february 2016 austrian firms in emerging markets

JOHANNES KEPLER

UNIVERSITY LINZ

Altenberger Straße 69

4040 Linz, Austria

www.jku.at

DVR 0093696

Author

Tamara Rossegger

Submission

Department of Retailing, Sales and Marketing

Thesis Supervisor

Prof. Dr. Zeynep Bilgin

Wührer

February 2016

MARKET ENTRY

STRATEGIES OF

AUSTRIAN FIRMS IN

EMERGING MARKETS -

A CROSS-CASE ANALYSIS

Master’s Thesis

to confer the academic degree of

Master of Science

in the Master’s Program

General Management

February 16, 2016 Tamara Rossegger 2/113

SWORN DECLARATION

I hereby declare under oath that the submitted Master’s Thesis has been written solely by

me without any third-party assistance, information other than provided sources or aids

have not been used and those used have been fully documented. Sources for literal,

paraphrased and cited quotes have been accurately credited.

The submitted document here present is identical to the electronically submitted text

document.

Linz, February 2016

Tamara Rossegger


ACKNOWLEDGEMENT

Herewith I would like to thank all of the people below, who generously supported me in

various ways while writing the thesis.

My sincere acknowledgements to my supervisor, Prof. Dr. Zeynep Bilgin Wührer, for

sharing knowledge and providing constructive criticism.

I thank all interview partners who agreed to be interviewed and provided my with expert

know-how during the research study. Without your expertise this study would lack

interesting and important insights.

I thank my family and especially my mother Sabine, with all my heart for their

understanding, help, patience, and love during my studies. Without their generous support

my stays abroad would not have been possible.

Finally, a big thank you to my dear friends who motivate me anytime and provided me with

advices on my way.


Table of Content

1. Introduction ................................................................................................................. 8

1.1. Background to the study and problem definition ............................................... 8

1.2. Research objectives ....................................................................................... 10

1.3. Scope and structure of the study .................................................................... 11

2. Theoretical foundations ............................................................................................. 12

2.1. Internationalization of firms............................................................................. 12

2.1.1. Motives for going international ............................................................. 12

2.1.2. Internationalization theories ................................................................. 16

2.2. Entry modes for operations in international markets ....................................... 25

2.2.1. Types of entry mode ............................................................................ 25

2.2.2. Factors influencing the choice of entry mode ....................................... 32

2.3. A general focus on emerging markets ............................................................ 39

2.3.1. Types of emerging markets ................................................................. 39

2.3.2. Characteristics of emerging markets .................................................... 43

2.3.3. Opportunities and motives for foreign firms

to operate in emerging markets ...................................................................... 53

2.3.4. Challenges and entry barriers for foreign firms in emerging countries .. 57

2.4. Success drivers in emerging markets ............................................................. 62

2.5. The proposed model ...................................................................................... 69

3. Research methodology ............................................................................................. 70

3.1. Research questions, aim and objectives of the study ..................................... 70

3.2. Research design ............................................................................................ 70

3.3. Data collection method, instrument and sampling .......................................... 71

3.4. Data analysis ................................................................................................. 74

4. Findings of the empirical study .................................................................................. 75

4.1. Individual analysis .......................................................................................... 75

4.1.1. café+co ................................................................................................ 75

4.1.2. Landhof GesmbH & Co KG .................................................................. 76

4.1.3. Almdudler-Limonade A. & S. Klein GmbH & Co KG ............................. 78

4.1.4. Wollsdorf Leder Schmidt & Co Ges.m.b.H. .......................................... 80

4.1.5. A. Darbo AG ........................................................................................ 81

4.1.6. Walter Heindl GmbH ............................................................................ 83

4.1.7. Schlumberger Wein- und Sektkellerei GmbH ....................................... 84

4.1.8. INTECO special melting technologies GmbH ...................................... 86

4.2. Cross-case analysis ....................................................................................... 88


4.2.1. Motivation for going international ......................................................... 88

4.2.2. Internationalization theories ................................................................. 89

4.2.3. Entry mode choice and factors influencing the entry mode .................. 90

4.2.4. Market entry barriers in emerging markets ........................................... 92

4.2.5. Success drivers of Austrian firms in emerging markets ........................ 93

5. Conclusion, implications and limitations .................................................................... 95

5.1. Summary and conclusion ............................................................................... 95

5.2. Implications and recommendations ................................................................ 97

5.2.1. Suggestions for academia ................................................................... 97

5.2.2. Suggestions for Austrian firms ............................................................. 97

5.2.3. Suggestions for governments .............................................................. 98

5.3. Limitations of the study ................................................................................... 98

6. References ............................................................................................................... 99

7. Appendix................................................................................................................. 110

7.1. Interviewguidline for interviewpartners (german) .......................................... 110

7.2. Interviewguidline for interviewpartners (english ............................................ 111

7.3. Interviews - questions................................................................................... 112

7.4. Interview partners - overview ........................................................................ 113


List of Figures

Figure 1: The establishment chain ...................................................................................18

Figure 2: Basic structure of the network model ................................................................19

Figure 3: The business network internationalization process model of 2009 ....................20

Figure 4: Types of entry modes .......................................................................................25

Figure 5: Entry modes and desired mode characteristics .................................................32

Figure 6: Factors influencing the market entry mode........................................................33

Figure 7: Actual and projected top 20 economies ranked based on GDP at PPP terms ...44

Figure 8: Predicted average real growth in GDP at PPs (2011-2050) ..............................45

Figure 9: World consumption ...........................................................................................48

Figure 10: Key success drivers in emerging markets .......................................................65

Figure 11: The proposed research model ........................................................................69

List of Tables

Table 1: Why firms go international ..................................................................................12

Table 2: Export motives beyond West-Europe of Austrian firms .......................................15

Table 3: Internationalization theories - an overview .........................................................23

Table 4: Advantages and disadvantages of entry modes .................................................31

Table 5: Influential factors and its tendency towards entry strategies ...............................38

Table 6: Emerging markets listed by different institutions .................................................42

Table 7: Percentage share of world exports (merchandise trade) ....................................45

Table 8: Percentage share of world imports (merchandise trade) ....................................46

Table 9: Population and age breakdown ..........................................................................47

Table 10: Opportunities and motives in emerging markets ...............................................53

Table 11: Challenges and entry barriers in emerging markets .........................................58

Table 12: Overview of current research on success factors .............................................63

Table 13: Chosen type of entry modes in emerging markets ............................................90


List of Abbreviations

B2B Business-to-business

B2C Business-to-consumer

BEM Big emerging market

BMWFW Federal Ministry of Science, Research and Economy

BRICS Brazil, Russia, India, China, South Africa

CEE Central Eastern Europe

CEO Chief Executive Officer

EM(s) Emerging market(s)

e.g. For example

E7 China, India, Brazil, Russia, Indonesia, Mexico, Turkey

ff. Following pages

FDI Foreign direct investment

FTSE Financial times stock exchange

GDP Gross domestic product

G7 Canada, France, Germany, Italy, Japan, United Kingdom, USA

i.a. Inter alia

JV Joint venture

n.p. No page

N11 Next 11: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan,

Philippines, South Korea, Turkey, Vietnam

MIKT Mexico, Indonesia, South Korea, Turkey

MNE Multinational enterprise

MNC Multinational corporation

MSCI Morgan Stanley Capital International

OeKB Oesterreichische Kontrollbank Aktiengesellschaft Research Services

p.(pp.) Page(s)

ppp Purchasing power parity

PWC Pricewaterhouse Coopers

RQ(s) Research question(s)

R&D Research and Development

SEM Starting emerging market

SME Small and medium sized enterprises

TCA Transaction cost analysis

UAE United Arab Emirates

USP Unique selling proposition

WKO Austrian Economic Chamber

w.p. Web page

WTO World trade organization


1. Introduction

Due to globalization the world has grown closer together. Technological advantages and

trade agreements enabled the rise of international trade activities. Today the world can be

seen as one big marketplace with actors from various countries. Nevertheless, the

economic power of nations is currently under transformation.

In the last years, a megatrend, concerning a shift in global economic power from

advanced to emerging economies, arose. This shift not only transforms business,

moreover it affects nations and societies. There are predictions that India will become the

third global economic giant after the US and China by 20501. In general, emerging market

countries can be defined as markets which record rapid economic development2, for

example in terms of high GDP growth, and thus, serve as immense contributors to the

world trade. Emerging markets also consist of large populations and a growing middle

class3. In 2013, 85% of the world’s population lived in emerging market countries,

including 90% under 30 years old4. This middle class is supposed to grow further and also

the global emerging middle, these are customers with per capita income just below the

one of the middle class, will be increasing in the following years5. Consequently, this

growing middle class will bring along an increasing consumption desire6.

All those characteristics and trends of emerging markets bear huge business opportunities

for foreign investors and firms. Thus, also Austrian economic experts emphasize on these

immense potentials and encourage Austrian firms to increasingly enter emerging

markets7. Although there are plenty of Austrian firms operating in emerging countries, little

is known about their intention and strategy to enter these markets. Because of the rising

importance of these nations for international business, the purpose of the thesis is to

provide more insights regarding the motivation to enter, entry strategies, challenges and

success drivers of Austrian firms in emerging markets.

1.1. Background to the study and problem definition

Out of many alterations within this century, the rise of emerging markets is probably the

most defining one for the global economy8. Since the early 1990s, emerging countries

have been the fastest-growing markets worldwide9. These markets have contributed to

global economic growth due to a rise in domestic consumption level, which is assumed to

grow further. According to forecasts, by 2025 the emerging markets consuming class will

increase to 4.2 billion people accounting for $30 trillion annual consumption which is

1 Cf. PWC, w.p.

2 Cf. Fan (2008), p. 353

3 Cf. Cavusgil et al. (2013), p. 5 ff.

4 Cf. Euromonitor (2013), p. 6

5 Cf. PWC, w.p.

6 Cf. Bilgin/Wührer (2014), p. 48

7 Cf. WKO (2013), w.p.

8 Cf. Euromonitor (2013), w.p.

9 Cf. Khanna/Palepu/Sinha (2005), p. 5


nearly half of the global total10. Thus, foreign companies are highly attracted by these

huge sales potential and business opportunities. The same applies to Austrian firms.

Over the past years, the Austrian economy has recorded a rise of trade interactions

between Austria and emerging markets. According to trade statistics, a shift between

export destinations can be recognized. Even if Germany is the most important trading

partner since decades, exports to emerging countries are rising11. While in 2004 two

emerging nations (Hungary and the Czech Republic) are amongst the top 10 export

partners12, the number doubled in 2014 (Hungary, the Czech Republic, Poland and

China). Exports to these four countries accounted for € 15.86 billion or 12.3% export

share in 2014. Thereby machinery and vehicles are the most exported product group13.

Moreover the export share, of total Austrian exports, to BRICS countries has steadily

increased from about 4% in 2005 to 7% in 2013. Researcher assumes that this increasing

trade link between Austria and the BRICS nations is due to BRICS’ strong economic

growth and, consequently, the demand for imports14. Emerging countries are also

attractive markets for Austrian foreign direct investments. In 2014 eight emerging nations,

namely the Czech Republic, Russia, the UAE, China, Brazil, Hungary, Poland and Turkey,

are among the top fifteen FDI destinations for Austrian investors, accounting for € 2.673

million. Russia, on the contrary, is the largest foreign direct investor in Austria15. Aside

from recognizing sales potential and business opportunities in emerging economies, it is

also important to understand the challenges and barriers as well as the pros and cons of

market entry strategies and success drivers in emerging markets. As some emerging

countries can be described as unstable due to their environment, foreign firms may be

confronted with numerous barriers such as legal uncertainties or strong local competition.

However, little is known about obstacles, risks and entry barriers of Austrian firms in

emerging markets. Besides export, which is perceived to be the preferred entry mode of

Austrian companies in BRICS countries16, there are other strategies available to enter

emerging markets such as contractual agreements or sole ventures. Identifying factors

that could have an influence on the entry mode decision through comprehensive analysis

will be an approach to commence.

Because of the rising importance of emerging markets for the Austrian economy, this

thesis tries to further fill the research gap of how Austrian firms enter emerging markets

successfully. This case study will provide insights into the internationalization process of

Austrian firms, the decision of market entry modes, barriers to enter as well as success

drivers since there is only limited literature available which address this issue.

10

Cf. Mc Kinsey (2013), p. 49-50 11

Cf. Statistik Austria (2015b), w.p. 12

Cf. WKO (2005), p. 9 13


Cf. BMWFW (2014b), p. 44 ff. 15

Cf. BMWFW (2014d), p. 7 16

Cf. BMWFW (2014b), p. 32-68


1.2. Research objectives

As emerging markets holds varieties of opportunities for foreign firms17 and are expected

to further increase their contribution to the world trade18, also Austrian companies should

take the chance and incrementally enter these high-potential markets19.

Therefore, the main aim of the thesis is:

to increase knowledge concerning a successful internationalization and market entry

strategy of Austrian firms in emerging markets.

In order to reach the main objective, three corresponding sub-aims are set:

The first objective of the thesis is to identify motivators for Austrian firms to go

international. In addition more insights regarding the internationalization process of

Austrian firms should be exposed with different research questions:

What are the main motives for Austrian firms to enter emerging markets?

Which internationalization theory is most applicable for Austrian firms?

The second objective is to increase knowledge about the market entry process of Austrian

firms in emerging markets. In detail, this objective should cover issues like the choice of

entry mode as well as barriers to enter and is highlighted through research questions:

Which types of market entry modes are chosen in emerging markets?

Which factors influence the choice of entry mode?

Which barriers are the Austrian firms confronted with while entering emerging

markets?

The third objective is to determine success drivers of Austrian firms in emerging markets.

Thereby the Austrian companies state which perceived factors contribute to its success in

emerging markets. This is addressed through the following research question:

Which drivers contribute to the Austrian firms’ success in emerging markets?

Thus, the main research question is tailored towards understanding:

How do Austrian firms enter emerging markets successfully?

17

Cf. Cavusgil et al. (2013), p. 5 ff. 18

Cf. PWC, w.p. 19

Cf. WKO (2013), w.p.


1.3. Scope and structure of the study

The scope of the study is mainly focused on internationalization and the market entry

process of Austrian firms in emerging markets. Austrian firms are interviewed for the

purpose of generating new insights and information. Various concepts and theories

associated with internationalization, market entry process and success drivers, focusing

on emerging markets are discussed in the theoretical part of the thesis and afterwards

analysed according to the findings of the qualitative interviews. Furthermore

characteristics and types of emerging markets are also explored by the researcher.

The thesis is structures as follows:

In the first section the researcher explains the aims, problem definitions and objectives

of this study.

The second section examines literature regarding the objectives of the study. This

literature review includes various concepts and theoretical frameworks.

The third section describes the research methodology adopted for this study, including

research design, data collection method and data analysis.

The fourth section provides empirical findings, analysis and discussion of the

generated data.

The fifth section presents the conclusion and recommendations.


2. Theoretical foundations

2.1. Internationalization of firms

In the last decades the number of firms that are operating in global market increased

enormously20. In general, internationalization can be described as improving business

activities by a firm in the international environment21. Plenty of internationalization theories

are available and the most common ones will be discussed in this section. However, as a

first step it is necessary to identify motivators for firms to commence their business

operations abroad.

2.1.1. Motives for going international

There are a number of reasons why firms decide to go international identified by various

researchers. However, a common distinction is made between reactive and proactive

reasons. Reactive motives arise from a firm’s reactive behaviour to a present condition,

whereas proactive motivators are more future related and based on a firm’s interest to

exploit opportunities and market potentials22. Table 1 states motivators, followed by a brief

interpretation.

Table 1: Why firms go international

Reactive motives

(Antecedents)

Proactive motives

(Consequences)

Competitive pressure Profit/growth advantages

Market reasons Product/technological advantages

Output reasons Foreign market opportunities/market information

Proximity to customers, suppliers and networks

Economies of scale and production advantages

Managerial urge Risk diversification

Source: Compiled by the researcher based on Albaum/Duerr (2008) p. 76, Bilgin/Wührer (2014) p.

3, Hollensen (2011), p. 51, OECD (2009), p. 13-14 and Reiner et al. (2008), p. 934-935

a) Reactive motives

These types of motives are rather passive and related to the present market conditions.

Competitive pressure:

Competitive pressure is the prime form of reactive motives. Firms might be afraid of losing

domestic market share to competitors or to be completely displaced by new competition in

foreign markets23. Moreover firms might follow competitors in their decision to start

20

Cf. Barkema (1996), p. 151 21

Cf. Kubíčková/Votoupalová/ Toulová (2014), p. 320 22

Cf. Albaum/Duerr (2008), p. 76 23

Cf. Czinkota/Ronkainen (2013), p. 282


operating abroad24. Especially where products and processes are standardized or

products reach the end of their life cycle, cost pressure, resulting in fierce competition,

pushes firms to go international25.

Market reasons:

Firms may decide to operate abroad because of a small or saturated home market in

terms of sales volume or market share26. As the domestic market does not provide

satisfactory scale or scope economies, firms might seek new business opportunities in

foreign markets. This type of motivation is classified as reactive because firms may only

consider to commence business abroad due to domestic financial pressures27. A declining

stage of the product life cycle at home can also motivate firms to export to developing

nations, since the consumption demand may not be yet fulfilled28. SMEs can also be

pushed into starting its business abroad by dynamic and fast-changing environment29.

Output reasons:

When a company is producing more output than the domestic market is capable off,

foreign markets can serve as possible outlets30. Firms may produce additional output for

export when growth of the domestic market is stagnating. Extra production can strengthen

a firm’s competitive position abroad as well as at home due to production efficiency.

Normally additional production can be done without high costs because of already existing

equipment31.

Proximity to customers, suppliers and networks:

Orders made by foreign customers32, physical closeness to customers and foreign

markets can also lead to an increase in international business activities. According to

research, European firms become quicker international marketers as U.S firms because of

closer boarders33. There is also evidence that Austrian firms enter nearby markets before

distant countries34. Five of Austria’s neighbour countries are amongst the seven top export

destinations in 201435. However, despite their geographical proximity European countries

differ, for example in terms of standards or institutions36. Geographical proximity can also

bear the risk of “shock effects”. Firms might feel forced to react to potential market

opportunities of close neighbour countries. This shock appears due to unexpected local

knowledge gaps realized by managers37. Furthermore social ties, networks and supply

chain relations can trigger firms in a first internationalization step and also extend its

international business activities38.

24

Cf. Leonidou et al. (2007), p. 750 25

Cf. Reiner et al. (2008), p. 934-935 26

Cf. OECD (2009), p. 13-14 27


Cf. Hollensen (2011), p. 54 29

Cf. Andersson/Gabrielsson/Wictor (2004), p. 30 30



Cf. Westhead/Wright/Ucbasaran (2002), p. 61-63 33


Cf. Ninan/Puck (2010), p. 251 35


Cf. Disdier/Mayer (2004), p. 294 37


Cf. OECD (2009), p. 13-14


Managerial urge:

It is evidenced that the management’s attitude and enthusiasm drive the

internationalization path39. Especially in SME’s the management plays a significant role in

identifying the stimuli for internationalization40. Thereby the CEO’s perception towards

environmental changes mainly influences the decision of internationalization41. This type

of motivation comprises management’s internal desire and drive for operating abroad.

Sometimes firms internationalize simply because of the decision maker’s desire to

participate in international trade or expansion. This stimulus is mostly found when

managers are internationally minded42. Managers, who are experienced in living or

working abroad, are generally more internationally minded than others43.

b) Proactive motives

Proactive motives are future oriented and are related to market expectations or internally

urges for better market positioning.

Profit/growth advantages:

Especially when the home market is limited or saturated, presence in foreign markets is

necessary for achieving growth goals44. Firms also internationalize in order to follow their

growth objectives45. Profit is one of the main incentives for going abroad as firms perceive

international sales as a possibility for additional profits46. However, companies have to be

aware that the actual profitability does not always meet the perceived one due to

unexpected events, high start-up costs or inaccurate estimations47.

Product/technological advantages:

If a firm offers products or services which are not widely available from competitors in

international markets or include unique characteristics, patents48 or specific technological

know-how, the firm might perceive unique advantages and sales potential through

differentiation. Nevertheless, firms may also have erroneous perceptions about the

uniqueness of its products by overlooking international competitors49. In addition firms can

get motivated to internationalize while searching for knowledge assets50.

Foreign market opportunities/market information:

Significant foreign market growth or markets with similarities to the home market also

motivate firms to enter new markets. Moreover specific market knowledge, resources or

marketing research, which are only limited available across companies, can stimulate

firms to take advantage of foreign markets when the firm also aims to gain knowledge of

future markets51.

