THE MAIN CAUSE OF FOREIGN MARKET WITHDRAWAL

Main Cause of Foreign Market Withdrawal: Lack of Consistency Between Reasons to Export and Corporate Objective

A four-country 59-company study result

Companies embark on export business enthused by growth and revenue expectations. However many of them decide to close down some markets or even abandon internationalization. Lack of consistency between reasons to export and corporate objective has influence on the decision of withdrawal. 44 out of 59 surveyed companies evidenced such inconsistency. This paper aims to measure its influence. When a company exports as a goal in itself and not as a corporate support activity, it diverts resources necessary to achieve corporate objective, which in most cases leads to foreign market withdrawal.

In 2011 I witnessed the withdrawal of one of the most successful medium-sized Chinese international operations. The unexpected closure called my attention so much that I decided to research the subject in depth and found that it was not just a field about which there was very little literature, but also was a very frequent situation. This work is the result of that investigation and also leaves open questions that can be further developed by other researchers.

In 2010 a Chinese company contacted me for advice on its Latin America entry strategy. The company had already international operations in 14 countries across Asia and Europe and was keen to conquer the Latin market because of the growth its agricultural sector had shown in recent years. It was an agricultural tool and machinery producer that saw the Latin American market as an interesting target, since it is considered as one of the food sources the world will have in the coming decades. The company was already installed for a little over a year in Peru and during the time we worked together Chile and Colombia were opened. Entrance to these markets was a success from the commercial point of view and the brand rapidly reached strong positioning in the channels we had identified as key to the business. Sales grew thanks to the investments the company made in marketing and to a distributor network that generated affection for the brand. Directors had set a breakeven monthly sale of USD$3 million at the end of the fourth year, which with its sales of USD$ 2,550,000 monthly during the first quarter of the fourth year seemed attainable. The margins were better than initially expected thanks to a differential with American and European competitors. Everything seemed to forecast a profitable and sustainable business over time. But suddenly, at the end of the first quarter of the fourth year of operation, the company decided to withdraw from the three Latin American countries. By asking company executives why the sudden and unexpected decision, I discovered there were mixed responses. Only two things all agreed: the export market was blurring the strategic objective and no one foresaw it because entry to those markets seemed a logical move due to the dynamics of the company, a natural step that had to be given at the time.

Before proceeding I will detail the terms of the conceptual framework for this paper. As a starting point the work focused on medium enterprises in four countries: China, Brazil, Peru and Colombia. Motivated by the case of the Chinese company previously mentioned, I wanted to delve into the behavior of firms from different backgrounds to see if there was any inherent cultural reason (Luo, 2008) or whether the described phenomenon could be confined to a particular country. I found no exclusive relationship with any culture, and the phenomenon of opening a very attractive market for a later withdrawal because it distracts from corporate objective, was a common practice in business of the four countries studied. I received 59 surveys from medium-sized companies in the four countries which had closed down at least one international market in the last five years. These companies are good for this type of analysis because their patterns of internationalization are more flexible than those of larger companies (Chetty & Campbell-Hunt, 2003) which makes them less predictable and more varied in its ways. Medium-sized multinationals can be very active in international markets and the importance exports have in their entire operation (Ali & Swiercz, 1991) claim that the impact, positive or negative, is significant for the survival of the company. Therefore, the implications of these markets over medium enterprises provide good information for this kind of research, not being necessarily so in larger multinational where withdrawal from an international market may go unnoticed in the total operation.

LITERATURE REVIEW

Scholars of international business have made a great contribution to literature on how to successfully develop an international market (I found 676 jobs): Investigations such as Shoham (1996), Solberg (2000), Dow (2006), Slater & Mohr (2006) among others, make a thorough analysis of how adaptation or standardization play an important role in the success of company internationalization. Vertically and horizontally dissemination and transfer of knowledge, e.g. between headquarters and subsidiaries, and between subsidiaries without the intervention of parent company, was extensively studied by Pearce (2011), Birkinshaw & Morrison (1995), Autio, Sapienza & Almeida (2000) and Ganotakis & Love (2012), among other authors, which has given us a better understanding of how companies learn. He & Liu (2010), along with Hannay (2009), Athanassiou & Nigh (2012), Tröster & van Knippenberg (2012) and Mierke, Rosier & Schoeller (2012) have done extensive research on the influence of leadership and intercultural communication on EMME and the benefits that can be derived from proper management of these factors. Additionally, authors like Cuervo-Cazurra, Maloney & Manrakhan (2007), Mezias (2002), Luo, Shenkar & Nyaw (2002) and Petersen & Pedersen (2002) speak of successful development of international markets through administration of benefits and identification and proper management of difficulties of a foreign company.

