Increase your international market knowledge

Attaining a solid knowledge of your foreign market will help you select the best entry strategy for your company. Getting your market entry right helps you operate efficiently in the local market, which contributes to your competitive advantage there. Getting it wrong can increase in-market costs and make logistics more difficult. This can reduce your margins and make it harder to reach potential customers.

Which strategy you choose will depend on your product or service, the results of your research and your objectives in the market. The most common approaches are the following:

Direct exports are sold to foreign customers without using the services of an intermediary such as a distributor or agent. Your customers may be either individual consumers residing in the foreign market or local businesses operating there.

5.1.1 Direct exports to consumers

With this approach, you sell to consumer-level customers in your target niche. This has a number of advantages, including the following:

• Your profits are higher because there are no middlemen.
• You have complete control over your transactions.
• You can establish close relationships with your customers.
• You have greater flexibility when you need to adapt to changes in the market or respond to your customers’ needs.

Whether this is the best approach for your company will depend on the nature of your product or service and your business model. If your offering is unique and has strong consumer appeal abroad, and you have adapted it to match the tastes of your target niche, then the direct-to-consumer approach could be your ideal entry method.

5.1.2 Direct exports to foreign businesses

In this model, you sell directly to a foreign business that uses your product or service for its own purposes, perhaps in manufacturing goods of its own. The advantages of this approach resemble those of selling directly to consumers, with the added benefit that you are dealing with a much smaller number of customers.

A foreign business that is not the end user of your product, but on-sells it essentially unchanged (except, perhaps, for the packaging), is considered a form of intermediary.

In places where there are language barriers, cultural differences and unfamiliar ways of doing business, using an intermediary can be an efficient way of entering the market. Good intermediaries will be familiar with local conditions and can help you find customers, arrange distribution channels, handle documentation, clear your goods through customs and provide after-sales service.

The three most common types of intermediaries are agents, distributors and export management/trading companies. Finding the right one will take some work. Contacts at trade fairs are one avenue of approach. Check with your contacts at the Trade Commissioner Service (TCS) and your sector’s trade associations. Other companies in your sector may be willing to share information about their experience with particular intermediaries.

There are three basic types of intermediary:

• Agents

An agent is an individual or firm you employ, usually on commission, to sell your product to wholesalers, retailers and sometimes end users in the target market. Unlike distributors, they do not at any time own the products they represent. They often have particular territories and sell to a particular set of customers. They may also handle products that compete with yours.

Unless agreed otherwise, the agent is responsible only for taking orders for your goods and then forwarding those orders to you. Actually filling the orders, shipping the goods to the customers and collecting payment is your responsibility, as is setting the local price for your product.

Your agent is usually responsible for the local promotion and marketing of your products through channels such as trade shows, social media, billboards, direct mail and newsletters. Agents will do a better job of this if you’ve trained them to fully understand your value proposition and to make your USP the keystone of their sales strategy.

• Distributors

Distributors buy your product from you and then sell it to end users at a markup that provides them with their profit margin. They can represent you in all aspects of sales and service, but may handle products that compete with yours. Unlike agents, they buy your product outright, warehouse your goods as needed, handle all local orders and shipping, and are responsible for customer credit risks.

Distributors represent you in the territory specified in the distribution contract, and may do so on either a non-exclusive or an exclusive basis. If it’s non-exclusive, you’re allowed to have more than one distributor in the territory. If the case of an exclusive contract, you agree to only use one distributor in the territory.

Like good agents, good distributors will promote and market your product effectively within your target niche. Also like agents, they’ll get you better results if they understand and use your value proposition and your USP.

• Export management and trading companies

These businesses handle multiple aspects of exporting, such as market research, transportation and advertising. Some firms buy your product outright, while others may act as agents on commission. Most specialize by product, by foreign market, or both; as a result, the better ones are familiar with the products they handle and the markets they serve and usually have well-established distributor networks already in place.

The major advantage of using one of these firms is the immediate and easy access they provide to a foreign market. The disadvantage is that you have less control over your foreign sales and you may not have a chance to become familiar with the market.

• Partnering with a larger Canadian exporter

Many small and medium-sized Canadian companies have succeeded abroad by working with larger Canadian partners that are already operating in foreign markets. This strategy can take several forms, from contributing to a supply chain to providing a custom product tailored to the larger partner’s needs. While there may be some loss of control for your company, this may be substantially outweighed by the opportunity for sales growth and diversification outside Canada.

Direct exporting, using intermediaries and working with Canadian partners aren’t the only ways of establishing your firm in a foreign market. Many Canadian companies start that way, but then discover that their expanding overseas business requires an equally expanded foreign presence.

These more advanced types of business presence are often referred to as foreign direct investment (FDI). FDI can range in complexity from small sales offices to large manufacturing plants producing for the local market.

5.3.1 Affiliates

An affiliate, sometimes called a subsidiary, is simply a company you set up in your target market to serve your interests there. Usually, its size is unimportant—you may be using it merely to establish a local business presence, or you may intend it to become a full-scale manufacturing firm with millions of dollars in annual revenues. In either case, though, it operates as a local company with respect to regulations, laws and taxes.

Governments vary widely in their attitudes to foreign companies that wish to set up businesses on their soil. Some welcome the investment and offer incentives to attract and keep it, while others may treat foreign-owned companies less favourably than local ones. Some countries don’t allow wholly-owned foreign affiliates at all, and foreign companies wishing to operate within their borders must do so by setting up a partnership with a local firm.

