Barriers to Export Entry

When developing an export entry strategy, it is essential to assess the barriers of foreign markets.

Typically, when searching for export markets where a company can supply its products, the main selection criterion is their capacity. In this case, marketing efforts are aimed at researching the market potential in terms of the number of consumers, identifying key segments, analyzing the pricing system in channels, the established price level for similar products, and other related issues. However, the most interesting market in terms of potential capacity may yield zero sales if measures to overcome entry barriers are not planned in advance.

Why it is important to consider entry barriers before selecting priority export markets

Assessing barriers is very important to do in a timely manner for one simple reason – it significantly saves time and money for the potential product exporter. Unfortunately, Russian businesses often look exclusively at market capacity in physical terms and average market prices when choosing directions for export activities. Such information is important but does not provide a complete picture, which can lead to erroneous decisions in selecting the markets with which work could be most effective.

Currently, the topic of entering export markets is very relevant, even elevated to a separate national project. Export support infrastructure organizations are making serious efforts to popularize this area of activity for Russian businesses. Having learned about the opportunities that export activities open up, many entrepreneurs, not only those operating at the micro-enterprise level but sometimes quite substantial business structures, want to make supplies abroad as soon as possible, especially since good preferences can be obtained for them. In such cases, market selection often occurs intuitively or according to the principle – where there is more capacity, that's where we will send.

As a result, "typical" ideas for exporting products to China arise with the argument – "the largest market, so they will buy something from me too," to the most developed countries of the European Union (Germany, Great Britain, France) – "large markets, no internal borders, solvent population," or even to the USA, which is perceived as some kind of fertile territory for selling anything, combining the advantages of China and the EU.

Behind such tempting prospects, the question of how the traded goods should be prepared to overcome entry barriers to export markets often falls out of sight. In many cases, the entry barriers are such that they either require large sales volumes to cover the costs of overcoming them, or in principle indicate the need for a fundamental adaptation of the product to the new market.

A vivid example of this type is China – significant financial resources and time are required both for passing various formalities and for preparing the product for the market. A simple example – the taste priorities of a Chinese and a Russian person are so different that most food products well consumed in the home country will be of little interest to anyone in China simply because they are not tasty. A separate issue is packaging – it combines both formal barriers (marking, placement of necessary information) and actual market barriers – it must be attractive to the "Chinese consumer." We will talk about the types of barriers further.

What barriers exist in export?

Barriers to entering new geographic markets are quite diverse. The term "market entry barriers" was introduced into wide circulation by Michael Porter within his "5 forces" model. Basic knowledge about the essence of barriers can be gleaned from this source, although they are well understood at an intuitive level by any experienced businessman and specialist in marketing and sales.

To make it easier to work with the material in the future, two main types of barriers that need to be assessed when entering a new geographic market can be distinguished.

1) barriers related to measures of state and supranational (for example, the European Union or the EAEU) regulation, less often barriers related to the specifics of regulation at the level of subjects of a federal state (quite different conditions for paying import taxes and duties can be noted, for example, in Brazil or the USA), as well as the action of special zones for foreign trade activities (here, rather, we need to talk about "negative" barriers, that is, their reduction);

2) barriers of the actual market of a particular country (presence of local producers, language and cultural barriers, etc.), not directly related to state regulation measures.

The first type of barriers is subdivided in the most general form into tariff and non-tariff barriers. To competently analyze this type of barrier, the exporter will need to clearly know the HS code of the harmonized system (at least the first 6 digits), because all measures of state and other related regulation in this part are determined precisely by the codes of the commodity nomenclature, primarily, customs duty rates and fees.

The second type of barriers will be determined by the actual type and parameters of the product, and the specifics of the business. At the same time, for different markets and products, various barriers subject to assessment to determine market prospects may have priority significance.

Additionally, it should be remembered that when exporting goods outside the customs, and in some cases the state border of the Russian Federation, it is possible to encounter export barriers. There are much fewer of them, they are easier to overcome, and for many products almost unnoticeable, but it is better to protect yourself in advance and familiarize yourself with all the features of exporting precisely your product range.

Here, first of all, one should remember about technical export control, which controls the export of a fairly wide range of goods, and if your product can be classified as a dual-use product, then it is necessary to go through a number of formal procedures that will require time and some expenses. However, we will not dwell on this issue in detail due to the fact that it is less significant for the main mass of current and potential exporters.

Export barriers related to state regulation

It is advisable to start the analysis of barriers in a new geographic market with the block of state regulation. This will allow determining the fundamental possibility of carrying out export activities and give an understanding of those additional costs that will need to be incurred to pass all formal procedures for admitting imported products to the local market.

Tariff barriers should be understood as tariffs and special customs fees that are paid in the country of import. Also, in most countries, value added tax is paid upon import (the universal term VAT is used), and in its absence – other related taxes (if any).

