Small firms urged to consider frontier markets — Exporter Magazine

New research from Massey University suggests that many small New Zealand firms could be missing good export opportunities in emerging markets.

Massey master’s student Tony Martin, who also happens to be New Zealand’s trade commissioner and consul general in Vietnam, has just completed his thesis on how small businesses select their export markets and find partners to do business with.

Martin focused his research on the food and beverage sector, but says the insights from his thesis apply to other sectors too.

“My thesis topic is based on observations I made while working in international development roles for New Zealand-based businesses. I saw many great New Zealand food and beverage products pushing out into international markets with varying degrees of success,” he says.

“It seemed to me that there was a trend for smaller New Zealand companies to select markets which they were familiar with, rather than considering broader options for growth and development.”

Mr Martin’s research backed up his observations – a proportion of firms still adopt the traditional staged approach to exporting by going first to Australia and then onto markets like the United States, United Kingdom, Singapore, Hong Kong and Canada. Small firms, he says, often make decisions to export based on reasons that may seem irrational or even emotional.

“Small firms from small domestic economies such as New Zealand are forced out into international markets as fledglings based on the need for revenue growth and, as a result, there seems to be a tendency to be far more reactive when it comes to market selection and finding business partners offshore,” he says. 

“This is where the concept of ‘psychic distance’ such as language, cultural and historical differences can interfere with decision making.”

He says that while the food and beverage sector is a very large part of New Zealand’s export economy, aside from the large dairy and meat companies most exporters are small in size and face the challenges associated with a lack of human and financial resources.

Testing the waters in “psychically close go-to markets” is not inherently bad, he says, as these markets can be a natural fit in terms of taste and quality profile, especially for food and beverage products. But emerging markets are starting to become more important.

“In recent years we have started to see a change in the order of the countries firms export to. China –  a psychically distant market from New Zealand – is becoming a second, third or fourth choice market and overtaking many of our traditional markets in order of sequence.”

Mr Martin says markets like China, Indonesia, Vietnam and the Philippines offer opportunities that developed markets don’t – if firms can overcome the influence of pyschic distance, which can overshadow more objective factors, when chosing which markets to enter.

“Emerging markets are sometimes referred to as ‘frontier’ markets and, for companies that have a longer term vision for growth and development, being at the frontier of a new market can provide much better long-term returns than joining the ultra-competitive marketplace in developed countries.  

“There are, of course, risks with market entry and finding suitable channel partners in less developed export markets, but in many cases the best time to develop a presence in an emerging market is while they are still emerging. Long-term relationships can be established and product and brand awareness can be developed without having to fight for space and a share of voice.”

Mr Martin says choosing the right partner is absolutely crucial to export success in an emerging market and the offshore networks that help New Zealand firms find those partners are invaluable. He says his research has certainly shaped his own thinking as the head of an offshore trade development office in an emerging market.

“Emerging markets are investment markets in terms of trying to build longer term plans for development in key sectors. This requires a lot of time dedicated to relationship building and establishing deep links with key influencers. 

“The biggest change I can see ahead is finding much better ways to leverage the offshore connections and networks that organisations like Kea, alumni groups and New Zealand Trade & Enterprise have. These are surely one of the greatest assets that can be made available to small firms who have the motivation and desire to break through psychic distance barriers.”