How to choose your first market for international expansion

Entering an international market is a serious strategic decision. And one of the most common mistakes companies make is choosing a country solely by the size of its economy or its population.

However, a large market does not necessarily mean high profit. It is important to assess not only potential demand but also the cost of entry, the competition and the complexity of doing business.

The first criterion is market potential.

You need to determine whether there is real demand for your product in the country, how fast the target industry is growing and what market share the company could potentially capture.

A study published in Thunderbird International Business Review proposes a three-stage model for assessing foreign markets: analyzing the country's attractiveness for a specific industry, forecasting the industry's growth and comparing the results with industry benchmarks.

The second criterion is the distance between markets.

Harvard Business School professor Pankaj Ghemawat developed the CAGE Framework, which helps assess four types of differences between countries: cultural, administrative, geographic and economic.

For example, even if a product is in demand in both countries, differences in language, consumer habits, legislation and purchasing power can significantly increase the cost of adaptation.

That is why a neighboring market with a similar business environment sometimes turns out to be more promising than a large economy on another continent.

The third criterion is the competitive environment and the cost of entry.

The McKinsey study “Beating the Odds in Market Entry” stresses that companies often overestimate their own capabilities and underestimate their competitors. The authors recommend analyzing not only market size but also your own competitive advantage, potential market share, future revenue and costs.

A good example is Amazon's entry into India. The company waited for a period of rapid growth in local e-commerce and invested in infrastructure, logistics and adapting its service to local shoppers.

Finally, before opening a full-fledged office, it is worth testing the hypothesis with minimal investment: launch pilot sales, find a local partner or test demand through a distributor.

So the best first market is not necessarily the largest. It is a market where demand has been proven, the company has a competitive advantage, and the cost and risks of entry match its resources.

Sources:

1. Harvard Business Review — Distance Still Matters: The Hard Reality of Global Expansion (Pankaj Ghemawat, 2001). The original source of the CAGE Framework. Four types of distance between markets and their impact on international expansion.
2. McKinsey — Beating the Odds in Market Entry (2005). An analysis of why companies fail when entering new markets. It covers competitive advantages, market size, competition, potential revenue and costs.
3. Thunderbird International Business Review — Delineating Foreign Market Potential: A Tool for International Market Selection (2015). A research model for assessing the potential of foreign markets in three stages.
4. Harvard Business Review — Entering a Market Where There's Little Demand for Your Product (Lele Sang, Karl Ulrich, 2021). Practical cases of Hyundai, Amazon and Uber. The authors explain why it is sometimes wiser to enter a market after demand has already been proven.
5. McKinsey — Building a Global Biotech: Taking a First-Time Launch into International Markets. Practical recommendations for an international launch: assessing local market needs, regulation, partnerships and the entry model.