European business school present study on German companies' internationalization strategies

• 88 percent of companies say additional growth is their main motivation
• The main destinations are Poland and the Czech Republic, followed by China and India
• Around 50 percent of firms plan to enter more Eastern European markets, 42 percent want to invest in Asia
• Market growth is the main basis for choosing a destination
• 53 percent of companies begin with a sales office
• Besides sales and production, companies are also offshoring marketing, accounting, human resources, purchasing and IT

When German companies get involved in Asia, Eastern Europe or South America, their objectives are primarily higher growth (88 percent) and increased sales (78 percent). These are some of the findings of a joint study by Roland Berger Strategy Consultants and European Business School, Oestrich-Winkel (ebs), which examined 120 German companies from various industries. More than 80 percent of the respondents are expanding into Poland and the Czech Republic, 76 percent are moving into China and 73 percent are entering the Russian and Hungarian markets. Around half of the companies plan further expansion in Eastern Europe. 42 percent intend to invest in Asian countries such as China and India. The main criteria for selecting a destination are market growth (79 percent), political and economic stability (78 and 76 percent respectively) and the ability to achieve a leading market position (75 percent). For 53 percent of companies, the first step in an emerging market is to establish a sales office. After making a successful start, they not only base their production and sales capacities there, they also decentralize their marketing, accounting, human resources, purchasing and IT activities.

Roland Berger Strategy Consultants and ebs conducted a written survey among 120 of Germany's 500 biggest companies (based on sales). The aim was to find out about their market entry strategies in the emerging markets of Eastern Europe, Asia and South America. The study looked at the issue across all industries and encompassed small and medium-sized enterprises as well as international groups. The study was completed in August 2004.

Offshoring as a path to growth

The primary goal of German companies in these foreign markets is to create additional growth (88 percent). 78 percent of firms said they wanted to tap into new sales potential. Companies therefore prefer countries with dynamic growth markets, such as Poland, the Czech Republic and China.

Other reasons given for offshoring include having an early market presence (71 percent) and attaining higher profitability (70 percent). Such internationalization plans are usually part of a long-term strategy.

Just 40 percent of companies choose to get involved in Eastern Europe, Asia or South America because of the lower production costs. "This shows that cost advantages actually play a lesser role in internationalization than was generally thought to be the case," explains Markus Strietzel, Project Manager in charge of the survey from the Financial Services Competence Center at Roland Berger Strategy Consultants. However, the responses do differ markedly. While companies are interested in new sales opportunities in countries like China, for instance, it is the lower cost of production that draws firms to India, Indonesia and the Philippines.

Poland and the Czech Republic are the main destinations

Eastern Europe is the offshoring destination for more than 98 percent of the companies surveyed. Some 79 percent of firms have invested in Asian countries with low average incomes (for instance China and India), while the figure is about 76 percent for Asian countries with higher average incomes (Hong Kong, Malaysia, Singapore, Taiwan and South Korea). 73 percent have activities in South America.

The companies in the study currently consider Poland and the Czech Republic to be the most important growth markets. More than 80 percent of firms are represented there, followed by Hungary and Russia, at 73 percent each. 76 percent of the companies have activities in China.

The survey respondents have a much lesser presence in South America. A mere 49 percent of firms have invested in Argentina, with less than 45 percent having invested in Columbia and Peru. Just 17 percent of the companies consider South America to be an interesting region for investment.

Main criteria for selecting a destination

In weighing up the pros and cons of potential destinations, companies place most emphasis on strong market growth (79 percent). This underlines the overall goal of internationalization: sustainable international growth.

As for the other criteria, 78 percent look for economic stability, 76 percent insist on political stability and 75 percent want to be able to take a leading market position. Besides all this, companies also value high economic growth (73 percent) and healthy demand (73 percent).

Much less important is the availability of cheap labor (43 percent) and specific skills (38 percent) - a further sign that pure cost cutting is becoming less important.

The market determines the entry strategy

Companies that adapt their market entry strategy to the local conditions enjoy particularly strong growth in the emerging markets. In the dynamic growth regions of Asia, such companies prefer to take a pioneering position, occupying markets before the competition can. In contrast, firms tend to enter the more slow-moving markets of Eastern Europe and South America at the same time as their competitors or even later.

Where neighboring markets display a fast pace of innovation, companies with the highest growth will often choose to enter the markets in parallel. They will engage in multiple acquisitions to enable them to quickly tap into local know-how to further their own growth.

53 percent of survey respondents choose to open a sales office as the first step to penetrating new markets. "Such legally dependent entities can be managed flexibly from a strategic perspective and also require fewer resources than independent subsidiaries, for example. They are therefore best suited to handle the particular risks of starting business in emerging markets," says Prof. Dr. Rolf Caspers from ebs.

Strategic alliances and joint ventures represent a suitable way of entering the Asian market in particular. Government aid to joint ventures seems to be becoming particularly common in China. In Eastern Europe, on the other hand, acquisition is the usual way to get a foot in the door.

Comprehensive internationalization

Around half of the companies surveyed have shifted their production and sales activities to emerging markets. But other business activities are also being offshored. For example, more than 70 percent of companies have also moved their marketing operations to the local country, almost 60 percent have established a local accounts department and more than 50 percent handle human resources in other countries.

Around half of the companies have also decentralized their purchasing activities. This is particularly true in parts of Asia (60 percent) and in South America (56 percent). German companies are particularly interested in both of these regions not only as sales markets, but also as purchasing locations.

Just under 40 percent of firms establish local IT operations. The area where companies have so far shown the least propensity for offshoring is research and development: less than one quarter of survey respondents have R&D capacities in Asia Eastern Europe or South America.