Adapted from Peng, 2006Adapted from Peng, 2006 11

Entering Foreign MarketsEntering Foreign Markets Dr. Ellen A. DrostDr. Ellen A. Drost

22

OutlineOutline Why go abroad?Why go abroad?

A comprehensive model of foreign market A comprehensive model of foreign market entriesentries

Where to enter?Where to enter?

When to enter?When to enter?

How to enter?How to enter?

Debates and extensionsDebates and extensions

Implications for strategistsImplications for strategists

33

Why Go Abroad?Why Go Abroad? Answers typically include:Answers typically include:

– To reach larger economies of scale by selling to To reach larger economies of scale by selling to more customers in other countries.more customers in other countries.

– To reduce the risk of over dependence on one To reduce the risk of over dependence on one country by spreading sales in multiple countries.country by spreading sales in multiple countries.

– To replicate the success at home in new settings.To replicate the success at home in new settings.

Opening Case: Wal-MartOpening Case: Wal-Mart

– The answer can be The answer can be ““all of the aboveall of the above””

44

Why Go Abroad?Why Go Abroad?Overcoming the Liability of ForeignnessOvercoming the Liability of Foreignness The LThe Liability of Foreignnessiability of Foreignness

– TThe he inherentinherent disadvantage foreign firms experienc disadvantage foreign firms experience in host countries because of their non-native stae in host countries because of their non-native status.tus.

– Liability is manifested in two dimensionsLiability is manifested in two dimensions:: The numerous differences in formal and informal instituThe numerous differences in formal and informal institu

tions in different countries (etions in different countries (e.g., .g., regulatory, language, aregulatory, language, and cultural differences). Failure to nd cultural differences). Failure to recognize trecognize these rules hese rules may cost foreign firms dearly.may cost foreign firms dearly.

Customers Customers discdiscriminateriminate against foreign firms, sometimeagainst foreign firms, sometimess formally and other times informally.formally and other times informally.

55

Why Go Abroad?Why Go Abroad?Overcoming the Liability of ForeignnessOvercoming the Liability of Foreignness

To offset the liability of foreignness, foreign To offset the liability of foreignness, foreign firms must employ firms must employ overwhelmingoverwhelming resources resources and capabilities (in some aspects).and capabilities (in some aspects).

– Superior knowledge about institutional intricacies Superior knowledge about institutional intricacies in various countries (e.g., Volkswagen in China in various countries (e.g., Volkswagen in China and CEE)and CEE)

– Superior technologiesSuperior technologies SIA 6.1: A warship named SIA 6.1: A warship named Joint VentureJoint Venture

– Superior organizational, marketing, and financial Superior organizational, marketing, and financial capabilitiescapabilities

66

Why Go Abroad?Why Go Abroad?Understanding the Propensity to InternationalizeUnderstanding the Propensity to Internationalize

Not every firm is ready for going abroad.Not every firm is ready for going abroad.

– Prematurely venturing overseas may be detrimental Prematurely venturing overseas may be detrimental to overall firm performance, especially for smaller to overall firm performance, especially for smaller firms whose margin for error is very small.firms whose margin for error is very small.

Factors underlying the motivation to go abroad:Factors underlying the motivation to go abroad:

– Size of the firmSize of the firm

– Size of the domestic marketSize of the domestic market

Adapted from Peng, 2006Adapted from Peng, 2006 77

A Comprehensive Model of Foreign Market Entries

Figure 6.2

88

A Comprehensive Model of A Comprehensive Model of Foreign Market Entries Foreign Market Entries

Institution-Based ConsiderationsInstitution-Based Considerations

– Regulatory risks: Obsolescing bargainRegulatory risks: Obsolescing bargain

– Trade barriers: Trade barriers: Tariff barriers Tariff barriers

Non-tariff barriers (safety inspections, local content Non-tariff barriers (safety inspections, local content requirements, entry modes restrictions)requirements, entry modes restrictions)

– Currency risks: Speculation and hedgingCurrency risks: Speculation and hedging

– Cultural distancesCultural distances

– Institutional norms Institutional norms

99

A Comprehensive Model: A Comprehensive Model: A SynthesisA Synthesis

How each of the three perspectives on strategyHow each of the three perspectives on strategy—i—industry-, resource-, and institution-basedndustry-, resource-, and institution-based——sheds additional light on foreign entry sheds additional light on foreign entry decisions.decisions.

