Barriers to entry into foreign markets

Any organization of relatively any size has some fundamental aims and objectives. One of such primal aims is to grow; this growth can be in terms of sales, profits, or anything else but the underlying value is to grow. In a given region or rather in the country of origin, a firm may grow up to a certain extent may be by reaching each and every corner of the country and having presence everywhere but this ‘everywhere’ is limited or bounded by geographical boundaries so the growth, in essence, is restricted.Organizations grow ‘big’ when they cross the borders, arrive in a new market and capture mass customer base and then move on to another target while keep in mind-frame the issue of customer retention. This phenomenon or type of growth is known as entry into foreign markets. Generally, the government of any country welcomes foreign firms coming in as they increase the investor confidence and show signs of growth; however, only in a few scenarios, that can be counted as exceptions, the local competitors welcome foreign firms.There are several reasons to this fact, the prime reason being people’s attraction towards foreign products and services. To ensure their local market share retention, these local vendors create barriers to entry in the local markets, which are in essence foreign markets for the investor . This research paper presents an over view of the barriers that might be faced by an entrant into a foreign market. These barriers can be of any form and type. The major aim of this paper is to analyze these barriers and how they can be eliminated.What is a foreign market? The foreign exchange market exists wherever one currency is traded for another. It is by far the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions . Foreign Market Entry Global Assess ment One must first identify what regions or countries of the world would be a potential market opportunity for your product or service.Also conduct an industry sector analysis that covers the market outlook for a particular industry . A Foreign Market Entry Plan Having determined the best international markets for your products, you now need to evaluate the most profitable way to get your products to potential customers in these markets. This can be achieved through a Foreign Market Entry Plan that will help plan entry into a market and the Foreign Market Growth Plan that will keep you in the market. These plans typically include : †¢ Identification of marketing and sales objectives†¢ Target market descriptive †¢ Expected sales †¢ Profit expectations †¢ Market penetration and coverage †¢ Marketing activities †¢ Identification of target market †¢ Alternative Methods of Entry (based on Country Assessment) †¢ Development or redesign of tact ical marketing plan †¢ Product adaptation, or modification †¢ Promotion strategy †¢ Distribution strategy †¢ Price strategy (includes terms of sale and methods of payment) †¢ A proposed budget and implementation schedule †¢ Resource requirements (finance, personnel and capacity) †¢ Implementation and control plans†¢ Key contacts from the United States’ Foreign Commercial Services The Foreign Market Growth Plan It is completed near the end of your first year of entry into the country market. One must identify and prepare for Trade Events. Trade shows, international buyer programs, matchmaker trade delegations programs or a catalog exhibition program can lead to tremendous international opportunities . Methods of foreign market entry Methods of foreign market entry include exporting, licensing, joint venture and off-shore production.The method you choose will depend on a variety of factors including the nature of your particular product o r service and the conditions for market penetration which exist in the foreign target market . Exporting can be accomplished by selling your product or service directly to a foreign firm, or indirectly, through the use of an export intermediary, such as a commissioned agent, an export management or trading company. International joint ventures can be a very effective means of market entry. Joint ventures overseas are often accomplished by licensing or off-shore production.Licensing involves a contractual agreement whereby you assign the rights to distribute or manufacture your product or service to a foreign company. Off-shore production requires either setting up your own facility or sub-contracting the manufacturing of your product to an assembly operator. Barriers to entry into foreign markets The main trade barriers to any foreign market include: Psychological barriers in foreign exchange markets Traders adjust their anchors in two ways. Some believe that exchange rates move tow ard (perceived) fundamentals, while others bet on a continuation of the current exchange rate trend.The behavior of the traders causes complex dynamics. Since the exchange rate tends to circle around its perceived fundamental value, the foreign exchange market is persistently misaligned. Central authorities have the opportunity to reduce such distortions by pushing the exchange rate to less biased anchors, but to achieve this; they have to break psychological barriers between anchors. High import tariffs inclusive of restrictions related to national security Tariffs are taxes that raise the price of a good when it is brought into another country.Tariffs and import quotas form the toughest barriers. Seventy percent of respondents say tariffs on goods and services are the most effective form of protectionism, followed closely by import quotas (68%). But this is by no means the whole story: 45% say that artificially undervalued exchange rates do much to boost the competitiveness of loc al firms, while 59% cite subsidized competitors as a major barrier. Many also noted the challenges of informal protectionism, such as local firms convincing government officials to block the approval of licenses.Quota systems in Japan: The tariff quota system charges a lower duty rate (primary duty rate) on imports of specific goods up to a certain quantity, but a higher duty rate (secondary duty rate) on quantities exceeding that volume. This