Companies entering foreign markets might face problems or increased costs because of the business environment and the way in which companies operate. For example, marketing services might be prohibitively expensive. The banking system might be undeveloped, and certain payment mechanisms may be unavailable. Letters of credit might be unreliable or difficult to obtain.
A monopoly situation represents a very serious entry barrier. A monopoly occurs when one company is the main provider of a product or service in a market. Monopolies might be state owned or can be created through takeovers of competing companies.
Monopolies often block entry to competitors by using patents and licences to prevent the development of possible substitutes, by controlling distribution routes, resources or suppliers, or by using pricing strategies.
One example of a monopoly-type situation is the provision of Internet services in North America. Because of the way Internet signals are carried (through cable or phone lines), consumers usually only have one of two choices for how they obtain their Internet service: through their phone company or through their cable provider. In rural areas where cable has not been installed, the phone company will be the only provider of Internet services for most customers.
If entering companies cannot access an efficient or cost-effective distribution system because incumbent companies control distribution networks, their goods or services are unlikely to be successful.
If supplies and resources in the target market are cut off because of an exclusive deal with incumbent companies, an alternative supplier from another market will need to be identified if possible, although this will be more expensive. In the case of the Internet providers described above, a new company wishing to provide Internet service would have to install new wiring to all areas it was targeting. This would be prohibitively expensive. Incumbent companies can also charge lower prices than new entrants and often use this as a strategy to dissuade competition.
2. Legal protection
Poor legal protection available to foreign companies also acts as a barrier. If a company cannot assume protection of its intellectual property (copyrights, patents, trademarks) and fair and effective dispute settlement mechanisms, it is likely to suffer losses in the market. In some countries, resorting to legal action over a commercial dispute can be futile, because neither the law nor the courts favour the foreign exporter.
3. Bribery and corruption
In many countries, business activities are commonly sped up or made possible through the payment of bribes.
Corrupt practices can be used to induce a government to adopt measures that are favourable to an industry or to influence government purchasing decisions.
In other cases, key officials and decision makers will demand some form of payment to allow a transaction to proceed. Although public opinion in the target country may be against such practices, they remain a reality. While local companies in such countries treat bribes as an everyday business occurrence, foreign companies can face severe civil and criminal penalties for paying bribes. This puts them at a disadvantage in the market.
Strategies to consider
Companies should remember that no matter how different the conditions, there are business people who thrive and prosper in virtually every country of the world.
Therefore, one strategic response is to partner with local business people who do understand the system and can work it to commercial advantage. When entering a market dominated by a monopoly, companies must understand that they have a high chance of failing and be prepared to lose substantial amounts in sunk costs.
Perhaps the most successful strategy is to differentiate their product or service from that provided by the monopoly. Companies should limit their exposure in countries that lack legal safeguards, especially when they have valuable intellectual property that is essential for their success.
2 thoughts on “Top three potential barriers to foreign market entry”
I think the most important thing for any company to understand is the cultural sensitivities of the new market they are planning to enter. Once you understand the culture, it will become easier to navigate your way through the market. This was so true for our company when we entered a new market.
That is so true Krishna! This is a point that is not lost on the many subject matter experts experienced in global trade. You will find the cultural aspects of international trade mentioned repeatedly across our blog as well as in the FITTskills text books. Thank you for the comment Krishna!