Say you are a successful US-based franchise company and you have expanded to the point where your market is becoming saturated. Or your competition has become so fierce that it is very difficult to expand your business further and still make a profit. Or the vast opportunities offered by increasingly integrated world markets are becoming more enticing. After all, even the large US domestic market has less than 5% of the world’s potential customers... It may be time to go international!
But where do you go first or what countries do you target first for further expansion? This is no simple task as there are over 200 different countries and territories where you could find potential customers for your product or service. You could choose the relatively safe and familiar (Canada for example) or you could chose a big potential market (China or India for example) - but this may not be your optimal option as market size or market risks are only some of the many factors that drive success in international markets. The challenges experienced by many otherwise successful US companies (franchisors as well as non-franchisors) in overseas markets attest to the difficulties of international expansion. These include failures - or less than satisfactory performances - by McDonald’s in the Caribbean, Taco Bell in China, Wendy’s in Japan, Starbucks in Australia, Best Buy in Europe, Walmart in South Korea, etc.
Making Data-driven Decisions
In many cases, expanding into the wrong country at the wrong time was a major reason for the failure of the internationalization initiatives. A computer model developed at the University of New Hampshire’s Rosenberg International Franchise Center (RIFC) may help franchise companies identify the countries where they have the highest chances of successfully expanding their businesses (full disclosure: I am the director of the RIFC). This model looks at international expansion as an investment with potential returns and risks. A good investment is one that has a favorable risk/return profile, i.e., one that maximizes returns for a given level of risk and/or minimizes risks for a given level of return.
Factors to Consider: Returns vs Risks
RIFC researchers identified key drivers of potential returns in internationalization initiatives, including:
-Market Size: the larger the size of the population and/or the economy, the better the potential returns;
-Market Growth: the faster the economy grows, the higher the potential for higher returns; and
-Purchasing Power: the more disposable income the potential customers have, the more opportunities for higher sales, higher profits, and higher returns.
RIFC researchers also identified the key risks in international markets. These include:
-Political and Economic Risks: these arise when political or economic conditions or changes adversely impact a foreign company’s operations. These can include currency instability, increased tariffs, economic recessions, strikes, boycotts, etc.;
-Legal and Regulatory Risks: unfamiliar and/or changes in the laws and regulations of a host country can hurt a foreign company operating there. Non-enforcement of legal contracts and intellectual property laws, restriction on the ownership and control of company assets, barriers to repatriation of profits, discriminatory pricing, etc. can hamper a company’s operations and hurt its bottom line;
-Cultural Distance Risks: operating in a different cultural environment poses unique challenges. Different customer tastes, employee expectations, management practices, etc. can lead to business underperformance and failure. The more different the host country’s culture from the foreign company’s home country culture, the higher the risks of failure;
-Geographic Distance Risks: as the geographic distance between the foreign market and the company’s headquarters increases, the higher the monitoring costs are, and the more difficult and costly it is to provide logistical and other support to foreign franchisees.
After quantifying all these factors, ranking all countries according to each one of these factors, assigning to them relative weights based on a survey of over 100 franchise executives, RIFC researchers came up with an index that ranks 131 countries according to their attractiveness as international franchise expansion markets. The more favorable a country’s risk/return profile, the more attractive it is as an international expansion market. Only countries with populations of more than one million people and that have publicly available data are included in the rankings.
Top 10 Most Attractive Countries in 2019 - For Balanced Growth Companies
For a US franchise company seeking to expand into foreign markets with balanced risk/return profiles (i.e., reasonable returns with moderate risks), the Top 10 most attractive countries in 2019 are, in this order:
- Germany
- United Kingdom
- Canada
- Poland
- France
- Australia
- Spain
- Ireland
- Sweden
- South Korea
(For the complete list of 131 countries, see https://www.unh.edu/rosenbergcenter/international-franchise-attractiveness-index%E2%84%A2)
What makes these countries attractive?
#1 Germany: offers a great balance of potential returns and risks. It scores relatively high in market potential at #14, driven by a large market size (#16) and purchasing power (#13). At the same time, it offers relatively low market risks with low economic and political risks (#10) and favorable cultural and geographic risks at #9.
#2 United Kingdom: has a sizable market potential (#18) at very low market risks (#7), especially geographic and cultural distances risks (#4). However, UK’s attractiveness may be impacted depending on how the looming Brexit proceeds.
#3 Canada: provides reasonable market potential (#28) at very low market risks (#6), particularly in terms of geographic and cultural distance risks where it leads other countries at #2.
Top 10 Most Attractive Countries in 2019 - For Aggressive Growth Companies
For companies that are more aggressive and are willing to take more risks to secure higher returns, the Top 10 countries in 2019 are:
- China
- Germany
- Turkey
- United Kingdom
- India
- South Korea
- Poland
- Spain
- Malaysia
- Canada
#1 China: its massive potential customer base (#1) and fast market growth (#8) make it very attractive for international companies willing and able to confront its serious market risks (#51 overall), especially its unattractive ranking in cultural and geographic distance risks (#116).
#4 Turkey: similar to China but to a smaller extent, its sizable potential customer base (#18) and respectable market growth (#24) are attractive to risk-taking international companies willing to deal with sizable market risks (#40 overall), especially political and economic risks (#57).
#5 India: close to China in market size (#2) and market growth (#4), though with lower purchasing power (#93), India may be attractive for international companies that can deal with its high market risks (#53 overall), especially its notoriously difficult legal and regulatory environment (#71).
Focusing mostly on market potential without explicitly taking into account the many risks present in international markets may lead to inadequate internationalization decisions. Not so long ago, the BRICS countries (Brazil, Russia, India, China, South Africa) were priority markets for companies seeking to expand internationally, due to their large market potential. However, these countries also had very high market risks. Many companies that expanded into Brazil, Russia, and South Africa have come to regret their decisions as these countries have faced severe economic, political and/or social problems in recent years.
Fortunately, some countries can be highly attractive to both balanced growth and aggressive growth companies: Germany, United Kingdom, Canada, South Korea, Poland, and Spain. These countries should be high on the target lists of most US franchise companies seeking to enter or expand into international markets.