39

Cf. Calof/Beamish (1995), p. 129 40

Cf. Chetty/Holm (2000), p. 91 41

Cf. Andersson/Gabrielsson/Wictor (2004), p. 31 42



Cf. Amal et al. (2013), p. 412 45

Cf. Westhead/Wright/Ucbasaran (2002), p. 61-63 46

Cf. OECD (2009), p. 13-14 47

Cf. Czinkota/Ronkainen (2013), p. 281 48



Cf. OECD (2009), p. 13-14 51

Cf. Hollensen (2011), p. 52


Economies of scale and production advantages:

Firms can seek scale economies by decreasing unit costs of products produced by

manufacturing abroad. This may result in lower labour costs compared to production in

the home market52. Thus it presents a future oriented proactive motive for firms to go

international.

Risk diversification:

Firms might expect risk advantages by operating in more than one market due to different

timings of business cycles. An economic downswing does not affect each country to the

same extant and so the risk associated with declining profits or sales can be spread over

many markets. If the home market is facing a recession, the level of exports to foreign

countries may be still satisfactory53.

Not all of the motives influence the decision to operate abroad to the same extend. A non-

presentative study of the Austrian institute of economic research (WIFO) of 2003 analysed

export motives for Austrian firms beyond Western Europe. The respondents had to rank

11 motives for exporting according to their perceived importance from 1 (very important),

2 (important), 3 (partly important), 4 (less important) to 5 (not important). As a result, the

main motivators for exporting were rapid market growth, which is stated by almost 70% of

the respondents as very important and important, and market niches, followed by early-

mover advantages and compensation for low demand in Western Europe54. Table 2

demonstrates the motivators, ranked by their importance for firms in % (very important +

important answers only):

Table 2: Export motives beyond West-Europe of Austrian firms

Rank Motive Number of firms %

1 Rapid market growth 130 69.9

2 New market niches 128 68.8

3 Security of strategic advantages by early entrance 114 61.3

4 Compensation for low demand in West-Europe 104 55.9

5 Increasing market share easier to accomplish than in West-Europe

79 42.5

6 Decreasing trade barriers 65 34.9

7 Higher sales prices 57 30.6

8 Customer proximity 54 29.0

9 New concentration on better market segments 53 28.5

10 Less competition 48 25.8

11 Competition in target market 37 19.9

Source: compiled by the researcher based on Wolfmayr (2003), p. 16

By considering firm size in terms of employees, the findings evidence that for small firms

(with fewer than 20 employees) new market niches are of main importance, whereas

52

Cf. Vereecke/Van Dierdonck (2002), p. 504 53


Cf. Wolfmayr (2003), p. 16 ff.


larger firms are mainly motivated by rapid market growth and security of strategic

advantages by early entrance55. Other studies also show that the types of motivation for

internationalization differ by firm size, in terms of resources56. It is proven that smaller

firms with fewer resources are more likely to be reactively motivated than larger firms57.

Moreover the internationalization process of companies differs by the economic

development of the home country58. Once a firm has successfully started its operations

abroad, the age of the firm (older firms) and the age of the CEO are perceived to explain

the extension of international business of small firms. Younger CEOs might push the

international business activities to increase because they perceive themselves as

international marketers59.

To conclude, firms going abroad need to focus on markets where the motives met the

opportunities and advantages expected best. From the literature it is assumed that firms

may be either pushed due to present conditions or may be proactively motivated to start

its business abroad. Thereby motives connected with domestic and foreign markets, for

example foreign market growth, a saturating or stagnating home market, new foreign

market niches or advantages connected with foreign market information are perceived to

play the most significant role in the internationalization decision.

However it must be noted, that stimuli for internationalization differ between company’s

resources and structure.

After stating common motives for going abroad, in a next step six common

internationalization theories will be described and then linked to motives as their

descriptive factors.

2.1.2. Internationalization theories

A number of theories about internationalization are available. However the thesis focuses

on six common approaches. These approaches are the eclectic paradigm, the stage

model, the network model, the business internationalization process model, the

transaction cost analysis and the born globals. As a first step the approaches are

described separately and then respectively linked to the internationalization motives.

a) The eclectic paradigm

With the eclectic paradigm, also named OLI paradigm, John Dunning states reasons why

firms invest abroad rather than at home60. In his publications he argues that three factors

are responsible for the determination of international activities of MNEs: Ownership

advantages (O), location advantages (L) and internationalization advantages (I)61.

55

Cf. Wolfmayr (2003), p. 16 ff. 56

Cf. Westhead/Wright/Ucbasaran (2002), p. 64 57

Cf. Moen (1999), p. 66 58

Cf. Amal et al. (2013), p. 452 59

Cf. Andersson/Gabrielsson/Wictor (2004), p. 30-31 60

Cf. Eden/Dai (2010), p. 14 61

Cf. Dunning (2000), p. 163-164


Ownership advantages (O) arise through internally transferrable intangible assets, such

as know-how, from the parent company to its subsidiaries abroad62. The greater this

competitive advantage, the more the firm is able to operate in or increase its production in

host markets63.

Location advantages (L) refer to specific location or environmental characteristics which

benefits MNEs. Such location advantages include natural resources, transport

possibilities, communication channels or labor cost gains64. According to Ferdows,

location advantages are defined as the strategic reason for establishing and exploiting the

plant65. Superior manufacturers might gain L in developing countries through advanced

infrastructures and workers’ skills rather than by low labor costs. Examples of 3M and

Xerox in India and China show that companies can take advantage of a higher level of

productivity by choosing production places where wages are higher than in many other

parts of these countries but skilled staff and sophisticated suppliers are available66.

The third sub-paradigm of the OLI, internationalization advantages (I) deal with

internalizing activities such as buying and selling goods in the open market. The greater

the net benefits of internalizing business activities, the more attractive foreign production

affiliates are rather than licensing or franchising contracts67.

b) The stage model

The stage model, or establishment chain, was introduced in 1975 by Johanson and

Wiedersheim-Paul at the University of Uppsala in Sweden. This model is based on the

underlying assumption that firms enter foreign markets stepwise. With each step larger

resources are committed to the market abroad. Therefore market commitment, market

experience and the level of information is increasing68. It is also assumed that the process

of increasing commitment and transition from a pure export strategy into foreign direct

investment is influenced by location specific factors. The higher the location specific

attractiveness, the faster this transition will take place69.

Referring to this transition, researchers identified four different stages, as seen in figure 1.

In stage one the company has made no commitment of resources to the foreign market

and is only involved in the home market. Because of increasing foreign market knowledge

the firm starts to export via independent representatives in stage two. Thereby the firm

starts commitment to the market abroad. In stage three, where the firm sets up sales

subsidiaries, the company is able to control information channels and gains direct

experience of resource influencing factors. Finally, stage four represents the highest

involvement in the host market with the highest level of resource commitment as the firm

establishes own production facilities abroad70.

62

Cf. Dunning (2001), p. 174 63

Cf. Dunning (2000), p. 164 64


Cf. Ferdows (1989) in Vereecke/Van Dierdonck (2002), p. 498 66

Cf. Ferdows (1997), p. 74 67

Cf. Dunning (2000), p. 164 68

Cf. Johanson/Wiedersheim-Paul (1975), p. 307 69

Cf. Gilroy/Lukas (2006), p. 460 70

Cf. Johanson/Wiedersheim-Paul (1975), p. 307


Figure 1: The establishment chain

Source: compiled by the researcher based on Johanson/Wiedersheim-Paul (1975), p. 307

According to this model, firms change their mode of entry to foreign markets by increasing

market and resource commitment that is mainly gained through experience and

improvement of knowledge.

A study of 2010 provides evidence that some Austrian firms in CEE regions are indeed

changing their modes from lower (e.g export) to higher (e.g FDI) committed ones.

However there are two other strategies found. A number of Austrian firms seem to have

sufficient market knowledge, either achieved through host country nationals or staff, and

commitment in order to enter CEE countries directly through higher modes from the

beginning. Secondly, some firms continue doing business without changing its entry

strategy and remain in low modes. Therefore the authors question the stage model’s

implication that higher entry modes are the desired final ones71.

c) The network model

Because of the rising importance of networks, another model evolved. The network model

is a common internationalization theory, which states that actors in the business

environment are not operating independently. Firms in international business have

specific relationships with each other. Thereby actors, activities and resources construct

the three main variables of the model, as seen in figure 2. It is assumed that different

actors control diverse resources and possess different levels of knowledge. Thus,

individual firms depend on resources that are controlled by other actors. In order to get

71

Cf. Ninan/Puck (2010), p. 250

100%

market

knowledge

100%

resource commitment

1. no regular

export activities

2. export

via agents

3. sales

subsidiary

4. production/

manufacturing


access to required resources and take part in business operations, firms participate in

international networks72 including suppliers, customers, distributors or government

organizations. Thereby it mainly depends on the management’s decision and knowledge

to participate in networks, even when networks try to drive the firm into

internationalization73.

Figure 2: Basic structure of the network model

Source: Håkansson/Johanson (1992), p. 154

d) The business network internationalization process model

Because of the importance of networks for the firm’s success and changing economic and

environmental conditions, Johanson and Vahlne revisited their original model from 1977 in

2009. The original model stated that companies change their mode of entry to foreign

markets by increasing market and resource commitment, mainly gained through

experience and knowledge improvement74. However, the business network

internationalization process model of 2009 emphasizes on business relationships and

close networks to gain experience immediately. With these relationships it is further

possible to exploit opportunities and increase know-how75. This learning process can take

place with actors in various networks such as suppliers, customers, competitors or

government organizations76. Moreover it is crucial for entering firms to understand the

networks in foreign markets and to be supported from key stakeholders in order to

demonstrate relevance and importance77.

For Johanson and Vahlne it is of immense strategic importance to be an insider in

important business networks78. The authors also claim that existing business relationships

considerably impact firms regarding their entry mode decision. Furthermore the authors

72

Cf. Håkansson/Johanson (1992), p. 153 ff. 73

Cf. Chetty/Holm (2000), p. 88-91 74

Cf. Johanson/Vahlne (1977), p. 23-26 75

Cf. Johanson/Vahlne (2009), p. 1411 76

Cf. Chetty/Holm (2000), p. 88 77

Cf. Johansson/ Thelander (2009), p. 694 78

Cf. Johanson/Vahlne (2011), p. 487

network of resources

network of activities

activities resources

actors

network of actors


assume that insidership, that describes firms as active partners in international business

networks, provides companies with crucial market information. The researchers also

added the concept of relationship-specific knowledge to their original framework. This

knowledge is developed through interactions between business partners. Building on

previous studies, the authors perceive that trust is highly important for successful learning

and the creation of new knowledge. The scholars also expect that firms enter new

markets due to networks with important partners or decide to go abroad because the

relationship partner does. In short, the firm will operate abroad where opportunities are.

Figure 3 shows this revised model. Consistent with the original model, the variables are

distinguished between state and change aspects and influence each other79.

Figure 3: The business network internationalization process model of 2009

state aspects change aspects

Source: Johanson/Vahlne (2009), p. 1424

State Aspects:

Compared to the original version, market commitment and market knowledge were

replaced by knowledge/opportunities and network position. Thereby it is assumed that

opportunities are the most important elements of the knowledge body that drives the

process. Additionally knowledge also includes capabilities, strategies and networks with

related firms. The second state aspect is identified as network position and replaces the

original variable market commitment. The researchers now argue that the

internationalization process takes place within a network. As knowledge is distributed

differently among the partners involved, the level of internationalization success differs80.

Change Aspects:

The originally variable current activities was changed to learning, creating and trust-

building in order to specify the outcome of current activities. Intensity, speed and

efficiency of the learning process, creating knowledge and trust-building depend on the

existing knowledge, trust and commitment. The second change aspect, namely

commitment decisions, was originally adapted. However the scholars added relationships

to clarify the increasing or decreasing commitment of a firm towards networks81.

79

Cf. Johanson/Vahlne (2009), p. 1411 ff. 80

Cf. Johanson/Vahlne (2009), p. 1424 81

Cf. Johanson/Vahlne (2009), p. 1424

Knowledge

Opportunities

Network

position

Relationship

Commitment

decisions

Learning

Creating

Trust-building


A practical example of this theory is demonstrated by Elg. et al. regarding IKEA’s market

entry into China and Russia. Thereby IKEA’s entry success was mainly related to its

participation and identification of relevant actors and networks. Positive relationships to

leading officials, politicians, company representatives and the media helped IKEA to push

its internationalization path in these countries and to overcome crucial barriers. Especially

in the early phase of entrance, firms that are able to cultivate trust and credibility towards

major network actors might gain access to important market information, market niches,

favorable initial conditions, and local knowledge about e.g bureaucratic and society. It is

also crucial to not only understand the different networks with its actors, but also to know

how to manage and maintain relationships successfully82.

e) The Transaction Cost Analysis

The Transaction Cost Analysis (TCA) is one of the most used theories in market entry

mode studies83 and was originally developed by Coase in 1937 within his literature “the

nature of the firm” 84. He argued that a firm will internally perform those activities which

can be conducted at lower costs through internal control and systems. On the other side,

the firm is relying on the market for those activities where independent outsiders, such as

agents, have cost advantages85. Transaction costs (TC) became a major tool for cost

reduction, performance improvement and studying economic system operations. All

activities among people or enterprises can be classified as transactions in a universal

definition86. In “the problem of social cost”, another literature by Coase in 1960, he argued

that “in order to carry out a market transaction it is necessary to discover who it is that one

wishes to deal with, to inform people that one wishes to deal and on what terms, to

conduct negotiations leading up to a bargain, to draw up the contract, to undertake the

inspection needed to make sure that the terms of the contract are being observed, and so

on”87. In the TCA framework it is stated that structural decisions are explained by cost

minimization arguments. In general, TC are the sum of ex ante costs (including costs for

gathering information about foreign markets and potential export intermediaries as well as

contracting costs) and ex post costs (monitoring costs and enforcement costs referring to

sanctioning of trading partners). If the TC through externalization are higher than the costs

of control through an internal system, than an internalization mode is advised by TCA88.

In subsequent years a number of scholars extended the original TCA by various factors.

Anderson and Gatignon, for example, developed a TC framework for analysing the

efficiency of entry modes which is mainly based on Williamson’s assumption that the

desired entry market has at least enough potential for the company to balance its

overhead of a high-control entry mode. If this is true, high-control modes, such as wholly-

owned subsidiaries, should be considered. In the framework of Anderson and Gatignon, it

is suggested that long-term efficiency in a foreign market depends on the entry mode with

an optimal degree of control which is determined by transaction-specific assets, external

and internal uncertainty as well as free-riding potential89.

82

Cf. Elg/Ghauri/Tarnovskaya (2008), p. 689-694 83

Cf. Brouthers/ Nakos (2004), p. 230 84

Cf. Lv/Liu/Wang (2012), p. 127-128 85


Cf. Lv/Liu/Wang (2012), p. 127-128 87

Coase (1960), p. 15 88

Cf. Hollensen (2014), p. 83-85 89

Cf. Anderson/Gatignon (1986), p. 7


To sum up, TCA assumes that cost minimization explains structural decisions of firms and

affects the mode of entry. However control is only one method by which entry modes can

be classified and transaction costs hence reflecting only one possible factor to determine

entry modes.

f) Born globals

In the last years another form of internationalization occurred, which does not follow

traditional internationalization processes. A born global can be defined as a small start-up

company with products to serve the global market right from their start. They seek

superior international business performance through using knowledge-based resources

for sales on a global level90.

Those firms can be typically found in the high-tech, for example Blackberry, or low-tech

industries, for instance Zara as clothing retailer. Furthermore born globals internalize

rapidly and early91 due to advances in communication technologies, alternative available

sales channels92 and innovativeness93.

Born globals tend to choose business fields with minimal marketing mix adaptation due to

limited available resources. Moreover, a born global usually has to face intense

competition94 and is risk seeking95. High-tech born globals in B2B markets are usually

competing with well established, international brands. Therefore these born globals need

to gain trust, acceptance and legitimacy, for example through prizes, industry awards or

media recognition, in order to convince buyers. This also applies for low-tech or fashion

products born globals where acceptance by critical customers is of significant

importance96. Furthermore a born global is running the risk that its products are becoming

obsolete within a short period of time97. As a consequence born globals need to focus on

quality and technological excellence to succeed in niche markets around the world as

early as possible98.

Involvement in relevant networks is also crucial for a born global’s success and

identification of market opportunities. Networking capabilities may enable born globals to

acquire technological know-how and market trend knowledge. However participating in

networks can also limit strategic options of born globals as opportunities are limited within

the network boundaries. This aspect is termed “network rigidity”99.

In the following table the author of this thesis presents an overview which also contrasts

the six approaches with each other:

90

Cf. Knight/Cavusgil (2004), p. 135 91

Cf. Gabrielsson et al. (2008), p. 388 92

Cf. Gabrielsson/Gabrielsson (2011), p. 88 93


Cf. Âijö et al. (2005), n.p. 95

Cf. Sullivan Mort/Weerawardena (2006), p. 563 96

Cf. Sullivan Mort/Weerawardena/Liesch (2012), p. 557-558 97

Cf. Âijö et al. (2005), n.p. 98


Cf. Sullivan Mort/Weerawardena (2006), p. 563-567


Table 3: Internationalization theories - an overview

a)

The eclectic

paradigm

(OLI)

b)

The stage

model

c)

The

network

model

d)

The

business

network

internationa

lization

process

model

e)

The TCA

model

f)

Born

globals

Ownership advantages (O), location advantages (L) and internationalization advantages (I)

are responsible for the determination of international activities of MNEs.

Firms change their entry modes in foreign markets with increasing market and resource commitment, mainly gained through experiences and increasing knowledge.

Firms in international business have specific relationships with each other. In order to get access to the required resources and take part in business operations, firms participate in international networks.

Through business relationships it is possible to exploit opportunities and increase knowledge and thus, influence the mode of entry. Furthermore the model emphasizes on the importance on insidership.

TCA assumes that cost minimization explains structural decisions of a company and affects the mode of entry.

Born globals are small start-up firms that internalize rapidly and right from their start.

Dunning

(2000)

Johanson/

Wiedersheim-Paul

(1975)

Håkansson/ Johanson (1992)

Johanson/

Vahlne

(2009)

Coase (1937)

Knight/ Cavusgil (2004)

Source: composed by the researcher based on Dunning (2000), Johanson/Wiedersheim-Paul

(1975), Håkansson/Johanson (1992), Johanson/Vahlne (2009), Coase (1937) and Knight/Cavusgil

(2004)

After stating motives for internationalization and common types of internationalization

theories, possible connections between these two topics are discussed in the following

paragraph. Each internationalization theory can be linked to one or more motive as their

descriptive factors. Thereby the author reviews each theory for its main stimuli and

compares as well as links them to table 1.


By examining the OLI theory it can be assumed that product and technological

advantages proactively motivate firms to start internationalization activities. Ownership

advantages arising through intangible assets, such as expertise100 may lead to product or

technological advantages in new markets by offering unique products or services101.

Foreign production advantages such as economies of scale or labor costs102 are also

perceived to stimulate location decisions in the OLI. By reviewing the TCA model the

researcher also perceives economies of scale and production advantages as primary

proactive stimuli. As structural decisions are explained by cost minimizing arguments in

the TCA103, cost advantages by decreasing cost of production may explain

internationalization104. In the stage model firms are extending their resource commitment

to foreign markets by increasing their level of market knowledge and experience105.

Therefore it can be assumed, that the main motivator for internationalization is the access

to relevant foreign market information in order to improve knowledge in the future106 and,

consequently, increase market commitment. It is supposed that the main motivation for

internationalization regarding the network model is to get access to important resources

which are controlled by other actors in the business environment107. Thus firms have to

participate in relevant networks to exchange resources, obtain market information and

realize foreign market opportunities. In the business network internationalization

process model taking part in networks is also highly crucial for the firm’s

internationalization process. However compared to the network model, this theory focus

more on insidership, trust issues, knowledge building and learning through network

activities. Firms may also go abroad because important business partners do108.

Therefore it can be argued that proximity to customers, suppliers and networks as well as

foreign market opportunities and market information are the main motives for starting

business abroad in this model. Lastly, born globals differ from the other five theories

since born global firms internationalize right from their start109. Born global managers are

therefore perceived to be internationally minded, have a desire to participate in

international trade and are motivated for internationalization by managerial urge. Born

globals may also be motivated to extend operations abroad because of its product or

technological advantages, participation in networks or competitive pressure.

Various reasons and stimuli trigger firms to start its operations abroad. After discussing

the incentives of firms to internationalize, as well as their future expectations of operating

abroad, the next questions address the issues of how to start operations in foreign

markets, which market entry strategies are available and which one should be chosen?

Therefore the following chapter focuses on entry modes in markets abroad.