New foreign market entry strategy has been also extensively studied (487 jobs) and can be grouped, in general, into research on how and where: Tan (2009), Herrmann & Datta (2002), Agarwal & Ramaswami (1992) and Anderson & Weitz (1986) among others have analyzed the different ways in which companies enter international markets, the requirements of each of these ways and the advantages of one over the other. Meanwhile, Banalieva & Dhanaraj (2013), Isa Ibrahim, Baki, Ghani, Mustaffa & Nasir (2011), Miečinskienė, Stasytytė & Kazlauskaitė (2014) and Gaston-Breton & Martin (2011), and other authors have studied the selection process for international markets to which the company expands.

I found 278 jobs like Mintzberg’s (1978) and Haley & Boje’s (2014), which delve into the theory of internationalization process model and analyze the experience of many companies around the world. This research has allowed to see changes undergone by the model over time (Johanson & Vahlne, 2009) and the development of which it is subject due to the contribution of each academic (Santangelo & Meyer, 2011).

Although not as recurrent as successful development of international markets, entry strategies or model of internationalization, reason for a company to internationalize is also an issue that has been studied by a number of researchers (61 works). Thanks to the reasons found by researchers and the way they address the issue, clear differentiation can be made between two types of work: one analyzes the many reasons that lead a company to engage in international business, as in the works of Kubíčková, Votoupalová & Toulová (2014), Baldauf, Cravens & Wagner (2000), Senik, Isa, Scott-Ladd & Entrekin (2010) and Korsakiene & Baranauskiene (2011) while other focuses solely on innovation as the ultimate reason driving companies to internationalize (Gaba, Pan & Ungson, 2002; Salomon, 2006; Deresky, 2000, and Golovko & Valentini, 2011).

Finally, I just found one job that is dedicated solely and entirely to the relationship between internationalization and company’s corporate strategy (Melin, 1992). Apparently, the further one looks into foreign target market, the more literature there is, and the further one looks inside the company, the less evidence of research intensity there is.

RESEARCH METHOD

This work is based on a multiple case study. It is an instrumental study (Stake, 1995). whose goal is to create something more than just understanding what happened to the companies studied, it is reaching a conclusion to generate new knowledge in international business. This method allows choosing the universe of firms in a theoretical way rather than randomly (Pettigrew, 1990) to limit the variables a qualitative study has and reflects the reality more accurately. An open question was included to check consciously what was happening in the investigation and avoid getting meaningless results (Van Maanen, 1988).

Government export databases from China, Peru, Chile and Colombia for the period 2007–2012 were reviewed. 3,927 mid-sized EMME which had opened a new export market with sustained exports during the period (that is, all companies handling market test or sample export or exports that were not repeated in the first year were discarded), which exported for at least two consecutive years to the same country and which had then suspended exports were identified. Then I filtered by tariff position. 418 companies exporting manufactured products with a transformation component in its production process were selected. Exporters of agricultural products, live animals and plants, raw materials and minerals were excluded. After finding out the availability of the right person to be contacted and answer the questionnaire, the list was reduced to 273 companies, which was the number of surveys sent. 85 companies answered the survey. 79 companies responded to the survey with valid information while six left incomplete answers or responded with incomprehensible or irrelevant information. Finally, I confirmed that 59 companies had actually closed down an international market in the previous five years. The research uses these 59 companies as 100% of the universe that would be analyzed, due to its compliance with the conditions of size, industry type and exports behavior. This selection follows the logic of theoretical selection method (Eisenhardt, 1989) explained lines above and I chose because it minimizes deviations and removes information that does not contribute to the exercise. 22 companies were from China, 15 from Brazil, 13 Colombia and nine from Peru.

