How to Expand Your Business Globally

Overview

Today’s global market demands global action, yet, according to the U.S. Department of Commerce (DOC), fewer than 10 percent of American manufacturing and service companies are involved in international trade. However, like it or not, you’re probably already competing globally — foreign-owned companies are competing with you in your domestic markets. You can turn global competition to your advantage by tapping markets and labor supplies across international borders yourself — a process that is simpler than you may believe. This Interactive Business Tool will help you understand how to stretch your company’s global reach. In addition to this discussion, you will also find valuable information in a related module, How to Enter an Emerging Foreign Market.

A. Why Compete Globally?

Becoming involved in international trade can help your business:

• Enhance domestic competitiveness by finding less-expensive suppliers
• Increase sales and profits
• Gain global market share
• Reduce dependence on existing markets and suppliers
• Extend the sales potential of existing products with relatively low development costs
• Stabilize seasonal or cyclical market fluctuations
• Enhance potential for corporate expansion

B. Watch Out For.

In order to participate in global trade, your business will need to incur additional costs, such as developing new promotional material, traveling to foreign locations, modifying your product to meet the needs of a new market, and shipping overseas. For these reasons, the decision to embark on international trade should be done with eyes open.

II. Methods of Doing Global Business

There are several methods you can use to enter a foreign market, including exporting, importing, licensing, joint ventures and off-shore production. If you have an existing business that creates a tangible product, exporting is the most common method. Start-up costs and risks are limited, and profits can be realized early on. If you are beginning a new venture, the other choices are options that may reduce some of the start-up risks.

There are two basic ways to export: directly or indirectly.

A. Direct Exporting

In direct exporting, your company finds a foreign buyer and then makes all arrangements for shipping your products overseas. This method requires a lot of footwork and infrastructure, and entails more risk, but the potential profit rewards are often higher. If you choose to export directly, you have several options:

Sales Representatives/Agents — Essentially, you hire foreign-based representatives or agents who work on a commission basis to locate buyers for your product, just as you would domestically.

Distributors — You strike a deal with a foreign distributor, who purchases merchandise from you and resells it with a markup. The distributor maintains inventory and provides after-sales service to the buyer.

B. Indirect Exporting

Your company uses an export intermediary to perform most of the details of the export arrangement. Many small businesses choose this option, at least at the outset. There are several types of export intermediaries:

Commissioned agents — These are brokers who link your product or service with specific foreign buyers, allowing the primary company to fulfill the order and handle packing, shipping and export documentation.

Export Management Companies (EMCs) and Export Trading Companies (ETCs) — These companies operate in the country where the goods are to be exported. EMCs generally represent your product to promote it to other prospective overseas purchasers, while ETCs usually work according to demand, finding a need and sourcing your product for foreign buyers. Both types of companies usually take care of all aspects of the export transaction (including conducting market research, promoting your product overseas, accessing proper distribution channels, and locating foreign distributors), making them a viable option for smaller companies that lack the time and expertise to break into international markets on their own. EMCs and ETCs usually operate on a commission basis, although some work on a retainer basis and some take title to the goods they sell, making a profit on the markup. Importing and exporting can be done on any scale — from a tiny home office or from the World Trade Center. You don’t need a license from the United States government in order to do international trade, but the country with which you do business may require a license. What you do need is an international business plan.

III. Your International Business Plan

If you’re already in business, you probably already have a business plan. If so, you’ll need to amend it to include the specifics of international business. If not, you’ll need to begin from scratch in order to define your company’s present status, internal goals and commitment, and to seek financial help if you expect to pursue a bank loan or other types of investment. An international business plan should define:

• Why you’re interested in global trade
• What your import/export pricing strategy will be
• Who your potential export markets (or import sources) and customers are
• How you plan to enter the foreign market
• What additional costs (travel, shipping, marketing, sourcing) you expect to incur
• What revenues your venture is expected to bring in
• How you plan to finance your global expansion
• What the legal requirements are to enter the markets that interest you
• How you plan to transport the goods
• Whether you plan to pursue overseas partnership or investments

Back to Outline

IV. Getting Ready to Go Global

For your business to succeed globally, the principles are the same as succeeding domestically: You need to find a product that will fill a targeted need for the purchaser in export markets according to price, value to customer/country and market demand. Do you have a product for which there is a market overseas? Is there a product manufactured overseas that has a market domestically? If so, you need to identify why your product will have a market overseas or why an imported product will sell domestically. What gives your product a competitive advantage for an overseas market? Who are the buyers for your product? Why would they buy from you? Take the following steps to determine the feasibility of your international business plan.

