DOI: https://doi.org/10.62204/2336-498X-2023-1-5

CHARACTERISTICS OF THE PROCESS OF STRATEGIC

PLANNING OF FOREIGN ECONOMIC ACTIVITY OF AN

ENTERPRISE DEPENDING ON THE CONDITIONS OF WAYS

TO ENTER A NEW MARKET

Damir Kulish,

Doctoral student, Zaporizhzhya National University, Ukraine,
damir.kulish@gmail.com; ORCID: 0000-0003-2224-1078

Annotation. The article examines the characteristics of the process of strategic planning of foreign economic activity of an enterprise, depending on the conditions of ways to enter a new market. It is determined that foreign economic activity is the process that a company follows in order to enter international markets and export the goods and services that it produces in its market of origin. A methodology is presented with the aim to analyze the probability of implementing a company’s foreign economic activity. This method will help the company enter international markets and gain important advantages: greater competitiveness, better margins and diversification of market risk. First of all, the work carried out confirms that companies achieve better results by implementing foreign economic activity than by not implementing it in terms of operating profit and normal results.

Keywords: characteristics, process, strategic planning, foreign economic activity, conditions, new market.

The company’s foreign economic activity is a logical step that will allow it to continue developing through the development of new markets. Exploring the opportunities offered by an international business is exciting, but at the same time more difficult than doing business in your own country. And it’s not just because customers are different. In addition, you will have to deal with Customs and other government agencies, banks, insurance companies, import or export service providers, and international transportation. In addition, you need to familiarize yourself with business practices in other countries, with different cultures and currencies. Success largely depends on an appropriate foreign economic strategy, starting with market analysis and obtaining the necessary assistance and support.

Despite the fact that there is no consensus in the literature on international business about the impact of foreign economic activity on the results that the company achieves (Malyshko, Ye., & Chernyshov, V.., 2020), several studies have shown that FEA has a positive impact on such outcomes, at least to the extreme point from which the costs of coordinating and managing business activities in countries that are very remote, geographically and institutionally, can negatively affect outcomes (Dobrostok Yu. B., 2019). This effect was found for both large companies (Ievtushenko V. A., Liashevska V. I., Chupryniuk Yu. V, 2020), and for small and medium-sized enterprises. In particular, before the mentioned extreme point, the positive effect of foreign economic activity is justified, since companies can create advantages related to the relationship of activities between different geographical areas, for example, by sharing activities necessary to work in different countries (Kovbatiuk, M. V., Shkliar, V. V., & Pietukhov, A. S., 2023), enjoy higher growth rates and therefore access to sources of benefits in key costs, such as the experience curve or economies of scale and volume (Zhyhalkevych Zh.M.,  Stanislavskyi  O.V., 2019). Foreign economic activity companies can also take advantage of the resources available in different markets, as well as capitalize on market imperfections and achieve greater profitability of their resources; thus, these companies face fluctuations in the domestic market with greater solvency and reduce the risks associated with dependence on the single market.

Foreign economic activity is the process that a company follows to enter international markets and export the goods and services it produces in its market of origin.  Export activities are not the ultimate activity that responds to market situations, but require a medium-term vision and a well-defined strategy. This process takes time and requires a lot of effort on the part of the company. But with an adequate strategy and the necessary knowledge, internationalization can bring very positive results to your company. You need to create a company, thinking from the very beginning about foreign economic activity, that is, about how to also win the customers who are located in other countries. The foreign economic activity process is usually gradual: first it involves random exports or imports, then a phase of regular international activity, in order to finally achieve establishment abroad through commercial or manufacturing subsidiaries.