100

Cf. Dunning (2001), p. 174 101



Cf. Hollensen (2014), p. 83-85 104


Cf. Johanson/Wiedersheim-Paul (1975), p. 307 106

Cf. Hollensen (2011), p. 52 107

Cf. Håkansson/Johanson (1992), p. 153 ff. 108


Cf. Knight/Cavusgil (2004), p. 135


2.2. Entry modes for operations in international markets

In today’s globalized world the decision of how to best enter new markets is one key

challenge firms are facing. When a firm decides to internationalize, there are several entry

modes to choose from. The decision of electing a specific foreign market entry strategy is

crucial for the firm’s success abroad and of immense strategic significance to any firm110

because it includes commitment of resources, different level of control, risks and

ownership issues111. Especially market entries in emerging markets can provide complex

challenges for firms112 such the level of risk, which is perceived to be higher in emerging

markets than in developed economies113. This chapter starts with stating common types of

entry modes, including their advantages as well as disadvantages. In a next step relevant

factors that influence the choice of entry modes are pointed out. Thereby the thesis

follows a classification based on Hollensen. In the last part of this chapter these factors

will be linked to the entry modes, followed by a discussion.

2.2.1. Types of entry mode

This section of the thesis explains the basic types, characteristics as well as advantages

and disadvantages of common market entry modes. The choice of entry types is crucial

as entry modes are the means of linking the firm’s products and services to new markets.

In general entry modes differ significantly concerning the level of resource commitment,

risk, return114 and control115. In the current literature various classifications of entry modes

can be found. For instance, Pan and Tse categorize entry modes within their hierarchical

model between equity and non-equity types116. Anderson and Gatignon cluster entry

modes referring to the degree of control117. Bennett differs entry modes according to the

degree of risk and extent of investment118 and Root divides entry modes into three

categories (see figure 4)119.

Figure 4: Types of entry modes

Source: compiled by the researcher based on Bennett (1995), p. 61 and Root (1994), p. 6

110

Cf. Agarwal/Ramaswami (1992), p. 1 111

Cf. Datta/Herrmann/Rasheed (2002), p. 1-2 112

Cf. Cavusgil/Ghauri/Akcal (2013), p. 335 113

Cf. Kotabe/Helsen (2015), p. 519 114

Cf. Pan/Tse (2000), p. 539 115

Cf. Anderson/Gatignon (1986), p. 5 116

Cf. Pan/Tse (2000), p. 538 117


Cf. Bennett (1995), p. 61 119

Cf. Root (1994), p. 6

high

low

degree of risk

and control

Investment entry modes

Contractual entry modes

Export entry modes


a) Export entry modes

By using export entry modes the firm’s products are manufactured in the home country

and will then be transferred to the host market. This entry mode is commonly used by

initial entry in new markets120 and includes a relatively low level of risk, committed

resources and control121.

Export is of tremendous importance for the Austrian economy and has significantly

increased over the past years and in 2014 have reached a peak at 128.1 milliards Euro.

Thereby machinery and vehicles, processed goods and chemicals account for about 75%

of all exports. These products form hence the major group of export goods. Neighbor

countries and European member states are amongst the top export destinations in 2014.

However exports to destination overseas such as USA or Asian countries, as well as

emerging countries are also increasing122. A study of 2014 shows that export is the

preliminary mode of entry for Austrian firms in Brazil, Russia, India, China and South

Africa, which are also known as “BRICS” nations. Thereby machinery, electrical

equipment, metals and metal products as well as pharmaceutical products are the most

exported goods123.

Generally export modes can be sub-categorized into three types.

Firstly, indirect exporting where independent middlemen (e.g. export houses or trading

companies), which are located in the firm’s home country, are conducting export activities.

The manufacturing firm itself does not take direct care of export tasks. The main

advantage of indirect export is that only little commitment of resources is made to foreign

markets. This includes a low level of investment risk and a high degree of flexibility.

Therefore this entry mode is also available to firms with limited resources that want to

internationalize. However the use of middlemen carries a number of risks such as little or

no control regarding the operations abroad. Products may be sold through inappropriate

channels or with poor sales support. This can damage the product’s or brand’s reputation.

Furthermore no or little contact is established with foreign markets and, thus, learning is

limited 124.

The second type of export modes is direct exporting where firms set up their own

exporting departure and host country middlemen, in form of agents or distributors, are

used125. Thereby the choice of the distributor is crucial for achieving export success126.

Criteria for distributor selection include elements like the financial strength of a distributor,

market knowledge, planning abilities, product-related factors127 and the distributor’s

reputation based on experience and services128. Studies show that direct exporting can

lead to positive effects on firm productivity due to technology and knowledge spillover

arising through interactions with business partners. This positive effect is, however, not

120

Cf. Hollensen (2014), p. 347 121

Cf. Gilroy/Lukas (2006), p. 453 122


Cf. BMWFW (2014b), p. 32-68 124

Cf. Hollensen (2014), p. 347-350 125

Cf. Root (1994), p. 7 126

Cf. Obadia/Vida (2011), p. 467 127

Cf. Albaum/Duerr (2008), p. 330-331 128

Cf. Cintron/Ravindran/Ventura (2010), p. 584


found within indirect exporting129. Compared to indirect exporting the firm has more control

over its international operations, nevertheless more resources have to be committed130 .

The last type of export is defined by direct branch/subsidiary exporting and is related to

a firm’s own operating units in the host country, which requires equity investment.

Compared with indirect and direct export, this type of export mode provides more control

over international operations. However due to the equity investment required, the degree

of flexibility is very low131.

b) Contractual entry modes

Contractual entry types are long-term associations between a company and an entity in a

foreign target market. These agreements usually take place wherever a firm possesses

competitive advantages but is unable to exploit them solely due to e.g. resource

limitations. In case of the firm being able to transfer these advantages, contractual

agreements might be a suitable entry mode. Such transfers may involve intermediate

goods like knowledge, skills132 or technologies. Contractual entry modes do not include

equity investment and thus differ from investment entry modes133. Common types of

contractual entry modes are licensing, franchising and contract manufacturers.

Licensing includes a variety of contractual liabilities between a domestic company

(licensor) and a foreign firm (licensee). In a licensing contract the licenser provides

intangible assets, like patents, knowledge, trade secrets or brands to the licensee in return

for financial payments such as royalties134. Thereby the specification of the licensing

duration is significant for a licensor’s success. The licensing duration should be long

enough to decrease foreign market uncertainties for further investments and, on the other

hand, should be designed short enough to not overlook expansion opportunities135. In

general licensing requires a low level of committed resources, low transportation costs

and is a relatively fast way to enter new markets136. Through licensing access to markets,

which are otherwise closed due to regulations or import quotas, can be granted.

Nevertheless this type of entry mode also bears some risks. The licensor lacks control

over the licensee’s operations such as quality of the products in the target markets. This

can harm the brand’s reputation137. Additionally revenues may not be as high as expected

and through the acquired know-how the licensee may be able to establish competition138.

Examples of brand licensing can be found in the consumer goods industry. In 2013 The

Walt Disney Company was ranked as top global licensor of retail sales of licensed

merchandise worldwide139.

129

Cf. Yaşar (2015), p. 115-116 130


Cf. Root (1994), p. 7 132

Cf. Hollensen (2014), p. 369 133

Cf. Root (1994), p. 7 134


Cf. Jiang/Aulakh/Pan (2009), p. 560 136


Cf. Hollensen (2014), p. 390 138

Cf. Bennett (1995), p. 66 139

Cf. Lisanti (2014), w.p.


In the literature franchising is defined as a long-term business arrangement in which a

domestic firm (franchisor) allows another party (franchisee) to offer products and services

under its brand name in return for some sort of payment140, including royalties or other

fees. A franchise system consists of all the franchised units and units owned and

managed by the franchisor itself (i.e. company-owned units) that all operate under more or

less the same business format141. This type of entry mode is specifically attractive when a

company has a product that cannot be exported to a target country, when a company is

not willing to invest in that country and when its production process is easily transferable

to a third party142. Common examples of franchising agreements are found in the service

industry like hotels or restaurant chains (e.g McDonald’s) 143. According to a current study,

franchisors should especially focus on fast growing franchise categories, including

foods/restaurants, automobile products/services, children’s products/education services,

maintenance/cleaning, construction/remodelling and business aids/services. Thereby

visibility of the brand is highly important for competitiveness144. Franchisees are typically

small independent investors who have working capital but little business experience.

Compared with licensing, franchising provides a greater degree of control over

international operations. New markets can be entered quickly and without heavy

investments. However there is still a lack of full control over the franchisee’s operations

regarding quality and the risk of creating new competition as the franchisee is provided

with internal business knowledge145. Moreover poor performance of the franchisee can

harm franchisor’s trademark and reputation146. Therefore franchisors are advised to

monitor against potential franchisee’s opportunism by setting standards, inspect outlets

and check records147.

Finally, through contract manufacturing, parts of the production process are outsourced

to external partners as part of a supply chain agreement148. Thereby it can be

distinguished between two types of agreements: part consignment, where the contract

manufacturer receives parts from the manufacturing firm to process production into

finished good, and turnkey arrangement, where the contract manufacturer orders parts

directly from suppliers149. This type of market entry enables foreign sourcing to firms

without making huge commitments to the host market and whilst maintaining flexibility150.

Nevertheless, there are disadvantages to consider. It can be very difficult to control the

quality of the products and the manufacturer may set up in competition151. Typically,

contract manufacturing can be found in industries such as electronics, automobile

manufacturing or pharmaceuticals.

140

Cf. Combs et al. (2011), p. 100 141

Cf. Elango/Fried (1997), p. 69 142


Cf. Madangolu/Lee/Castrogiovanni (2013), p. 1003 144

Cf. Tariq Anwar (2011), p. 252-253 145

Cf. Hollensen (2014), p. 374-390 146

Cf. Klick/Kobayashi/Ribstein (2012), p. 39-40 147

Cf. Shane (1996), p. 78 148

Cf. Kim et al. (2002), p. 663 149

Cf. Kim (2003), p. 63-64 150


Cf. Bennett (1995), p. 72


c) Investment entry modes

The third categorization of entry types consists of investment modes which are

determined by immense investment sums, a high degree of risk152 and ownership issues.

Common types of investment entry modes are sole ventures or joint ventures153.

Sole ventures or wholly production include a 100% ownership and is thus the greatest

commitment a company can make to a foreign market. In contrast to export and

contractual entry modes, sole ventures offer a greater degree of market control over its

international business, as well as higher revenues, however combined with higher

committed resources (initial investment plus operating costs) and greater risk154. In

general there are two options to establish a sole venture for local production: acquisition

of a firm (brown field investment) or developing own facilities (green field investment)155.

Companies may acquire foreign firms for several reasons such as the acquisition of

specific assets (e.g. management or technology), sales opportunities in foreign countries,

financial diversification156 or the access to important country specific capabilities157. This

type of investment entry mode provides quick access to distribution channels, local

networks, workforce, local knowledge and brand reputation. Consequently, foreign firms

with limited international expertise and local knowledge can take advantage158. However

brown field investments include a high level of financial committed resources159 and

investment risk. In addition, integration problems, in form of cultural differences or a lack

of coordination, may occur160.

Green field investments refer to the establishment of own facilities in foreign markets161.

Thereby firms are independent of routine, cultural and operational issues in comparison to

acquisitions. Through entering new markets with green field investment the company is

able to fully control its operations abroad with less risk of losing its know-how.

Disadvantages arise due to an immense level of resources committed, including high

investment risks, and the length of time necessary for establishing operations in the target

country162.

A market entry through joint venture (JV) is conducted when an international company

shares ownership of an enterprise in a host country with local private or public interests.

Usually the international company agrees to share capital and other resources with a

single local company for collective targets and efforts. There are three classifications of

JVs, depending on the equity share of the international company: majority, minority or

50:50 JVs163. The main advantages of JVs are access to local market knowledge and

contacts, as well as shared risks and shared resources. However there are several

152

Cf. Bennett (1995), p. 61 153

Cf. Root (1994), p. 7 154

Cf. Kwon/Konopa (1993), p. 62-63 155

Cf. Nocke/Yeaple (2007), p. 337 156

Cf. Root (1994), p. 7 ff. 157

Cf. Nocke/Yeaple (2007), p. 337 158

Cf. Hollensen (2014), p. 413 159

Cf. Lee/Liebermann (2010), p. 143 160

Cf. Hollensen (2014), p. 413 161

Cf. Root (1994), p. 7 ff. 162

Cf. Cavusgil/Ghauri/Akcal (2013), p. 243-245 163

Cf. Root (1994), p. 146


drawbacks including lower level of control, the potential for conflicts across partners164 due

to e.g. cultural clashes or different objectives, a lower level of flexibility and administrative

difficulties165.

The following table and figure provide an overview about the advantages and

disadvantages of each entry mode type, as well as a classification regarding control,

flexibility and risk.

164

Cf. Fernandes/Gouveia/Pinho (2014), p. 59 165

Cf. Bennett (1995), p. 76


Table 4: Advantages and disadvantages of entry modes

Market entry

type

Advantages

Disadvantages

Ex

po

rt m

od

es

Indirect export -low risk due to low resources commitment

-flexibility

-low investment required

-no export experience required

-lack of control over operations

-lack of foreign market contact

-lack of learning experience

Direct export -more control over operations as with indirect exporting

-access to local market experience and customers

-local selling support

-little control over price and distribution

-more investments required

Branch/

subsidiary exporting

-control over operations -equity investments required

-less flexibility

Co

ntr

ac

tual

ag

ree

me

nts

Licensing -little/no investment (low level of resources committed)

-rapid market entry

-no tariff or transport costs

-risk of creating competition

-risk of low revenues

-lack of control

Franchising -greater degree of control compared to licensing

-low-risk due to low level of resources committed

-rapid market entry

-lack of full control

-harm of reputation

-difficult to find competent partner


Contract manufacturing

-low risk to low level of resources committed

-cost savings

-risk of quality control


-difficult to find competent manufacturer

Inve

stm

en

t m

od

es

Acquisition -full control over operations

-access to local resources

-local cost advantages

-high risk due to a high level of resources committed

-costly

-cultural clashes

-legal aspects

Green field investment

-full control over operations

-latest technology

-less risk of cultural clashes

-high risk due to a high level of resources committed

-costly

-time-consuming

Joint venture -gain local know-how and expertise

-shared resources and risk

-potential of conflicts across partners

-risk losing flexibility, control and know-how

Source: compiled by the researcher based on Bennett (1995), p. 66-76, Root (1994), p. 6 ff, Hollensen (2014), p. 362-413, Glowik (2009), p. 94-101 and Cavusgil et al. (2013), p. 245


Figure 5: Entry modes and desired mode characteristics

Source: compiled by the researcher based on table 4

After stating the three broad categories of market entry strategies, each with different

levels of control, resource commitment, flexibility and risk, the question of which entry

strategy to choose for a specific target market is still unanswered. Not only the

advantages and disadvantages of each mode have to be weighted; there are more criteria

influencing the decision of how to enter a new market. Which additional factors have to be

considered is discussed in the subsequent chapter.

2.2.2. Factors influencing the choice of entry mode

Numerous studies have focused on the entry mode decision and identified various factors

playing a significant role concerning the choice of entry mode166. This part of the thesis

follows a classification of the factors into four groups based on Hollensen, see figure 6:

internal factors, external factors, transaction specific factors and desired mode

characteristics. Moreover the following figure shows how these factors interact with each

other167:

166

Cf. Koch (2001), p.353 167


export modes

investment modes

contractual agreements

low investment risk high

indirect export

direct export

branch exporting

contract manufacturing

licensing

franchising

Joint venture

Green field investment

Acquisition

low

deg

ree o

f fl

exib

ilit

y

h

igh

low degree of control high

http://dict.leo.org/ende/index_de.html#/search=subsequent&searchLoc=0&resultOrder=basic&multiwordShowSingle=on


Figure 6: Factors influencing the market entry mode

Source: compiled by the researcher based on Hollensen (2014), p. 334

a) Management’s desire and being content with mode characteristics

These factors refer directly to the management’s attitude towards risk, control and

flexibility. Thereby control, risk and flexibility are highly interrelated with each other.

Moreover, these management-related factors influence internal factors168, external factors

and transaction-specific factors169 and vice versa (see figure 6). Consequently, it is

assumed in the thesis that mode characteristics are the most important and influential

factors when electing the foreign entry mode.

According to Anderson and Gatignon control has an immense influence on the chosen

mode of entry because it determines risk and return. Control is hereby linked with the

firm’s resource commitment to foreign markets. Low-control modes, such as export,

include low resource commitment and low levels of risk170. Thereby foreign environmental

conditions influence the level of commitment. On one hand significant resource

commitment is necessary for companies to gain opportunities in foreign markets, but on

the other hand it involves tremendous risk. Such risk can occur due to uncertainties of

markets such as changing market conditions171. Nevertheless, through appropriate

management and market control the level of risk can be moderated172. Thus, managers

have to understand the local market conditions and configure resource commitment. Risk

can also be defined in terms of the amount of money that could be lost. The manager’s

risk perception is also influenced by the firm’s capabilities, in terms of assets, and the

level of control over its operations. Another study concludes that firms with lower

capabilities perceive more risk in high-control modes and prefer entry strategies that

involve less control and less associated risk. Managers in firms with high capabilities may

168

Cf. Forlani/Parthasarathy/Keaveney (2007), p. 296 169

Cf. Luo (2004), p. 769-770 170


Cf. Luo (2004), p. 754-757 172

Cf. Kwon/Konopa (1993), p. 62

Management’s

desire and being

content with mode

characteristics

-high/low control -high/low risk -high/low flexibility

Internal factors

-firm size -international experience -product complexity/ product differentiation

External factors

-sociocultural distance -competition -political/economic risk -demand uncertainty -market size/market growth -number of suited intermediaries

Transaction specific factors

-tacit nature of know how -opportunistic behavior -transaction cost


associate risk with opportunities and choose high-control modes173. Other scholars

assume that risk perception is the major of location decisions in the internationalization

process. For them, foreign markets are chosen depending on its risk profile174. Decision

makers also have to consider the degree of flexibility associated with entry modes.

Flexibility describes the ability to change systems and adapt to changes175. Investment

modes possess high level of control, but the least flexible ones due to the high level of

committed resources176.

In short, the management’s perception towards the involved level of risk, control and

flexibility influence the choice of entry mode to great extent due to the fact that each entry

mode inherits a specific combination of these factors.

Additionally, there is evidence that the management’s attitudes primarily drive the

internationalization path177.

b) Internal factors

This group of factors are related to firm-specific conditions:

Firm size:

The company size is an indicator for the firm’s internal resources, assets and capabilities.

The more resources (tangible and intangible) the company controls, the more possible

entry modes are suited. As resources grow, firms tend to increase their commitment to

foreign markets178. Studies show that large companies, which possess huge capabilities,

have a preference for wholly owned subsidiary modes179 as this type of entry mode

involves substantial investments180 and control may be highly desired181. However, risk-

seeking managers might also commit greater resources to volatile markets if they

perceive huge opportunities there.

International experience:

Another internal factor mentioned in the literature is international experience, which can

be described as multinational know-how and expertise of the management and the

company. By taking part in international operations, management gains experience.

These insights or learning experiences can reduce the costs of uncertainty and increases

internal know-how182. Thus, firms increase their market and resource commitment to their

foreign operations due to experiences and knowledge improvements183. Scholars assume

that firms with relevant international experience prefer investment entry modes184.

173

Cf. Forlani/Parthasarathy/Keaveney (2007), p. 295-296 174

Cf. Kraus et al. (2015), p. 1504 175


Cf. Hollensen (2014), p. 339 177

Cf. Calof/Beamish (1995), p. 129 178

Cf. Hollensen (2014), p. 335 179

Cf. Agarwal/Ramaswami (1992), p. 15-18 180

Cf. Koch (2001), p.356 181


Cf. Hollensen (2014), p. 335 183


Cf. Agarwal/Ramaswami (1992), p. 6


Product complexity/product differentiation:

The location of production is influenced by the physical characteristics of products or

services. Companies in the commodity industry typically license their products, e.g. soft

drinks, due to high shipment costs. Luxury goods, on the other hand, with high

value/weight ratios are usually exported185. When a firm is producing highly differentiated

products it could face the risk of losing revenues by sharing its specific knowledge with

partners abroad. Therefore sole ventures are preferred with higher levels of product

differentiation186.

As internal factors are firm and product related, each company has to precisely check and

evaluate its resources and product characteristics as well as reviewing its international

experience when considering the strategy of foreign market entry.

c) External factors

External factors describe the macro environment of the host country and have to be

evaluated according to the target country’s characteristics. It is important to note that

macro environmental factors can also constitute barriers to enter the market. Therefore, if

possible, it is advisable to choose modes that make it possible to overcome obstacles to

enter. Yet market entry barriers are discussed in detail in chapter 2.3.4. External factors

include the following elements:

Sociocultural distance between home and host country:

Sociocultural distance between countries occur due to different languages, values,

believes or educational levels187.This distance might lead to uncertainties, resulting in the

management’s risk perception, and influences the level of resource commitment188. As

emerging markets have a growing middle class with changing buying habits189, uncertainty

is assumed to be higher than in developed countries. Moreover underestimating

sociocultural differences can lead to entry obstacles. Another scholar shows that industry

characteristics moderate the link between resource commitment and cultural distance.

MNEs are likely to commit fewer resources to its operations in an emerging market that is

highly volatile190. The greater sociocultural differences in terms of business practices,

cultural values or norms are, the more the tendency for firms to avoid investment modes.

