Research shows international market entry is a risky and long term endeavour

Many founders and CEOs dream of accelerating growth by expanding into new international markets propelled by a successful fundraising round. The opportunity to develop a strong brand profile as an innovative global market leader is an alluring prospect.

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This is not just wishful thinking. The Startup Genome Scaleup Report (2023) provides global longitudinal research which shows that, “early-stage startups that go global (more than 50% of foreign customers) are on a revenue growth curve that is 2x faster than those that do not (less than 50% of foreign customers).” That is a compelling startup metric.

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However research reveals most international expansions fail and that it can take many years to generate returns

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Research findings published in the Harvard Business Review in 2015 by Christian Stadler, Michael Mayer, and Julia Hautz provide sobering reading concerning the time it takes to generate Return on Assets from international market entry. These academics comment:

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“In an analysis of 20,000 companies in 30 countries, we found that companies selling abroad had an average Return on Assets (ROA) of minus 1% as long as five years after their move. It takes 10 years to reach a modest +1% and only 40% of companies turn in more than 3%.”

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In comparison:

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“We found that companies in our database that expanded domestically typically had an average ROA of +1% after five years, rising to +2.4% after 10 years, with 53% exceeding 3%.”

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These researchers concluded that: ​​

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“Few companies have the size or management capabilities to make a success of going overseas and for most it may well be more profitable to look closer to home.” 

Conventional wisdom within the field of international business expansion management consultancy suggests that only one in four market entry initiatives succeed although it is hard to find strong data on this topic. 

In the absence of more recent research data, Chris Zook, an advisory partner at Bain & Company concluded in his 2004 book "Beyond the Core: Expand Your Market Without Abandoning Your Roots," that only 27 per cent of adjacency moves (including geographic expansion) could be considered successful based on a study of 181 adjacency moves of major U.S. and U.K. public companies, randomly selected from 1995 to 1997.

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A 27% success rate for geographic expansion might sound rather low but is it so surprising given that (a) 90% of startups fail according to Startup Genome (2022), (b) 70-90% of mergers and acquisitions fail (Harvard Business Review, 2011), and (c) up to 70% of cross-border M&A projects fail to deliver (Hodgen. S., 2023)?

Setting up and expanding into new markets is difficult. No two markets are exactly the same and there are many factors to consider.​​​​ Here are ten common reasons for international market entry failure identified by ChatGPT:

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"1.     Insufficient Market Research: Entering a market without thoroughly understanding its dynamics, consumer behavior, and competitive landscape can lead to misaligned strategies and offerings.

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2.     Cultural Differences: Failing to adapt to the cultural nuances, local customs, and consumer preferences can alienate potential customers and create a negative perception of the brand.

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3.     Regulatory and Legal Issues: Not understanding or complying with the local laws, regulations, and business practices can result in legal complications, fines, or even expulsion from the market.

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4.     Inadequate Localization: Not localizing products, services, marketing materials, and customer support to fit the local language, culture, and needs can result in poor customer acceptance.

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5.     Overestimation of Brand Strength: Assuming that a successful brand in one market will automatically succeed in another can lead to overconfidence and lack of necessary adaptations.

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6.     Poor Distribution and Logistics: Inefficient supply chain management, unreliable distribution networks, and logistical challenges can lead to delays, increased costs, and poor customer service.

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7.     Pricing Strategy Failures: Incorrect pricing strategies, whether pricing too high or too low, can impact the perceived value of the product and affect competitiveness.

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8.     Lack of Local Partnerships: Entering a new market without strong local partners or networks can result in a lack of local insights, connections, and support.

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9.     Underestimating Competition: Not adequately assessing and responding to local competitors who may have a better understanding of the market can lead to a significant competitive disadvantage.

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10.  Financial Mismanagement: Misjudging the financial resources required for successful market entry, including underestimating costs and overestimating revenue, can lead to financial strain and eventual withdrawal.

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Addressing these issues through thorough preparation, strategic planning, and local adaptation can increase the likelihood of success in international market entry."