Sometimes it is difficult for small and medium-sized companies to know the trends of the global economy in order to take advantage of new business opportunities and determine a strategy that will lead to successful foreign economic activity, but you need to be careful and use all the opportunities. Digital companies are just a click away from all the customers in the world, but there is no point in trying to win over customers who live in other countries if you haven’t already won those who are close. Traveling abroad involves additional efforts, partners, resources, investments, and people who need to be well prepared (Oh, C., Cho, Y. y Kim, W., 2015). If a business model doesn’t work properly in a region where companies don’t need to improve, repeating it in other countries can actually make the situation worse by willing to reach the international level ahead of time. Investors want startups with broad growth potential, and this requires the entrepreneur to have big ambitions for the company’s fastest-growing foreign economic activity. It is good to think on a large scale, but it is right to start implementing small and reach the international level in time. In foreign economic activity, the method of entering a new market depends on a number of characteristics that depend on the conditions of the destination country, those related to the country of origin, and those that compete with the company itself (fig.1).

Source: author’s summary

  1. for characteristics related to the destination country , the most recommended method of entry will vary depending on:

− Market growth potential.  If the market is small or the opportunities to increase the company’s market share are low, it is advisable to start the foreign economic activity process with a market entry method that involves little risk and investment, such as exports. On the other hand, if the destination country has high growth forecasts, the company should consider, if its resources allow it, settling in the destination country and starting production activities in that market in the medium or long term.

Fig. 1. Сharacteristics of ways to enter a new market in foreign economic activity that depend on the conditions of the destination country, those related to the country of origin, and those that compete with the company itself.

− The competitive structure of the sector to which the company belongs in this new market. The presence of markets with a small number of competitors, as in the case of sectors with a certain oligopoly situation, promotes acquisition as a method of entering a new market.

− Infrastructure quality. A good infrastructure network promotes exports (either through its own channels or through intermediaries) as a possible way to enter the territory due to low risk and investment, as this encourages an adequate distribution of the company’s products in the country. The distribution and logistics system is improved, with low cost and adequate service.

− The presence of entrance barriers. If there are barriers to entering the market, it is very likely that the company will not be able to export as a method of entering the market, because duties make the product too expensive and uncompetitive. The company will then be forced to establish a specific type of institution that performs a stage in the product’s value chain, with sufficient value to qualify the product as a product originating from a new market, or alternatively assign a license to manufacturers in the country.

− Social and cultural features of the market. Segmentation of potential customers with certain characteristics in a new market often determines whether it will be convenient to apply new market entry methods that will allow the company to have greater control in the new market, such as direct investment or alliances with local partners.

− Political risks. In some markets, it is advisable for companies to look for a local partner who provides experience and security in the new market in order to reduce this type of risk in the markets that are exposed to it, so it is necessary to study the country’s macroeconomic and regulatory structure in advance.

  1. for characteristics related to the country of origin, the selected entry mode will depend on:

− Production costs. If production costs are relatively lower in the country of origin compared to the country of destination, the appropriate form of receipt is export, so that products produced in the country of origin are more competitive abroad. On the other hand, if costs in a new country are relatively lower, the company should consider setting up production in the new country and thus take advantage of the cost opportunities offered by the new market. Such determinitorialization was a common practice of Western companies moving their manufacturing facilities to countries with cheaper labor, such as many Asian countries. However, after the decline in wages caused by the crisis and the increase experienced by some of these markets, such as China, some countries have ceased to be as attractive to certain sectors. Therefore, it is necessary to first study the cost structure in each market before making a decision to postpone production.

− The degree of competition in the company’s domestic market. If the country of origin of the sector from which the Company originates is characterized by a structure with a small number of competitors, it may be advisable to choose quick entry methods, such as acquiring or finding reliable partners in a new market.

  1. for characteristics related to the company itself, the selected login mode will depend on:

− Size. Larger companies have more technical options to choose between one or the other login method; however, the smallest ones often only have access to exports. The company’s own ability to be competitive, directives, organizations, and so on. These features affect the mode of administration during foreign economic activity.

− Ownership of intangible assets – such valuables as trademarks, patents, know-how, etc. In this case, it is recommended to rely on entry methods that allow the company to have more control over these assets in a new market, such as direct investment or alliances that provide high control. However, sometimes this is usually the most appropriate method when there are valuable assets that can potentially be licensed. For example, technology transfer is the initial method.

