Market Entry and Developing Economics

[1]

 Daniel Suchenski  -  April 26, 2016

Introduction:

While in its purest sense globalization has been a “historical that began with the first movement of people out of Africa into other parts of the world”[2], the history of globalization being a household term and its general utilization as a ‘buzzword’ has perhaps only happened over the last two decades.[3] This is important to note as the needs of the business community has changed quite dramatically in just a few decades. While there has long been a history of international trade, and global commerce, these issues were not nearly as common, and did not affect as many individuals and companies as it has in the past. As the playing field has continued to flatten and companies have needed ever-increasingly to look to new markets for business success and world-wide profits.

Market Entry: More finesse then prowess

The decision by an organization to enter an overseas market can be daunting and complex. The decision is not taken lightly and organizational leadership and strategy play an instrumental role in the success of such an initiative. A market entry strategy consists of both an entry mode and a marketing plan to achieve the entry goals. Anderson and Coughlan summarize the entry mode as a choice between company owned or controlled methods, "integrated" channels as opposed to "independent" channels for entry into the target country[4] The marketing mode is used in conjunction with the marketing plan which is used to gain entry into a target market within the target country. Albaum and Duerr define marketing plan for market entry as: “a system composed of marketing organizations that connect the manufacturer to the final users or consumers of the company’s product(s) in a foreign market.”[5]

When discussing market entry options it’s important to note that flexibility is key to success. While direct exporting may be the best option in one country, it may be less effective or appropriate than a joint-venture in another country and then perhaps a licensing arrangement for manufacturing in another. Simply repeating the successes or assumptions from one country to the next is rarely a recipe for achieving organizational goals. Trade Start in Canada lists 9 primary options for market entry when looking to go abroad. They are:

• Direct Exporting – “selling directly into the market you have chosen using in the first instance you own resources.”[6]
• Licensing - “a firm transfers the rights to the use of a product or service to another firm.”[7]
• Franchising – “the right to sell a company's goods or services in a particular area”[8]
• Partnering – “can take a variety of forms from a simple co-marketing arrangement to a sophisticated strategic alliance for manufacturing”
• Joint-Ventures – “a particular form of partnership that involves the creation of a third independently managed company.”[9]
• Buying a Company – purchasing a wholly owned subsidiary.
• Piggybacking – “If you have a particularly interesting and unique product or service that you sell to large domestic firms that are currently involved in foreign markets you may want to approach them to see if your product or service can be included in their inventory for international markets.”[10]
• Turnkey Projects – “is where the facility is built from the ground up and turned over to the client ready to go – turn the key and the plant is operational”[11]
• Greenfield Investments – “is where you buy the land, build the facility and operate the business on an ongoing basis in a foreign market.”[12]

If there is any lesson to take away from this brief overview of market entry, it might be that even the best laid entry strategies are not fool proof and there are any number of internal and external factors at play. Overall the entry strategy of a company is more about brains over brawn and compromise over arrogance. Additionally, while the marketing plan is perhaps just as important to the success of the overall strategy, there cannot be a marketing plan for a target country or market without first having an entry mode.

A guest columnist for Forbes noted that there are 5 key insights that all companies looking to enter the international market should keep in mind. 1. Educate yourself on the customs and business etiquette of the international market. 2. Gather historical data on the country’s currency value fluctuation and import/export timelines. 3. Become an expert on the country’s laws governing business. 4. Conduct focus groups to test the waters in the prospective international market. 5. Find out what your competition has done in the same territory.[13] These 5 insights are an important backdrop for all aspect of the strategy of entry mode and the subsequent and simultaneous marketing plan.