– However, different considerations may pull foreign However, different considerations may pull foreign entrants in different directions.entrants in different directions.

To make an optimal decision, given these To make an optimal decision, given these conflicting forces, strategists often have to conflicting forces, strategists often have to make a series of entry decisions along the make a series of entry decisions along the 2W1H dimensions (where, when, and how).2W1H dimensions (where, when, and how).

1010

Where to Enter?Where to Enter?Location-Specific AdvantagesLocation-Specific Advantages

Location-Specific AdvantagesLocation-Specific Advantages– Geographical features difficult to match by Geographical features difficult to match by

others.others. Singapore, Austria, Turkey, MiamiSingapore, Austria, Turkey, Miami

– Clustering of economic activities Clustering of economic activities (agglomeration).(agglomeration). Knowledge spillover among closely located firms that Knowledge spillover among closely located firms that

attempt to hire individuals from competitors.attempt to hire individuals from competitors. A regional skilled labor force available to work for A regional skilled labor force available to work for

different firms. different firms. A regional pool of specialized suppliers and buyers.A regional pool of specialized suppliers and buyers.

1111

Where to Enter?Location-Specific Advantages (cont’d)

Table 6.2Source: First two columns adapted from J. Dunning, 1993, Multinational Enterprises and the Global Economy (pp. 82–83), Reading, MA: Addison-Wesley.

1212

Where to Enter? Where to Enter? Cultural/Institutional Distances and Foreign Locations (cont’d)Cultural/Institutional Distances and Foreign Locations (cont’d)

Cultural DistanceCultural Distance– The difference between two cultures along some The difference between two cultures along some

identifiable dimensions (such as power distance). identifiable dimensions (such as power distance).

Institutional DistanceInstitutional Distance– The extent of similarity or dissimilarity between the The extent of similarity or dissimilarity between the

regulatory institutions of two countries.regulatory institutions of two countries.– Firms from common-law countries are more likely Firms from common-law countries are more likely

to be interested in other common-law countriesto be interested in other common-law countries– Colony-colonizer links boost trade by 900%Colony-colonizer links boost trade by 900%

1313

Where to Enter? Where to Enter? Cultural/Institutional Distances and Foreign Locations (cont’d)Cultural/Institutional Distances and Foreign Locations (cont’d) Two schools of thought : Two schools of thought :

– Stage models in which firms enter culturally Stage models in which firms enter culturally similar countries during the first stage of similar countries during the first stage of internationalization and, as they gain confidence, internationalization and, as they gain confidence, enter culturally more distant countries in later enter culturally more distant countries in later stages.stages.

– Critics of stage models argue that considerations Critics of stage models argue that considerations of strategic goals such as market and efficiency of strategic goals such as market and efficiency are more important than cultural/institutional are more important than cultural/institutional considerations as suggested by stage modelsconsiderations as suggested by stage models

Adapted from Peng, 2006Adapted from Peng, 2006 1414

First Mover Advantages and Late First Mover Advantages and Late Mover AdvantagesMover Advantages

Table 6.3

1515

When to Enter?When to Enter? First or Late Mover AdvantagesFirst or Late Mover Advantages

– While evidence supports first mover advantages, there is While evidence supports first mover advantages, there is also evidence supporting a late mover strategy.also evidence supporting a late mover strategy.

– Although first movers may have an opportunity to gain Although first movers may have an opportunity to gain advantage, pioneering status is not a birthright for successadvantage, pioneering status is not a birthright for success

– Integrative Case 1.3: The Chinese auto industryIntegrative Case 1.3: The Chinese auto industry First mover success / failure: Volkswagen / PeugeotFirst mover success / failure: Volkswagen / Peugeot

Late mover success / failure: GM / FordLate mover success / failure: GM / Ford

Entry timing, although important, is not the sole Entry timing, although important, is not the sole determinant of success and failure of foreign entries. determinant of success and failure of foreign entries.

1616

How to Enter?How to Enter?Scale of Entry: Commitment and ExperienceScale of Entry: Commitment and Experience

Large-Scale EntriesLarge-Scale Entries– BenefitsBenefits

A demonstration of strategic commitment to certain A demonstration of strategic commitment to certain markets, which both assures local customers and markets, which both assures local customers and suppliers and deters potential entrants.suppliers and deters potential entrants.