Data

The survey was designed to be used as a source of information for an inductive case study research (Yin, 1994) and intended to collect three types of information: the first type was control questions (questions 1–3), to confirm that export performance agreed with what was needed for the study. Three closed questions were prepared, which only gave option to be either inside or outside the universe of suitable companies. With this information 20 firms were excluded, reporting that markets showing no recent exports were on stand-by or was the normal business cycle and did not correspond to a definitive closure of these markets. The second type of information collected (questions 4 and 5) was aimed at knowing how was the performance of exports during the time that the export market was served. This information was required to determine how many companies closed down export market only because of a poor performance (12 companies) and how many had other reasons. The third type (questions 6–9) was designed to determine the level of coherence between company’s strategic objective and reason to export. The following are the survey questions:

1. Has your company entered into a new international market during the last five years?

2. Has your company retreated from any of those markets?

3. Retreat decision was temporary or definitive?

4. On a scale of 1 to 5 with 1 being the lowest and 5 being the highest, how was the overall result of the operation in that market?

5. Pulling out of market responded strictly to low business performance in that specific market? If not, please specify.

6. Which was the main reason for international market entry?

7. Did your company set international market entry as a strategy for specifically facilitate corporate objective achievement?

8. Did market entry interfere in any way with corporate objective achievement?

9. On the contrary, did market entry facilitate corporate objective achievement?

RESULTS

Table 1 shows results of the survey. The first column identifies each company (e1 to e59). Control questions No. 1 and 2 are answered with Yes (Y) or No (N) while question 3 is either Definitive (D) or Temporary (T). To be considered for the research companies should have answered Y, Y, D to questions 1, 2 and 3 respectively. Performance questions are No. 4, which responds with a score of 1–5 and No. 5 which responds with Y or N. Questions to verify consistency between corporate objective and reasons to start exporting start with No. 6, an open question which I left blank in the table. And questions No. 7, 8 and 9 respond Y or N. In terms of countries of origin, CN refers to companies from China, BR from Brazil, CO from Colombia and PE from Peru.

Seven companies (11.9%) reported very low operation results (score 1). Four companies (6.8%) rated their results as low (score 2). The previous 11 companies explicitly reported poor results as cause of withdrawal. Five of them were from China, four from Colombia and two from Brazil. 26 companies (44.0%) rated their results as medium (score 3). 19 companies (32.2%) rated its operation results as good by rating it 4 and finally, three companies (5.1%) considered their results were very good during the period the international operation went on.

DISCUSSION AND CONCLUSION

As expected, answers to the survey suggest that there is a high correlation between a poor result in international operation and the decision to leave that market. 12 companies withdrew from international market only because of poor results, 11 of which rated their results as 1 (very low) or 2 (low). There was only one company (from Colombia) which reported having closed down because of poor results but its performance rating was average (grade 3). The answer of this latter company to question 5 on reasons for withdrawal suggests that, although export performance was not all bad, it was very slow and such low speed was assumed as a bad result, though it was possibly very premature to decide (Contractor, 2007). For the 12 companies it was a hasty retreat, which probably gave them no time to recover the money invested, but was also something that did not become a clue issue on which the company depended (Benito & Welch, 1997). 12 agreed that international market had not become a key part of the total business. Apart from these 12 companies, two other were absorbed by multinationals larger than them. Both acquiring multinationals already had operations in target countries, so both decided not to continue attending those markets with products manufactured at its newly acquired company. As a result, exports of the two companies ended. A Brazilian company said that the reason for closing down the international market was because it went bankrupt. Both national and international operations were closed down and there was only a legal and financial department handling the liquidation and dissolution of the company.