While thus far the discussion has been about consideration when your company already has both the intent and the logistics of entering a foreign market. The question still remains, which country should this strategy be planned for? Global Finance Magazine publishes is rankings for the best countries to do business with and their top ten the last 2 years have included 4 European countries, 4 East Asian countries as well as Australia and the USA.[14] Interestingly enough all the countries in the top 10 are developed countries. This might confuse some who are often hearing stories of the impending takeover of the global trading system from developing countries. One such notable group of rapidly growing countries in the call themselves the BRICS. This acronym, which stands for Brazil, Russia, India, China and South Africa, has grown tremendously over the last decade and so has provided investors and companies with a great deal of opportunity. However, despite their historic growth they may not be the clear choice that they once were.   

BRICS: A Market Entry Example

[15]

Above is a diagram of the growth rates over the last decade of BRICS countries and leading developed economies. In recent years there has been a slightly less bang for your buck with regard to these countries as the recent financial troubles in China including a significant downward expectation of its long enviable growth rate. Both Brazil and Russia find themselves in deep recessions and recent scandals of offshore accounts and impeachment proceedings threaten the political stability in addition to the already present economic shakiness. S. Africa is not much better with the chances of a recession still a real consideration. India is perhaps the most stable relatively but even their economy has shown signs of slowing in recent years. All these factors help explain why Global Finance ranked Brazil (#120), Russia (#62), India (#142), China (#90), and S. Africa (#43) all below the top 40 countries in the world for doing business.[16] That is not to say that these countries are not the most appropriate for a given company to enter but that all aspects of the entry strategy need to be brought to the table and planned for as best as possible to account for all variables in the international marketplace including an ever-evolving business environment that might not follow the standard by-line or buzz of a country.

Conclusion:

Using Brazil as a more specific example for market entry, the country, like many in the BRICS group, puts a very high importance on personal relationships. To account for this, Export.gov and organization whose mission it is to provide the best information and support for US companies looking to do business abroad suggests, as part of an entry strategy that, “U.S. firms need a local presence and thus should invest time in developing relationships through frequent visits to Brazil.” It is also noted that any US firm should start with the real possibility of establishing an office and/or a joint-venture in Brazil as a way to not only understand the local needs when it comes to marketing but also for cultural reasons that make business much harder with someone that they have not met and does not have a ‘local’ presence.[17] Global business need to understand the needs on the ground for not only successful entry but continued existence after entry. These lessons will serve the marketing and export manager well regardless of the country that the firm chooses to enter. It should also be noted that these recent decades of ‘globalization’ are not a flash in the pan. There is no end in sight when it comes to the interconnectedness of the global community. Indeed, as much as the BRICS countries are expected, despite their recent hiccups are still expected to continue growing and being ever-more attractive places to do business. With that in mind the BRICS acronym is unlikely the last such group that will be making headlines in years to come. Just like when the BRICs term was coined in 2001, there are new acronyms that are emerging that have just as much expectation and opportunity behind them as attractive markets to grow with. Some of these include, ‘MINT’ (Mexico, Indonesia, Nigeria and Turkey), ‘CIVETS’ (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa), and ‘The Next Eleven’ (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea and Vietnam).[18]

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[1]  https://upload.wikimedia.org/wikipedia/commons/a/ac/BRICS_heads_of_state_and_government_hold_hands_ahead_of_the_2014_G-20_summit_in_Brisbane,_Australia_(Agencia_Brasil).jpg

[2] “History of Globalization.” Yale Global Online. Retrieved on 4.22.2016 from: http://yaleglobal.yale.edu/about/history.jsp

[3] C.R. “When did globalization start?” The Economist. Published Sept 23^rd, 2013. Retrieved on 4.22.2016 from: http://www.economist.com/blogs/freeexchange/2013/09/economic-history-1

[4] Anderson, E. and Coughlan, A.T. "International Market Entry and Expansion via Independent or Integrated Channels of Distribution". Journal of Marketing, Vol. 51. January 1987, pp 71-82.

http://www.tandfonline.com/doi/abs/10.1080/10696679.2004.11658509

[5] Gerald Albaum and Edwin Duerr. “International Marketing and Export Management” 7^th Edition. Prentice Hall Financial Times. 2011. Page 393.

