How should a business choose its first overseas market?
Market size alone cannot determine a good entry choice. Compare institutional distance, customer demand, entry methods, learning costs and the company’s resources.
What matters when choosing a first overseas market?
To reduce the cost of failure, choose a country that is close to your company rather than a country with a large market. Here, distance refers not only to the distance on the map, but also to differences in culture, institutions, geography, and economy. Companies that start exporting usually start in one country and expand to other countries if they survive, so choose your first market with the view that it is a place to gain experience that can be transferred to the next market.
Why is it easy to fail if you only look at the size of the market?
A paper on overseas expansion (Ghemawat, 2001) points out that companies habitually overestimate the attractiveness of foreign markets. Analysis that ranks countries by indicators such as their wealth, income, and consumption propensity shows only potential sales and omits the costs and risks of doing business in an unfamiliar market. The paper argues that most of the costs and risks arise from distance.
Even in countries with large populations and rapidly rising incomes, if the language and distribution structure are completely different and regulations are strict, it may cost more money and time to find local partners and obtain certification than to make sales in the first year. Conversely, even if the market is small, you can learn quickly and at low cost in countries with similar trading practices and low tariffs through agreements.
How do we compare candidate countries across four distances?
The same paper presents a framework for dividing distance into four categories. It is called CAGE frame based on the first letters.
Four distances to compare candidate countries
| distance | Elements of a thesis | Questions our company will check |
|---|---|---|
| cultural distance | Differences in religion, social norms, and language | How much should you change your product description, packaging, and advertising? |
| institutional distance | Past colonial relations, common currency, trade agreements | How strict are the tariffs, certification, and country of origin requirements? |
| geographical distance | Physical distance, land size, transportation and communication infrastructure | Can you handle the delivery period, logistics costs, and follow-up management? |
| economic distance | Differences in income levels, differences in resource costs and quality | Can we make a profit with our cost in the local price range? |
The paper explains that the impact of distance varies depending on the industry. If the product is bulky and heavy, the geographical distance may be greater, and if the product is one where language and taste are important, the cultural distance may be even greater. Fill in the four boxes for each candidate country and rank our products starting from the heaviest distance.
What path do companies that export for the first time usually take?
A study analyzing Colombia's customs records from 1996 to 2005 (Eaton et al., 2007) reported that in a typical year, nearly half of exporting firms were new firms that had not exported in the previous year. Most new export companies were very small and did not continue exporting until the following year.
Still, some of the new companies that emerged each year increased their overseas sales very quickly, accounting for nearly half of the total increase in exports in less than 10 years. New export companies started in one country and, if they survived, gradually expanded to other countries. The country they expanded to and the possibility of continuing exports differed depending on the country they first entered. This means that the choice of the first market determines the subsequent path. Although the subject of the study is a Colombian company and the timing is different from ours, the trend of companies that start small and survive expanding their markets is worth considering when choosing your first market.
What should I prepare to receive FTA benefits?
A representative means of reducing institutional distance is a free trade agreement. However, the agreed tariff can only be received if the country of origin requirements are met. Article 7 of the Act on Special Provisions of the Customs Act for the Implementation of Free Trade Agreements stipulates that criteria such as change in product number, added value, and major processes shall be applied in accordance with the agreement when determining the country of origin. Even if it is produced in the country of origin, it may not be recognized as the country of origin if it is transported through another country. Since the origin standards for each agreement are different for each product, you must first check the standards for export items.
According to Article 11 of the same law, the certificate of origin is issued by a designated agency or prepared by the exporter or producer himself, and if he is certified as an exporter with certified origin under Article 12, he can use autonomous certification and simple procedures. Start by obtaining information on the origin of raw materials from your partner companies.
Which entry method alternatives should we compare side by side?
Korea Research Institute of Business & Branding compares market entry and growth strategies in terms of conditions, costs, expected effects, risks, and execution order for each alternative. The overseas expansion method is as follows.
Comparison by overseas expansion method
| way | suitable conditions | Expected effects | danger |
|---|---|---|---|
| Indirect export through trading companies | Little to no overseas experience | Start with less | Customer information is not accumulated |
| Export directly to local distributors | Have a trusted partner | Securing sales channels | dependence on partners |
| online direct sales | Consumer goods, easy to ship | Quickly check customer reactions | Logistics and returns burden |
| Establishment of local corporation | Demand confirmed | Strengthening local responsiveness | Fixed costs and withdrawal costs |
It is common to initially check demand through indirect exports or online sales, and then increase investment through direct exports and local corporations once response is confirmed.
What do we learn from our first market and take with us to the next?
Keep a record of why local customers choose your product, how they react to your pricing, and the terms of your dealings with your partners. You can use the sales reduction limit calculation in Things to consider before raising prices when determining local price ranges, New business idea verification sequence when testing small local demand, and Supplier Dependency Checklist when considering partner dependence. When referring to other companies' overseas cases, differences in industry, size, timing, and market environment must be considered. Check out Management strategy advisory for a review of entry strategies and Management research and advisory field for all related areas.
Overseas expansion Frequently asked questions
Is it better to start in one country or multiple countries?
Most new exporting firms in the study started in one country. For companies with limited resources, it is easier to manage risk by learning in one place and then expanding.
Is a nearby country always a good choice?
Even if the geographical distance is close, the institutional or cultural distance may be long. Compare all four distances and choose based on the distance that is most important to your product.
When should I prepare the FTA certificate of origin?
Arrangements must be made prior to first shipment. It takes time to receive a certificate of origin of raw materials from the partner company, so request it at the contract stage.
Should I withdraw if sales are low in the first year?
Research also shows that many of the successful export companies started small. Make a decision by looking at indicators that predict the next year, such as sales, number of customers reordering, and partner reactions.
References
- Harvard Business Review, 「Distance Still Matters: The Hard Reality of Global Expansion」(Ghemawat), 2001. https://pubmed.ncbi.nlm.nih.gov/11550630/
- National Bureau of Economic Research, 「Export Dynamics in Colombia: Firm-Level Evidence」(Eaton, Eslava, Kugler, Tybout), 2007. https://doi.org/10.3386/w13531
- National Legislation Information Center, Articles 7, 11, and 12 of the Act on Special Provisions of the Customs Act for the Implementation of Free Trade Agreements, effective January 2, 2026. https://www.law.go.kr/법령/자유무역협정의이행을위한관세법의특례에관한법률