Tariff rates and features of their calculation must be looked at in the regulatory acts of the country of import. As a rule, rates are determined for each year by a separate document. Most often, it is posted on the website of the country's customs authority in the state language (or languages), which requires qualified translation.

In addition, it must be borne in mind that rates may vary depending on the country of origin of the product, there is a preferential regime for less developed countries, as well as various trade agreements, including regional ones. All this must be taken into account in order to subsequently calculate a price offer that is beneficial for the local buyer.

Non-tariff barriers include the following list of possible measures regulating foreign trade activities:

- quantitative restrictions, including tariff quotas, product licensing and obtaining other import permits, general bans on import into the country;

- technical barriers – mandatory product requirements and measures related to the procedure for assessing conformity to national standards and norms;

- sanitary and phytosanitary measures – mandatory requirements for products of animal and plant origin;

- trade protection measures – anti-dumping, compensatory and protective measures applied to neutralize the negative impact of imports on the market of the importing country;

- measures affecting competition, which provide exclusive or special preferences to one or a limited group of economic entities;

- pre-shipment inspection and similar measures related to mandatory inspection of goods before shipment from the exporting country;

- restrictions regarding the sale of goods within the importing country;

- restrictions regarding the participation of foreign companies in public procurement;

- financial measures regulating access to foreign currency and its cost for import purposes, payment terms;

- restrictions on carrying out after-sales service in the importing country.

This list is not complete and is constantly changing. Each type of non-tariff barrier requires detailed study in order to understand the feasibility of exporting products to the target country.

At the same time, it is necessary to proceed from which position and subposition of the HS code the exported product belongs to, since for different goods there are different combinations of entry barriers. However, the specifics of the economy of the potential export country, the role of the state sector in business, and so on also matter.

For example, if a company is considering entering the Chinese market with products for heavy engineering industries and extractive industries, then it must be prepared for the fact that most likely it will have to work with public procurement, where there are very high barriers for foreign manufacturers. Sometimes this is, in fact, a de facto ban.

But the main attention should still be paid to the specifics of the product. It is this that determines the need to pass sanitary and phytosanitary control, fall under import quotas, ensure the product's compliance with the requirements of national technical standards and regulations, and so on.

The complexity of entering "exotic" markets for the manufacturer, where existing barriers require deep immersion in the specifics of doing business in the country and a detailed study of the local regulatory framework, usually leads the exporter to the idea of either ordering a comprehensive marketing research of this market, or working through a distributor. Such options can be very productive and significantly reduce the time for developing an export market entry strategy.

Moreover, distributors usually bear a significant share of responsibility for the safety of the product for the local consumer. In a number of countries, this means their obligations to verify and approve the certification of supplied products; in some countries – full responsibility for the product's compliance with international and national standards.

If barriers to export related to state regulation act relatively uniformly on all potential exporters, then barriers determined by market specifics depend to a greater extent on the specific product and its country of origin, as well as the exporter itself. Let's consider them further.

Export barriers of the actual geographic market

Unlike the previous group of barriers, which can be classified and ordered with a greater degree of accuracy, as they are related to the tools of state regulation of foreign trade activities and the economy of the export country as a whole (technical barriers, etc.), barriers determined by the market are quite diverse. They depend on the behavior of various consumers, features of business practices, cross-cultural communications, the importance of reference in a particular industry market, and many, many factors.

The list of such barriers for almost every product group will be unique, but their analysis is very important from the point of view of selecting those country markets where the exporter can get the maximum result from their commercial activities.

If there are quite a few countries being compared within the research – ten or more – then a detailed study of such barriers can take literally years if this work is done independently. Here we can recommend either setting such a task for an outsourcing marketing agency, or breaking the research into two parts to reduce time and resources spent.

At the first stage, select fairly general qualitative parameters that allow assessing barriers from the point of view of product specifics and exporter competencies. As examples, criteria such as the presence of local production of similar products, the company's recognition in the market of a given country (with other products), the attitude of potential consumers to Russian products of this type, the kinship of language and cultural environments, the proximity of business models, and so on can be cited.

Conducting an assessment based on these very general criteria will allow setting basic priorities and selecting countries for a deeper assessment of barriers, and then market attractiveness. It is clear that for two companies from the same country and with similar products, barrier assessments can be completely different.

Thus, a company may have a staff employee – a native speaker of a certain country with weak distribution of international communication languages and good knowledge of local cultural characteristics. For such an organization, cultural and communication barriers will immediately become lower. But at the same time, the second company may have experience working in this market with a different type of product. For which of them the total "height" of barriers will be lower is a big question.

At the second stage, a deeper elaboration of the criteria for identifying barriers related to industry and product specifics is required. Here the assessments will be more accurate, quantitatively expressed, which will allow making an accurate choice of the priority export country. At this stage, the study of barriers essentially flows into marketing research of the export market.