− Depends on the level of risk aversion. A company with strong risk avoidance should avoid significant investments; it is advisable to use entry methods that allow you to use local knowledge and share risks, such as transferring licenses, forming alliances, or low-risk methods, such as exporting.

− Goals that the company wants to achieve with its foreign economic activity . The company should try to adopt an entry method that will allow it to achieve its goals in the target market. If, for example, a company wants to expose itself to domestic demand, exports will be sufficient. On the other hand, if you want to learn how to take into account differences in consumer tastes and preferences, you will have to internationalize marketing, research and development, or even production capabilities.

Therefore, depending on this, a practical and flexible methodology has been developed that allows you to analyze the country in order to determine priorities and focus your efforts on finding opportunities for international business expansion. The methodology is based on a number of filters that allow you to narrow the portfolio of countries by analyzing available public information, while at the same time deepening the analysis of countries that pass each filter. The methodology consists of 3 stages:

Stage 1 deals with the pre-selection of countries. Based on the foreign economic activity strategy defined by the company, senior management adopted guidelines for the regions or groups of countries in which the company is interested to be present, and then information from these countries became the source of the analysis model.

Phase 2, which focuses on setting country priorities, will include a methodology whose primary purpose was to qualify pre-selected countries according to the overall country and sector capacity.  The result suggests an index number with values from 0 to 1, so that the higher this index was, the greater the attractiveness of the country. The composition of the index provides 35% of the weight of the country’s potential and 65% of the potential of the sector in which the company is located.

Stage 3 deals with the feasibility of entry strategies. This stage is a financial translation of various scenarios. This phase consisted of a thorough understanding of the aspects listed below to evaluate the most viable type of Entry Strategy (open field investment, acquisition, export, distribution, among others):

− Evaluating a portfolio of acquisition opportunities, i.e. identifying a specific target size for local laboratories.

− Assessment of the feasibility of creating your own business or export, taking into account such factors as the time of registration and territory, the intellectual property regime, and the bioequivalence regime.

− Assessment of specific restrictions or incentives that may exist both for trading and for the company to operate in another country.

After identifying the priority countries, in order to find opportunities for international expansion, it is necessary to identify possible steps in these countries, seeking to assure the availability of production, marketing and communication platforms, distribution and sales necessary to establish a successful company in the selected country.  Scenarios are evaluated using an evaluation matrix based on 2 criteria: the first is financial attractiveness, i.e. how much value these scenarios add to the business, and the second is the probability of covering the added value that the strategy represents. Movements that do not meet the requirements of some axes can be changed to improve their positioning through various actions, such as: linking a financial partner, linking a strategic partner, maintaining a local management team. The result of applying this methodology is an index from 0 to 1, which served to localize the course in the upper quadrant of the matrix (if it is>0.5) or in the lower quadrant (if it is<0.5). Evaluating financial attractiveness has been an evolutionary process in which, as more information becomes available, there is greater confidence in the results of evaluating opportunities. Taking into account the above, the company will have 2 stages of work:

− Phase I: return, the initial phase at which it was determined whether an opportunity represents potentially interesting value; this is the go/don’t go phase.

− Phase II: due diligence and evaluation , when an opportunity passes Phase I and a preliminary agreement is reached with potential «sellers», due diligence and a detailed assessment of the opportunity should be carried out.

So, this method will help the company enter international markets and get important advantages: greater competitiveness, better margins and diversification of market risk.

Conclusions. First of all, the work carried out, confirms that companies achieve better results by implementing foreign economic activity than by not implementing it in terms of operating profit and normal results.

Moreover, this paper presents a methodology that aims to analyze the probability of implementing a company’s foreign economic activity. These results have relevant implications for both founders and managers, as well as for government agencies that can offer support programs to promote successful international expansion. On the one hand, it would be advisable for managers to be trained in issues related to international business so that they can recognize and use business opportunities in foreign markets, preferably from the very beginning of the business project concept. On the other hand, these results can be useful for building an institutional support program for FEA to promote its outcomes and survival.

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