A study involving 91 German-owned multinational corporations revealed that lack of insights into the culture and regulations of other countries hinders companies to expand to new international markets.
“Despite all the talk about globalization and the trend towards the expansion of the international trade space, the world is still far from frictionless or flat,” said Ingo Kleindienst, associate professor from the School of Business and Social Sciences at Aarhus University. “There are still large national differences between countries. And these differences can greatly influence the companies’ earning potential when they seek to expand.”
The study specifically revealed that companies lose a considerable amount of profits due to the geographical, cultural, and administrative or regulatory challenges they encountered upon entering new international markets.
But every line of business has its own propensity toward particular challenges. For instance, Kleindienst mentioned that companies in industries where language plays an important part—such as media and food industries—might have a hard time overcoming cultural challenges. This is also true for companies with products or services entering an international market widely known for similar products or services.
On the other hand, companies in highly regulated and high technology industries such as aviation and telecommunications often have difficulties overcoming administrative or regulatory challenges.
Geographical challenges are inevitable for companies that need to export goods that have low value compared to their weight and size primarily because of associated transportation costs.
Of course, among the three challenges, Kleindienst reiterated that it is harder to gain insights into new cultures and unfamiliar regulations. Challenges relating to transportation are easier to overcome.
“We are not likely to find a ‘one size fits all’ strategy for this. Generally, we recommend that companies proceed slowly. That they gather and exchange knowledge and don’t move on to the more challenging markets, before they have secured employees with extensive international knowledge within the company,” said Kleindienst.
He added, “It is also possible to spread the risk and still obtain more knowledge about the market for instance by collaborating with a partner, participating in joint ventures or hiring local employees, who possess the knowledge that you need.”
Further details of the study are found in the article “Added Psychic Distance Stimuli and MNE Performance: Performance Effects of Added Cultural, Governance, Geographic, and Economic Distance in MNEs’ International Expansion” published in the Journal of International Management. Kleindienst collaborated with Thomas Hutzschenreuter and Sandra Lange from the Otto Bisheim School of Management in Germany.