Updated: Sep 25, 2020
How should you enter a new foreign market? Learn how to manage liability of foreignness and how to decide whether to use a local intermediary.
Companies decide to move abroad for many reasons, including to pursue markets, acquire new resources, and reduce risk. The decision to move to a new foreign market, however, introduces a whole host of important questions for the company. One of the first questions you will want to consider when entering a new market is how you should enter that market?
This is an important question, because when entering a foreign market companies experience what is referred to as “liability of foreigness”. Liability of foreignness is an additional burden that foreign firms face due to the geographic, economic, cultural, or administrative differences between the foreign market and the domestic market. Companies doing business in countries that are geographically proximate, are economically similar, share a common cultural base, and have few administrative differences—such as Thailand and Laos, or the United States and Canada—face a small liability of foreignness. Those doing business in the presence of large differences—such as Brazil and Saudi Arabia, or Mexico and Turkey—are likely to face a large liability of foreignness.
To manage a company’s liability of foreignness, companies need to consider whether they will enter the market by themselves using their own resources, networks and people, or whether they will enter the market using some type of third-party vendor or intermediary. Intermediaries are what you might call a transaction specialist. They are companies or even individuals embedded in local markets who possess specialized knowledge of the local market’s political, economic, sociocultural and technological differences. With that greater awareness comes more connections and ways to sell the product directly to the people. Not only do intermediaries help foreign companies decrease their liability of foreignness, but they also help the company create new relationships and customize content for the local market.
But doing something yourself without the third-party intermediary also has its advantages. Sticking with doing the job in-house may be more expensive but strengthens the firm-to-client relationship. Development and delivery are done by the foreign company and work is done directly with the client. This allows the entering company to build the necessary capabilities to effectively service the local clients.
So should you use an intermediary or not? Overall, it’s a big question for any company trying to enter a foreign market, especially if they have diverse clientele and are working with a variety of needs and products. Luckily for us, cutting edge research by Professors Geoff Kistruck, Shad Morris, Justin Webb and Charlie Stevens has found that the number of different types of clientele a company is trying to sell to when entering a foreign market is the main factor in determining if the foreign company should use a local intermediary or not. In particular, they find that as a company’s clientele grows more and more diverse, it becomes more difficult to manage in-house and an intermediary becomes more necessary.
For instance, Deloitte Consulting company was in the final planning stages for its expansion into Bulgaria. Deloitte was particularly interested in Bulgaria because of its market potential for the company’s newly developed cyber security training services. However, Deloitte’s targeted clients of large multinational corporations, small and medium-sized enterprises, and nongovernmental organizations in Bulgaria were considered extremely fragmented and diverse. Thus, Deloitte was faced with the choice of either attempting to internalize the activities supporting transactions with potential clients or rely upon an intermediary to do so. Turning to an intermediary could provide potential significant benefits in terms of the intermediary’s specialized knowledge and local networks, but it also meant potential risks of the intermediary misrepresenting its capabilities, holding up Delotitte’s efforts, shirking its responsibilities, or otherwise behaving in opportunistic ways. Deloitte ultimately decided that the diversity of their potential clients and the liability of the foreign environment made using a third-party intermediary specialist a more efficient choice rather than attempting to seek out these many different types of clients directly.
These researchers found that corruption is also a factor when deciding to use an intermediary or not. In some places and countries where corruption is much higher, then firm’s may very well decide it is best to internalize the costs and make the product or service in-house. In places of corruption, a third party intermediary may only introduce the foreign company to clients they have agreements with, thereby holding back with other potential clients. Agreements might be broken, and a myriad of other things might slow the process and make it more challenging than it’s worth.
As firms understand the implications of using a third-party intermediary when entering a foreign market, they can weigh the decision of making or buying and if it is worth the costs. As clients become more diverse with varying wants and requests, then using an intermediary may very well be necessary.