Identify and understand the most interesting target markets

There are many theoretical papers explaining how companies should conduct research to identify opportunities in international markets. Undoubtedly, the central question is, in which one of the 180 plus markets should the company choose to engage in international trade? Which one will demand the company’s products and services? It is necessary to act with pragmatism and common sense as this decision is one the most important ones impacting on the SME’s success in internationalisation.

In general, when choosing which market to operate in, attention should be given to those markets that can be considered to be thriving in terms of the company’s products. This is an important factor, but not the most important one. Businesses need to measure the markets not only from a quantitative point of view but also in terms of the distance between markets.

5.3.1 Analyse international data

The first step involves understanding the situation of the business’s product/s in the global market, and cross reference this trade data with the global data. To understand the classification of the business’s product/s, the Harmonize Commodity Description and Coding System (HS) (UN Trade Statistics, 2017) or TARIC code in UE  (European Commission, 2020) is used. These codes are essential in order to identify trade data, duties, import barriers and possible limitations.

Once the business has identified its products, it should also analyse which markets are importing its products and in which markets it is easier to do business for their own country. There are several helpful platforms, such as TRADE MAP (International Trade Center, 2019).  In this phase, the business should avoid the temptation of choosing the biggest markets, the SME service officer should analyse other factors that will be outlined in the next section.

5.3.2 Measure the distance between countries

The SME service officer need to identify in which markets the company could be successful: this will involve analysing different factors and understanding how they influence the SME’s competitiveness in the target market.

Geographic-Political factors

In a global economy with 21^st century logistics, geographical distance is not such a problem as it was in the past. However, it is usually the case that countries that are closer in proximity to each other have more similar characteristics in terms of other barriers such as cultural, administrative, economic, etc. However these neighbouring markets can also result in increased competition. Using this framework, logistics will affect a business’s competitiveness. A business needs to consider if their product will be more competitive if grouped in small shipments or if on the contrary it is necessary to have full shipments.

Geopolitical factors can be the most important barriers to access a market. A business must analyse how their competitors’ products arrive in the target country. In the Australian market, for example, it is probable that every company sends goods by ship and this affects all competitors. It is also important to identify if trade sanctions imposed by governments on products will affect the business’s products.

Cultural factors

There are a lot of different cultures world-wide that influence the way products are consumed. It is important for businesses to ask the following questions:

• Will all customers want the same identical product?
• Should the product be modified?
• Are those customers going to want them delivered in the same way?

Frequently, these barriers emerge from administrative barriers, for example if a business wants to export meat and other products such as milk to Islamic countries they will need “Halal” certification.

Administrative/economic factors

Administrative/economic factors can be some of the most difficult barriers for a company to overcome, particularly if it is not prepared to deal with regulations and a different type of legal system. In this case the company could fail even it has the best product on the market. These administrative regulations are sometimes used by countries to protect their own indigenous companies.

Globalisation has contributed to the generation of groups of countries that, based on their policies, share harmonised criteria, and have free trade agreements between them. The Regional Trade Agreements Database from the WTO (World Trade Organisation, 2020) can be consulted for the signatory countries.

Economic barriers are closely related to administrative issues. Some influencing factors are the market’s purchasing power, currency and currency fluctuations and local production capacity. These overseas barriers can be viewed on the WTO database page (World Trade Organisation, 2019) using the TARIC code or the European Database  (European Commission, 2020).

When negotiating sales contracts, currency is important, as some contracts are long term and if a company accepts local currencies that are not stable, it can be exposed to fluctuation risks. This is why it is better to choose stable currencies like EUR, USD, JPY or GBP.

Trading bloc map 2019