Flexible entry modes with low costs and risks involved, such as export modes, may be

favored191. For Brouthers and Brouthers investment risk (defined by the perceived stability

of the social, economic and political environment in the target country, as well as the

investor's perception of the target country’s political attitudes towards foreign firms)

moderates the relationship between cultural distance and entry mode. By studying a

sample of western firms entering Central and Eastern Europe markets (CEE), the scholars

found evidence that cultural distance was related to both – cooperative entry modes and

investment modes, depending on the level of investment risk192.

185

Cf. Hollensen (2014), p. 335 186


Cf. Hollensen (2014), p. 336 188

Cf. Luo (2004), p. 769-770 189

Cf. Bilgin/Wührer (2014), p. 48 190

Cf. Luo (2004), p. 755 191


Cf. Brouthers/Brouthers (2001), p. 181-183


Intensity of competition:

Another external factor influencing the entry mode type decision is the intensity of

competition in the foreign market. In emerging markets foreign firms face severe

competition with high levels of competitive advantages. These local and international

competitors may be able to establish strong entry barriers193. Therefore firms prefer to

enter markets with fierce competition through modes that include low-commitment such as

export modes194.

Political/economic risk:

This type of risk refers to the level of uncertainty regarding the political and economic

environment in the host market. Governmental regulations are highly critical to a firm’s

success and survival in a country195. Especially emerging markets’ institutional voids lead

to a high level of uncertainty for foreign firms196. Past research shows that managers tend

to not commit to huge levesl of resources to markets with high country risk (including legal

restrictions197 and location unfamiliarity)198 and thus prefer low-commitment modes such

as export. If the company decides to enter via investment mode although high investment

risk is given, green field investments are preferred over acquisitions because restructuring

may be more expensive and cultural clashes can be avoided199. Moreover, it must be

noted that some countries have specific FDI regulations or restrictions and thus the choice

of entry mode is limited.

Demand uncertainty:

This external factor describes changes in consumer demand in the industry, the firm plans

to operate in abroad. If demand is changing frequently, new entrants are facing higher

level of operational risks200. In emerging markets the new rising middle class and the

youthful population can be seen as potential customers for foreign firms. However this

group of potential customers is also characterized by changing buying habits201. Research

indicates that low-commitment entry modes, like direct exporting are preferred when

uncertainty is high. Vice versa, MNCs may use high commitment modes, such as solve or

joint venture, when uncertainty is low202.

Market size/market growth:

Market attractiveness in terms of market size and market growth is one of the

predominant factors influencing the choice of entry mode203. Emerging markets record

rapid and sustainable economic growth over the past years204. Thus, these markets are

highly attractive for foreign firms to enter. Firms tend to use investment modes in markets

with high potential due to the possibility of economies of scale as well as to establish a

long-term market presence205. When having to choose between acquisition and green

193

Cf. Dawar/Chattopadhyay (2002), p. 458 194

Cf. Hollensen (2014), p. 334 195


Cf. Khanna/Palepu/Sinha (2005), p. 4-5 197

Cf. Morschett/Schramm-Klein/Swoboda (2010), p. 68-69 198

Cf. Kim/Hwang (1992), p. 47 199

Cf. Demirbag/Tatoglu/Glaister (2008), p. 21-23 200

Cf. Elango/Sambharya (2004), p. 114 201


Cf. Fernandes/Gouveia/Pinho (2014), p.68 203

Cf. Morschett/Schramm-Klein/Swoboda (2010), p. 62 204

Cf. Fan (2008), p. 353 205

Cf. Agarwal/Ramaswami (1992), p. 5


field investments in emerging markets with high potential, acquisitions are preferred by

MNEs due to e.g. cost and workforce issues206. Companies are also more likely to commit

more resources to countries with high economic growth rates and prefer modes through

which the company is able control the operations in order to develop sustainably in the

host country207.

Limited number of suited intermediaries:

Infrastructure, in terms of public transportation services, is usually largely underdeveloped

in rural areas in emerging markets compared to developed nations. Therefore distribution

and supply chain channels may also be developed weakly. This challenges foreign

companies, since the ability of reaching consumers is limited208. Thus, where only limited

intermediaries are available, firms may be advised to not enter via export modes because

the distributor’s negotiation power may be high.

In short, external factors need to be considered for each market separately as each

country possesses different characteristics. Especially emerging markets’ characteristics

may vary drastically from developed nations and can change rapidly. Therefore relevant

data and information must be obtained and the target market has to be analysed in detail.

Thereby it must be noted that relevant information and data are not fully available for

emerging markets. However the main characteristics of these markets are stated in

chapter 2.3.2.

d) Transaction specific factors

Transaction specific factors include transaction costs, opportunistic behavior and tacit

nature of know-how. The TCA states that if transaction costs, that are the sum of ex ante

costs (including costs for gathering information regarding new markets and potential

intermediaries as well as contracting costs) and ex post costs (like monitoring costs and

enforcement costs), of export modes are higher than the costs of control through an

internal system, investment modes are recommendable. Besides costs and opportunistic

behavior, also know-how has to be considered. When the nature of firm-specific

knowledge is tacit, it is difficult and costly to transfer. Therefore firms prefer to choose

investment modes for market entry as intra-organizational transfers of specific knowledge

and routines reduce complexity209. Firms may also want to fully control its know-how,

especially if it includes competitive advantages. By using low-control modes, like indirect

export, or modes where competition may be created, such as franchising, the risk of

weakening the competitive advantage is higher than by using sole ventures.

206

Cf. Demirbag/Tatoglu/Glaister (2008), p. 23-24 207

Cf. Hollensen (2014), p. 337 208


Cf. Hollensen (2014), p. 83ff.


To conclude, there is no general recommendation of one single entry mode for every new

market. All of the influential criteria and the advantages as well as disadvantages of each

available entry strategy have to be analysed in detail and weighted afterwards to decide

on the most suitable entry strategy for a specific market. Nevertheless, the choice of entry

mode preliminary depends on the management’s and decision maker’s attitudes because

they influence all other factors and drive the internationalization path of a firm.

The following table summarizes this chapter by showing the tendency of each influential

factor towards two extreme ends: export modes (including the lowest level of resource

commitment, control and risk) or sole ventures (maximum degree of resource

commitment, control and risk).

Table 5: Influential factors and its tendency towards entry strategies

Influential factor Tendency towards

Ma

na

ge

me

nt’

s a

ttit

ud

e a

nd

pe

rce

pti

on

tow

ard

s r

isk, c

on

tro

l an

d f

lexib

ilit

y

internal factors

export

modes

sole

venture

large firm size X

immense international experience X

high product complexity/product differentiation X

external factors

great sociocultural distance X

fierce competition X

high political/economic risk X

big market size/ market growth X

limited number of suited intermediaries X

high transaction specific factors X

Source: compiled by the researcher based on the literature of chapter 2.2

After clarifying which strategies are available to enter foreign markets and how to choose

the most suitable mode, the question of which markets are worth to enter arises. Because

of growing importance of emerging markets to foreign companies, the thesis focuses on

these countries in detail. In the next section characteristics of emerging markets, as well

as opportunities and obstacles will be discussed.


2.3. A general focus on emerging markets

In general, there is no consensus on the definition of the term “emerging markets”210.

Different authors have different concepts on this term. However the researcher states

some viewpoints and generates her own definition.

Antoine van Agtmael, an economist of the World Bank, used the term “emerging markets”

for the first time, to refer to economies with huge economic growing potentials211.

Fan defines emerging markets as a term “which refers to a country that has undertaken

transition in its political or economic systems and experienced rapid economic

development”212.

According to Kearney emerging markets are diverse in culture, language and politics and

includes greater levels of uncertainty and risks for foreign investors213.

For Pelle emerging markets are countries which re-though their economic models,

changed patterns and boosted their GDP growth214.

By analysing these definitions the author states the following definition for this thesis:

Emerging markets are countries which possess huge business opportunities for potential

foreign entrants, if the foreign companies consider the market’s characteristics and

outweigh the underlying risks.

2.3.1. Types of emerging markets

After defining emerging nations, those countries that are currently termed as emerging

market have to be listed. In general, there is no standard list of emerging markets nations,

because different institutions and researchers use various types of indexes and indicators

to determine emerging nations215. In the following part, common typologies of emerging

markets are stated in a chronological way.

Garten pioneered the classification of emerging markets. In his literature he identified ten

big emerging markets (BEM). These are: China, Brazil, Argentina, Mexico, Poland, South

Africa, South Korea, Turkey, India and Indonesia216. These BEMs have become major

economic and political players and because of their economic development, also their

living conditions also improved217.

One of the most common typologies of emerging markets is BRICS. The concept of BRIC

was defined in 2001 by Jim O’Neill of Goldman Sachs. Originally the BRIC included Brazil,

210

Cf. Kearney (2012), p. 161 211

Cf. Van Agtmael (2007), n.p. 212

Cf. Fan (2008), p. 353 213

Cf. Kearney (2012), p. 162 214

Cf. Pelle (2007), p. 15 215


Cf. Garten (1996), p. 8 217

Cf. Bilgin/Wührer (2014), p. 46-47


Russia, India and China218. In 2010 South Africa was added to this group of nations and

became BRICS219. These countries have been expected to record substantial economic

growth and opportunities in future. Indeed the BRICS nations established themselves as

dominant global economic giants and it is predicted that China overtakes the United

States as the largest economy in terms of purchasing power parity (PPP) in 2017220.

Moreover, by the end of 2013, the BRICS economies already accounted for 21% of the

global economy in terms of GDP221.

In 2005 Goldman Sachs introduced another classification of emerging markets – the “Next

11”. The N11 (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines,

South Korea, Turkey and Vietnam) can be seen as BRICS followers in terms of economic

growth potential and impact on the global economy. Especially their demographic

advantages (in form of large and young population groups which collectively account for

19% of the world’s population) will enhance economic growth222.

MIKT, consisting of Mexico, Indonesia, South Korea and Turkey, is another typology of

emerging markets by Goldman Sachs, which was introduced in 2011. These economies

recorded immense growth rates in the past years and were able to double in size223.

The E7, these are the seven largest emerging markets (in economic terms) consisting of

China, India, Brazil, Russia, Indonesia, Mexico and Turkey are predicted to overtake the

G7 in 2017 as latest in PPP terms. Moreover, the difference between the E7 and G7

nations will broaden because the recession of 2008/2009 did not harm emerging markets

as dramatically as in developed nations224.

But beyond a contribution to world economy with economic growth and growth of

population, there are some other factors to consider.

Grant Thorntons’ emerging markets opportunity index combines economic size,

population, wealth, involvement in world trade, growth prospects and levels of

development in order to rank the 27 largest emerging economies in terms of their potential

for business investment225.

Morgan Stanley Capital International’s (MSCI) emerging market index currently consists of

23 countries based on the country’s economic development, size, liquidity and market

accessibility226.

The Financial Times Stock Exchange (FTSE) emerging market index dissects stock

market indices according to its development level227. The main aim of this index is to help

investors in measuring the performance of companies in emerging markets. Thus, this

218

Cf. Goldman Sachs (2005), p. 3 219


Cf. PWC economics (2013), p. 1 221

Cf. Euromonitor (2013), p. 3 222


Cf. Bloomberg (2012), w.p. 224


Cf. Grant Thornton (2012), p.4 226

Cf. MSCI (2013), w.p. 227

Cf. Cavusgil/Ghauri/Akcal (2013), p. 3


index is used for performance benchmarking and identifies 22 emerging markets in

2015228.

Because there is no general classification of emerging markets, some nations are

members of more than one typology. For instance, South Korea is member of the Asian

Tigers, MIKT and also N11.

However, it needs also be kept in mind that the list of emerging countries can change over

time. Some starting emerging markets (SEMs) are countries that are still in transition

process from a closed system to a system of free market, from the 1990s, e.g. Russia229,

have already transferred into BEMs230 and new SEMs, like Vietnam, Romania and Poland

evolved231.

The following table states the countries that are currently defined as emerging markets by

different institutes:

228

Cf. FTSE (2015), p.3 229

Cf. Bilgin/Sriram/Wührer (2004), p. 29 230

Cf. Bilgin/Wührer (2014), p. 46-47 231

Cf. International Monetary Fund IMF (2014), w.p.


Table 6: Emerging markets listed by different institutions

FTSE

(2015)

MSCI

(2013)

PWC

(2013)

E7

Grant

Thornton

(2012)

Goldman

Sachs

(2005)

N11+MIKT

Goldman

Sachs

(2001)

BRICS

Garten

(1996)

Algeria X

Argentina X X

Bangladesh X X

Brazil X X X X X X

Chile X X X

China X X X X X X

Colombia X X X

Czech Rep. X X

Egypt X X X X

Greece X

Hungary X X X

India X X X X X X

Indonesia X X X X X X

Iran X X

Malaysia X X X

Mexico X X X X X X

Morocco X

Nigeria X X

Pakistan X X X

Peru X X X

Philippines X X X X

Poland X X X X

Romania X

Russia X X X X X

South Africa X X X X X

South Korea X X X

Taiwan X X

Thailand X X X

Turkey X X X X X X

UAE X X

Ukraine X

Venezuela X

Vietnam X X

Qatar X

Source: compiled by the researcher based on: FTSE (2015), MSCI (2013), PWC (2013), Grant

Thornton (2012), Goldman Sachs (2005) and Garten (1996)


2.3.2. Characteristics of emerging markets

In the following pages, the most significant characteristics of emerging countries will be

pointed out. Even though emerging markets differ in terms such as culture, legal

frameworks, economies, demographic or market structures, some general characteristics

are identified in order to better understand those markets as well as their future

potential232. These characteristics can be listed as follows:

Fast economic growth and increasing international trade

Youthful and growing population

Growing middle class, changing buying habits and marketing orientation

Diversity within market and infrastructure

Availability and interpretation of information

Severe competition of local firms and international firms

Complex regulations, reforms and corruption

a) Fast economic growth and increasing international trade

Perhaps the most important characteristic of emerging markets is their rapid and

sustainable economic growth233. Since the early 1990s, emerging markets have been the

fastest-growing markets worldwide234. They have indeed contributed to global economic

growth due to an increase in domestic consumption level, resulting from an emerging new

middle class235.

There are predictions that China will overtake the United States as the biggest economic

giant in terms of purchasing power parity (PPP) in 2017236. Additionally, India is projected

to become the third largest economic player behind the US and China by 2050237.

Figure 7 shows the top 20 countries based on its GDP in 2011 and forecast its

development for 2030 and 2050.

232


Cf. Fan (2008), p. 353 234

Cf. Khanna/Palepu/Sinha (2005), p. 5 235


Cf. Hawksworth/Chan (2013), p. 3 237

Cf. PWC economics (2013), p. 1


Figure 7: Actual and projected top 20 economies ranked based on GDP at PPP

terms

Source: PricewaterhouseCoopers (PWC) economies (2013), p. 2

Interestingly, it is projected that both - the N11 nations, as well as the BRIC countries will

further increase their economic power. By looking closer at the predicted annual GDP

growth rates in figure 8, the N11 countries demonstrate higher economic growth than the

G7238. The N11 are estimated to grow by over 700% in the next decades and might

account for 17% of the total global GDP in 2050239. Nigeria might be the country with the

fastest economic growth due to its young and growing working population240.

238



Cf. PWC economics (2013), p. 10


Figure 8: Predicted average real growth in GDP at PPs (2011-2050)

Source: PricewaterhouseCoopers (PWC) (2013), p. 10

The generation of business in emerging markets is also influenced by environmental

conditions such as the freedom to create business and freedom of investment241. In the

last years emerging countries steadily raised its export and import rates as seen in table 7

and table 8. In 2013, China has already taken the USA as the world’s export leader in

merchandise trade. In total, 44% of the world merchandise export originated from the

developing countries242.

Table 7: Percentage share of world exports (merchandise trade)

countries

(E7) 2003 2008 2013

Brazil 1.55% 1.20% 1.30%

China 5.80% 8.70% 11.70%

India 0.70% 1.00% 1.70%

Indonesia 0.80% 0.80% 1.00%

Mexico 2.20% 2.00% 2.00%

Russia 1.80% 2.50% 2.80%

Turkey 0.60% 0.80% 0.80%

Austria

1.30%

1.20%

0.90%

Source: World trade organization WTO (2013; 2008; 2003), n.p.

241

Cf. Herrera-Echeverri/Haar/Estévez-Bretón (2014), p. 1921 242

Cf. WTO (2014), w.p.


Table 8: Percentage share of world imports (merchandise trade)

countries

(E7) 2003 2008 2013

Brazil 0.70% 0.90% 1.30%

China 5.30% 6.70% 10.30%

India 0.90% 1.50% 2.50%

Indonesia 0.40% 0.60% 1.00%

Mexico 2.30% 2.10% 2.10%

Russia 1.00% 1.60% 1.80%

Turkey 0.90% 1.20% 1.30%

Austria

1.30%

1.10%

1.00%

Source: World trade organization (WTO) (2013; 2008; 2003), n.p.

b) Youthful and growing population

Emerging markets record fast growing populations within the last decades and are

projected to further increase. The structure of population highly differs from that of

developed nations. The population is on average 12.5 years younger in emerging markets

than that in developed nations (see table 9). These demographic factors contribute

enormously to economic growth as emerging markets have sizeable working-age

populations and upcoming young populations who will join workforce soon. In 2013, 85%

of the world’s population live in emerging market countries, hereby 90% are under 30

years old243. Furthermore life expectancy and education levels are increasing because of

rising welfare in emerging markets. Especially in China and Brazil expenditures on

education rose enormously244. According to O’Neill, higher education levels account for

higher levels of productivity245. Moreover, education contributes to an increasing life

expectancy through better training of medical staff246.

243



Cf. O’Neill (2011), n.p. 246

Cf. Ciravegna/Fitzgerald/Kundu (2014), p.33


Table 9: Population and age breakdown

Countries

Population growth

(2014 est. %)

Mean age

(2014 est.)

emerging markets (E7+N11)

Bangladesh 1.6% 24.3 years

Brazil 0.8% 30.7 years

China 0.44% 36.7 years

Egypt 1.84% 25.1 years

India 1.25% 27.0 years

Indonesia 0.95% 29.2 years

Iran 1.22% 28.3 years

Mexico 1.21% 27.3 years

Nigeria 2.47% 18.2 years

Pakistan 1.49% 22.6 years

Philippines 1.81% 23.5 years

Russia -0.03% 38.9 years

South Korea 0.16% 40.2 years

Turkey 1.12% 29.6 years

Vietnam 1.00% 29.2 years

G7 countries

Canada 0.76% 41.7 years

France 0.45% 40.9 years

Germany -0.18% 46.1 years

Italy 0.3% 44.5 years

Japan -0.13% 46.1 years

United Kingdom 0.54% 40.4 years

USA 0.77% 37.6 years

Austria

0.55%

44.3 years

Source: compiled by the researcher based on The CIA World Factbook (2014), n.p.

This young and growing population creates various opportunities for foreign firms.

Particularly the younger generation has numerous demands for fashionable products in

beauty, fashion, food, technology, entertainment, to mention a few. Thus, companies need

to be aware of this demand and focus on this target group.

Moreover, the growing and young population structure within emerging markets provides

a huge pool of workforce, which offers advantages to foreign companies. As low paid

workers are widely available in emerging markets, foreign firms can benefit from low

labour costs. This is also a common reason for placing manufacturing sites in these

markets. Since it is also very important to assure high quality production, foreign

companies implement new technologies and focus on training programs for their staff247.

Pelle emphasizes on the importance of hiring local talent in order to operate successfully

in emerging markets. For him, the availability of high potential workforce varies between

countries. East Asian countries, like China or Taiwan, are well reputed for their good task

247

Cf. Cavusgil/Ghauri/Akcal (2013), p. 23-25


executors and manual capability of people regarding activities such as manufacturing and

processing. High skilled information technology potentials are associated with the Indian

workforce248. In order to attract skilled and well-educated people in emerging markets,

many companies cooperate with elite schools in order to pick high potentials for their

personnel249. Another option for foreign firms is to transfer their own talents to emerging

countries. However working with expats might also bear problems, especially in terms of

cultural clashes.

c) Growing middle class, changing buying habits and marketing orientation

Another common characteristic of emerging markets is its growing middle class. It is not

possible to generalize the definition of middle class because different countries have

different income levels depending on its economic development. However, the essential

characteristic of middle class consumers is their ability to spend a significant amount of

their discretionary income on non-essential goods and services250

. The consumption of

middle class consumers in emerging markets increased enormously over the last decades

and is assumed to continue to grow in future. According to predictions, by 2025 the

emerging markets consuming class will increase to 4.2 billion people accounting for $30

trillion annual consumption which is nearly half of the global total251 (see figure 9).

Especially the N11 middle class consumers are projected to skyrocket their average

incremental consumption in the next 25 years252.