[6] “Market Entry Strategies.” Trade Start Canada. Retrieved on 4.22.2016 from: http://www.tradestart.ca/market-entry-strategies

[7] Ibid.

[8] Merriam-Webster Definition: http://www.merriam-webster.com/dictionary/franchise

[9] “Market Entry Strategies.” Trade Start Canada. Retrieved on 4.22.2016 from: http://www.tradestart.ca/market-entry-strategies

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] Lauren Maillian Bias. “A 5 Step Primer for Entering an International Market.” Forbes Published on Sep 22, 2011. Retrieved 4.22.2016 from: http://www.forbes.com/sites/yec/2011/09/22/a-5-step-primer-for-entering-an-international-market/#14742423845f

[14] Gilly Wright. “Best Countries for Doing Business 2015”. Global Finance Magazine. Published Nov. 12, 2015. Retrieved on 4.22.2016 from: https://www.gfmag.com/global-data/economic-data/best-countries-doing-business?page=2

[15] Andrew Walker. “Whatever happened to the Brics economics?” BBC World News. Published Nov. 27, 2014. Retrieved on 4.22.2016 from: http://www.bbc.com/news/business-29960335

[16] Gilly Wright. “Best Countries for Doing Business 2015”. Global Finance Magazine. Published Nov. 12, 2015. Retrieved on 4.22.2016 from: https://www.gfmag.com/global-data/economic-data/best-countries-doing-business?page=2

[17] “Doing Business in Brazil.” Last updated 8.5.15. Retrieved 4.22.2016 from: http://www.export.gov/brazil/doingbusinessinbrazil/index.asp

[18] Mary Gooderham. “Beyond BRICs: Meet the next batch of emerging markets.” HSBC Global Connections. Published Aug. 28^th 2014. Retrieved 4.22.2016 from: https://globalconnections.hsbc.com/brazil/en/articles/beyond-brics-meet-next-batch-emerging-markets

Title: Adding the Yuan to the list of IMF reserves: Implications for the Future.

[1]

Daniel Suchenski

March 14, 2016

Introduction

For international financial managers in China November 30, 2015 will be remembered as a significant moment for the Renminbi (Yuan). The International Monetary Fund (IMF) indicated as part of its regular five-yearly review of the global currencies that make up the coveted Special Drawing Right (SDR) announced that the Chinese currency, the Renminbi would be included in this group starting October 1^st, 2016. Ms. Christine Lagarde, the current managing director of the IMF stated:

“The Executive Board's decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”[2]

The big question that many in the financial world are asking since this announcement and will likely continue to ask throughout much of 2016 is what does this mean for the international financial markets and specifically does this mean that the RMB may one day overtake the predominant currencies in the SDR as the leading reserve currency?

Background

The Special Drawing Reserve or SDR is a global reserve asset that the IMF created in 1969 as a means of supplementing the existing official reserves. The IMF goes into greater detail about the SDR defining it as,

“A potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.”[3]

Why does the SDR designation matter? An article from August 5^th 2015 published by The Economist sheds light on the role and importance of the SDR. SDR constitutes “an international reserve asset that helps maintain balance between countries with big external liabilities and those flush with cash.”[4]