A. Analyzing Your Industry

You need to identify where your industry is today and predict the trends and directions that it will take over the next three years. How competitive is your industry in the global market? To find out, consult the following resources:

• Talk to people in the same business or industry, research industry-specific magazines, attend trade fairs and seminars.
• Consult the National Trade Data Bank (NTDB), obtain import/export statistics from the Bureau of the Census, and contact the U.S. Small Business Administration (SBA) or the U.S. Department of Commerce (DOC) district office in your area.
• Contact the SBA or the U.S.& Foreign Commercial Service (US & FCS) district office and contact a DOC country or industry desk in Washington, D.C.
• Contact SBA, your state international trade office, a DOC country or industry desk in Washington, D.C. for federal or state government market studies that have been conducted on your industry’s potential international markets.
• Find export data on your industry through your SBA or DOC district office. Contact the SBA at (202) 205-6720 or DOC at (202) 482-2867 for a district office near you.

B. Analyzing Your Business’s Capabilities

If you have an existing business that you are planning to expand globally, you probably are already doing a few things right to have reached this point in your business. However, you’ll need to assess your business’s strengths and weaknesses to determine what approach to take in the international market. Ask yourself the following questions:

• Why is your business successful in the domestic market? What’s your growth rate? What are your strengths?
• What products do you feel have export potential?
• What are the competitive advantages of your products or business over other domestic and international businesses?
• What are the needs that will be filled by your product in a foreign market?
• What competitive products are sold abroad and to whom?
• Is there an after-market for your product? Who will provide it?
• What complementary goods and technologies does your product require?

If your product is an industrial good:

• What firms are likely to use it?
• What is the useful life of your product?
• Is use or life affected by climate?
• Will geography affect product purchase (e.g. transportation problems)?
• Will the product be restricted abroad (e.g. tariffs, quotas or non-tariff barriers)?

If the product is a consumer good:

• Who will consume it? How frequently will the product be bought?
• Is consumption affected by climate or geography?
• Will the product be restricted abroad (e.g. tariffs, quotas or non-tariff barriers)?
• Does your product conflict with traditions, habits or beliefs of customers abroad?

C. Selecting the Best Markets to Enter

Although the three largest markets for U.S. products are Canada, Japan and Mexico, these countries may not be the largest markets for your product. If you’re not sure where to do business, one good indicator is to find out where your domestic competitors have expanded internationally. Another useful resource are three key United States government databases that can identify those countries that represent significant export potential for your product: The Small Business Administration’s Automated Trade Locator Assistance System (SBAtlas), Foreign Trade Report FT925 and the U.S. Department of Commerce’s National Trade Data Bank (NTDB).

Once you’ve identified several countries that you think have market potential for your product, you’re ready to do serious market research. Research and review data and information for the following factors for each country.

D. Market Factors to Assess

Answer yes or no to the following questions to asses the potential of specific countries.

