GLOBAL BARRIERS TO MARKET ENTRY FOR DEVELOPING COUNTRY BUSINESSES

Fahri Karakaya, University of Massachusetts Dartmouth

Michael J. Stahl, The University of Tennessee

Abstract competitors' entering into the market. The existence of

Market entry barriers are crucial environmental factors that
influence firms to make market entry decisions. While the
importance of barriers differs depending on the market and the
type of product being marketed, their impact in international
markets has continued to increase during the last decade. This
paper discusses the importance and implications of ten major
market entry barriers in international markets for firms from
developing countries. · 4) customer switching costs; 5) access to distribution
Introduction
Ever-increasing global competition and protective measures
taken by governments have had a growing impact on
performance of companies marketing their products in
international markets. Firms from developing countries have
been especially affected by these and other barriers to market
entry. Although many businesses from developing countries
face the same market entry barriers as their competitors from
developed countries, the number and magnitude of barriers are
often higher for them. This paper focuses on the barriers that
are specific to developing country businesses attempting to
enter international markets.
Shepherd (1979) describes barriers to entry as anything that
decreases the likelihood, scope, or speed of the potential
barriers to entry results in fewer entries and, therefore, allows
incumbents to enjoy above average profitability (Yip, 1982).
Mann (1966) and Shepherd (1979) also support this view that
barriers to entry influence profit rates.
Porter (1980) proposed six major sources of barriers to entry.
These six barriers were: 1) cost advantages of incumbents; 2)
product differentiation of incumbents; 3) capital requirements;
channels, and 6) government policy. Karakaya and Stahl
(1989) empirically tested these six barriers for both consumer
and industrial products. In another study, Karakaya and Stahl
( 1992) examined the importance of 25 barriers to entry and
their underlying dimensions in U.S. consumer markets.
There is an increasing number of research studies focusing on
global market entry barriers for U.S. businesses. Yang,
Leona and Alden (1992) cite three categories of barriers to
exporting: 1) external barriers; 2) operational barriers, and 3)
internal barriers. External barriers as suggested, by these
researchers, consist of tariff and non-tariff barriers, foreign
exchange fluctuations, competition in foreign markets,
government policy, foreign business practices, and differing
product and consumer standards in foreign markets
(Bauerschrnidt, Sullivan, and Gillespie, 1985; Czinkota and
Ursie, 1983; Dichtl, Koglmayr, and Muller, 1986; Kaynak
and Kothari, 1984; Kedia and Chokar, 1986; Robino, 1980).
Similarly, operational barriers encompass problems of
receiving payments from foreign customers, locating potential

FIGURE 1
MARKET ENTRY BEHAVIOR OF FIRMS FROM
DEVELOPING COUNTRIES INTO INTERNATIONAL MARKETS

GLOBAL BARRIERS TO
MARKET ENTRY

• GOVERNMENT POUCY
• PRODUCT DIFFERENTIATION
• CULTURAL BARRIERS
• ACCESS TO DISTRIBUTION
CHANNELS
• PRODUCT ADAPTATION
• CUSTOMER SERVICE
• COMPETITION
• CURRENCY EXCHANGE RATES
• CUSTOMER SWITCHING COSTS
• EXPERIENCE AND KNOWLEDGE

