By Lucas Juan Manuel Alonso Alonso
A. Country Risk:
This risk includes a collection of risks associated with investing in a foreign country. Such as political risk, exchange rate risk, economic risk, sovereign risk and transfer risk…
Political Risk (also known as geopolitical risk) makes reference to a country’s political changes and instability. As I state in another article of this series on Entrepreneurship & SME Internationalisation (please, read the article about market size, growth and accessibility), the fact that, in the host country, foreign investments account for a big share of its economy, it could be understood as a sign of stability and, therefore, be minimized market uncertainties associated with political risk.
Transfer Risk is very important because it can affect investment and profits. Some foreign governments impose restrictions to move money (or prevent the repatriation of funds) out of the country. Sovereign Risk is essentially the risk that a foreign government may default on its loans or fail to honour other business commitments. For example, the host country might carry out the nationalization of foreign companies. Accordingly, please take into account the following:
“Resource-rich developing countries (many of them LDCs) need to improve their infrastructures (a current core objective of the WTO) and to reach that objective it is necessary to develop the adequate mechanisms to attract foreign investments, as for example resource-backed financing”
Obviously in the above statement, for that kind of projects and funding models we are talking about large multinational companies; but the fact that foreign investments are backed with resources increasing reliability in these countries. Therefore, this situation could be considered as something positive for SMEs wishing to enter into trade relations with these countries.
Exchange Rate Risk (also known as currency risk) is associated with losses due to currency exchange. This risk is related to changes in exchange rates; changes in the value of our currency in relation to a foreign currency. When we carry out international trade operations we must take into account several macroeconomic variables, as for instance interest rates, exchange rates, expectations of inflation, monetary policies…For example, if the FED shrinks its asset purchase program (Quantitative Easing) the amount of dollars in the system will be less and therefore the dollar will tend to appreciate against foreign currencies.
The ECB monetary policy, as for example the interest rate at which the ECB lends money, access to credit by SMEs and individuals, austerity policy and possible bailouts in the euro area …, etc.
“The use of financial instruments to fix the future exchange rate which buy or sell foreign currencies is not common in SMEs; therefore, the firm needs to take into consideration these macroeconomic variables because they affect exchange rates, which in turn affect the relative prices of imports and exports and any investment to be carried out in the host country”
It is essential, in order to reduce the economic risk, be aware of macroeconomic variables trend since they influence the stability of investments.
B. Competitive Intensity:
First of all it is necessary to indentify our close competitors in the same or nearby strategic group and obviously, in order to measure the competitive intensity of a marketplace, we have to take in consideration the Porter five forces. As everyone knows, we have a high competitive intensity within an industry when there are many companies competing, limited market available, customers have free mobility to change providers, harder product differentiation, high barriers of exiting, competitors with a large market share…, but bear in mind:
“A competitive intensity environment can be a driver for innovation in manufacture processes and marketing”
Take, for example an European publishing company that, in order to reduce costs, decides to manufacture part of its product in Hangzhou (China). Thus, through an innovation in the manufacture process, it starts its internationalization process moving part of its manufacture process abroad. In this way the production process is divided between China and Europe. Continuing with our example, assume that the company holds an international patent on design stickers and sells its finished product mainly in the European market. Precisely, design stickers are its main competitive advantage (product differentiation).
“With this strategy (innovation in manufacturing processes) the European publishing company can sell cheaper its differentiated product and enhance its competitiveness in Europe. In addition, the fact to manufacture part of its production in China allows it to become familiar with the competitive environment of such market”
A marketing innovation can be a simple change in the design of a label of a product, for example in a box of chocolates, a bottle of wine (bottle shape, label design…etc)…
Take, for instance, a chocolate manufacturer located in a South America country. Assume now, the company sells its product in the local market in the following way:
· Black and White chocolates
· Delicious big chocolate bonbons
· Kiosks are the main points of sale
· Unit sale price US$ 0, 2 (unit = bonbon)
So far, the firm sells its products only in the domestic market in which it competes on prices and number of sale points. Chocolates have very good quality but it is estimated that in the domestic market is not possible to create product differentiation.
But now, the firm, together with an important distributor of Shanghai, creates a marketing plan for the introduction of its products in China. As a result of the joint development the South America company gets meaningful data about China’s socio-economic, such as what kind of competitive forces prevail in the industry, competitors’ geographic scope, lifestyles trends…,etc., which allow it to reduce business risks and forecast the strategic moves of rivals.
The high quality of chocolates is a strong point but they have to compete with famous Swiss chocolates. Therefore, company and distributor develop a marketing strategy based on the specific character of the market place:
· The market is segmented by age and events (for instance, toy-shaped boxes for kids, heart-shaped boxes for Valentine’s Day…)
· The beautifully-wrapped bonbons are sold in luxurious cardboard boxes.
· The product is marketed under the name of a Caribbean dance rather than under the brand name of the South America company.
The reason for this is that the target group likes such Caribbean dance and additionally the name is evocative of beautiful warm exotic places. On the outer surface of luxurious cardboard boxes, the dance name is shown in large red letters, while the company name, which is the brand, is just below in golden letters of smaller size.
“Through a marketing mix innovation the firm is able to create a new identity for the product’s targeted consumers. Therefore, keeping the same physical quality of the product, chocolates are perceived by Chinese consumers in a completely different way than in the domestic market”
In this way, the firm achieves a singularity of product (distinguishing characteristics, product differentiation). The company starts its internationalisation process carrying out a marketing innovation; thus, in the domestic market, it competes on prices and number of sale points while in the international market it uses differentiation.
“But keep in mind that the competitive advantage provided by differentiation will be sustainable in the time meanwhile the product’s targeted consumers perceive unique product characteristics”
A cross-country study looking at the contribution of foreign firms to national economies can be useful to know foreign competitors and their market share in different economies (for example, OECD studies).