system protects domestic producers of similar goods but also benefits consumers with the lowest tariff rates possible. The tariff quota volume for each allocation can be applied in one of two ways: according to the order in which the request was received, or according to prior allocations.Japan utilizes the prior allocation method. The tariff quota system does not restrict direct imports, since imports can be made without a tariff quota certificate, provided high duty is paid. Regarding footwear, quota allocations to individuals or companies a re based on historical trade performance in the importation of footwear. Japan has allocated quota not to quota traders but to footwear importers, so business can take place as per footwear importers requirements. At the same time, new importers can acquire special quota for new importers.The Government of Japan implements this system in accordance with governmental regulation. Therefore, Japan believes that new importers have opportunities to obtain quotas under the current quota allocation system. Unfavorable foreign rules & regulations Voluntary export restraints limit the quantity of a good brought into a country, but they are initiated by the country producing the good, not the country receiving the good. Federal, state, and local governments sometimes restrict entry into markets by requiring firms to have licenses.The Federal Communications Commission, for example, grants licenses to radio and television stations; there simply aren't enough frequencies for an unlimited number of firms to broadcast in any area. For safety reasons, all nuclear power plants are licensed as well. Governments also bar entry by giving firms exclusive rights to a market. The U. S. Postal Service, for example, has an exclusive right to deliver first class mail. Firms are sometimes given exclusive rights to do things like operate gas stations along toll roads, produce electricity, or collect garbage in a city.Exclusive rights are granted if a government believes that there is room for only one firm in a market. Until the 1980s, the federal government also restricted entry into the airline, trucking, banking, and telecommunications industries. Many of the laws that restricted entry into these industries were put into place in the 1930s, when many people believed that large firms needed to be protected from â€Å"cutthroat competitors. † Many economists now believe that these laws did more harm than good. In 1938, for example, the Civil Aeronautics Board, or CAB, was establi shed to regulate the airline industry for interstate flights.For the forty years that it existed, it didn't allow a single new firm to enter the market, although it received over 150 applications for routes. In 1978, despite protests from the airlines, President Carter ordered the deregulation of the industry and the phasing out of the CAB. Within five years, 14 new firms entered the industry. Many experts believe that airline fares after deregulation were well below what they would have been had regulation continued. For instance, take China as an example. China’s government has set policies that are posing great challenges for foreign investors.China’s regulatory framework for cross-border remains a complex and incomplete patchwork of laws, regulations and policy decisions made by various ministries and government agencies. A lack of transparency, coupled with low standards of corporate transparency and disclosure, makes it difficult for potential investors to carry out due diligence to accepted international standards. Valuing the potential liabilities of a firm is especially difficult. At the same time, the Chinese government continues to close off so-called â€Å"strategic assets† to cross-border without specifying which sectors are defined as strategic, or why.To address these issues and remove other obstacles to cross-border deals, it is recommended for China to: †¢ Streamline the approval process for cross-border and make it more transparent; †¢ Put in place a sound competition framework; †¢ Further open its capital markets to foreign investors; †¢ Encourage its firms to increase corporate transparency and provide more up to date and accurate financial information to make it easier to value a potential acquisition, especially regarding a firm’s liabilities; Relax foreign ownership restrictions.In particular, revise existing catalogues that list the type of firms that can or cannot be acquired by foreign i nvestors. The report also recommends that China pilot these recommendations in the North-East of the country before rolling them out nationwide. This region, China’s historical industrial heartland, has a high concentration of state-owned firms in need of restructuring and technological upgrading, as well as high unemployment and low productivity. Cross-border could help rejuvenate the region’s economy. Free Trade PolicyPolicy in which a government does not discriminate against imports or interfere with exports. A free-trade policy does not necessarily imply that the government abandons all control and taxation of imports and exports, but rather that it refrains from actions specifically designed to hinder international trade, such as tariff barriers, currency restrictions, and import quotas. The theoretical case for free trade is based on Adam Smith's argument that the division of labor among countries leads to specialization, greater efficiency, and higher aggregate production.The way to foster such a division of labor, Smith believed, is to allow nations to make and sell whatever products can compete successfully in an international market. Arbitrary tariff classifications Regional wise review: Africa: The eight sub-Saharan African countries under review are undertaking economic and political reforms to promote economic growth and to facilitate their integration into global markets. Most of the countries have taken steps to improve their investment climate and are actively seeking foreign investment. Tariffs have been reduced, but remain high in certain sectors and countries. Other issues hampering U.S. exporters in sub-Saharan Africa include ineffectual enforcement of