– DrawbacksDrawbacks Large-scale entry limits strategic flexibility Large-scale entry limits strategic flexibility

elsewhere.elsewhere. Entrants must incur sizable losses if the large-Entrants must incur sizable losses if the large-

scale entry “bet” turns out to be wrong.scale entry “bet” turns out to be wrong.– Closing Case: Hutchison Whampoa invests in 3GClosing Case: Hutchison Whampoa invests in 3G

1717

How to Enter? (cont’d)How to Enter? (cont’d)Scale of Entry: Commitment and ExperienceScale of Entry: Commitment and Experience

Small-Scale EntriesSmall-Scale Entries– BenefitsBenefits

Less costly if entry is unsuccessful.Less costly if entry is unsuccessful. Organization learns through hands-on experience in Organization learns through hands-on experience in

host countries.host countries.

– DrawbacksDrawbacks A lack of strong strategic commitment, which may A lack of strong strategic commitment, which may

lead to difficulties in building market share and lead to difficulties in building market share and capturing first mover advantages.capturing first mover advantages.

1818

How To Enter?How To Enter?Modes of Entry: The First StepModes of Entry: The First Step

Factors Affecting the Choice of Entry Mode:Factors Affecting the Choice of Entry Mode:

– Among numerous modes of entry, strategists are Among numerous modes of entry, strategists are unlikely to consider all of them at the same time.unlikely to consider all of them at the same time.

– Given the complexity, strategists must Given the complexity, strategists must prioritizeprioritize by considering only a few manageable key by considering only a few manageable key variables first and then consider other variables variables first and then consider other variables later.later.

A hierarchical model shown in Figure 6.3 and A hierarchical model shown in Figure 6.3 and explained in Table 6.3 is helpful.explained in Table 6.3 is helpful.

Adapted from Peng, 2006Adapted from Peng, 2006 1919

The Choice of Entry Modes: A The Choice of Entry Modes: A Hierarchical ModelHierarchical Model

Figure 6.3Source: Adapted from Y. Pan & D. Tse, 2000, The hierarchical model of market entry modes (p. 538), Journal of International Business Studies, 31: 535–554.

2020

How To Enter?How To Enter?Modes of Entry: The First Step (cont’d)Modes of Entry: The First Step (cont’d)

The crucial first step: equity or non-equity modesThe crucial first step: equity or non-equity modes This is what defines a multinational enterprise This is what defines a multinational enterprise

(MNE) and a non-MNE(MNE) and a non-MNE– Equity modes: Through foreign direct investment (FDI)Equity modes: Through foreign direct investment (FDI)

– Direct Direct control and management of value-adding control and management of value-adding activities overseas—key word is activities overseas—key word is directdirect, as opposed to , as opposed to foreign foreign portfolioportfolio investment (FPI) investment (FPI)

– If a firm does not have FDI, it can still engage in If a firm does not have FDI, it can still engage in international business (through non-equity modes), but international business (through non-equity modes), but it is not an MNE.it is not an MNE.

2121

Structuring modes of entry to reduce Structuring modes of entry to reduce opportunismopportunism

WHAT FORM SHOULD THE ENTRY MODE TAKE?WHAT FORM SHOULD THE ENTRY MODE TAKE?

Contractual AlliancesContractual Alliances----------------------------------------------------------------------------------EquityEquityMarketingMarketing ConsortiumConsortium Wholly Owned Wholly Owned R&D R&D Joint VentureJoint Venture

TurnkeyTurnkey

LicenseLicense

Franchise Franchise

Short-termShort-term ------------------------------------------------------- -------------------------------------------------------Long-termLong-term ---------------------difficult to control ---------------------difficult to control

difficult to monitordifficult to monitor

difficult to enforcedifficult to enforce

difficult to negotiatedifficult to negotiate

2222

Strategic Alliances and NetworksStrategic Alliances and NetworksOverall, Overall, strategic alliances and networks are strategic alliances and networks are

cooperative interfirm relationshipscooperative interfirm relationshipsStrategic alliances formed by multiple firms to Strategic alliances formed by multiple firms to

compete against other such groups and against compete against other such groups and against traditional single firmstraditional single firms

Also known as constellationsAlso known as constellations– Star Alliance: United, Lufthansa, Air Canada, SAS, etc.Star Alliance: United, Lufthansa, Air Canada, SAS, etc.– Sky Team: Delta, Air France, Korean Air, etc.Sky Team: Delta, Air France, Korean Air, etc.– One World: American, British, Cathay Pacific, Qantas, One World: American, British, Cathay Pacific, Qantas,

etc.etc.