RMB overtaking the USD

From instituting new regulations on financial institutions, to seeking new ways to hedge investments, many around the world have sought ways to ensure a repeat of the recession that started in 2008 is less and less likely. For some, the recession was a wakeup call that having an overreliance on developed countries currencies might be leaving some exposed. As Dr William H Overholt, co-author of Renminbi Rising: A New Global Monetary System Emerges states,  the decline of the US dollar during the recession exposed China’s “reserves of about $4trn to huge book losses. They reasoned, as did leaders of some other countries, that if more of their transactions and more of their holdings were denominated in other currencies, or better in their own currency, they would be far less exposed to such risks.”[5] Indeed, many in China think the overtaking of the USD is a foregone conclusion. “Chen Yulu, a leading economist, says it will take 15 years. Wei Jianguo, deputy head of a major think-tank, puts it at 20.” Still others think that the RMB is “already on the verge of displacing the USD.”[6] As the RMB continues to grow in use and function as it takes advantage of its new designation with the IMF, being added to the SDR only strengthens a growing trend in recent years as China and its currency were essential in maintaining global trade during the great recession. This new designation by the IMF, has some concluding that this will likely lead to cheaper and more efficient transactions for many. Dr. Overholt explains that “companies trading with China can often structure deals much more efficiently when they have the option of denominating the deal in RMB.”[7] While acknowledging the great potential of the RMB and its likely rise as a currency of significant prowess for reserves, and transactions globally, Dr. Overholt does note that there are a number of real changes that the country needs to make to help facilitate the rise of the RMB. Principally he lists three things. One, that there will continue to be a period of strong economic growth in the long-term. Two, the dismantling of China’s current capital controls. And three, “They need to grow their domestic bond market, which is now about 10 percent of the size of the US counterpart, and unify it so that it is a single, highly liquid market, rather than the fragmented market under four different regulators that prevails today.”[8] While this is a closely watched progression and even Dr. Overholt thinks that it will take years if not decades for this transition to take place, there are many dissenting voices around the world when it comes to the ‘likely’ prospects of the RMB overtaking the USD. Some believing that not only is it not likely but that it’s highly improbable.

Skepticism for the rise of the RMB

For some engaging in this debate, not only is the conversation somewhat surprising, the weight given to the evidence that builds the argument is simply staggering. The same Economist article that discussed the use of the SDR as a balance between countries with “big external liabilities and those flush with case,” will point out that the prior to the November 30^th announcement, “rarely” in the nearly 50 year history of the SDR has the international reserve garnered so much attention. That’s because, according to the article, the SDR plays a mostly “arcane role in the global financial system.”[9] While the currency was designed with providing greater balance in the international monetary system, the application of the SDR is perhaps only a small part of the larger whole “as countries largely rely on capital markets and hard currencies to cover their obligations.”[10] Gwynn Guilford in an article published in Quartz takes a closer look at the reach and usage of the currency in the real-world. According to her further examination of the usage of the RMB, “the yuan hasn’t truly become much more widely used than the Norwegian kronor”[11] when it comes to international exchanges. Ms. Guilford attributes the relative ‘popularity’ of the RMB recently to short-term factors including speculators’ “one-way bet on the yuan’s appreciation against the dollar—an appeal that is now dimming fast.”[12] While the RMB is now the fifth-most used currency in international payments according to data from ATLAS. A closer examination, according to Guilford, reveals that “seven-tenths of those supposedly international yuan transactions are done in Hong Kong, says Ho-Fung Hung, professor at Johns Hopkins University and author of The China Boom: Why China Will Not Rule the World.”[13] Hung goes on to say that if you were to “strip away Hong Kong’s influence, and the yuan claims only about 0.8% of international transactions—less than the Thai baht”[14] Zhang Jun, writing for the Taipei Times, echoes the sentiments of Hung insisting that “despite China’s massive GDP and trade volume, the yuan’s share in the global foreign-exchange market remains negligible. And the process of internationalizing the yuan is far from complete.”[15] An article written for Business Insider takes the likelihood of the RMB becoming a significant reserve currency further stating that “Bitcoin 2.0 has a better chance of becoming the world’s reserve currency than China’s yuan.”[16] The author, John Mauldin, goes on to two factors that will keep the RMB from making any significant runs on the other major reserve currencies in the next couple decades. One. ‘China has a massive trade surplus’.