intellectual property rights, onerous customs delays, and corruption. Canada: The United States trades more with Canada than with any other country, but a number of issues threaten this partnership. The 1996 U. S. -Canada Softwood Lumber Agreement, which covers $7 billion in tra de, was created to mitigate the effects of Canadian provinces' timber sales practices and to provide time for reform. But the United States has seen little change in these practices and continues to be concerned with the lack of market principles in Canadian forest management systems.The Canadian Wheat Board has been reorganized but continues to enjoy government-sanctioned monopoly status, as well as other privileges that restrict competition. In October 2000, USTR initiated a 12-month investigation of the wheat board's practices in response to an industry petition. Canada committed to bring its dairy export subsidy regime into compliance with its WTO obligations by January 31, 2001: Instead, it instituted programs that essentially replicate the old regime. The United States has requested WTO authorization to suspend trade concessions if a WTO appeals panel determines that Canada has not complied.China: The United States and China continued multilateral negotiations on China's acces sion to the WTO throughout 2000. In preparation for accession, the Chinese government launched a campaign to align domestic laws and regulations with WTO rules. But a number of problems continue to plague the bilateral trade relationship. Import standards and requirements are being used to create import barriers for products that will benefit from tariff cuts following accession to the WTO. Imports of products ranging from cosmetics to medical equipment are required to undergo duplicative and expensive quality and safety inspection procedures.Imports of agricultural products such as grain, poultry and citrus have been arbitrarily blocked. Transparency continues to be an issue for both foreign and domestic firms. Inconsistent notification and application of existing laws and regulations create problems for businesses. China has made improvements in its intellectual property rights protection regime, but a high level of product counterfeiting and copyright piracy continues. European U nion: Several European Union policies continue to create significant barriers to U. S. economic interests.These include the bananas regime, bans on U. S. beef from livestock treated with hormones and on U. S. bio-engineered products, member state government financial support to the aircraft industry, and widely differing EU standards, testing, and certification procedures. Many U. S. trade concerns stem from the lack of transparency in the development of EU regulations. The United States views transparency and public participation as essential to promote more effective trans-Atlantic regulatory cooperation, to achieve better quality regulation, and to help minimize possible trade disputes.India: Access to the Indian market has improved with the removal in the last year of longstanding quantitative restrictions on a wide variety of products. However, India continues to impose substantial barriers to U. S. exports, including high tariffs and related taxes, and a variety of non-tariff measures affecting most trade, including an onerous import licensing regime. Inadequate intellectual property protection and enforcement remains a longstanding concern. India's policy linking auto imports to investment, local content and trade balancing is the subject of a WTO dispute.India has recently introduced new labeling and other standards-related requirements that could impede U. S. exports to India. Japan: Japan is the United States' third largest trading partner, accounting for well over $250 billion in two-way trade in goods and services. But a sputtering Japanese economy, persistent market access barriers, structural rigidity and excessive regulation limit opportunities for U. S. companies trading with, and operating in Japan. The United States is encouraged that Prime Minister Mori agreed with PresidentBush in their Joint Statement on March 19, 2001, about the importance of promoting deregulation, restructuring and foreign direct investment. Much of this year's report f ocuses on progress achieved under the U. S. -Japan Enhanced Initiative on Deregulation and Competition Policy. The report highlights the U. S. submission to Japan under the Enhanced Initiative in October 2000. The initiative calls on Japan to adopt additional regulatory reforms in key sectors and structural areas of the Japanese economy. This year's report includes new sections on information technology and proposed revisions to Japan's Commercial Code.The report underscores USTR's deep concern with barriers in Japan's $130 billion telecommunications sector. Competition in this sector has been stifled due to the absence of an independent regulator; weak dominant carrier regulation; high interconnection rates for both wired and wireless services; and inadequate access to rights-of-way, facilities and other services to competitors. We are concerned about the increase in barriers to Japan's agricultural market, including the level of access for U. S. rice. Japan also needs to comply wi th a WTO ruling in favor of the United States on varietals testing.Korea: Korea is one of the United States' major trading partners, and President Kim Dae Jung has made some progress toward a more open, market-oriented economic policy. However, Korea continues to impose significant barriers to U. S. imports. Korea's high tariffs and related taxes, and anti-import biases, combine to restrict seriously access for U. S. exports. Korea's auto market remains virtually closed to U. S. companies. Korea also imposes high duties and maintains other barriers on many agricultural and fishery products.The United States has expressed its concern to the Korean Government about the negative implications of recent government-directed lending on the country's restructuring efforts, and the potential inconsistency of this action with its WTO commitments. Inadequate protection of intellectual property rights continues to be a