fund (IMF).4
This is not a new pattern. “Since the early 1990s, developing countries have been the fastest-growing market in the world for most products and services,” according to an article in the Harvard Business Review (HBR) titled “Strategies that Fit Emerging Markets.”5 As importantly, this is not a short-term or cyclical difference, but a long-term, secular transformation of the global economy – a fact that too few corporate executives appreciate, says the PwC consultancy.6
In an international trade survey published by the KPMG consultancy in 2015, over half of all respondents (54 percent) said that high-growth, developing countries already account for more than 30 percent of their revenue.7 Among only mid-sized companies, 44 percent claimed developing country revenue of 30 percent or more. Seventy-six percent of all respondents expected revenue from this market segment to increase in the coming three to five years. In developing countries, “massive consumer growth, increasing prosperity, greater rule of law and young populations all create significant opportunity,” KPMG concludes.
U.S. SMEs currently conduct international trade mostly in Mexico or Canada (43 percent), according to a 2016 survey by American Express, followed by Europe (29 percent) and Asia (17 percent). “While exporters are more likely to see the regions where they are already exporting and regions nearest to home as possessing the greatest growth potential, Asia may experience increased sales efforts in the next five years,” the survey showed.8
Despite low growth and established competition, developed markets also hold obvious appeal. For example, there are over 500 million consumers in the European Union (EU), which is evolving around the principle of free movement of goods without barriers to trade and with a minimum of administrative burden.9 Even with slow growth, a large addressable market like the EU can deliver the business benefits of lower unit costs, easier access to a wide range of commercial partners and greater rewards for innovation.10 Online information resource Startup Overseas factored in this easy access across the EU when declaring Denmark a good “starter market” for SMEs,11 even though the local market has only 5.7 million people and is growing at only 1 percent to 1.9 percent in 2016.12
Newcomers have succeeded in taking market share in European consumer goods, for example, despite apparent market saturation. Smartphone market statistics for the third quarter of 2016 bear this out: Huawei, a relative newcomer from China, has built a brand in Europe that continued to take market share in the quarter from more established suppliers by providing competitive features at lower price points, according to market researcher IDC.13
In any market, the digitization of global trade presents new opportunities by lowering costs and other barriers to entry for SMEs as well as the biggest multinationals. “Trade was once largely confined to advanced economies and their large multinational companies. Today, a more digital form of globalization has opened the door to developing countries, to small companies and start-ups, and to billions of individuals,” according to the McKinsey Global Institute.14 As an example, McKinsey cites tens of millions of SMEs worldwide that have turned themselves into exporters by joining e-commerce marketplaces.
Still, many companies struggle to expand outside of their existing markets to capture the benefits of global trade, KPMG says. Expansion can be delayed by a lack of insight into local markets, as well as the need to identify the right market entry models and local partners to reduce risk while maximizing reach.
Add to that the litany of practical challenges quantified in the World Bank’s Doing Business 2017 report, including taxes, the costs of starting a business, construction permits, getting electricity, labor market regulation, enforcing contracts, property registrations and trading documentation and finance. In these and other areas, developed economies dominate the report’s “ease of doing business” ranking.
As the oil that lubricates international commerce, trade finance can be a key challenge for exporters as well as importers – and this is particularly true for SMEs and developing countries. “Following the 2008-09 economic crisis, SMEs have found it increasingly difficult to access this vital form of credit,” according to the WTO. “The poorer the country, the greater the challenge.”15
Even analyzing the market opportunity can be harder in developing countries. “Executives are usually taught that data is an objective and critical input for strategic planning and operations. Applying this, however, is much easier said than done — especially among companies operating in emerging markets,” according to an HBR analysis.16 Issues include significant data gaps, biased data and outdated or incorrect numbers that can lead executives to make misguided investment decisions.
But developed countries present their own set of challenges. According to noted management theorist Michael Porter, competing with entrenched market leaders often means investing to achieve sufficient scale, overcoming customers’ long-standing loyalties, testing local government's relationships with national industry and battling advantages in everything from distribution channels to locked-in supply contracts.17
Of course, the opportunities and challenges vary among all nations and industries, and they will change over time. Latin America and the Caribbean provide a current example. “After almost a decade of strong growth following the global financial crisis, growth rates in the region have fallen and several countries are now heading into recession,” according to the World Economic Forum’s Global Competitiveness Report 2016-2017.18
“Business in emerging markets is just business,” says Harvard Business School Professor Felix Oberholzer-Gee. “That is the essence of global management. A thousand things change completely as you go from one market to another, and a thousand things stay exactly the same. The difficulty is in knowing which is which – what needs to change, what can stay the same.”19
Successful companies take the trouble to understand and work around institutional voids, information gaps and market barriers in whatever country they are targeting, according to specialists in global trade. “They develop strategies for doing business in emerging markets that are different from those they use at home and often find novel ways of implementing them, too. They also customize their approaches to fit each nation’s institutional context,” according to the HBR article on “Strategies that Fit Emerging Markets.”