That leaves out 44 companies (74.6%) which did not report that withdrawal has been exclusively by poor performance or by factors outside the business, but for other reasons. With answers to question No. 5 firms showed that there was more than one reason for closing down. It was an open, multiple choice question with the intention of identifying feelings about the withdrawal, to get clues about the consistency or inconsistency. Responses like “we were devoting much time to such an insignificant market”, “there were countries more interesting to work with” or “placing my team in a more profitable country cost me the same money” suggest an inconsistency between the strategic objective and what they were getting from that market. There is a disagreement with their presence in the target market even when results were ranked as medium (24 companies, 40.7%), good (17 companies, 28.8%) or very good (three companies, 5.1%) . On the other hand, only two of these 44 companies answered yes to question No. 7, indicating that 95.5% of them did not consider the opening of international markets as a support for achieving the strategic objective but as a goal in itself. Answers to open question No. 6 mentioned completely different objectives from supporting corporate objective. Even the two companies that responded affirmatively to question No. 7, did not answered explicitly that exporting was a tool to support strategic objective: one answered that exports were done to increase profit margin in a market where higher prices could be handled and the other to increase its presence in Latin America, which ultimately supported the achievement of corporate objective. In addition to this, 41 of the 44 companies (93.2%) answered yes to question No. 8, which asks if international market entry had generated interference in the achievement of corporate objective. This result indicates that a large majority of companies considered that, even with average, good or very good results, the company’s presence in that market was diverting corporate objective in some way. And finally, only three of these companies (6.8%) stated that international market entry supported the achievement of corporate objective, suggesting that few companies saw entry as something positively related to corporate goal. Given the answers to questions No. 6, 7, 8 and 9, it can be inferred (Holyoak, 1989) that, when companies embark on exports as a goal in itself and not to support corporate objective achievement, end up closing down such markets once they realize the operation is deviating from something more important, even if the result of that particular market is successful.

Exporting for the wrong reasons

In principle all reasons that a company has to internationalize are usually beneficial; however, only few EMME do it as a strategy to achieve its corporate objective. Companies from all sectors, all sizes and from all countries tend to export for a very attractive reason (Doherty, 2000) as using idle capacity, taking advantage of a temporary market opportunity, improving margins, etc. but this may not necessarily support corporate strategy or may even go against it. In many cases internationalization through exports occurs as a mere and natural consequence of a growth process of the company and its directors accept it as a fact. Research has shown that managers think about exporting as a goal (Buckley & Casson, 1998) to be achieved at some point in the life of the company (Leonidou, Katsikeas, Palihawadana & Spyropoulou, 2007), either from its beginning as a born-global firm (Jantunen, Nummela, Puumalinen & Saarenketo, 2008), when it is more mature and ready (Keng & Jiuan, 1989) or when its innovation level forces it into new markets (Cassiman & Golovko, 2011).

Many authors go further and say that there are not only different reasons but it is also a need for companies to internationalize as soon as possible (eg Zhou, 2007; Weerawardena, Mort, Liesch & Knight, 2007; Sapienza, Autio, George & Zahra, 2006) and outline the benefits they will enjoy by doing so (Fan & Phan, 2007; Zhang, 2009; Gabrielsson & Kirpalani, 2004; Gassmann & Keupp, 2007), which they summarize in economic benefits, stability and knowledge transfer. Some authors abridge reasons that lead a company to internationalize into a few and very general. Pope (2002) presents a very clear classification of the four reasons that motivate small exporting firms: having a unique product, having a technological advantage over its competitors, taking advantage of economies of scale and seizing opportunities in foreign markets. Others prefer to group them in more detail (Miesenböck, 1988; Jaffe & Pasternak, 1994) and identify the appropriate internationalization strategies according to the reasons the EMME had to export. However, this research has shown there are as many reasons as companies and the mere exercise of grouping them can leave out of consideration important elements of the decision criteria. I have identified many reasons: there is no local demand for my product, using idle capacity, taking advantage of transient opportunities, positioning brand in more markets, valuing the company to sell it, prolonging the life cycle of a product, attacking competition in countries where I can be stronger, improving sales margin, reducing country-related risk, having an affinity with destination country, because someone is already buying from me, because if I do not do it my competition will, exporting as a first step in controlling raw material supply, testing a product or service in a market where there is very few failing consequences, measuring a future market for foreign direct investment, tax reductions achieved via transfer pricing, access to government incentives, etc. Any reason is good as long as it approaches company to reaching its strategic objective.