MARKET
ATTRACTIVENESS

208
buyers, making arrangements for transportation and
shipments, clearing customs, and obtaining representation in
international markets (Kedia and Chokar, 1986; Yaprak,
1985). Internal barriers are past experience in foreign
markets, lack of managerial commitment, and lack of human
and capital resources (Bauerschmidt, Sullivan, and Gillespie,
1985; Cavusgil and Nevin, 1981; Yaprak, 1985).
Market Entry Barriers for Firms from Developing Countries
Attempting to Enter International Markets
Figure 1 shows a global market entry model for businesses
from developing countries. The model consists of: 1) Global
market entry barriers; 2) Chance of overcoming barriers to
entry; 3) Timing; 4) Attractiveness of potential market; 5)
Market selection, and 6) Market entry mode. It is important to
note that many of the barriers in domestic markets (i.e.
barriers for U.S. firms in domestic markets) can translate into
competitive advantages for companies from developing
countries.
Most of the market entry barriers identified in the literature are
applicable to businesses from developing countries attempting
to market their products in international markets. However,
the viewpoints of executives in developing countries
attempting to enter international markets are that most of the
barriers change in form and magnitude. From this perspective,
the following barriers are proposed to influence market entry
and competitive position of the firms from developing
countries:
1. Government policy (i.e. taxes, licensing requirements,
controls, import quotas, and export restrictions);
2. Product differentiation advantage held by incumbents;
3. Cultural barriers;
4. Access to distribution channels and transportation costs;
5. Product adaptation;
6. Customer service;
6. Expected local and global competition;
7. Stability of foreign currency exchange rate;
8. Customer switching costs;
9. Experience and knowledge about foreign markets.
Government Policy Barrier
Government policy has become one of the most important
barriers during the last decade. Often, foreign governments
set import quotas limiting the amount of goods that can be
marketed by foreign companies. According to Porter (1980),
government policy can easily limit the number of firms in a
market through controls such as licensing. Licensing
requirement allows the government to emphasize their low
tariffs or nonexistent quotas while still restricting entry.
There have been a variety of studies concerning the impact of
the government policy barrier in domestic markets (see
Harrigan, 1985; Moore, 1978; Pustay, 1985; Beatty at a!.,
1985; Grabowski and Vernon, 1986; Dixit and Kyle, 1985).
209
Interestingly, the influence of government's domestic policy
also affects the way foreign companies can operate in
international markets. Some important examples of this
barrier include customs duty taxes, regulatory requirements,
and import quotas. Some governments require joint ventures
between the host country firms and the foreign firms. In
addition, many governments subsidy agricultural production
and other industries (i.e. steel and aerospace industries).
Subsidy of wheat production in the U.S. and England's
subsidy of Airbus are good examples of this practice.
Kotler (1987) states that firms may confront tariff (e.g. taxes)
and non-tariff barriers (e.g. bias against a foreign company
bid). In addition, some countries have created barriers by
forming economic communities. For example, The European
Economic Community, better known as the "Common
Market," sets no tariffs on the member countries, but sets a
uniform tariff and quota to nonmembers. The 1992
unification of the 12 member countries is expected to alter
many of the barriers by removing fiscal, physical, and
technical barriers among the 12 nations (Quelch and Buzzell,
1990). While the developing country members (e.g. Greece,
Portugal, and Spain) will benefit from this unification, the
nonmember developing countries marketing their products in
Europe may be at disadvantage.
There is very little that firms from developing countries can do
to overcome this major hurdle, the government policy barrier.
However, this does not mean that they should remain passive
and let foreign government policies rule their marketing
strategies. Keeping a close eye on foreign government
policies can help these firms take actions before it is too late.
Communication with foreign government officials to resolve
differences is an important step and it may be worthwhile. Of
course, retaliatory action of the developing countries'
governments is another alternative, yet it is not an easy one.
In addition, the governments of developing countries usually
are not in strong positions to retaliate. Thus, market entry
through joint ventures may be the only alternative in defeating
this barrier.
Product Differentiation Advantage of Incumbents
Product differentiation advantage held by the domestic and
other foreign companies can hinder the market entry efforts of
firms from developing countries. According to Porter (1980),
product differentiation stems from the established firms'
having brand identification and customer loyalties, which
often result from past advertising or simply being first into the
industry. Early market entrants often gain product
differentiation advantages over the later entrants because when
customers become convinced that the first brand in any
product class performs satisfactorily, that brand becomes the
standard against which subsequent entrants are rationally
judged (Schamalensee, 1982). This view is also supported by
Robinson and Fornell (1985).
Firms in developing countries are usually not the first entrants
into foreign markets. Often these firms follow the domestic
marketers, or enter the market at the growth or maturity stages
of the product life cycle. Because early entrants have
advantages and create some barriers to entry for later entrants,
firms from developing countries are at a disadvantage when
even thinking of marketing their products in international
markets. Another important reason why it is difficult for
developing country firms to achieve product differentiation is
the fact that they do not have the advantage of being able to
use the mass media in foreign nations as well as the domestic
firms. Many do not even advertise, but choose to compete on
the basis of price. However, some products from firms in