Figure 9: World consumption

Source: Mc Kinsey (2013), p. 50

This new middle class can be seen as a consequence of the economic upswing in

emerging markets. Because developing countries mastered to attract foreign companies

to invest foreign capital and establish factories and manufacturing facilities in their

markets, employment increased significantly. Subsequently, growing export rates and

248

Cf. Pelle (2007), p. 63-64 249



Cf. Mc Kinsey (2013), p. 49-50 252

Cf. Goldman Sachs (2005), p. 6

http://dict.leo.org/#/search=subsequently&searchLoc=0&resultOrder=basic&multiwordShowSingle=on


improvements of infrastructure further contributed to economic growth. These economic

developments led to increased incomes and, thus, to a rise in consumer spending. On the

other hand this increased level of consumption also serves as a major growth driver in

emerging markets253.

The rising consumer spending power and the new variety of available products also led to

changing customer preferences. The growing middle class is characterized by having

great a interest in quality brands and new products, and buying high-quality brands in

order to upgrade the social status in society254. Interestingly, nine of the largest shopping

malls worldwide are located in emerging markets, four of them situated in China255. This

may also be seen as an indicator for the Chinese consumer spending power.

The increase in consumer spending and the economic upswing in emerging markets

attracted multinationals in particular, which can be traced back to the potential to reach

billions of new customers. However, various MNCs failed in the first place because they

did not adapt their marketing strategies to the local consumers and requirements256.

Differences between the desires of populations in urban areas and rural areas appear and

thus, need to be adhered to through different strategies. However, due to the

internationalization of retailing, shopping habits tend to become more similar and local

consumption habits begin to disappear257.

It is furthermore of interest to analyze the target of middle class consumers’ discretionary

spending. A survey of 2013 showed that the middle class consumers in emerging markets

prioritize future spending on home products including décor, furniture and renovation

utilities, whereas the middle class consumers of developed countries emphasize on

holidays, leisure, travel and dining out activities258. While the degrees of spending for each

category differ among the emerging countries, there seems to be a preference for

materialistic goods rather than spending on intangible activities.

In short, foreign firms that are able to attract this middle class, by offering adequate

products, can indeed record success, due to the consumer’s rising demand and spending

power.

d) Diversity within market and infrastructure

Various differences can be seen between urban and rural areas in emerging markets259.

In rural villages, many citizens are still living under poor conditions and are less educated,

whereas in urban areas people obtain prosperity and are usually very sophisticated.

Moreover consumers in India, Indonesia and China differ within the country by religious,

linguistic, cultural260 and taste dimensions. For example, within China there is a huge

regional variety in local flavours and personal hygiene routine261. It is therefore very

253





Cf. Bilgin/Sriram/Wührer (2004), 30-31 258

Cf. Euromonitor (2013), p. 15-16 259



Cf. Johnson et al. (2014), p. 263


important for foreign firms to not only understand the national consumer perse, moreover

they need to consider the regional differences in the areas they are planning to operate in.

Generally, the economic development of a nation is directly affected by the quality of its

infrastructure262. Infrastructure, in terms of public utilities, public works and public

transportation services, are largely underdeveloped in rural areas in emerging markets

compared to developed nations. Consequently distribution and supply chain channels are

developed weakly which especially challenges foreign companies, as the ability of

reaching consumers is limited263. The more connected an area is, the higher the number

of potential customers. Transportation influences local economies by linking markets and

creating new ones. In addition linking markets increase labour mobility, allowing workers

access to new sources of income. Capitals and bigger cities are usually well integrated in

world trade, as well as fast developed. However, in rural areas roads are typically

unpaved and some villages are unreachable by public transportation264.

e) Availability and interpretation of information

This characteristic describes one of the biggest challenges when operating in emerging

markets: the access to relevant data, which is only scarcely available265. Generally, before

looking at the data, it is relevant for companies to determine which characteristics of the

economic environment are pertinent for the particular business. For instance the level of

urbanization, climate or transportation does not affect each industry to the same extent266.

However, important information, such as reliable databases on consumption patterns, that

allow firms to estimate demand, is scarce267. Moreover, mapping relevant resources can

also be complex, due to a limitation in available records or conflicts between the

government and regimes that control territories268. Even basic information, which is taken

for granted in developed countries, e.g. the certainty of the date of birth of a person, may

not be available for large parts of the population in emerging markets269. Even when data

and information are available, there is still the risk of misinterpretation. This constitutes a

problem for firms as understanding the background of data in emerging markets is

essential. For instance, informal economy may not be included in the available database.

As the size of informal economy is generally bigger in emerging markets as in developed

nations, this may lead to wrong estimations regarding per capita income or growth rates.

Furthermore, through falsely reported business income statements, misinterpretation of

the market size or business structure might occur. Data can also be misleading because

of differences in basic definitions and concepts between emerging markets and developed

nations. For example, if a firm is considering distribution in an emerging market, it may

look at indicators such as available roads. Even if the information concerning roads is

correct, it might not state which roads are paved and which ones are not. Thus, inaccurate

distribution strategies may be developed270.

262

Cf. Ciravegna/Fitzgerald/Kundu (2014), p.36 ff. 263


Cf. Ciravegna/Fitzgerald/Kundu (2014), p.36 ff. 265

Cf. Bilgin/Sriram/Wührer (2004), p. 32 266



Cf. Ciravegna/Fitzgerald/Kundu (2014), p.135 269

Cf. Pelle (2007), p. 47 270

Cf. Cavusgil/Ghauri/Akcal (2013), p. 336


Finally, companies must be aware of the fact that emerging market conditions can change

drastically within short periods. This leads to a huge level of uncertainty for foreign

firms271. Hence it is crucial for foreign firms to carefully observe the market development

and update available information. Additionally it is recommendable to participate in

relevant networks and connect with local experts in order to get access to reliable

information and avoid misestimation.

f) Severe competition of local and international firms

In emerging markets local competition is extremely strong and usually underestimated by

MNCs272. There is a high level of consumption of unbranded products and services in

emerging markets, since branded goods are not available in rural areas and unbranded

goods are often perceived as “good enough”273. Moreover, domestic firms have built

strong relationships with their customers as well as authorities and inherit a deep

understanding of consumer needs274. This local knowledge is a powerful competitive

advantage, which foreign firms have to consider275.

However, an increasing number of internationally successful MNCs can be found in

emerging markets. Prominent examples are Tata motors (India), TCL (China) and

Samsung (South Korea)276. The latter ranked on the 18th position on Forbes’ global 2000

list regarding the world’s biggest public companies in 2015277. Moreover Samsung

accounts for the seventh most valuable brand worldwide in 2015278.

With the rapid growth of emerging countries, local companies started global expansion

and quickly gained market shares in newly entered emerging, as well as developed

markets. The main competitive advantages of these companies based in emerging

markets arise from low costs of material and labour, a rapid learning process, local talents

and governmental incentives279. Hong-Kong, South Korea and Taiwan represent

examples of successful technology adopters, mainly achieved through learning. These

countries made a rapid transition from assembly to original equipment manufacturing in

apparel in the 1970s. They mastered to upgrade themselves, in the apparel value chain

by learning from developed countries and establishing own international production

networks280. Due to the advantages these emerging market based companies possess,

they are able to confront foreign entrants with harmful market entry barriers.

This severe competition, originating from these respective companies, brings several

implications for entering companies. Foreign firms must be aware that entering a market

with intensive local competition bears a high level of costs and risks, particularly when

emerging market companies have already established strong entry barriers. A possible

solution to overcome these barriers may be the establishment of partnerships with local

firms, in order to learn about local conditions and local customers.

271

Cf. Pelle (2007), p. 47-49 272




Cf. Khanna/Palepu/Bullock (2010), p. 39 276

Cf. Pelle (2007), p.173-180 277

Cf. Forbes global 2000 (2015a), w.p 278

Cf. Forbes valuable brands (2015b), w.p 279

Cf. Pelle (2007), p.173-183 280

Cf. Gereffi (2012), p. 174-175


g) Complex regulations, reforms and corruption

Emerging markets have less effective legal systems than developed countries, as well as

have institutional holes281. Property rights and patents may not be respected fully and also

tax- and labour market regulations can vary widely282. Moreover, emerging markets are

undergoing rapid changes in economic and political terms283. Foreign Direct Investment

(FDI) policies and the reduction of trade barriers contributed tremendously to economic

growth of some emerging countries. MNCs are especially attracted by favourable FDI

conditions and thus bring, in addition to FDI, employment opportunities and hence a

decreasing poverty rate284. China represents an excellent example of successful FDI

policies. It has been the most successful emerging market country in attracting FDI,

benefited hugely from FDI, without having full capital market liberalization and any

changes to its political system285.

Another challenge in emerging markets arises through the high level of corruption which

causes enormous costs for companies and the country itself286. Corruption can destroy a

nation’s value by interfering in political and economic decision making processes. Strong

institutions are needed to issue transparent rules and regulations. A study by Kaymak and

Bektas, covering 24 emerging markets, indicates that market growth rate, market

intensity, commercial infrastructure, economic freedom, and decreased country risk are

associated with lower levels of corruption in emerging markets287. According to the

Transparency International’s Corruption Perceptions Index 2014, most N11 countries,

particularly Nigeria, Iran and Pakistan, are classified as highly corrupt288.

Consequently, it is absolutely necessary for foreign firms to be informed precisely about

governmental regulations, bureaucratic processes and laws before operating in emerging

markets.

Considering all these features, it can be concluded that opportunities, as well as

challenges will hereby arise for foreign firms. In the next chapter potential motivators,

chances, risks and obstacles regarding a market entrance will be discussed in more

detail.

Referring to market entry strategies and analysing only external influential factors (see

figure 6), one can argue that low-commitment modes, such as export strategies, may be

advisable due to a high level of political risk, fierce competition, demand uncertainty which

result in changing buying habits and lack of information, and potential sociocultural

distances, even though emerging markets record significant market growth and have

limited number of suitable intermediaries. However firm and product-specific factors,

transaction specific factors and management’s attitude must also be taken into account

when deciding for an entry mode.

281


Cf. Ciravegna/Fitzgerald/Kundu (2014), p.43 283

Cf. Pelle (2007), p.47-48 284

Cf. Stiglitz (2003), p. 513 285

Cf. Stiglitz (2003), p. 508 286

Cf. Pacek/Thorniley (2004), p. 94 287

Cf. Kaymak/Bektas (2014), p. 13-16 288

Cf. Corruption Perception Index (2014), w.p.


2.3.3. Opportunities and motives for foreign firms to operate in

emerging markets

After stating the main characteristics of emerging countries it is interesting to determine

which opportunities these markets offer for new entrants and why foreign firms are

interested in commencing operations there.

From chapter 2.1.1, it is known that firms generally internationalize either because they

are pushed into new markets or proactively motivated to exploit chances. In order to

specify market entry motives for foreign companies in emerging markets, the first step will

be to analyze each characteristic in hindsight to the potential business opportunities it

inherits. Afterwards these opportunities are linked with internationalization motives from

table 1 to identify motives for starting operations in emerging countries (see table 10).

The following table links characteristics of emerging markets to opportunities and motives,

followed by a brief interpretation.

Table 10: Opportunities and motives in emerging markets

EM

characteristics

Description

Opportunities

Motives

Studies/

scholars

Fast economic growth and increasing international trade

-EMs record fast economic growth

-international trade (e.g exports, imports) increased

-market condition improved

a)sales potential a)growth/

profit advantages

OECD

(2009), Albaum/Duerr (2008), Westhead et al. (2002), Wolfmayr (2003), Johanson/

Wiedersheim-Paul

(1975), Johanson/

Vahlne (2009)


-the new middle class as a consequence of the economic growth in EMs

a)sales potential

b)potential customers

c)sizeable and talented workforce

a)growth/

profit advantages

b)product/

technological advantages

c)cost advantages

d)proximity

to customers/ suppliers/ resources and networks

Albaum/Duerr (2008), Knight / Cavusgil (2004)



-EMs record fast growing populations, a young population structure, increasing life expectancy and education levels

a)sales potential

b)potential customers

a)growth/

profit advantages

b)product/

technological advantages

d)proximity

to customers/ suppliers / resources and networks

Albaum/Duerr (2008), Westhead et al. (2002), Wolfmayr (2003), Johanson/

Wiedersheim-Paul

(1975), Johanson/

Vahlne (2009)


-access to relevant data only limited available

d)exclusive market information

d)proximity

to customers/ suppliers / resources and networks

e)foreign market opportunities and market information

Albaum/Duerr (2008), Wolfmayr (2003), Håkansson/ Johanson (1992), Knight / Cavusgil (2004)


-severe competition with high level of competitive advantage and the possibility of establishing strong entry barriers

e)learning and improvement of local knowledge

f) competition Dunning (2000), Håkansson/ Johanson (1992), OECD

(2009), Albaum/Duerr (2008), Westhead et al. (2002), Wolfmayr (2003), Johanson/

Vahlne (2009)

Source: developed by the researcher


Opportunities in emerging markets

Due to the characteristics of emerging markets, several opportunities for foreign firms

arise, which are discussed as follows:

a) Sales potential:

The fast economic growth of emerging economies and its increasing international trade

activities over the past decades attract various foreign investors and firms289. The growing

middle class with its tremendous spending power and extensive demand creates a huge

sales potential for foreign firms290 .

b) Potential customers:

Because of the emerging markets’ youthful and growing population structure291 with

significant spending power, these markets offer opportunities to attract billions of potential

customers. Companies may additionally be able to improve their brand awareness and

successfully reposition themselves in new markets.

c) Sizeable and talented workforce:

Foreign firms may be attracted to enter emerging markets because emerging countries

typically have sizeable working-age populations292, a rising education level293 and a huge

pool of talented people294. Hence, local talent to support business operations are widely

available.

d) Exclusive market information:

Although access to data in emerging markets is usually limited and scarce295, having the

relevant market data, such as exclusive information about consumers, may presents

significant opportunities or competitive advantages to foreign companies.

e) Learning and improvement of local knowledge:

The strong local competition in emerging markets can also be seen as an opportunity for

foreign firms. Through partnership agreements or local representatives foreign companies

may be able to improve knowledge about local markets and consumers.

289

Cf. Fan (2008), p. 353 290


Cf. Euromonitor (2013), p.6 292

Cf. Euromonitor (2013), p.6 293


Cf. Pelle (2007), p. 63-64 295

Cf. Khanna/Palepu/Sinha (2005), p. 10


Motives for operating in emerging markets

When Austrian firms recognise the opportunities offered in emerging markets, they are

interested to starts its operations there. A research study by the OeKB Research Services

from 2014, on behalf of the Austrian federal ministry of science, research and economy,

conducted motives of Austrian firms to operate in BRICS countries. The results of this

study, including more than 400 respondents, demonstrate that firms mainly enter these

markets due to of market size, market growth and sales potential. Location advantages

referring to production costs and access to raw materials are not identified as main

motives to enter296.

Referring to the motives of chapter 2.1.1, main characteristics of emerging markets in

chapter 2.3.2 and opportunities, six categories of motivators to operate in emerging

markets are identified by the author:

a) Growth/profit advantages

As emerging markets record significant economic growth297 and some home markets are

already saturated or declining, firms may be pushed to start its operations in emerging

countries298. The growing middle class299 and the youthful population300 with its changing

buying habits, provide immense profit potential for foreign firms due to their increasing

spending power and interest in quality products. Thus, foreign firms may be stimulated to

raise its international sales and achieve additional profit by targeting potential customers

in emerging countries.

b) Product/technological advantages

The new middle class in emerging countries is described by having great interest in

quality brands and new, fashionable products. Moreover, they enjoy buying foreign brands

in order to upgrade their social status in society301. When foreign companies offer

products which are perceived as new, innovative, high-quality or prestige, they may be

motivated to enter EMs due to product-related advantages through differentiation302.

c) Cost advantages

Other incentives for foreign firms to operate in emerging economies are cost and risk

advantages in form of economies of scale, lower costs of production, overproduction and

risk diversification303. Due to the sizeable workforce304, the relatively cheap labor costs

compared to developed countries and the availability of talented people in emerging

markets305, foreign firms may be motivated to enter.

d) Proximity to customers/suppliers /resources and networks

Foreign companies can also be driven by the desire to be closer to its business

partners306. Being geographically close to potential customers in emerging markets may

296

Cf. OeKB Research Services (2014), p. 68 297

Cf. Fan (2008), p. 353 298

Cf. Hollensen (2011), p. 54 299

Cf. Mc Kinsey (2013), p. 49-50 300

Cf. CIA World Factbook (2014), w.p. 301


Cf. Hollensen (2011), p. 52 303

Cf. Albaum/Duerr (2008), p. 78-80 304


Cf. Pelle (2007), p. 63-64 306



increase the chance for success when foreign firms understand their local demands and

needs. Furthermore inquiries from interested consumers307 or supply chain relationships308

can stimulate internationalization.

e) Foreign market opportunities and market information

As already discussed, access to relevant data in emerging market is typically limited309.

The possession of exclusive market information and data are additional incentives for

foreign firms. Market know-how can be received through local networks and

partnerships310. Particularly in emerging markets, where market uncertainties occur in

various forms, networks can provide crucial information and support.

f) Competition

Although local competition in emerging markets is strong and establishes barriers to

enter311, it can also be seen as a motivation factor312. On the one hand competitive

pressure forces companies to compete in foreign markets313, on the other side foreign

entrants can gain learning advantages through local partnerships or competitors.

By analysing the general motives for internationalization and motives specifically for

operating in emerging markets, one can argue that especially profit and growth

advantages are decisive for emerging countries as they record immense economic growth

rates and consequently offer high sales opportunities and billions of potential customers.

Although these markets provide tremendous business chances to foreign firms, also

drawbacks and obstacles must also be considered. These will be analysed in the following

section.

2.3.4. Challenges and entry barriers for foreign firms in emerging

countries

When it comes to the decision of starting a business in emerging markets, potential

obstacles may occur. Before entering these markets, foreign firms have to respect its

entry barriers, challenges and risks.

The following table, which is discussed afterwards, connects characteristics of emerging

markets (see chapter 2.3.2) to challenges and market entry barriers.

307

Cf. Westhead/Wright/Ucbasaran (2002), p. 62 ff. 308

Cf. OECD (2009), p. 13-14 309


Cf. Hollensen (2011), p. 52 311

Cf. Dawar/Chattopadhayay (2002), p. 458 312

Cf. Wolfmayr (2003), p. 16-17 313

Cf. Czinkota/Ronkainen (2013), p. 282


Table 11: Challenges and entry barriers in emerging markets

EM

characteristics

Description

Challenges and

risks

Market entry

barriers

Studies/

scholars


-the new middle class as a consequence of the economic growth in EMs

a)demographical and cultural differences

a)sociocultural differences

Leonidou (2004)


-EMs record fast growing populations, a young population structure, increasing life expectancy and education levels

a)demographical and cultural differences

a)sociocultural differences

Leonidou (2004)

Diversity within market and infrastructure

-huge differences between urban and rural areas:

Infrastructure gaps

b)weak/ expensive distribution channels

b)infrastructure gaps

Porter (1980), Leonidou (2004)


-access to relevant data only limited available

c)lack of available information and data

c)information gaps

Leondiou (2004)


-severe competition with high level of competitive advantage and the possibility of establishing strong entry barriers

d)high level of local and international competition

d)competitive pressures

Porter (1980), Bain (1965), Needham (1976), Krouse (1984)

Complex regulations, reforms and corruption

-changing regulations in EMs

-less effective legal systems

-high level of corruption

e)changing rules and regulations

e)legal uncertainty

f)capital requirements

Porter (1980), Bain (1965), Leonidou (2004)

Source: compiled by the researcher


Challenges in emerging markets

Emerging countries’ characteristics inhibit the following risks and challenges:

a) Demographical and cultural differences:

Underestimating the importance of local habits and culture reflects a major risk.

Differences between desires, tastes, and beliefs of people also occur within countries314.

Thus, adaptation strategies are suggested

b) Weak/expansive distribution channels:

Rural areas in emerging markets are typically weak developed in terms of infrastructure.

Potential customers may not be reached due to unpaved roads or unavailability of public

transport services315.

c) Lack of available information and data:

Limited access to important market information and misinterpretation of data316 creates

uncertainty during market entrance. Wrong data or misleading assumptions can lead to

erroneous decisions. Consequently, firms need to observe the markets carefully.

d) High level of local and international competition:

Local competition is extremely strong, but underestimated by foreign entrants. Strong

domestic companies with significant knowledge and a loyal customer base are able to

establish strong barriers317, which foreign firms need to overcome in order to operate

successfully. In addition, the international competition must be considered as well.

e) Changing rules and regulations:

In emerging countries foreign firms are confronted with high levels of uncertainty due to

constantly changing laws, tariffs, regulations and reforms318. Moreover entry costs may

increase because of corruption319 or the reputation can be damaged because trademarks

are not fully respected320. Hence, firms need to find a way to deal with these uncertainties.

These challenges can be linked to market entry barriers which hinder or prevent foreign

firms to enter.