“For a country to deliver the currency in which most global trade is done, it must supply that currency “in size” to enable the trading. The United States runs a massive trade deficit, pushing dollars all over the world to circulate among the economies of other countries. China, by contrast, has a trade surplus. It is taking in dollars and many other currencies although it does run trade deficits with some countries.”[17]

Two, ‘no one will ever trade in an SDR’. For Mauldin, not only does the reserve not allow for the degree of flexibility that is needed in global finance, for example, “in the case of the United States, we could create only the equivalent of about two to three months of our trade deficit in SDRs”[18] which routinely runs in the tens of billions of dollars each month. The current reserves of SDR, according to the IMF is just a little more than 200 billion.[19] “There simply aren’t enough SDRs to actually conduct trade in.”[20]

Conclusion

While it’s hard to see there much likelihood of either bitcoins or the Renminbi taking on significant prevalence in the international markets in the foreseeable future, especially without some necessary reforms in the financial institutions within China, the possibility is still present. If this is indeed an aim of the financial managers in China, the road will be long and require a willingness to be more transparent and liberalized, a sign that the country has thus far not shown signs of taking on. Many of the skeptics on the reserve importance of the RMB may have been singing a different tune a year or two ago when markets were predicting the value of the yuan to continue rising which highlights the difficulty in assessing the reality of these topics when predictions reach out decades in the future. At least for now, the prospects remain dim but tomorrow is a new day and only time will tell which pundit and which analyst is proven right and which wrong.

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[1] https://upload.wikimedia.org/wikipedia/en/8/88/Yuan_collection.jpg

[2] International Monetary Fund Press Release. “IMF’s Executive Board Completes Review of SDR Basket, Includes Chinese Renminbi.” Retrieved on March 10^th 2016 from: https://www.imf.org/external/np/sec/pr/2015/pr15540.htm

[3] International Monetary Fund. “Special Drawing Rights.” Retrieved on March 10^th 2016 from: http://www.imf.org/external/about/sdr.htm

[4] The Economist. “China knocks on the reserve-currency door.” Retrieved march 10^th, 2016 from http://www.economist.com/blogs/freeexchange/2015/08/yuan-and-sdr

[5] Matsangou, Elizabeth. “The RMB could lead global currencies over the USD.” World Finance. Retrieved on March 10^th 2016 from: http://www.worldfinance.com/markets/the-rmb-could-lead-global-currencies-over-the-usd

[6] The Economist. “The yuan’s rise will challenge America, but not before China changes.” Retrieved on March 10^th 2016 from: http://worldif.economist.com/article/6/what-if-the-yuan-competes-with-the-dollar-clash-of-the-currencies

[7] Matsangou, Elizabeth. “The RMB could lead global currencies over the USD.” World Finance. Retrieved on March 10^th 2016 from: http://www.worldfinance.com/markets/the-rmb-could-lead-global-currencies-over-the-usd

[8] Ibid.

[9] The Economist. “China knocks on the reserve-currency door.” Retrieved march 10^th, 2016 from http://www.economist.com/blogs/freeexchange/2015/08/yuan-and-sdr

[10] Ibid.

[11] Gwynn Guilford. “The Chinese yuan won’t become a global reserve currency any time soon.” Quartz. Retrieved on March 10th, 2016 from: http://qz.com/561635/the-chinese-yuan-wont-become-a-global-reserve-currency-any-time-soon/

[12] Ibid.

[13] Ibid.

[14] Ibid.

[15] Zhang Jun. “Inclusion of the yuan in SDR matters.” Taipei Times. Retrieved on March 10^th, 2016 from: http://www.taipeitimes.com/News/editorials/archives/2015/12/19/2003635128

[16] John Mauldin. “MAULDIN: Bitcoin 2.0 has a better chance of becoming the world's reserve currency than China's yuan.” Business Insider. Retrieved on March 10th, 2016 from: http://www.businessinsider.com/china-yuan-not-close-to-reserve-currency-2015-12

[17] Ibid.

[18] Ibid.

[19] http://www.imf.org/external/np/exr/facts/sdr.htm

[20] John Mauldin. “MAULDIN: Bitcoin 2.0 has a better chance of becoming the world's reserve currency than China's yuan.” Business Insider. Retrieved on March 10th, 2016 from: http://www.businessinsider.com/china-yuan-not-close-to-reserve-currency-2015-12