5.3.2 Sales and marketing offices

If all you need is a basic presence in the market, opening your own sales or marketing office (sometimes called a branch office) may be the answer. In most places, however, a sales office does not have the same freedom of action as an affiliate and can only perform basic functions such as market research and identifying customers. These offices can also be expensive to operate and staffing can be a problem. In many markets, sales offices have no real advantage over affiliates, and Canadian companies usually opt for affiliates when they need a local business presence.

5.3.3 Strategic alliances and joint ventures

A strategic alliance is a cooperative arrangement between two or more businesses and is designed to achieve a shared goal. It can take many forms, such as technology transfer agreements, purchasing and distribution agreements, marketing and promotional collaboration or joint product development. Ideally, the strengths of the two firms will complement each other and enhance their joint competitiveness in the target niche.

In a joint venture, your company and another firm cooperate to achieve a specific business objective. This cooperation could be a simple partnership that is limited in scope or duration, or it could involve a long-term investment of funds, facilities and resources to set up a separate company in the target niche.

Service exports tend to be intangibles. Even so, the major ways of delivering services in a foreign market do resemble those for exporting goods:

• If the business environment of the target market resembles that of Canada, and language barriers are minimal, (in the U.S. and the U.K, for example), you may be able to provide your services directly from Canada to your customers abroad.
• If the market is unlike Canada’s or is very distant, (or both), you could use an intermediary to negotiate a service contract between you and the client. Your staff would then go to the market to deliver the service.
• If the demand justifies it, you could set up a local office to promote your services in the target niche. You’d then send staff there to deliver the services as needed.
• Increasing demand for your services might justify establishing an affiliate in the target niche to deliver them. This can be a very flexible approach, since you can hire and train local professionals to deliver the service for you, or transfer Canadian personnel overseas to work directly for the affiliate.
• You could establish a partnership or joint venture with a firm whose services dovetail with yours, to the advantage of both companies.

Entry barriers are government-imposed restrictions on the free flow of goods and services among countries. A good knowledge of a foreign market will reveal what barriers you are likely to face, how they might affect your competitive advantage and how you may be able to overcome them.

There are two major types of entry barriers, tariff and non-tariff.

5.5.1 Tariff barriers

Governments impose tariffs or duties, (the terms are used interchangeably), to pursue various goals. The most important tariff objectives are as follows:

• Tariffs generate revenue for the government. This is their major purpose.
• They can be used to restrict the volume of imports to protect the country’s trade balance and avoid trade deficits.
• Tariffs can be used to protect local industries by making imports more expensive than their domestic equivalents. Local consumers will consequently tend to favour the domestic items over the imported ones.

5.5.2 Non-tariff barriers

Non-tariff barriers are also common in international trade. Many, such as technical standards for products or licensing requirements, are intended to provide safeguards against dangerous or substandard imports. However, they can also serve as trade barriers by being so stringent that foreign goods find it difficult to comply with them, and are thus put at a disadvantage in the local market.

The non-tariff barriers most often encountered by Canadian exporters include the following:

• Product regulations and certification standards can be so rigorous that the cost and difficulty of compliance is unacceptably high for most exporters. This effectively prevents them from trying to enter the market at all.
• Quotas limit the amount of a product that can be imported into a country. This can either keep the product out of the market entirely or increase its price until it cannot compete with local products.
• Sales and distribution licences can become a trade barrier if the government restricts the number of licences issued. Licensing procedures can also be made so difficult that it is not worth the importer’s time to acquire one.
• Customs clearance processes that are slow, complex and expensive can amount to a trade barrier in themselves.
• Discriminatory government procurement can favour local suppliers so that foreign competitors are kept out of the market.
• Entry taxes and other charges are normally intended to help cover the costs of customs formalities, but can be manipulated to make imports more expensive.

The most direct way of dealing with a trade barrier is simply to comply with it, if this is feasible from a business point of view. Leaving aside that approach, there several other ways of overcoming trade barriers:

5.6.1 Establish a local business presence

You may be able to bypass a barrier by establishing a local business presence, such as an affiliate or a sales office, as described in an earlier section. Because your entity is local and treated like a domestic firm, it’s not subject to government-imposed trade barriers that affect foreign-based companies.

5.6.2 Work with a local partner

If you work with a local partner, you may be able to avoid some kinds of entry barriers. For example, some governments do not allow foreign companies to operate in sensitive economic sectors, such as communications, unless they do so in partnership with a local business.

5.6.3 Take advantage of free trade agreements

In its most basic form, a free trade agreement (FTA) reduces or eliminates the tariffs on goods that originate in one nation and are sold in the other. Depending on how they’re negotiated, FTAs can also cover non-tariff barriers such as product standards and labour mobility. They may also regulate bilateral investment between FTA participants, so that the rules are the same for investors in both countries.

The existence of an FTA between Canada and another nation may make it much easier for Canadian exporters to operate in the latter’s market. Depending your sector and on the specific provisions of the FTA, the agreement may help you compete as an equal with local firms in the partner country—for example, by eliminating import tariffs and thus helping you compete on price in the target niche.

As of 2018, Canada had FTAs in force with the following nations or groups of nations (other than our NAFTA partners, the United States and Mexico):

5.6.4 Use distributors

If customs clearance is a significant barrier, a local distributor may be able to ease the passage of your goods into the county. Because a distributor buys your product outright and then handles all the details of importing it, using this approach may substantially speed up the clearance process. This can shorten delivery time at the local level, which may be an important selling point if the local customs process is prone to delays.