serious problem in Korea. USTR has long-standing concerns about the Korean G overnment's involvement in, and support for the Korean steel industry. Mexico: Mexico is the United States' second largest bilateral trading partner, and has been the fastest growing major U.S. export market over the last seven years. USTR welcomes Mexico's progress in promoting competition in its $12 billion telecommunications market. However, Mexico has not addressed certain outstanding issues subject to its WTO commitments. It has failed to ensure competition in its market for international services. Unfavorable quotas and embargos Quotas place limits on how much of a good can be brought into a country. Observers in Europe, Latin America, Asia and Africa have frequently inveighed against U. S. trade sanctions policies aimed at punishing regimes in Cuba, Iran and Libya.They argue that sanctions and embargos have not brought the desired results, and that the Cuban, Iranian and Libyan people, rather than governments are the ones who suffer. Pundits overseas strongly support European Union retaliatory efforts designed to combat the Helms-Burton Act which allows U. S. citizens to sue foreign companies using property in Cuba confiscated from them after Fidel Castro seized power in 1959. The EU efforts includes request for the formation of a WTO dispute panel. Complaints that the Helms-Burton Act â€Å"conflicts with rules for international trade,† is â€Å"extra-territorial† in dimension, approaching â€Å"trade terrorism†.Analysts hold the strong objection against actions taken by America's allies over the sanctions issue reveals the extent of European â€Å"frustration† with the U. S. over trade issues and signals. Europe's new-found resolve to challenge the world's leading economic power. Berlin's left-of-center Die Tageszeitung, for example, held, â€Å"For more than 50 years, the U. S. has determined the rules of the global economy according to its taste. Only in recent times have the view grown in the EU that a common Europe is strong enough to have a say on an equal basis.† Criticism of the U. S. strategy, however, did not inspire observers in the press to offer other alternatives on how to promote the U. S. -stated goal of encouraging greater respect for human rights and democracy, and discouraging state-sponsored terrorism in suspect nations. This may be a good time to reinforce the idea that trade barriers are designed to protect some industries but, in fact they may hurt other industries or even consumers. Economists have found that sanctions don't often reach their political objectives and they come with high costs.A good example is the steel tariff imposed by the Bush administration, on foreign-made steel. President Bush imposed the tariffs, ranging from 8 percent to 30 percent, on some kinds of foreign steel in March 2002, in order to help the U. S. steel industry compete with foreign steel producers. Many U. S. manufacturing companies that use steel, including manufacturers of auto parts and appliances, say that the steel tariffs have raised costs for manufacturers and caused thousands of manufacturing losses. Also, people who buy cars or appliances may have to pay higher prices because of the steel tariffs.The U. S. International Trade Commission recently concluded that the tariffs have caused a $30 million net loss to the U. S. economy. In addition, the European Union is considering retaliatory tariffs against the U. S. High costs of customs administration Customs procedures for imports are time-consuming. Generally, over 10 steps are required for a typical import clearance transaction. Besides, the trade facilitation institutions are not in one place, which makes the clearance more complicated. The Kenya Customs requires more than 20 copies of bills of documents to be passed from one officer to another.The documents are not only processed slowly, but also sometimes subject to repeated examination. Similar procedures are also applied on paying of tax refunds and obta ining tax waivers and rebates on imports used for manufacture. To inspect imports, the Kenyan Customs opens almost every container, the practice of which not only delays the goods from passing the Customs, but also increases the likelihood of breakage. Customs valuation Though Kenya has implemented the Agreement on Customs Valuation since 2001, customs officials constantly uplift the declared valuation of goods instead of using the c.i. f. value provided or the supplier's invoice, which usually results in a completely higher tax liability. Information on custom valuation methods and tariffs are not disclosed. Additionally, importers are hard to question the tax liability, because the clearance process will be delayed when a dispute of valuation occurs and the high demurrage costs arising there from exert a heavy burden on the importer. Pre-shipment inspection As from June 30, 2005, pre-inspection certification is required for goods to be imported into Kenya.All goods must demonstrat e compliance with Kenya Standards or approved equivalents by evidence of a â€Å"Test Report or Certificate† from an ISO/IEC17025 accredited laboratory or recognized by the ILAC (International Laboratory Accreditation Cooperation) or the IFIA (International Federation of Inspection Agencies). Goods imported without the above mentioned certificates or reports would be held at the port of entry at the importer's expense until their quality is determined. The new regulation has significantly affected the export of Chinese products to Kenya in the following two aspects.First, the quality certification has led to a substantial increase in the export cost. According to this regulation, all products to be exported to Kenya must obtain test reports or certificates from approved organizations. However, the Kenyan Market requires a small quantity of a great variety of goods and products. If every product needs a test report, then the cost will be greatly increased. Second, the Kenya Bu reau of Standards has assigned the certification of Chinese products to Intertek Testing Services, a company that monopolizes product testing and is known for its low efficiency.