Class 05_06Pedro Coelhoso

Foreign Market Entry

Thoughts for the Day

All our social problems arise from doing the wrong things righter. The more efficient you are at doing the wrong thing, the wronger you become. It is much better to do the right thing wronger than the wrong thing righter. If you do the right thing wronger and correct it, you get better.

Russell Ackoff (1919-2009)

Outline for Today

Administrative AnnouncementsMore on the link between strategy and institutions

Where are we in the course?Foreign Country Entry

Why go abroad?Why and Where to enter?Why and Where and How to enter?

Main Points and ImplicationsSet-up for next class

Strategy and Institutions

Khanna T, Palepu K. 1997. “Why focused strategies may be wrong for emerging markets”. Harvard Business Review, 75(4): 41-51.

They argue that focused strategies may be wrong for emerging markets as the required institutions may not be present to support this western-world mindset. They suggest that “companies must adapt their strategies to fit their institutional context”.

Applying Perspectives on International Strategy

Industry-basedCompetition

Firm-specificResources &capabilities

InstitutionalConditions:

- Formal- Informal

StrategicDecisions

Implementation/Performance

Entering Foreign Mkts

Country SelectionLocal CompetitionLocating activities across countries

These impact howfirms behave.

InternationalStrategy

Structure

Acquisitions/Restructuring

Global Competitive Dynamics

Learning/Alliances

Changes in National Regulations of Foreign Direct Investment (FDI), 1991–

2002

WSJ: September 15, 2009 Update:Sept 2009: 130 protectionist measures plannedFor 2009, 90% of goods affected by protectionist

measuresRatio of discriminatory vs. liberalizing trade laws is 6:1.Most targeted countries: China, U.S., Japan

Source: United Nations, 2003, World Investment Report 2003 (p. 13), New York and Geneva: United Nations.

Why Go Abroad?Answers traditionally include:

More customers:Economies of scale

Economies of scope.

Reduce the dependence on one country.

To replicate the success at home in new settings.

Possibly: The answer can be “all of the above”

Why NOT go abroad:Overcoming the Liability of Foreignness

The Liability of ForeignnessThe inherent disadvantage foreign firms experience

in host countries because of their non-native status.Liability can be seen in two dimensions:

Differences in formal and informal institutions in different countries (e.g., regulatory, language, and cultural differences).

Customers discriminate against foreign firms, sometimes formally and other times informally.

Why NOT go abroad?Overcoming the Liability of Foreignness

To offset the liability of foreignness, foreign firms must employ overwhelming resources and capabilities:

Superior knowledge about institutions for that marketVolkswagen in China and CEE

Superior technologies for that marketAustralian warship named Joint Venture

Superior organizational, marketing, and financial capabilities for that market

WARNING: Not every firm is ready for going abroad.

INTERNATIONALIZATION:GO or NO GO

Figure 6.1

A Comprehensive Model of Foreign Market Entries

Figure 6.2

(Why and) Where to Enter?Location-Specific Advantages

Location-Specific AdvantagesGeographical features difficult to match by

others.Singapore, Austria, Turkey, Miami

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

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

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

Why and 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.

Why Where

Where to Enter? Cultural/Institutional Distances and Foreign Entry Locations

Cultural DistanceThe difference between two cultures along some

identifiable dimensions (such as power distance). Institutional Distance (besides culture)

The extent of similarity or dissimilarity between the regulatory, normative, and cognitive institutions of two countries.

Firms from common-law countries are more likely to be interested in other common-law countries

Colony-colonizer links boost trade by 900%

Why and Where to Enter? Cultural/Institutional Distances and

Foreign Entry Locations (cont’d)

Two schools of thought have emerged:

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

Strategic Model: Considerations of strategic goals such as market and efficiency are more important than cultural/institutional considerations as suggested by stage models.

The Choice of Entry Modes: A Hierarchical 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.

How to Enter?Scale of Entry: Commitment and

Experience

Copyright © 2009 Cengage. All rights reserved.

6–17

Large-Scale EntriesBenefit from a strategic commitmentDrawbacks of large-scale entries: Limited

strategic flexibility and potential huge losses

Small-scale entriesFocus on accumulating experience“Learning by doing”Drawbacks of small-scale entries

A lack of strong strategic commitmentDifficulties in building market share

Exporting

Franchising

Wholly Owned Subsidiary

Licensing

Joint Ventures

Risk / Return of International Market Entry Modes

RISK

RETURN

Modes of Entry: Advantages and Disadvantages

Table 6.4

Modes of Entry: Advantages and Disadvantages

Table 6.4 (cont’d)

Modes of Entry: Advantages and Disadvantages

Table 6.4 (cont’d)

Why and Where and How to Enter?

Making Strategic Choices

A company may have a variety of entry choices for different countries and tasks.

Entry strategies may change over time.

Starbucks: Franchising JV WOS

China’s Haier in the United States: Direct exports FDI (green-field projects)

Liability versus Asset of Foreignness

Cyberspace Entry vs Conventional Entry: Rules to Use?

Global versus Regional Triad Concentration

Main Points and Implications

Foreign entry is the foundation for international business.

Competing considerations: Industry level, Firm level, and Institutional level.

Competing considerations for where to enter: natural resource, market, efficiency, and innovation seeking.

Selection between options (trade-offs) will depend on goals and risk acceptance regarding mode of entry.

Entry strategies, even when successful, do not guarantee international success. They are just the beginning. The challenge is to simplify and prioritize.

Set-Up for Next Class (Dec 17)

Strategic Alliances and AcquisitionsReading: Peng Text, Chapters 7; FranchisingOther Preparation: Read series of articles on

Danone in China. Prepare a 4-5 page analysis of the situation using the questions provided.

Learning Objectives: We will learn about an increasingly important arrangement between firms that is more formal than a contract but does not involve buying another firm with some comparison to acquisitions.