In developed markets, entrants may need to keep an especially keen eye on the established competition, and may need particularly aggressive marketing and advertising to persuade competitors’ customers to switch. For SMEs, in particular, “engaging in appropriate levels of brand management opens all the initial channels for negotiating with government regulators and potential business partners – such as supply chain, manufacturing, warehouse solutions, distribution, and delivery services – in foreign markets,” says Smartling, a translation technology company.20
For each tactical challenge raised here – and many others – there are increasingly well-documented solutions. For example, in gathering the data required to assess a developing country’s market potential, companies need to be creative, finding the right proxy indicators to fill in gaps, for example, and focusing on forward-looking demand drivers.21
Many successful companies create joint ventures and partnerships or acquire local companies to combine global know-how with local experience and insight, KPMG says. They keep on top of changing market and regulatory conditions and stay in constant communication with distributors, sales representatives and other colleagues.22 They aim to establish solid, enforceable contracts.
Such rules of thumb apply to most any market. However, “some executives with little experience in emerging markets expect them to be radically different,” says Oberholzer-Gee. “This is the wrong impression. What is almost always true of emerging markets is that there are islands of modernity where emerging markets are way ahead, and then there are islands where they are clearly backward.”
Developed and developing countries present different risk/reward scenarios to companies that are seeking to grow through global trade. But there are some common keys to approaching them: learning the lay of the land, choosing markets and partners with care, tailoring strategies, monitoring continuously, anticipating competitive response, communicating assiduously and adapting operations to compete effectively.
Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.
1. “Doing Business 2017”, World Bank; http://www.doingbusiness.org/reports/global-reports/doing-business-2017 .
2. “Trade finance and SMEs” , World Trade Organization; https://www.wto.org/english/res_e/booksp_e/tradefinsme_e.pdf .
3. Fulcrum Monthly Report Card,Fulcrum Asset Management; https://www.fulcrumasset.com/assets/Document/MRCAnnexOctober.pdf?1475852073
4. “The World Economy: Moving Sideways,”International Monetary Fund; https://blog-imfdirect.imf.org/2016/10/04/the-world-economy-moving-sideways/
5. Strategies that Fit Emerging Markets,Harvard Business Review; https://hbr.org/2005/06/strategies-that-fit-emerging-markets
6. “Navigating the Risks and Opportunities in Emerging Markets,”PwC; http://www.pwc.com/us/en/view/issue-15/navigating-risks-opportunities-emerging-markets.html
7. “Global High Growth Markets Outlook 2015”, KPMG; https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/high-growth-markets-outlook-2015.pdf
8. “International Markets Provide Growing Source of Revenue for Small and Mid-sized Companies, According to American Express Grow Global Survey,”American Express; http://about.americanexpress.com/news/pr/2016/intl-markets-revenue-amex-grow-global-survey.aspx
9. “Single Market for Goods,”European Commission; https://ec.europa.eu/growth/single-market/goods/
10. http://www.strategy-business.com/article/00123?gko=c502d .
11. "Why Expand to Denmark?” Startup Overseas; http://www.startupoverseas.com/expanding-a-business-in-denmark/entering-the-market.html
12. “The World Factbook,”U.S. Central Intelligence Agency; https://www.cia.gov/library/publications/the-world-factbook/geos/da.html
13. Worldwide Smartphone Shipments Up 1.0% Year over Year in Third Quarter Despite Samsung Galaxy Note 7 Recall, According to IDC,IDC;http://www.idc.com/getdoc.jsp?containerId=prUS41882816
14. “Digital Globalization: The New Era of Global Flows,”McKinsey Global Institute; http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/digital-globalization-the-new-era-of-global-flows
15. “Trade finance and SMEs,”World Trade Organization; https://www.wto.org/english/res_e/booksp_e/tradefinsme_e.pdf
16. “The Dos and Don’ts of Working with Emerging-Market Data,”Harvard Business Review; https://hbr.org/2016/07/the-dos-and-donts-of-working-with-emerging-market-data
17. “How Competitive Forces Shape Strategy,”Michael E. Porter, Harvard Business Review; https://hbr.org/1979/03/how-competitive-forces-shape-strategy
18. “Global Competitiveness Report 2016-2017,” World Economic Forum; http://www3.weforum.org/docs/GCR2016-2017/05FullReport/TheGlobalCompetitivenessReport2016-2017_FINAL.pdf .
19. Does Business Get Done the Same Way in Emerging and Developed Countries?,Harvard Business School; http://hbswk.hbs.edu/item/is-doing-business-in-emerging-economies-different-than-in-developed-nations
20. “The Complete Guide to Market Penetration,”Smartling; https://www.smartling.com/market-penetration/
21. The Dos and Don’ts of Working with Emerging-Market Data,Harvard Business Review; https://hbr.org/2016/07/the-dos-and-donts-of-working-with-emerging-market-data
22. “9 Tips for Doing Business Globally,”Inc.; http://www.inc.com/ss/9-tips-doing-business-globally