314






Cf. Corruption Perception Index (2014), n. p. 320

Cf. Ciravegna/Fitzgerald/Kundu (2014), p. 43


Market entry barriers

Researchers in various studies have identified numerous sources and types of market

entry barriers which can occur by entering new markets. In general, the research of

market entry barriers was pioneered by Bain in 1956321. Entry barriers do not appear for

every market or each firm similarly. Barriers can vary among stages of the

internationalization process, among business types322, the timing of entry323 and the

product of life cycle324. A research study by the OeKB Research Services, on behalf of the

Austrian federal ministry of science, research and economy, conducted obstacles of

Austrian firms to operate in BRICS. Thereby bureaucracy, competitive pressure, legal

uncertainty, corruption and high taxes/charges are identified as most crucial trade

barriers325.

By considering the characteristics and challenges of emerging markets (see table 11), and

by reviewing various barriers in the current literature, the author identifies six categories of

market entry barriers in emerging markets:

a) Sociocultural differences

Sociocultural barriers occur due to differences in religion, values, attitudes or

languages326. In emerging countries those differences can also occur within countries327.

Thus, for entering firms it is crucial to understand cultural issues of potential customers in

order to decrease the level of risk resulting in uncertainties.

b) Infrastructure gaps

Selling goods across borders can cause logistical problems328. Emerging markets’

difference between urban and rural areas regarding infrastructure conditions depicts

another potential barrier for entrants329. As access to distribution channels, resources and

raw materials greatly depends on a country’s infrastructure, firms may not be able to

reach potential customers or suppliers.

c) Information gaps

This barrier refers to problems in locating and selecting markets or business

opportunities.Reliable data are crucial for potential entrants because managers are taking

decision based on information and know-how330. In emerging markets foreign firms may

be confronted with limited access to available data or the risk of misinterpreting

information.

d) Competitive pressures

Severe competition in emerging markets can establish strong entry barriers for foreign

entrants. Established firms may have strong brand identification and loyal customers due

321

Cf. Karakaya/Stahl (1989), p. 80 322

Cf. Uner et al. (2013), p. 811 323

Cf. Pehrsson (2009), p. 70 324

Cf. Karakaya/Kerin (2007), p. 269 325


Cf. Leonidou (2004), p. 295 327

Cf. Dawar/Chattopadhayay (2002), p. 466 328

Cf. Leonidou (2004), p. 295 329


Cf. Leonidou (2004), p. 285


to advertising advantages or product differences331. According to Bain, product

differentiation is the most frequent source of entry barriers for consumer goods

companies332. Immense customer switching cost can also prevent buyers from changing

their supplier333. For Needham, the potential entrant has also to consider the incumbent’s

expected reaction to its market entry334. Consequently, local and international competition

should not be underestimated by new entrants.

e) Legal uncertainty

Barriers in emerging markets can also arise through complex regulations, tariffs and laws.

Thus entering firms may face uncertainties due to changing rules and laws that are

difficult to control335. Kraus et al. evidences that lower political development in foreign

markets is associated with greater perceived risk in internationalization decisions336.

Governments can also limit entry into industries by setting requirements or limitations on

various issues like the access to raw materials337. The relatively high level of corruption in

emerging countries338 constitutes a further trade barrier.

f) Capital requirements

Lastly, the author identifies capital requirements, which refer to firm’s internal resources,

as entry barrier in emerging countries. Referring to Porter capital requirements create

entry barriers due to the fact that entry in a specific market might entail immense financial

resources because of FDI requirements. This barrier is particularly relevant when it comes

to risky market entrance or when high spendings on R&D are required339.

Various entry and trade barriers can occur in emerging markets. Hence, it is of importance

for foreign firms to be prepared for potential challenges and obstacles. Thereby relevant

market information and participation in business networks may help. Whether or not

barriers are considered as harmful depends on the management’s risk perception. So

when decision makers discuss of how to enter an emerging market, its external factors as

well as potential market entry barriers have to be analysed, in order to understand the

market’s environment. Some barriers and challenges are reflected by external influential

factors, like legal uncertainty as political/economic risk factor, infrastructure gabs as

number of suited intermediaries factor, competitive pressures as intensity of competition

factor and sociocultural differences as sociocultural distance factor. Moreover capital

requirements as entry barrier are discussed as internal influential factor (see figure 6).

However it must be noted that, as a lack of relevant information in emerging markets is a

tremendous barrier, significant data concerning other external factors may be limited. So

when deciding for a specific market entry strategy, entry barriers as well as all other

influential factors must be discussed in detail.

331

Cf. Porter (1980), p. 7-13 332

Cf. Bain (1956), n. p. 333

Cf. Porter (1980), p. 7-13 334

Cf. Needham (1976) in Karakaya/Stahl (1989), p. 82 335

Cf. Leonidou (2004), p. 292-293 336

Cf. Kraus et al. (2015), p. 1504 337

Cf. Porter (1980), p. 7-13 338

Cf. Corruption Perception Indes (2014), w.p. 339

Cf. Porter (1980), p. 7-13


Although there is no general consensus on the definition of emerging markets, these

markets are generally characterized as markets with fast economic growth, a youthful and

growing middle class, diversity, lack of data, fierce competition and legal uncertainty. On

one hand these countries are definitively worth to enter, since huge opportunities to

foreign entrants like profit advantages, potential customers or economies of scale are

offered. On the other hand, due to its characteristics, risks and challenges may occur

which can constitute harmful entry barriers. Consequently, suitable entry modes should be

chosen to overcome or avoid entry obstacles.

After discussing what motivates firm to internationalize, which market entry modes are

available, and what influences the entry mode decisions as well as emerging markets’

characteristics as markets worth to enter, the next issue addresses the question of how to

operate successfully as foreign company in emerging markets. Which factors are crucial

for the success in emerging countries?

2.4. Success drivers in emerging markets

The last theoretical section of the thesis deals with success drivers of foreign firms in

emerging markets. Thereby various success criteria, which are stated in the current

literature, are identified and discussed.

Firstly, success needs to be determined. Operating companies in emerging markets may

perceive cost-savings or market expansion as success340. Exporters may perceive their

performance successful in terms of sales growth, level of sales, profits, sales volume,

market share or export profit contribution341. Vice versa, failure is interpreted as non-

success. What leads to success in emerging markets is widely debated. Various success

drivers on intra-firm and country levels are identified by a number of scholars.

Bilgin et al. analysed several case studies in order to ascertain success drivers in

emerging markets and success factors of emerging market companies. As a result, key

success drivers are grouped into four dimension, including sub-categories: the

organization, the market, the people and the operations dimensions342. Another scholar

who studies emerging markets is Pelle. For him, local talent is one of the key achievement

factors for firms in emerging markets. Moreover a first mover strategy may also favor

success in emerging markets due to the possibility of market creation and establishment

of brand loyalty. Other important criteria for business achievements are adapting the

marketing mix and Corporate Social Responsibility activities343. Knab examines success

factors of MNCs with consumer goods in emerging markets. Thereby industry experts

were asked to state their experiences and identify drivers that contribute to success.

Personnel, local market knowledge and relevant products are identified as most significant

success factors344, supporting the focus of Bilgin et al. and Pelle. The quality of products is

340

Cf. Deloitte Review (2009), p. 32 341

Cf. Leonidou/Katsikeas/Samiee (2002), p. 57 342

Cf. Bilgin/Sriram/Wührer (2004), p. 218 ff. 343

Cf. Pelle (2007), p. 63 ff. 344

Cf. Knab (2008) p. 166 ff.


especially important for success according to an Economist Intelligence Unit survey,

where key success criteria and how to overcome barriers in emerging markets are

researched. The insights of this study are based on a survey of more than 1300

executives from 15 emerging market countries. The interviewed executives were required

to select their top three key success factors for their company. According to this survey,

the most important success drivers are the high quality of the firm’s products and services,

followed by competitively prices and the ability to move and adapt rapidly. Moreover, local

contacts and relationships, as well as the ability to attract and retain the best local talent

and a strong brand appeal are considered to be considerably important for success in

emerging countries345. This focus was also supported by the 2004 publication on case

analyses of Bilgin et al.. The emphasis on high quality products is also highlighted by an

Austrian study. By analysing success criteria of Austrian firms in BRICS countries, a

current research identifies participation in relevant networks and relationships as a

preliminar success factor, followed by product quality, reputation as reliable business

partner and market knowledge346.

Other researchers focus on market entry success factors. In a study by Johnson and

Tellis they differ between firm-level and country-level success drivers. On the firm-level

they identify three factors determining the firm’s performance abroad: the entry mode, the

timing of entry and the firm size. On the country-level they state four drivers of entry

success: economic distance, cultural distance, country risk and openness347.

Another research proposes a management model for strategic success in emerging

markets. Generally none of the interviewed leaders believe that business as usual

succeeds in emerging markets. In their research study eight behavioural success criteria

are proposed348.

To conclude, the current literature offers various success factors on different levels. In

order to provide an overview, table 12 states the main success factors of each scholar

mentioned above. As there are similarities across the identified success criteria, in a next

step the author identifies a few major success drivers which are discussed in more detail.

Table 12: Overview of current research on success factors

Study Success Factors

Bilgin et. al

(2004)

Organization related factors

-corporate values

-qualiy focus

-innovativeness

-customer focus

-external resource access

345

Cf. Economist Intelligence Unit survey (2008), p. 21 ff. 346


Cf. Johanson/Tellis (2008), p. 4 ff. 348

Cf. Haley/Haley (2006), p. 29 ff.


Market related factors

-market selection process

-flexible market entry

-multi-segment approach

-management of environmental uncertainty

People related factors

-focus on competent personnel

-relationships and connections

-localization of management

Operation related factors

-customization of marketing

-supplier and distribution networks

-brand-building

Pelle

(2007)

-entry timing (first mover advantages)

-corporate social responsibility

-justifying the marketing mix to EMs conditions

-personell

Knab

(2008)

-personnel (experienced local managers)

-understanding the local culture and marketplace

-product features and options that meet the needs of the local market

Economist

Intelligence Unit survey

(2008)

-high quality products/services

-competitively prices products/services

-ability to move and adapt quickly

-good local contacts and relationships

-ability to attract and retain the best local talent

-strong brand appeal

-appreciation of local consumer culture/values

-flexibility and innovation in structuring deals/offers

-appreciation of local business/regulatory norms

-selling through appropriate sales channels

-good appetite for risk

-highly efficient supply chain

-willingness to share knowledge with local partners

OeKB

Research

Services

(2014)

-networks and relationships

-product quality

-reputation as reliable business partner

-market knowledge

-qualified local workforce

-technological competence

-service

-proximity to customers

Johnson/Tellis

(2008)

Firm-level

-entry mode

-entry timing

-firm size

Country-level

-economic distance

-cultural distance

-country risk


-openess

Haley/Haley (2006)

-knowledge

-speed

-action

-results

-relationships

-quality

-passion

-legacy

Source: compiled by the researcher based on Bilgin et al. (2004) p. 218 ff., Economist Intelligence

Unit survey (2008) p. 21 ff., Haley/Haley (2006) p. 29 ff., Halibryam (2010), p. 41-42, Knab (2008)

p. 166 ff., Johnson/Tellis (2008) p.4 ff., Pelle (2007) p. 63 ff. and OeKB Reserach Services (2014),

p. 149

By examining the current reseach, similar success drivers across numerous research

studies can be seen. The author identifies five groups of key success factors which are

determined as very important by several scholars:

Figure 10: Key success drivers in emerging markets

Source: compiled by the researcher based on Bilgin et al. (2004) p. 218 ff., Johnson/Tellis (2008)

p.4 ff., Haley/Haley (2006) p. 29 ff., Knab (2008) p. 166 ff., Pelle (2007) p. 63 ff., Economist

Intelligence Unit survey (2008) p. 21 ff. and OeKB Reserach Services (2014), p. 149

a) Market knowledge

The possession and access to relevant data about the market and consumers is of major

importance to foreign firms. By taking decisions in volatile markets, like emerging

Firm’s

Success

Abroad

a) Market knowledge

Bilgin et al. (2004), Haley/Haley (2006),

Knab (2008), Economist Intelligence Unit

survey (2008), Pelle (2007), OeKB

Reserach Services (2014)

d) Quality of product/service/brand

Bilgin et al. (2004), Haley/Haley

(2006), Economist Intelligence Unit

survey (2008), OeKB Reserach

Services (2014)

b) Networks

Bilgin et al. (2004), Haley/Haley

(2006), Economist Intelligence

Unit survey (2008), OeKB

Reserach Services (2014)

e) Market entry process

(timing and entry mode)

Bilgin et al. (2004), Johnson/Tellis

(2008), Pelle (2007)

c) Marketing mix adaptations to EM

conditions

Bilgin et al. (2004), Knab (2008), Pelle

(2007)


countries, leaders have to understand its market conditions of the past and focus on future

trends. Thereby the management’s experience contributes to make business sense of

quantitative data 349. Decision makers also have to manage environmental uncertainties as

sudden changes, for example in policies and regulations, can affect business

operations350. Consequently, knowledge regarding local markets should be treated as

strategic resource and investment351, since understanding the host market culture and

marketplace is crucial for success in emerging markets352. Moreover various researchers

identify local talent353 and the quality of personnel, in terms of education, motivation and

skills, as essential criteria for assuring business achievement abroad354.

b) Networks

Participating in relevant networks is identified as another major success driver in emerging

markets. For Austrian firm’s success in BRICS, the participation in relevant networks and

business relationships are highly important. Furthermore a reputation as reliable business

partner is associated positively with success355. Through networks firms increase their

knowledge about local conditions, customers and markets. Relationships with internal and

external stakeholder can also create value for the entire value chain356 and favour market

entry. Elg et al. show that close contacts between firms and institutions, such as

governments, have a significant influence on the market entry process. For example,

positive statements from local government may lead to additional, positive media

coverage, which further may improve the image of the firm among customers. Positive

relationships with local suppliers may favour a positive attitude of the government towards

the company. This can lead to favourable entry conditions and a stronger competitive

position357. As good local contacts and relationships are of immense importance for

success abroad358, firms are advised to participate in networking events and to establish

international business connections.

c) Marketing mix adaptations to EM conditions

Thirdly, marketing mix adaptations are determined as operational success driver. In

general, firms can either standardize or adapt products’ characteristic to the host market

when selling them in foreign countries. When markets differ i.a. in consumer lifestyles,

preferences or needs (excluding mandatory adaptation factors like religious beliefs,

technical standards or climatic conditions) adaptation strategies are advised359. As

products and services of foreign firms have to meet the requirements of the local

marketplace360, differences in customer needs, income levels and inequalities have to be

taken into account. In order to operate successfully361, product adaptations in emerging

349

Cf. Haley/Haley (2006), p. 29-32 350

Cf. Bilgin/Sriram/Wührer (2004), p 227-233 351

Cf. Haley/Haley (2006), p. 29-32 352

Cf. Knab (2008), p. 166 ff. 353

Cf. Pelle (2007), p. 63 ff. 354

Cf. Bilgin/Sriram/Wührer (2004), p. 235-240 355


Cf. Haley/Haley (2006), p. 29-32 357

Cf. Elg/Ghauri/Tarnovskaya (2008), p. 688-694 358

Cf. Economist Intelligence Unit Survey (2008), p. 21 359


Cf. Knab (2008), p. 166 ff. 361

Cf. Bilgin/Sriram/Wührer (2004), p. 218-225


nations are recommendable. Since many consumers in emerging nations are price

sensitive, competitive prices also determine success362. As price levels differ between

developed and emerging markets due to economic factors, it is assumed that some

adaptations to local prices are required. Moreover adaptation strategies regarding

communication tools may be preferred to ensure a fit between the massage and value

systems of local consumers. Also big MNEs like Coca-Cola adapt advertising messages

or sugar level for its Coke Classic to local preferences363. Studies show that foreign firms

which adapt its marketing mix (product, price, promotion and place) or at least some

elements to local conditions, have better chances to succeed364.

d) Quality of product/service/brand

As global competition is increasing, product quality, brand-image and service quality are

becoming major important success criteria in emerging markets365. Foreign firms are

advised to stick with high quality because customers in emerging markets are nowadays

very sensible to quality issues although decades ago they were used to lower quality

products366. However with changing buying habits, demands alter and the growing middle

class nowadays is very interested in quality brands and new products367. In a 2008

Economist Intelligence Unit of the Economist survey, the interviewed executives

determine quality of the products as the most important success factor in emerging

markets followed by competitive pricing. As for customers high quality is often associated

with brand strength, foreign brands with excellent brand reputation can gain advantages

compared to local producers. Especially for products in a higher price range, the quality of

the brand image is crucial for the customer’s buying decision368. Austrian firms also stress

the importance of product quality since this success driver was ranked as second most

important success factor for operating in BRICS countries369. Additionally firms that focus

on innovations, in terms of technological or appearance improvements of products may be

more successful in these markets370.

e) Market entry process (timing and entry mode)

The type of entry mode is also identifyed as major success criterium. Some researchers

argue in favour of flexible entry modes371, some advice for modes with a high level of

control372. Yet, there is no definite answer as towhich entry mode is the most successful

for emerging countries. As every country and company differs in its characteristics, there

is no single entry mode that suits all emerging markets and firms. Another success factor

is the timing of entrance in emerging markets. First-mover may be able to create

competitive advantage through technological leadership, preemption of scarce assets and

switching costs373. By analysing three decates of entry research, Gómez-Villanueva and

362

Cf. Economist Intelligence Unit Survey (2008), p. 22 363


Cf. Pelle (2007) p. 60 ff. 365

Cf. Haley/Haley (2006), p. 29-32 366

Cf. Bilgin/Sriram/Wührer (2004), p. 218-225 367


Cf. Economist Intelligence Unit Survey (2008), p. 21-23 369




Cf. Johanson/Tellis (2008), p. 4-9 373

Cf. Lieberman/Montgomery (1988), p. 41-44


Ramírez-Solís support the advantages of first-mover entry374. Other scholars, like Nakata

and Sivakumar argue that specific characteristics of emerging markets promote early

entrance375. Thus, one can conclude that early market entrance contributes to the firm’s

business achievement in emerging countries under certain market conditions.

Because of the rising importance of emerging markets, various scholars discuss how

foreign firms can achieve success in these countries. Thereby studies demonstrate

numerous success drivers from an intra-firm and external perspective. By examining

these factors, the author determines five key categories of success criteria for foreign

firms in emerging nations. In addition to participation in networks, high quality

products/services/brands and market knowledge, which are also named as very important

success drivers for Austrian firms in a current research, the author complementary

identifies marketing mix adaptations and the market entry process.

To conclude, all of these success factors should contribute to a foreign firm’s success in

emerging markets.

374

Cf. Gómez-Villanueva/Ramírez-Solís (2013), p. 46 375

Cf. Nakata/Sivakumar (1997), p. 478-479


2.3.3 opportunities

and motivators

for operating in

EM

2.2.1 types of entry mode

2.4 success in EM

Management’s attitudes of

Austrian firm

2.2.1 -control -flexibility -risk

2.2.2 factors influencing the

choice of entry mode

2.3.4

challenges and

entry

barriers in EM

2.5. The proposed model

In order to provide an overview about the literature and connect different theoretical parts,

the author proposes a model. From the last chapters it can be assumed that emerging

markets are indeed countries worth to enter, also for Austrian firms. After reviewing the

theoretical sections the author perceives that the motivations or hesitations of entering an

emerging market and the decision for a specific entry mode mainly depends on the

management’s attitudes towards risk, control and flexibility. The leader’s attitude primary

drives the internationalization path and hence, influence other factors and issues

regarding market entrance. To successfully operate as a foreign firm in emerging

countries, it is advisable to follow some key success drivers. On the other hand, if success

is achieved, the market entry strategy may be changed.

Therefore, knowledge of the previous chapters leads to the following research model:

Figure 11: The proposed research model

Source: compiled by the researcher based on the literature review

EM entrance


3. Research methodology

3.1. Research questions, aim and objectives of the study

The previous literature review of the thesis has reflected the following sub-research

questions (RQ):

RQ1: What are the main motives for Austrian firms to enter emerging markets?

RQ2: Which internationalization theory is most applicable for Austrian firms?

RQ3: Which market entry modes in emerging markets have been chosen and which

factors influence the choice of entry mode?

RQ4: Which barriers are the Austrian firms confronted with while entering emerging

markets?

RQ5: Which drivers contribute to the Austrian firms’ success in emerging markets?

This study aims to increase knowledge concerning a successful internationalization and

market entry of Austrian firms in emerging markets. In order to reach these objectives,

three corresponding sub-aims are set:

The first objective of the thesis is to identify motivators for Austrian firms to start its

operations abroad. In addition more insights referring the internationalization process of

Austrian firms should be generated.

The second objective is to increase knowledge about the market entry process of Austrian

firms in emerging markets. In detail, this objective should cover issues like the choice of

entry mode, factors influencing the mode of entry, as well as barriers to enter.

The third objective is to determine success drivers of Austrian firms by operating in

emerging markets. Thereby the Austrian firms are asked to state which perceived factors

contribute to its success in emerging markets.