1. Demographic and Geographic Factors

___ Is there sufficient population size, growth and density in the correct demographic region?

___ Is the climate compatible with your product?

___ Is the shipping distance economically feasible?

___ Is there a sufficient physical distribution and communication network?

___ Are the natural resources you may need available?

2. Political Factors

___ Is the government amenable to trade with the United States?

___ Is the country politically stable?

___ Does the government have heavy involvement in business?

___ Are there existing trade restrictions, tariffs, non-tariff barriers or bilateral trade agreements?

3. Economic Factors

___ Is the economy sufficiently developed to support your product?

___ Is foreign trade a significant part of the economy?

___ Is the country’s currency stable? What is the inflation rate, availability, controls and stability of exchange rate?

___ Is the per capita income and distribution of income sufficient to support your product?

4. Social/Cultural Factors

___ What is the literacy rate and average educational level in the country?

___ Is there a middle class that would support your product?

___ Do the people have sufficient disposable income and a propensity to spend money on products similar to yours?

___ How is the market similar to and different from your domestic market?

___ Are there language and cultural barriers to doing business?

5. Market Access Factors

___ Are there limitations on trade, such as high tariff levels or quotas?

___ What documentation will you need?

___ Are there local standards, practices and other non-tariff barriers?

___ What is the country’s policy on honoring patents and trademark protection?

6. Distribution and Production Factors

___ Are there intermediaries available if you need them?

___ Are there sufficient regional and local transportation and storage facilities?

___ Is there labor available with the skills you may need?

___ What are local manufacturing conditions?

___ What are local labor laws?

When you’re determining which foreign market to enter, one of the key factors may be the existence or absence of tariffs and non-tariff trade barriers. Tariffs are taxes imposed on imported goods in order to raise the price of imported goods to the level of domestic goods. Often tariffs become barriers to imported products because the amount of tax imposed makes it impossible for exporters to profitably sell their products in foreign markets.

Non-tariff barriers are laws or regulations that a country enacts to protect domestic industries against foreign competition. Such non-tariff barriers may include subsidies for domestic goods, import quotas or regulations on import quality. Countries with low trade barriers in place are usually not good choices for global trade.

V. Forming Connections in Your Market

Once you’ve identified the product or service you want to import or export and the country that interests you, you need to make business connections in the chosen market. That is, you’re looking for companies, agents or distributors who are looking for the products you will offer and that may be interested in doing business. You also need to determine whether you will handle your global business directly or choose an agent, distributor or intermediary to act on your behalf, and if so, you need to find someone qualified to do so.

The U.S. federal government, state governments, trade associations, exporters’ associations and foreign governments offer low-cost and easily accessible resources to simplify and speed your entry into foreign markets. In addition, almost every industry and product has a corresponding organization and publication, even in developing countries. Consult these organizations and publications for ads, articles and listings for companies that manufacture, buy or sell the product for which you’re looking. The Internet is a great boon for locating sources, since many companies that do international business will have English-language Web sites. Keep in mind, however, that Internet usage in most foreign countries lags behind United States usage, so if you limit your sourcing options to what is on the Web, you may not find the prices or selection you need.

The U.S. Department of Commerce (DOC) has a number of contact programs in place that can help you make the connections you need. Here’s a run-down:

Export Mailing Lists — These are custom searches of the DOCs databases of prospective overseers customers. You select market criteria, then receive a list of relevant manufacturers, agents, retailers, service firms, government agencies with names, addresses, contacts, products and other information. Output is available as mailing labels or on disk.

Trade Lists — These are directories that the DOC publishes for each country based on the information above.

Trade Opportunities Programs — This service collects sales leads from overseas firms looking for U.S. products. Lead details include specifications, quantities, delivery dates and bid deadlines.

Agent/Distributor Service — This is a matching service that performs a custom search of foreign import agents and distributors, contacts them with your company’s literature and products, then prepares a report identifying six prospects that are interested in doing business with you.

Here are a few other options for making contacts (more information about accessing these will follow in the Resources section):

Importing

International chambers of commerce

Consulates

Embassies

Foreign trade ministries

World Trade Centers Association (WTCA)

Foreign industry associations

Foreign industry publications

Dun & Bradstreet

U.S. Department of Commerce

WTCA

Domestic industry associations

Domestic industry publications

National Association of Export Companies (NEXCO)

National Federation of Export Associations (NFEA)

Once you’ve identified potential sources, contact them to seek specific product information, such as specifications, product samples and prices. Contact them by letter, fax, email, telex or cable. At this point, it’s best to translate your business’s own literature into the language of the country where you plan to do business. Although contacts at most foreign companies that do international business will speak English, it’s best to communicate in your potential source’s language.

Pricing a product is always one of the most important parts both of marketing a product and making a business profitable, and, unsurprisingly, pricing a product for the overseas market is one of the most critical factors for entering foreign markets. Prices must be high enough to generate a reasonable profit, yet low enough to be competitive in overseas markets. Naturally, your cost of goods sold must include all the expenses to move product to the port of destination, which hike up the bottom line considerably, but don’t forget that doing business internationally affects your overhead as well.

Cost of Goods Sold