Barriers Affecting the Internationalization of Value Chains and How to Overcome Them

The ratio of international trade to the gross world product has doubled since the liberalization of international trade in the 1980s. Advancing globalization, which goes hand in hand with higher levels of business internationalization, is one of the major issues characterizing the contemporary entrepreneurial environment.

This necessitates the internationalization of domestic companies in Estonia, Germany, and elsewhere. Companies’ internationalization contributes to more effective management by enhancing management capabilities, improving business processes, facilitating access to new resources, understanding markets and business models, and ensuring greater flexibility in undertaking diversified business risks. On a macro level, it contributes to GDP growth, increased productivity, job creation, and the increased competitiveness of countries and people’s satisfaction with life.

Understanding the Changing Business Context

Recontextualization is key for any business aiming to expand its trade with Germany and grow into international value chains. This involves taking a fresh look at the business environment and understanding how it has changed. Keeping up with new market trends, regulations, customer expectations, and feedback is essential. Recognizing shifts in the landscape and adapting strategies accordingly are crucial. As Warren Buffett has noted, creating "wow" moments and emotional connections can lead to lasting commercial relationships.

These moments do not have to be grand gestures; even small positive interactions in emails or meetings can resonate for months or years. Initial relationships in value chains may not start after the first encounter, but people will remember the positive emotions from these interactions and are likely to return when there is a need. Regular, strategic communication, such as annual check-ins for updates and discussions on innovation, can keep these connections alive.

Internal and External Barriers to Internationalization

Lack of knowledge about local markets is one of the main obstacles to internationalization. Companies experience lower uncertainty regarding culturally and psychologically similar markets due to the absence of cultural barriers, making them more likely to begin foreign activities in familiar markets. However, barriers can have extensive roots—from lack of knowledge to poorly developed markets and business processes. Barriers to internationalization are generally divided into two categories: internal and external.

Internal and External Barriers

Internal barriers primarily depend on the company itself. Psychic distance, for example, hinders information flow into and out of a given market. Factors contributing to psychic distance include language differences, education levels, business practices and traditions, cultural aspects, and levels of industrial development. These factors increase the uncertainty connected with internationalization and become barriers.

External barriers can include those in the external environment beyond the control of the firm within its home country, such as barriers related to the firm's marketing strategy in the foreign environment and uncontrollable barriers in the foreign environment, like food safety norms, building regulations, or pre-existing alliances in the EU that make it difficult for newer EU members to break into.

The availability of information to locate and analyze foreign markets proved to be a major deterrent to internationalization in recent studies. There is no uniform pattern in the rank and order of export barriers due to various international, national, industry, and company-specific factors. Therefore, there is no clear prescription for remedy, but there are tools and methods to overcome these barriers. One effective approach is to reduce the effect of export barriers by utilizing the support of consultancy, advisory, and training services.

Firms face export barriers at every stage of internationalization, from the pre-involvement stages to the more advanced stages. Companies in the pre-export stage worry about identifying export market opportunities, those in the initial stage worry about increasing market presence, and firms in the advanced stages focus on establishing long-term relationships with customers. There are studies that show export promotion programs can be effective, though not uniformly so.

Psychologist and best-selling author Daniel Goleman notes that people who manage their emotions well create safe, fair environments where drama is low and productivity is high, attracting top performers who are likely to stay. This principle applies to work motivation as well as commercial partnering motivation. An example from a recent meeting with a Belgian metalworking and engineering firm highlights that commercial success can be built over 25 years of openness and information exchange without an immediate benefit.

Acknowledge and Act on Feedback

Listening to client feedback is critical. Identifying which aspects of your current activities are working well and which ones aren't can help adjust your value proposition to better meet market needs. Often, businesses get so caught up in day-to-day operations that they overlook important insights from feedback. Regularly reassessing your approach based on client input can keep your strategies sharp and relevant. This also means continuous learning and adaptation. Establishing a robust feedback mechanism – a business process of a sort - to continuously learn from clients and market trends can help SMEs stay relevant.

Context of Institutions

When we talk about institutions in the context of international trade, we mean orgaizations and entities influencing firms involved in global value chains—those exporting goods and services or importing raw materials and input services. It’s not always clear-cut which country’s value chain a firm is part of. For example, the industrial equipment manufacturer ESTANC might sell to a Belgian engineering firm, but the final client could be an oil refinery in another country. Similarly, an Estonian digitalization and cybersecurity company OIXIO IT might work with a German manufacturer that is part of a global group headquartered in the UK.

Understanding different regulatory, normative, and cultural-cognitive systems is crucial when working with international partners. Before entering a new market, it's essential to understand the norms and regulations that apply to your products and services. For example, in the construction industry, EstNor quickly discovered the rules and norms that apply to building materials and elements to be exported to Germany. Another example is HELMES, the renowned IT firm, and its knowledge and awareness of healthcare IT regulations and principles in the target country, which may differ significantly from those in their domestic landscape. Equally important is knowing the preferred ways of doing business and communicating in the target country. Often, we underestimate the importance of face-to-face meetings and the barriers posed by differences, requiring stamina to find ways to overcome them.

Engaging in Institutional Environments and Professional Networks

Institutional environments encompass the broader systems and networks within which companies operate, including economic, regulatory, social, and political contexts. As noted by Kostova, Roth, and Dacin (2008), these environments can be either compatible or fragmented and conflicting. For example, clusters and trade promotion organizations may be helpful to organize collective visits to target markets and provide information. At the same time, industry-specific associations may favor the interests of larger firms more than smaller members, especially those whose representatives are elected to the board. Communicating with regional German Industrie- und Handelskammer might be supportive and conflicting in equal measure. It is important to understand the purpose. The organization’s interest may be to promote local economy while your goal may be to venture into their market. Despite potential conflicts, collaboration can create significant value and it is always worth seeking what benefit can one’s knowledge bring to the potential partner.

Participating in institutional strategic growth programs is a stepping stone for many firms. Initiatives such as the Top Innovators and Strategic Growth Program organized by the Estonian Business and Innovation Agency serve as networking and learning tools. They provide an enhanced network of influencers, corporate trainers and mentors who can be valuable sources of contacts, inspiration, sparring partners, and knowledge.

Networking in the B2B sector often feels like lobbying, requiring strategic engagement with various stakeholders. For example, a test in early 2024 involving outreach to numerous German manufacturing and service companies showed a lack of response to email inquiries. This highlights the importance of being active in institutional environments—such as industry associations, trade fairs, and networking events—to gain visibility and build connections.

Nurture Relationships Patiently

Recontextualization isn't a one-time effort; it's an ongoing practice essential for businesses aiming to thrive in the German market. Continuously reassessing the business context, acting on feedback, and engaging with the right institutional environments helps companies adapt their strategies to new challenges and opportunities. For instance, if a German business partner gives positive feedback stating they had a good impression of an earlier meeting but need time to proceed, that signals the need to maintain contact and nurture the relationship patiently.

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Whether in business or politics, effective networking and relationship-building are critical. Leaders should leverage individuals with intercultural experience, competence, and empathy to help navigate and bridge different cultural and business contexts, ensuring that goals and practices are effectively transferred and implemented. This approach can be the key to sustainable growth and success in a complex and competitive market like Germany.