3.2. Research design

This study is based on qualitative method of research because inner meanings and new

insights about the research topic should be gained376 through in in-depth interviews. The

main objective of this method is to obtain unrestricted expert knowledge and insights in

order to understand the dimensions of the subject and problem statements377.

To be more precise, a multiple case study methodology was applied. Case studies can be

used when knowledge about organizations should be improved or generated378. The term

“multiple” means that each case is treated as an individual case, but all cases together are

376

Cf. Zikmund/Babin (2010), p. 131 377

Cf. Burns/Bush (2014), p. 158 378

Cf. Yin (2003a), p. 1-5


used to formulate the conclusion.379 Hence, this approach is suitable for achieving the

research objectives of this thesis.

3.3. Data collection method, instrument and sampling

In the thesis, multiple data sources are used to collect the relevant data. For the

theoretical part of this thesis, secondary data was gathered through academic journals,

textbooks and webpages. For generating primary data in-depth face-to-face and

telephone interviews were conducted380. Potential interview partners, which fulfill the

criteria related to the topic of the thesis (Austrian firm plus operations in emerging

markets), were found through internet research and, afterwards, contacted through e-mail

or telephone. As a result eight CEOs or export managers agreed to be interviewed. Prior

to the date of the interview, the interview partners received a short interview guideline to

prepare themselves. The following data about the interviewed firms include information

concerning the firm’s characteristics and international business operations.

café+co International Holding GmbH

café+co is market leader in automat catering in Central and Eastern Europe and serves

more than 35.000 firms and organizations. café+co offers vending machines and special

coffee machines for hotels and gastronomy. Moreover café+co has its own self-service

coffee shops and coffee mobiles on several locations. The company is highly focused on

sustainability through its supply chain and receives diverse certifications such as the

Rainforest Alliance Certification and Fairtrade. Additionally café+co is a member of the

Leitbetriebe Austria and is a bearer of the Austrian state coat of arms for outstanding

business performance. café+co’s volume of sales has been rising steadily over the last

periods and peaked 163.000.000 Euro in 2012/2013. Currently café+co is operating in 12

countries and is the workplace for 1.400 employees. Five of café+co’s international

markets are emerging countries according to table 6: Poland, Romania, Russia, Czech

Republic and Hungary381.

Landhof GesmbH & Co KG

Landhof GesmbH & Co KG, a member of the VIVATIS Holding AG, is an Austrian firm

specialized in the production of traditional Austrian sausages and ham products. Moreover

Landhof successfully offers a variety of vegetarian products. Its’ innovative meatless

products and traditional sausages were awarded several times. In 2014 the Landhof

Group, including three wholly owned subsidiaries H. Loidl Wurstproduktions- und

Vertriebsges.m.b.H. & Co KG in St. Stefan i. Rosental, Karnerta GmbH in Klagenfurt and

LANDHOF Kft in Budapest, employed 690 staff and accounted for 190.000.000 € of sales.

The export quota in 2014 was 23%382. Primarily Landhof’s vegetarian products are

exported and connected with the term internationalization. Current export destinations are

Germany, Switzerland, Georgia, Czech Republic, Hungary and Italy. It is planned to start

379

Cf. Yin (2003b), p. 5 380

Cf. Burns/Bush (2014), p. 122 381

Cf. café+co International Holding GmbH (2015), w.p. 382

Cf. Landhof GesmbH & Co KG (2015), w.p.


exporting the vegetarian product line e.g. to Russia and South Africa. Therefore huge

emphasize is drawn on research and development of vegetarian products383.

Almdudler-Limonade A. & S. Klein GmbH & Co KG

Almdudler-Limonade A. & S. Klein GmbH & Co KG was founded in 1957 by the drink’s

inventor Erwin Klein in Vienna and is still a family-owned business. Since its foundation

Almdudler, which is a refreshing soda made from 32 natural Alpine herbs, gained

popularity and achieved cult status. This brand popularity, Almdudler ranks second

behind Coca-Cola in terms of purchasing preferences in Austria, derives largely from

Almdudler’s strong brand identification. Almdudler embodies the Austrian way of life in a

funny manner and is strongly associated with the Alpine character. Almdulder is also well-

known far beyond the Austrian boarder. Thereby the tourist sector in Austria plays a

significant role because Almdulder embodies characters like Austrian nature, tradition and

comfort which might be connected with holiday memories. Almdudler offers varieties of its

original drink, for example with varying levels of sugar or a combination with beer. In 2014

Almdudler’s annual sales accounted for 80.000.000 liters with an export share of 20% and

46 employees in total. Currently Almdudler is operating in countries like Germany,

Switzerland, Belgium, Luxemburg, Netherlands and Hungary384. In the following countries

Almdudler is now implementing a seeding-strategy for entrance: China, Turkey, Romania,

Singapore, Australia, Croatia and Slovenia385.

Wollsdorf Leder Schmidt & Co Ges.m.b.H

Wollsdorf Leather’s headquarter and the leather factory are located in Wollsdorf in Styria.

Wollsdorf manufactures premium leather and is specialized in the following application

areas: automotive leather, upholstery leather, aircraft leather, marine- and railway leather

and leather for special applications. Wollsdorf is also the world market leader for leather

steering wheels. Audi, VW, Ferrari, Maserati, Lufthansa, Japan Airlines are amongst

others customers worldwide. 14.800 hides, which amount to 80.000 m2 of leather, are

produced each week at Wollsdorf. Besides production in Austria, Wollsdorf operates

stamping- and sewing facilities in Croatia and China. 90% of their premium articles are

exported to about 30 different countries such as Thailand, Romania, Poland, India and

Mexico. Moreover Wollsdorf has sales branch establishments in i.a. the USA, Hong Kong

and Australia386.

A. Darbo AG

The history of Darbo goes back to the year 1879 where the firm was founded by the

Darbo family. Since its foundation Darbo has been producing high-quality products and

within a few years, Darbo became Austria’s market leader in the preserve and honey

market. In addition Darbo added jelly, compotes, diabetics, fruit syrups, fruit snacks and

fruit bars to its product range. Darbo’s business is categorized in three sectors: retail, food

service (including hotel business and airlines) and industry. In 2014 Darbo was one of

Austria’s leading food companies with a turnover of 123.500.000 € and 328 employees.

50% of its total turnover was generated through exporting. Currently Darbo is operating in

383

Cf. Interview with T. Huber, Linz, 22 June 2015 384

Cf. Almdudler-Limonade A. & S. Klein GmbH & Co KG (2015), w.p. 385

Cf. Interview with T. Horak, Vienna, 24 June 2015 386

Cf. Wollsdorf Leder Schmidt & Co Ges.m.b.H (2015), w.p.


60 countries worldwide like China, India, Indonesia, Taiwan, Thailand, South Korea,

Turkey, Hungary, Russia and Romania387.

Walter Heindl GmbH

The Confiserie Heindl was founded 1953 in Vienna by Walter Heindl senior and is to date

still owned by the Heindl family. Since its foundation Heindl has been creating and

producing confectionaries in various tastes which are famous today as classic Viennese

confectionary. Today Heindl’s product range includes over 190 different products which

can be purchased in e.g. 28 specialist confectionary outlets throughout Austria. In 2013

70.000.000 pieces of confectionery were produced, about 200 staff employed and Heindl

reached a turnover of 22.000.000 €. An export quota of 8% accounted for Heindl’s total

turnover. Heindl is currently exporting to countries like USA, Japan, China, Poland,

Hungary, Czech Republic, Malaysia, Iran and South Korea388.

Schlumberger Wein- und Sektkellerei GmbH

Schlumberger was founded in 1842 by Alwin Schlumberger. He was a pioneer who

produced premium sparkling wines by adhering strictly to the champagne-method. Since

then Schlumberger is producing high quality products in Vienna. Nowadays Schlumberger

has Austria’s most famous sparkling wine cellars and is market leader in premium

sparkling wines and spirits. Moreover the Schlumberger Group today holds stakes and

took over firms such as Hochriegel. In Germany and the Netherlands, Schlumberger has

wholly-owned subsidiaries and the Schlumberger Group accounted for a total turnover

about 194.100.000 € in fiscal year 2014/2015. Schlumberger is very famous for its

tradition and premium products abroad. About one third of the products are exported to

more than 30 different countries389. Its products are distributed through gastronomy, duty

free shops, retail outlets and wholesale. Schlumberger’s premium products are available

in emerging countries such as Chile, China, Mexico, Russia, Taiwan, Thailand, Poland

and Czech Republic390.

INTECO special melting technologies GmbH

INTECO special melting technologies was founded in 1973 by Dr. Wolfgang Holzgruber

and DI Ludwig Schwarz, both former employees of Böhler&Co AG, in Bruck an der Mur

(Styria). The company’s main purpose back then was to offer customized solutions for

turn-key plants or individual plant components for the production of alloyed and high

quality steel and metal, the name of INTECO- International Technical Consulting GmbH.

During the next years INTECO started, in addition to its consulting activities, to produce

and offer its own customized plants. Due to INTECO’s expertise, engineering qualities and

customized offers, INTECO has become the worldwide leader in the field of Special

Metallurgy as well as the leader in quality terms in the field of Secondary Metallurgy.

INTECO is still 100% privately owned and employees 170 staff. Currently INTECO’s

export rate is over 90% to destinations worldwide. The INTECO group includes sole

ventures in e.g. China and Brazil391.

387

Cf. A. Darbo AG (2015), w.p. 388

Cf. Walter Heindl GmbH (2015), w.p. 389

Cf. Schlumberger Wein- und Sektkellerei GmbH (2015), w.p. 390

Cf. Interview with H. Hügelsberger, Vienna, 29 July 2015 391

Cf. INTECO special melting technologies GmbH (2015), w.p.


All interviews are done in German. Detailed information is provided in the Appendix (see

7.4). Prior to the interview dates the interviewee received an interviewguidline in order to

prepare themselves (see Appendix 7.1). During the interview the researcher uses an

extensively set of questions (see Appendix 7.3) which were not mandatory asked in the

same sequence each time. This results in the natural flow of the conversations. It is also

not necessary to ask each question separately because answers are also given by the

interview partner themselves, without intervening.

The interview questions are divided into three different sections:

The first section clarifies motivators for Austrian firms to start its business operations

abroad.

In the second part questions concerning the market entry process are asked. This section

covers issues regarding the choice of entry mode, factors influencing the mode of entry as

well as barriers to enter.

In the final section success drivers of the Austrian firms are determined. Thereby the

interview partners are asked to state which perceived factors contributed to the firm’s

success in emerging markets.

The interview questions are open-ended because the respondents were asked about facts

as well as their opinions392.

3.4. Data analysis

The answers from the interviewee are transcripted after the interviews and then analysed

by the researcher personally. The empirical information gathered is then connected with

the theoretical foundation of the previous chapters. As this study is evaluated by a cross-

case analysis, in a first step each case is analysed individually and then similarities and

differences through all cases are identified in order to formulate a conclusion. The

following section presents the findings of the collected data.

392

Cf. Yin (2003), p. 90


4. Findings of the empirical study

4.1. Individual analysis

This chapter describes the main findings of the generated data which were collected

through eight expert interviews. Six of the interviewed firms are operating in the food

industry B2C and two interviewed firms are operating in the industrial sector B2B.

4.1.1. café+co

The interview was conducted face-to-face with the CEO of café+co, Mag. Gerald Steger,

on the 18th of June 2015 in Vienna.

Motivation for internationalization

For café+co the small Austrian market is the main driver for operating international.

According to Mag. Steger, for achieving growth and cost advantages it is absolutely

necessary to internationalize: “…for many operations it is impossible to reach the break-

even point with current market costs referring to eight million residents… to reach the

critical parameter you have to operate international…” . Therefore huge effort is drawn to

generate market knowledge in order to exploit opportunities in new countries like

emerging markets. He also emphasized on the close distance between Austria and its

neighbor states: “Austria is a very small country, meaning you do not need to drive long

distances to be in a foreign country”. Secondly, café+co is also motivated because of risk

diversification. By operating in several countries, café+co, is able to reduce and spread

various types of risks associated with e.g. sociocultural differences or political/economical

uncertainty393. To conclude, café+co seems to be reactively as well as proactively

motivated. On one hand market reasons due to the small Austrian market mainly forces

café+co to exploit business options abroad. On the other hand café+co pursues growth

objectives in foreign markets, actively trying to generate market knowledge and spread

risks. The main advantage of risk diversification is the possibility of generating

approximately consistent profits although one country is facing a recession or other

uncertainties.

Market entry process

Currently café+co is operating in 12 countries. Five of café+co’s international markets are

emerging countries according to table 6: Poland, Romania, Russia, Czech Republic and

Hungary394. café+co has chosen investment modes, in form of joint ventures and sole

ventures as entry strategies in emerging markets. These types of entry mode are elected

because of the desired level of high control over its foreign operations and the quality of

products and services as well as to protect firm-specific know-how. café+co wants to

make sure that their customers are highly satisfied with the quality of its services and

therefore do not outsource the maintenance of their machines to third parties. The choice

to enter a new market through JV or sole venture mainly depends on the risk estimations

393

Cf. Interview with G. Steger, Vienna, 18 June 2015 394

Cf. café+co International Holding GmbH (2015), w.p.


towards country specific external factors. Thereby a combination of sociocultural

differences, political and economic uncertainties are crucial for the decision395. Up to now,

its market entry mode in the five emerging countries did not change. For café+co networks

with customers and suppliers play a significant role for the decision to enter specific

markets: “Networks and relationships are very important. Otherwise you don’t need to

enter if you don’t have the right people on site”! Mag. Steger describes the management’s

attitude of café+co as high risk seeking, with a high desire for flexibility and mid-level of

control396. By considering characteristics and influential factors of entry modes referring to

chapter 2.2, investment modes represent café+co’s desired mode characteristics since

this category presents the most risky entry modes. As flexibility and control are also

important JVs may be more suitable as sole ventures because with sole ventures

maximum resources are committed and thus lack flexibility. On the contrary, by

emphasizing on the quality of the products and know-how of the firm, sole ventures

provide the maximum of control over quality issues and firm knowledge.


café+co is confronted with plenty barriers by entering and operating in emerging markets.

Especially complex regulations, competitive pressure and sociocultural differences for

example in terms of negotiation practices or ethic specifics, hinder entrance. Because of

these sociocultural differences, which are perceived as most harmful obstacle by the

interview partner, products and services are completely adapted to each country and

sometimes also to regions within countries. This means that the offered products (e.g.

coffee or tea flavors) vary between and within nations397.

Success drivers in international operations

For café+co its customer focus, including the adaption of all elements of the marketing mix

to local needs (e.g. product selection) and proximity to customers by e.g. offering

maintenance through intra-firm specialists, high-quality products as well as the firm

structure drive success in emerging countries. Moreover Mag. Steg focuses on the

importance of networks and relationships for café+co’s success abroad, knowledge

generating and learning398.

4.1.2. Landhof GesmbH & Co KG

The interview partner representing Landhof was CEO Dr. Thomas Huber. This interview

was conducted face-to-face on the 22nd of June 2015 in Linz.


Landhof is mainly motivated for internationalization because of the small Austrian market

and limited demand for its vegetarian products: “The Austrian market is simply too small”!

The target group for its vegetarian products in Austria is limited because of the relatively

small number of vegetarians in Austria and difficulties for potential customers to

understand the product features of vegetarian sausages. As a consequence Landhof has

395




Cf. Interview with G. Steger, Vienna, 18 June 2015


to internalize and search for business opportunities abroad. Indeed there is huge potential

for vegetarian products found in markets with a positive attitude towards vegetarian food

like the United Kingdom. Nevertheless also emerging markets like South Africa or Russia

offer sales potential. By its international operations Landhof mainly hopes to achieve profit

and growth advantages as well as product-related competitive advantages due to its

product features and innovations399. One can argue that Landhof is essentially driven to

start business abroad due to the limited demand and small home market. As a

consequence, Landhof is proactively searching for markets with sales potential for

vegetarian products.


Landhof is currently operating in two emerging markets: The Czech Republic and

Hungary. It is planned to start exporting its vegetarian product line to new markets like

Russia and South Africa. Therefore huge emphasize is drawn on research and

development of vegetarian products400. Landhof’s main market entry strategy is direct

exporting. There is also one country, namely Hungary, with a wholly owned-subsidiary.

The main reason why Landhof enters new markets through direct exporting is to keep the

expertise and know-how in Austria. Because its products are research intensive, Landhof

wants to keep its knowledge at home. The subsidiary in Hungary was founded 15 years

ago and is not of significant importance because production is exclusively located in

Austria. By direct exporting, the choice of the right distribution partner is essential for a

successful market entrance. Before entering a new country, intense market research is

conducted. Thereby only those distributors are chosen who fulfill specific criteria related to

Landhof’s products requirements (e.g. connections with retailers and network logistics for

maintaining the cold chain must be given anytime). So far the type of entry mode did not

change. By deciding for a market entry mode Landhof’s management is relatively risk

averse and does not want to take huge risks regarding resource commitment: “In Russia,

for example, we will forward the products only when payment is already settled”. Moreover

for Dr. Huber flexibility by market entrance is important but currently too low401. Regarding

to the market entry mode literature (chapter 2.2), direct exporting may be the most

suitable because of the low risk taking attitude and low focus of control. However because

of the importance of product-specific knowledge, product image and quality, distributor

monitoring is advisable due to the risk of reputation damages by lacking control over

distribution abroad.


Market entry barriers in foreign markets occur in many forms. In Russia Landhof is

currently confronted with problems referring to the market admission because of some

ingredients and a high level of corruption. Moreover difficulties regarding the vegetarian

product itself occur due to product features: ”The challenge is that the customer

understands the product.” Sometimes consumers have no clear ideas about vegetarian or

vegan products and have different expectations of the products. Consumers also differ in

taste and presentation preferences (how the sausage is presented in the packaging) In

South Africa for example only Halal products are demanded because of religious reasons.

399



Cf. Interview with T. Huber, Linz, 22 June 2015


Thus, Landhof is confronted with a number of sociocultural barriers and sometimes with a

lack of market information402.


Landhof’s primarily source of success in emerging markets is the product itself due to its

product specifications and focus on high quality. Thereby adaptations to local market

conditions, e.g. in form of taste or packaging, are crucial for success in new markets.

Immense effort is placed on product innovations and adaptations to customer behavior

and expectations (e.g. research eating habits: taste, ethnic and religious backgrounds).

Thereby also flexibility to adapt to changing consuming habits is crucial. Moreover timing

of entrance, “speed is king”, is very essential for Landhof’s success abroad in order to

gain competitive advantage403.

4.1.3. Almdudler-Limonade A. & S. Klein GmbH & Co KG

The interview was conducted face-to-face with Mag (FH) Thomas Horak, export director of

Almdulder, on the 24th of June 2015 in Vienna.


For Almdudler the main motivates for operating abroad are the already saturated Austrian

market and the “internal desire of Almdudler for internationalization”. The soda segment in

Austria is not significant growing and Almdudler brand has already reached a leading

market position. In order to gain growth advantages Almdudler has to internationalize. The

advantage for Almdudler is that skiing tourists may have already experienced the taste of

Almdudler during their vacation. Thus by entering these markets, the brand and the taste

are familiar and sales may be easier to achieve404. The author of the thesis got the

impression that Almdudler is motivated by both - reactive and proactive reasons. Indeed

Almdudler is reactively driven by the small and saturated Austrian market and the

managerial urge to exploit business activities abroad. Moreover, Almdudler is striving for

achieving growth and reputation goals in foreign countries and actively searching for

foreign market opportunities.


Almdudler is now fully operating in one emerging market namely Hungary405. In the

following emerging countries Almdudler is currently implementing a seeding-strategy for

entrance: China, Turkey and Romania406. Seeding-strategy means that these markets are

seen as test markets with only limited sales activities at the beginning. When there is

significant demand and sales, an extensive sales program will be implemented.

Almdudler’s original foreign market entry mode was licensing. However the mode

changed to direct exporting due to control and managerial reasons. Through licensing

agreements licensees use their own marketing activities and tools. For Almdudler it is of

tremendous interest to control the brand by the headquarter itself in Vienna to keep its

well-established brand image and reputation: “Almdudler represents high brand values

402




Cf. Almdudler-Limonade A. & S. Klein GmbH & Co KG (2015), w.p. 406

Cf. Interview with T. Horak, Vienna, 24 June 2015


and there will be enormous risks if we would allow other partners to handle the brand”.

Therefore Almdudler is now using direct exporting as market entry mode. Relevant market

information are gained through Almdudlers distribution partners in foreign countries. New

markets are chosen by market size, sales potential “potential mouths that might drink

Almdudler” and proximity to the Alpine culture. Thereby markets are entered step-by-step

without rushing or taking high risks because the owners are risk averse and only want to

enter markets with sufficient potential. Since some of the new markets are first seen as

test markets and success could not be achieved, Almdudler would be able to exit the

market flexible and quick because only few resources are committed. Direct export is also

chosen as exclusive entry mode due to its high level of flexibility, which is important for the

management407. By combining these insights with the literature (see chapter 2.2), direct

export seems to be a reasonable entry mode in new markets because flexibility is highly

demanded. However, as Almdudler emphasizes on the importance of control over its

operations and brand, it is important to note that direct exporting can lack control over

distribution. Thus, selection and monitoring of distributors is crucial. Branch exporting may

also be an appropriate entry mode because of a higher level of control. On the other hand,

branch exporting is less flexible and requires more financial resources.


