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 Date Dr Aidan Daly, Lecturer in Global Marketing, NUI Galway 22nd March 2004

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

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)

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 subobjectives. 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.

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 firms 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 todays

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 managements 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

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. uncertainty. This knowledge will be invaluable to the organisation in their selection process and will minimise risk and 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 countrys 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

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 companys 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

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 corporate citizen Be ethical

Philantropic Ethical

Desired

Expected

Obey the law Be profitable

Legal

Required

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 decisionmaking (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, Roots (1994 as cited in Koch, 2001, p. 67) terminology will be employed, with a view to Keegan & Schlegelmilchs (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 organisations 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 timeand 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 competitors entry into a new market by entering first or increasing the firms 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 countrys 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 relations 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 marketers 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 countrys 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 countrys 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 Level 1: General Instability Level 2: Expropriation Level 3: Operations

Examples Revolution External aggression Nationalisation Contract revocation Import restrictions Local content rules Taxes, Export requirements Repatriation restrictions Exchange rates

Level 4: Finance

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 terrorisms 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 governments 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 countrys 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 companys 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 The Islamic legal system derived from the interpretation of the Koran and The Marxist legal system, found in Marxist socialist countries such as Russia, nations, Japan and non- Islamic and non- Marxist countries. followed by Pakistan, Iran, Saudi Arabia and other Islamic nations. 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 countrys 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

Rostows (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). countries under three clusters:
Figure 3: Categorisation of countries by degree of industrialisation

This categorisation groups

Less developed Countries

This includes underdeveloped countries and 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. These are countries with an emerging industrial base just entering world trade. These economies have high per capita incomes and an extensive industrial base. They have a developed infrastructure and are highly industrialised.

Newly Industrialised

Advanced Industrialised Countries:

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 countrys 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 markets 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 firms 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, indepth 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

REFERENCES Aaker, D. A. (2001) Strategic Market Management. 6th ed. New Jersey, John Wiley & Sons, Inc. Alon, I. (2004) International market selection for a small enterprise: a case study in international entrepreneurship. S.A.M. Advanced Management Journal, 69(1), pp. 2533. 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. Cateora, P. R. & Ghauri, P. N. (2000) International Marketing. European Edition. Maidenhead, McGraw-Hill Publishing Company. Cateora, P. R. & Graham, J. L. (2002) International Marketing. 11th ed. New York, McGraw Hill Companies. Cavusgil, S. T. (1985) Guidelines for export market research. Business Horizons, 28(6) November-December, pp. 27-33. Chetty, C. & Campbell-Hunt, C. (2004) A strategic approach to internationalisation: a traditional versus a "born-global" approach. Journal of International Marketing, 12(1), pp. 57-79. Czinkota, M. R. (1991) International information needs for US competitiveness. Business Horizons, November / December, pp. 86-91. De Burca, S., Fletcher, R. & Brown, L. (2004) International Marketing - An SME Perspective. London, Prentice Hall. Dow, D. (2000) A not on psychological distance and export market selection. Journal of International Marketing, 8(1), pp. 51-64. Erramilli, M. K. (1991) The experience factor in foreign market entry behaviour of service firms. Journal of International Business Studies, 22, pp. 479-501. Garrett, D. E. (1987) The effectiveness of marketing policy boycotts: environmental opposition to marketing. Journal of Marketing, 51(2) April, pp. 46-57. Gidengil, B. Z. (1977) The social responsibility of business: what marketing executives think. European Journal of Marketing, 11(1), pp. 72-86. Hollensen, S. (1998) Global Marketing - a Market-Respective Approach. Hertfordshire, Prentice Hall.

25

Jeannet, J. P. & Hennessy, H. D. (2004) Global Marketing Strategies. 6th ed. Boston, Houghton Mifflin Company. Johansson, J. K. (1997) Global Marketing: Foreign Entry, Local Marketing and Global Management. New York, Times Mirror Books. Keegan, W. J. & Schlegelmilch, B. B. (2001) Global Marketing Management - A European Perspective. Harlow, Pearson Education Limited. Koch, A. J. (2001) Selecting overseas markets and entry modes: two decision processes or one? Marketing Intelligence & Planning, 19(1), pp. 65-75. Kumar, V., Stam, A. & Joachimsthaler, E. A. (1994) An interactive multicriteria approach to identifying potential foreign markets. Journal of International Marketing, 2(1), pp. 29-52. Lee, T. J. (2002) Leading the way with the company brand. Strategic Communication Management, 6(4) June/July, pp. 9. Madsen, T. K. & Servais, P. (1997) The internationalisation of born globals: an evolutionary process? International Business Review, 6(6), pp. 561-583 as cited in Chetty, C. and Campbell-Hunt, C. (2004) A strategic approach to internationalisation: a traditional versus a "born-global" approach. Journal of International Marketing, 12 (1), pp. 57 - 79. Oviatt, B. M. & McDougall, P. P. (1995) Global start-ups: entrepreneurs on a worldwide stage. Academy of Management Executive, 9(2), pp. 30-44 as cited in Chetty, C. and Campbell-Hunt, C. (2004) A strategic approach to internationalisation: a traditional versus a "born-global" approach. Journal of International Marketing, 12 (1), pp. 57 - 79. Papadopoulos, N. & Denis, J.-E. (1988) Inventory, taxonomy and assessment of methods for international market selection. International Marketing Review, 5(3) Autumn, pp. 38-51. Root, F. R. (1994) Entry Strategies for International Markets. San Francisco, Lexington Books as cited in Koch, A. J. (2001) Selecting overseas markets and entry modes: two decision processes or one? Marketing Intelligence & Planning, 19(1), pp. 65-75. Rostow, W. W. (1971) The stages of economic growth. 2nd ed. London, Cambridge University Press. Tylecote, A. (1987) Time horizons of management decisions: causes and effects. Journal of Economic Studies, 14(4), pp. 51-65. Westhead, P., Wright, M., Ucbasaran, D. & Martin, F. (2001) International market selection strategies of manufacturing and services firms. Entrepreneurship & Regional Development, 13(1) January-March, pp. 17-46.

26

Wood, V. R. & Robertson, K. J. (2000) Evaluating international markets. International Marketing Review, 17(1), pp. 34-55. Ziller, A. & Phibbs, P. (2003) Integrating social impacts into cost-benefit analysis: a participative method. Impact Assessment and Project Appraisal, 21(2) June, pp. 141147.

27