The concept of the “liability of foreignness” is well known in international business and it is no less of a hurdle for startups as it is for multinational corporations. It refers to the problems faced by firms trying to overcome the difficulties of expanding abroad. The term encompasses the problem faced by foreign companies in competition with local existing firms and ranges from obvious challenges like having to export physical goods over a longer distance as well cultural barriers.
From the beginning, all startups dream of global success with their products or services being consumed or utilised with disregard for national borders. For startups in smaller countries like Austria the greater revenue opportunities and potential for more impact makes international success an enticing aim. Europe-wide, more than half of all startups generate some form of revenue abroad. For countries like Finland and Hungary this is very high whereas for countries like Germany with a large domestic market, the share of startups focused on foreign markets is lower. At 51 percent of startups generating revenue abroad, Austria sits slightly below the European Startup Monitor average of 55 percent and is the European country with lowest proportion of revenues made in Non-EU countries. Despite this, Austrian startups represent the highest share generating revenues in fellow European countries.
“Austria is the European country with lowest proportion of revenues made in Non-EU countries”.
Austria’s position in Central Europe and small domestic size mean that the potential for early stage internationalisation is high, however, it is not easy. Looking at the most recent European Start-up Monitor from 2016, we will look at the main challenges that startups face when it comes to internationalising.
Differences in legislation and regulations
Around one third of European startups claimed that the biggest problem they had was the differing legislations and regulations. This is a challenge that imposes additional costs on startups and makes exporting to companies with a greater regulatory gap, like those outside of the EU very difficult. This alongside the economy of distance explains why revenue generated worldwide is much lower than in fellow European countries. Thus, it goes without saying, any successful internationalisation strategy needs to take into consideration at an early stage the regulatory differences in different markets. This is especially the case for companies that require, licenses or regulatory approval like in fintech or health. Differing taxation systems should also be taken into consideration as they increase the operational costs imposed by internationalisation.
“Around one third of European startups claimed that the biggest problem they had was the differing legislations and regulations.”
Adapting services and products to foreign market
If a startup has been successful in their domestic market they can rely on a strong brand reputation and a good understanding of the market’s needs and expectations. However, there is no one-size-fits-all formula which addresses the local needs. Startups must have a good understanding of what consumers or clients require and what incumbent firms are doing. If anything, this challenge acts as a warning against entering new market too quickly or underestimating the challenges that come with it. Despite this, technology services that offer non-tangible goods and a naturally ‘born global’ product like Vienna based travel website, TourRadar, or language learning apps like busuu (founded by Austrian Bernhard Niesner) are often better aimed at an international audience from the outset.
Although cultural difference relates to the point raised above, it is also important to consider how culture in itself represents a major challenge for a startup trying to expand outside of the comfort zone of its own market. To be successful, a startup will often have to provide services in the local language as well as avoid offence by breaking cultural faux pas. It goes without saying that a craft beer manufacturer would be best advised not to look for distributors in Saudi Arabia. However, sometimes these differences can be more subtle and impact the operational side of things. This is especially the case in business-to-business relationships where different corporate cultures make it difficult for start-ups to access decision makers. Differences of culture therefore must be considered in strategic considerations whereby acquiring local human capital, working with foreign partners and even setting up a subsidiary are all options to help to overcome the “liability of foreignness”.
Internationalisation is both enticing and difficult. It requires a combination of trial and error as well as an international strategy. Whatever happens, startups must choose their markets carefully and plan ahead. If success at home is difficult, success abroad may represent more of a challenge for some startups, whilst it may even be easier than at home for others – it all depends on your product and finding the right market for it.
– Written by Samuel Hargreaves –
This represents the start of a series of blogs into the internationalisation of startups looking at the challenges and success stories of Austrian companies. The next blog article will be focusing on regulatory barriers and in particular the difficulties faced by fintechs.