But when the reason to export is not aligned with the corporate goal, company usually sees natural market situations as insurmountable difficulties, because when analyzing possible solutions, they require resources beyond what they intend to invest. I argue that foreign market difficulties are situations easy to fix when internationalization is aligned with corporate goal. Not because difficulty degree is lower (difficulty is there regardless of what the company planned) but by the resources assigned to its solution. As well as reasons, difficulties have also been extensively investigated and classified, and different solutions have been suggested for each. The work of Crow-Cazurra, Maloney & Manrakhan (2007) explain six types of difficulties. Rugman & Verbeke (1992), Mezias (2002) and Kobrin (2001) speak of restrictions and discrimination foreign firms and products may face in the host country. Sometimes companies decide to withdraw from foreign markets at some point because the cost of supporting those businesses exceeds economic benefits (Patel, Fernhaber, McDougall-Covin & van der Have, 2014). Moran (2008) states that 85% of international business failures is due to differences between cultures. He affirms that business difficulties like competitor aggressiveness, poor planning, inadequate product, etc. only account for 12% of failures and 3% is attributable to having the wrong person running the business. All these reasons exist and are evident. But when taking into consideration that many companies withdraw from foreign markets regardless of whether they are doing well or poorly commercially and leave with the feeling that they did not make the right move, it is evident that there is a difficulty that transcends all others. I argue that this difficulty is the temptation to open international markets based on the wrong reasons. The only valid reason to exporting must be supporting company on corporate strategy achievement, through reaching a good margin, brand positioning, increasing volume or any other factor that the company considers critical in fulfilling its corporate goal.

Any reason is good in itself but there are two hidden risks in their choice to be avoided by the MMSE. The first risk is that reason for internationalization may go in opposite direction with corporate strategy. During 2006 and 2009 the government of President Chavez repeatedly closed Venezuelan borders to imports of products he believed, should be produced locally (Giraldo, & Montoya, 2014). When borders were reopened, unstable price soaring made Venezuela a very attractive market for Colombian and Brazilian companies. Due to profit margin, these EMME gave priority to Venezuela over their local markets and other export markets. Later, when Chavez closed borders again, companies were forced to abandon the lucrative Venezuelan market and focus again on previous markets, only to find that due to the inattention these markets underwent by prioritizing Venezuelan market, they had deteriorated badly. And by then, EMME had in Venezuela lots of resources they needed to recover those deteriorated markets. This affected liquidity of many companies, which had to postpone corporate strategy development. All this for taking a decision that was highly profitable in the short term but was not consistent with their long-term plans.

The second risk is MMSE do more than they should do according to its reason to export. If the company decides to export, for instance, because it has excess capacity and its interest is only fixed cost covering, it should not go further even when it goes against business logic. Investing in advertising, brand positioning, improving product quality to get more customers, etc. are logical activities from a business perspective but divert resources needed for corporate strategy and are not required for the original reason: to cover fixed costs. Some Indian (Haidar, 2012) and Chinese (Buckley, Clegg, Cross, Liu, Voss, & Zheng, 2007) EMME are examples of what to do and what not to do: Successfully growing EMME have in common adherence to value creation and continuous learning (Sun, Peng Ren, & Yan, 2012), while failing ones carry great costs from foreign markets to be recovered in their countries of origin (Sharma & Mishra, 2011). The latter have in common a well-made implementation of activities, but activities that were not consistent with the reason to export. Sometime they forgot the initial reason for internationalization and focused on implementing activities that did not add value to their corporate strategy.

Limitations and future directions

This study aims to fill a gap in an area of international business poorly studied, which shows to be decisive in the behavior and success of internationalization of companies. However, the study is limited to companies from only four emerging economies. Cases of companies from developed economies that could present a different behavior have not been included. Similarly, this work is limited to medium-sized companies. Result of this research is not enough to determine what implications does the phenomenon of inconsistency between the reasons for exporting and corporate objective has on large enterprises, or on small and microenterprises, or even to determine whether there is any effect on these. There is evidence (Mugler & Miesenböck, 1986) that size is important when internationalizing, so implications that this inconsistency may have over the company should also be affected by its size. Instrumental case study research method presents itself a limitation as it can lead to the generalization of concepts that cannot be generalized but are specific to a particular group of individuals (Eisenhardt & Bourgeois, 1988). Therefore, this paper leaves some unanswered questions and opens the path for further research to identify effective and conclusive concepts for proper development of international business.

Conclusion

Internationalization of a company must be a support activity for achieving corporate objective. Entering foreign markets can reduce planned time to fulfill a strategic objective; having more markets contributing towards a single objective is likely to accelerate achievement. Profitable foreign market may fund activities required by corporate strategy; local market may be too small to raise necessary funds or strategically the company does not want to put pressure on the local market by rising prices. Foreign market entry may supply critical mass for large projects. And foreign market entry can do many other things, but something it cannot do is being the strategy itself.

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