Adapted from Peng, 2006Adapted from Peng, 2006 2323

Alliances versus Joint VenturesAlliances versus Joint VenturesNot all strategic alliances are joint ventures.Not all strategic alliances are joint ventures.

– A joint venture (JV) is a new organization—a A joint venture (JV) is a new organization—a “corporate child” created by two or more parent “corporate child” created by two or more parent firms which hold partial equity ownership in the firms which hold partial equity ownership in the new venture.new venture. Sony EricssonSony Ericsson

– A non-JV alliance is two (or more) firms working A non-JV alliance is two (or more) firms working together—“getting married” but not having together—“getting married” but not having “children.”“children.” Renault is a strategic investor in alliance with Nissan. Renault is a strategic investor in alliance with Nissan.

Both operate independently and they have not created Both operate independently and they have not created a new firm.a new firm.

Adapted from Peng, 2006Adapted from Peng, 2006 2424

A Three-Stage Decision Model of Strategic Alliance A Three-Stage Decision Model of Strategic Alliance and Network Formation figure 7.3and Network Formation figure 7.3

2525

Managing the allianceManaging the alliance

– WHAT ABOUT PARTNER SELECTION?WHAT ABOUT PARTNER SELECTION? Differences can create valueDifferences can create value Similarities minimize costSimilarities minimize cost

Adapted from Peng, 2006Adapted from Peng, 2006 2626

Modes of Entry: Advantages and Disadvantages, Modes of Entry: Advantages and Disadvantages, Table 6.3Table 6.3

Table 6.4 (cont’d)

Adapted from Peng, 2006Adapted from Peng, 2006 2727

Modes of Entry: Advantages and DisadvantagesModes of Entry: Advantages and Disadvantages

Table 6.4 (cont’d)

2828

Entry Debate 1:Entry Debate 1:High Control vs. Low ControlHigh Control vs. Low Control

High control: Better?High control: Better?

Low control: Not necessarily bad?Low control: Not necessarily bad?

– No evidence that WOS always perform better No evidence that WOS always perform better than JVs.than JVs.

– Firms from some countries (e.g., Japan) usually Firms from some countries (e.g., Japan) usually prefer to have high control, whereas those from prefer to have high control, whereas those from other countries may not have such a other countries may not have such a preference.preference.

2929

Entry Debate 2:Entry Debate 2:Developed Economies vs. Emerging EconomiesDeveloped Economies vs. Emerging Economies 54 developed economies54 developed economies

– Per capita GDP > $9,000; 80% of global GDPPer capita GDP > $9,000; 80% of global GDP

156 emerging economies156 emerging economies– Currently account for only 20% global GDPCurrently account for only 20% global GDP– 12 big emerging economies (especially BRIC)12 big emerging economies (especially BRIC)

Represent 73% of the 20% of global GDPRepresent 73% of the 20% of global GDP– ArgentinaArgentina IndiaIndia PolandPoland South South

KoreaKoreaBrazilBrazil IndonesiaIndonesia RussiaRussia ThailandThailandChinaChina MexicoMexico South AfricaSouth Africa TurkeyTurkey

Markets of tomorrow: High risk, high return?Markets of tomorrow: High risk, high return?

3030

EntryEntry DebateDebate 3: 3: Cyberspace Cyberspace EntriesEntries vs. vs. Conventional EntriesConventional Entries

The Internet The Internet

– Is it evolutionary or just a new technology?Is it evolutionary or just a new technology?

– How to govern e-commerce?How to govern e-commerce?

– SIA 6.4: Yahoo in FranceSIA 6.4: Yahoo in France

It is still nation-states that matter.It is still nation-states that matter.

3131

Implications for Strategists Implications for Strategists Foreign entries are a Foreign entries are a foundationfoundation for for

international business.international business.

Issues are complex, and the challenge is to Issues are complex, and the challenge is to simplify and prioritize.simplify and prioritize.

Managers and companies will make mistakes Managers and companies will make mistakes and will not always get it right; but for many and will not always get it right; but for many companies, going overseas is unavoidablecompanies, going overseas is unavoidable

Be bold, but always be careful!Be bold, but always be careful!