By its internationalization process, Almdudler is confronted with a number of entry barriers

and obstacles. Sociocultural differences occur in many ways. The understanding of the

Austrian, Alpine lifestyle is the major issue. For example, Almdudler’s traditional

“Trachtenpärchen” couple is not appropriately dressed for some Arabic nations. Because

Almdudler does not want to adapt its brand symbols, as the original brand image should

be maintained, it refused to enter such countries. Complex regulations and laws also

hinder market entries. Some countries have strict regulations referring to ingredients.

South Korea, for example, tried to force Almdudler to reveal its secret formula. However

Almdudler kept its secret and resigned to enter: “Before revealing our recipe we resign

from this potential export market as there are plenty other options for us.” In China mainly

tariff “… depanding on the customs officer’s mood…” and language barriers occur: “How

to translate? How does it look in mandarin? How to explain the product: alpine herb

soda”408?


Almdudler’s main sources of success abroad derive from the selection of the right markets

with the right partners. The chosen distribution partners must reach the target group

successfully and possess relevant expertise: “…chose the right partners who really reach

the customers that Almdudler wants”! Another success driver is the product itself. For

Almdudler it is essential that foreign countries understand the brand world of Almdudler

because only small adaptations to local conditions are made in the marketing mix.

Examples for adaptations are renaming words in the communication process, translations

on the packaging or offering PETs instead of glass bottles. However, the taste of

Almdudler is standardized for all countries409.

407





4.1.4. Wollsdorf Leder Schmidt & Co Ges.m.b.H.

CEO Mag. Kindermann agreed to be interviewed by telephone on the 25th of June 2015.


Wollsdorf Leather is primarily motivated to operate abroad because of the small Austrian

market and the fact, that the car production industry, and thus one group of Wollsdorf’s

customers, is mainly located in foreign countries: “The Austrian market is too small for our

products. Our product is a product which is distributed worldwide – leather”. As a result,

Wollsdorf had to internationalize410. For the author of the thesis, Wollsdorf is mainly

reactively motivated because of the small home market and the proximity to its customers.

Thereby Wollsdorf is following its customers by exporting its products wherever they are

needed.


Wollsdorf Leather is using several entry mode types in emerging markets. In China a

production site is located where Wollsdorf entered with a 100% wholly owned subsidiary

and a sales branch to be closer to the customers and of the importance of the Chinese

market. Potential lower production costs do not play a role in the entry mode decision.

Moreover Wollsdorf is exporting its products to Thailand, Romania, Poland, India and

Mexico. The market entry modes have not changed over the past years. Even China was

entered first by a sole venture. Export is chosen as primarily entry mode because a high

level of flexibility is required by distributing products to customers worldwide and the low

level of risk involved. According to Mag. Kindermann, Wollsdorf is not choosing its export

destinations by itself. Rather Wollsdorf is following its customers to their location of

production sites “If a customer says I need the products in Kazakhstan, we will follow”! For

Wollsdorf as market leader for leather steering wheels, a worldwide presence and high

quality products are essential. Thus, control over its operations in terms of quality

assurance is extremely important411. By reviewing the literature (see chapter 2.2) a

combination of various entry modes seems suitable. When using direct exporting, a

maximum of flexibility is given, which is important when customers place order worldwide.

However the desired level of high control over distribution and quality may not be given

anytime. Another option is branch export that offers more control but less flexibility than

direct export. By entering through branch export, equity investment is also needed which

increase risk. Therefore it makes sense to enter only markets with high priority through

sole ventures and use direct exporting for other countries. Contract manufacturing in

strategic important countries can also be an option but it is difficult to find a competent

partner and could harm Wollsdorf reputation due to a possible lack of quality control.


By entering new markets Wollsdorf faces many types of barriers. In Thailand, China or

India mainly regulations, tariffs and laws hindered entry. In some countries parts of

production must be assembled within the host market and technological requirements for

quality of the products vary between countries. Furthermore sociocultural differences

hindered trade. Thereby business negotiations in China, Romania and India highly differ

from those in Austria: ”…the price is a crucial driver, however personal relationships are of

410

Cf. Interview with A. Kindermann, Vienna, 25 June 2015 411

Cf. Interview with A. Kindermann, Vienna, 25 June 2015


major importance in China. Without having good personal relationships nothing can be

implemented. That makes entry difficult. In India it is similar. In Romania only the price

matters…”412


For Mag. Kindermann Wollsdorf’s success in emerging markets derives from three

sources: “Quality is the most important success driver, secondly delivery loyalty and

thirdly the price”! As Wollsdorf is distributing premium leather products, high quality and

delivery loyalty must be assured anytime. Adaptations to local market conditions are done

regarding price issues413.

4.1.5. A. Darbo AG

The export manager of A. Darbo AG, Roland Huter, agreed to be interviewed by

telephone on the 3rd of July 2015.


The small home market is the main driver for Darbo’s international operations: “Industrially

it makes no sense to only produce for the Austrian market. Eight million customers are not

enough as we are only producing three product categories”. Additionally there is still a

huge amount of home-made preserves in Austria which can be seen as indirect

competition. Moreover, Darbo wants to become more independent from the Austrian big

retailers, as main business groups like REWE or Spar account for 80%. So in order to

reach profit and growth advantages Darbo has to enter new markets with sales

potential414. Darbo seems be motivated by both – reactive and proactive motivators

according to the literature. Since the Austrian market is too small to achieve satisfactorily

profit in the preserves branch, Darbo is pushed to search abroad for opportunities.

Thereby Darbo is also driven by an internal urge to become more independent from

Austria’s main retail groups and strengthen competitive advantage. By operating in

markets with sales opportunities, like emerging countries, Darbo wants to achieve growth

and profit advantages.


China, the Czech Repulic, Hungary, India, Indonesia, Iran, Malaysia, Pakistan,

Philippines, Poland, Romania, Russia, South Korea, Taiwan, Thailand, Turkey, UAE,

Ukraine, Venezuela and Vietnam are Darbo’s current export destinations which are

classified as emerging markets. Darbo also has one sales branch in China where potential

customers or distributors are identified and analysed. Direct exporting is chosen because

of the low level of risk and high level of flexibility involved. Moreover the production for all

markets is still located in Austria due to production efficiency. Until now, Darbo did not

change its entry strategy in these markets. New markets are generally chosen based on

its sales potential and not on geographical distance. By using direct export, the choice of

the distributor is crucial. Thereby questions of how to successfully control distributors and

ensure distribution quality are raised as Darbo’s success abroad also relies on its

distributors. Because Darbo is operating in three different branches, for each sector

412



Cf. Interview with R. Huter, Vienna, 3 July 2015


specific distributors must be selected. Especially in oversee countries the hotel sector is of

preliminary importance. By selecting new markets to enter, Darbo is highly orientated

towards airlines and hotel chains. Thereby networks play a significant role in acquiring

new customers. Because hotel chains are usually operating in more than one country,

Darbo may be able to enter new markets by serving hotel chains worldwide. With

increasing market knowledge and experience in a new country, Darbo also offers retail

products. In the retail business Darbo has to advertise actively its products for potential

consumers. In China, Thailand and Vietnam Darbo first offered its products exclusively for

food services and now its products are also available in retail markets. However, in China

Darbo’s main business still remains food service which accounts for 80%. This results in

consumer behavior. In China bakery trade is still a growing but small sector and only

where bread is eaten, preserves can be offered415. By reviewing Darbo’s entry strategies,

the author perceives direct exporting as most suitable because it involves the lowest level

of risk. Since Darbo is emphasizing on controlling its distributors, branch export, where

Darbo would have more distribution control, may also be a possible option although more

investment is needed.


Market entry barriers occur in various forms for Darbo. In emerging markets tariffs,

regulations concerning ingredients and lack of information complicate entry: “Tariff

barriers and non-tariff barriers occur because they want to wall off these markets.

Sometimes they demand different receipts or lots of documents which have to be

confirmed by embassies or ministries of health. The less developed these markets, the

more such issues are demanded. Sometimes you don’t know in advance what you will be

confronted with…” Because Darbo’s products are not highly sophisticated, ingredients are

usually revealed if required. Problematic tariff terms, for example in South Africa,

prevented Darbo to enter: “So we decided to not enter because at the end of the day we

would be too expensive”416.


Darbo’s success abroad mainly derives from the choice of the distributor and speed by

entering emerging markets: “For us, the choice of the best distributor is of immense

importance for success”! If Darbo’s distributors do not have a sufficient channel of

distribution to reach the target customers it can be time consuming and may lead to entry

failures. Speed is also very crucial because the preserve market is relatively small to

successfully compete in the food high-end market: “In emerging market speed plays an

important role. Because we are operating in a kind of niche it is of importance if you are

the first or the second on the market in emerging markets”417.

415

Cf. Interview with R. Huter, Vienna, 3 July 2015 416




4.1.6. Walter Heindl GmbH

The interview was conducted face-to-face with Mr. Ulrich Friedrich, export manager, on

the 6th of July 2015 in Vienna.


“The preliminary motive for Heindl to internationalize is definitely growth”! For Heindl it is

important to operate international in the today’s globalized world in order to increase

brand awareness and, thus, demand. Through internationalization Heindl is expecting

growth and profit advantages, whereby growth is more essential because after initial

entrance into a new market profit may not be skyrocketing. Another incentive for Heindl to

operate abroad is to exploit market opportunities such as a potential demands for its

products or the possibility to achieve first mover advantages. Thereby networks are

essential in order to get access to relevant market information418. It is perceived that

Heindl is mainly proactively motivated for internationalization since the firm is actively

searching for expanding its business and achieving its growth objectives.


Heindl is using direct exporting as market entry mode and starts to franchise its shop

concepts: “We cannot use the same strategy everywhere”. For each market the entry

mode is elected individually and mainly depends on local market conditions (e.g.

development of food trade, spending power) and market outlooks. Moreover it is also

possible to use multiple entry modes for one single country or to change the chosen entry

mode. However emerging markets (China, the Czech Republic, Hungary, Iran, Malaysia,

Poland and South Korea) are entered solely through direct exporting. Because in

emerging countries demand uncertainty can be high and flexibility is highly demanded by

Heindl’s management, export strategies are preferred. Production is solely placed in

Austria because of production efficiency. Geographic proximity to new markets is

somewhat important due to control and service reasons. By exporting to neighbor

countries the level of control, regarding product quality and the distributors, is higher than

by oversea destinations. Generally control over its operations abroad is very important for

Heindl’s management419.) Referring to the literature (see chapter 2.2), direct exporting is a

more flexible mode than franchising. Because flexibility as well as control is desired, direct

exporting may be chosen as the initial entry mode in emerging markets. When the

business expectations are fulfilled one may consider a less flexible strategy with more

control like franchising or branch exporting. However through franchising new competition

can be created.


By entering new markets, Heindl is confronted with a number of obstacleas. Especially

laws, tariffs, complex regulations concerning ingredients and competitive pressures hinder

market entries: “Governmental requirements must be fulfilled. If you are not able to

succeed, you don’t have to think further”. In order to lower or prevent barriers arising of

sociocultural differences, Heindl uses adaptation strategies. As tastes and present habits

vary between and within countries, Heindl adopt its packaging and communication tools,

like advertising, everywhere to local conditions and its taste to some markets: “Not in

every country chocolate is given as a present. There are huge differences. Also regarding

418

Cf. Interview with U. Friedrich, Vienna, 6 July 2015 419

Cf. Interview with U. Friedrich, Vienna, 6 July 2015


tastes and cultures. This must be considered. For example in China Chinese new-year is

the festive season where gifts are given…”420


According to Mr. Friedrich, Heindl’s strong competitiveness is most important for its

success in foreign countries: “To stay highly competitive is most important”! Thereby

Heindl focus on innovations, strong brand reputation and high quality. Moreover entry

timing is essential because chocolate can also be a seasonable product. Thus entry is

more effective by the beginning of host country’s chocolate or holiday season. As Heindls

products are also somehow related to Austria, a positive Austrian image is crucial for

foreign success: “We would have a serious problem if a food scandal happened in Austria.

Everyone from a specific branch would suffer… irrespective of who is responsible”.

Moreover market knowledge is very important for success abroad: “It is important to know

the market and then choose the right strategy and implement it” 421.

4.1.7. Schlumberger Wein- und Sektkellerei GmbH

Mag.(FH) Holger Hügelsberger MBA, export manager of Schlumberger, agreed to be

interviewed face-to-face at Schlumberger’s headquarter in Vienna on the 29th of July

2015.


Schlumberger is primarily motivated to operate in foreign markets due to growth

opportunities because the Austrian market is for its products already saturated: “We are

operating in an already saturated market… We have to look across borders in order to

check where we can grow further”. Additionally, economies of scale can be achieved

through a higher level of outputs resulting in an increase of sales abroad. International

competitive pressures also forces Schlumberger to operate abroad because the level of

Schlumberger’s sales have to sustain and sales growth is targeted. Another motivator for

operating abroad is to be closer to potential customers. Because lots of tourist consume

Schlumberger drinks during their Austria vacation and want to buy this brand in their home

country, Schlumberger wants to sell its products in markets where the brand is already

well known422. Regarding to the literature, the researcher argues that Schlumberger is

motivated proactively and reactively. On one hand, Schlumberger is pushed to start

business aboard due to a saturated home market, competitive pressures and proximity to

potential customers. On the other side, Schlumberger proactively searches for

international sales opportunities to achieve growth and profit advantages as well as

economies of scale.


Schlumberger is operating in 12 emerging markets according to table 6:

Chile, China, the Czech Republic, Egypt, Mexico, Poland, Romania, Russia, Taiwan,

Thailand and Ukraine. Thereby emerging markets are exclusively entered through direct

exporting. Export is elected because of the low level of financial resources needed “We

420



Cf. Interview with H. Hügelsberger, Vienna, 29 July 2015


are a mid-size company and we don’t invest in something…”, the high degree of flexibility

“We are totally flexible in intellectual, but restricted in financial terms…” and the low level

of risk involved “This mode of entry involves the lowest level of financial resources and if

you are successful you might think about a second step…” Control over foreign operations

is also of importance when entering emerging markets. However, according to Mag. (FH)

Hügelberger: “Control is important but someone must admit that a portion of control is

handed to others at some point”. Therefore a suitable distributor is crucial for

Schlumberger’s export business: “For us it is of preliminary interest to find the best

suitable partners. That’s the main point”. Sole ventures are not seen as an option at the

moment because production is solely based in Austria due to cost efficiency and local

know-how. Changing entry modes in emerging markets may be considered in future when

production abroad makes economically sense. Typically emerging markets are first

entered through gastronomy and, when successful, retail business follows423. By

reviewing the literature direct exporting is indeed the most applicable mode of entry for

Schlumberger due to its perception towards risk, flexibility and control. Due to a potential

lack of control in the distribution channel, sales branches in important markets may be an

alternative option although more investment must be committed.


Schlumberger is confronted with plenty market entry barriers and challenges in emerging

countries. Especially difficulties referring language differences “…it is not assured that the

contact person in China speaks English. This can also happen in the Czech Republic…”,

taste differences “some countries demand a sweeter product”, product design differences

“classic and elegant bottle designs are super successful in Asia”, and taxes occur.

Specific regulations concerning alcoholic products must be considered for each country

such as labeling duties in the local language or to reveal ingredients. Moreover, drinking

and gift giving behaviors differ between countries. For example the Chinese are

traditionally not used to drink sparkling wine or champagne when celebrating. However, to

some extent they start to adapt the western style of celebration. For Chinese also the

packaging of the product and not always the taste itself is of prior importance. Thus,

Schlumberger adapts, for example, the packaging to local demands. Moreover strong

local competition in emerging countries is identified as barrier: “Competitive pressure yes!

Especially where local products are available” 424.


Schlumberger’s success derives from its history and cultural heritage: “Schlumberger

exists since 1842 and not only for five years as a result of an invention of somebody”.

Thereby tourism and Vienna’s positive image contribute to its success abroad. Because of

Vienna’s positive image and Schlumberger’s history, Schlumberger connects its brand

with the Viennese elegance and cultural heritage: “Tourism plays a significant role. The

tourists who consumed or saw our products in Austria also recognize our brand abroad”.

Moreover Schlumberger’s value for money as a premium brand drives its success in

emerging markets. Additionally, Schlumberger adapts packaging and labeling to local

demands and because of its huge product portfolio the firm is able to serve different taste

preferences425.

423



Cf. Interview with H. Hügelsberger, Vienna, 29 July 2015


4.1.8. INTECO special melting technologies GmbH

Mr. Dipl.- Ing. Scheriau, the executive vice president and sales director of INTECO,

agreed to be interviewed by telephone on the 30rd of July 2015.


“From the very beginning it was obvious that we have to operate abroad because with our

products we are limited in Austria. Although Europe is named our home market we had to

expand further”. Since the foundation of INTECO and its early development it was obvious

that its operations won’t be limited to Austria because of the worldwide demand for its

steel and metal solutions and the small Austrian market. Thus INTECO enhanced its

product range to serve the worldwide needs. Moreover by operating in various countries,

risk can be spread on a broader level. Because steel production is a volatile and changing

market it is important to be independent of a single country or customer. For example in

China the focus of steel products changed within a short period from quantity to quality.

Moreover crisis or catastrophes shorten investment willingness what was the case after

the nuclear disaster of Fukushima in 2011 for Japan and China426. The author perceives

that INTECO is preliminary proactively driven. Although the Austrian market is too small

for its products, INTECO knew from the start that internationalization is required because

of a worldwide demand for its customized B2B products, technologies and services and to

reach profit and sales goals. Thus, INTECO is also following to some extend its

customers. Additionally by operating in various countries country risk is not limited to one

single market.


INTECO is using export and investment modes because of its special product

requirements: “No single project can be conducted only by a wholly owned subsidiary”.

The essential know-how, which is crucial for INTECO’s success, is mainly based in

Austria. The projects are planned by experts there and construction plans are then sent to

production facilities worldwide. Sophisticated parts of the production are still produced in

Austria due to quality control and expertise. However, simple parts of the products are

mainly produced in foreign countries in order to save distribution costs. China and Brazil

were entered with sole venture modes. The Chinese market was initially entered through

direct exporting due to the low level of risk involved. With increasing business activities

and sales opportunities a sales branch was established with employees on site. When

important orders with significant volume were placed in China, INTECO decided to

establish a wholly owned subsidiary in China where simple parts are produced. In Brazil a

company was acquired also because of tremendous orders and to be closer to the market

and its customers. In order to secure high quality standards and control, INTECO sends a

team of experts to check production standards at manufacturing sites worldwide. Because

flexibility is extremely required by selling products and technologies which are demanded

globally, exporting is also used as entry mode in emerging markets. With this entry

strategy INTECO is able to conduct orders worldwide without committing huge resources

to the markets. Additionally INTECO works closely with its sales representatives. Those

agents are based in countries like South Korea or South Africa in order to be close to the

market, search for potential customers and projects and absorb market trends. For

INTECO also local after sales services for customers are crucial for success and therefore

426

Cf. Interview with A. Scheriau, Vienna, 30 July 2015


a local presence is needed427. INTECO’s market entry strategies are highly influenced by

the volumes of orders, country risk and sales potential. In markets with significant sales

and profit potential, INTECO is more risk-seeking and entering through sole ventures.

However to maintain flexibility and keep expertise at the headquarter, which is determined

as very important by the interviewee, INTECO is using exporting to reach customers

worldwide. Because high control over operations is also desired by the management,

branch exporting may be more suitable than other types of export.


Import regulations, lack of relevant market data, competitive pressure in terms of price

and cultural issues like language barriers constitute as main entry barriers in emerging

markets for INTECO: “We have to adapt in order to overcome barriers.” Especially during

business negotiations it is crucial to understand the customer’s background, culture and

motives: “As there are huge differences in business negotiations between Austrians and

Chinese, Russians, Koreans… you really need cultural sensitivity to know how to speak

with whom”. To reduce uncertainties concerning profitability in emerging markets, local

presence, intensive market knowledge and long-term planning are crucial for INTECO428.


For Mr. Dipl.- Ing. Scheriau the basic requirement for success in emerging markets is “to

have a product that is needed there”. For INTECO it is essential to customize its products

and to understand local conditions and cultures. Also flexibility regarding its customers is

essential for success. If a customer is asking for prompt or modified solutions INTECO

can react immediately because of its flat firm structure. Moreover it is crucial to convince

customers with superior quality and innovativeness: “To believe that if you offer the best

technical construction to the best possible price guarantees you the order is wrong. You

need to properly address the potential customer”. Additionally networks are considered as

highly important driver: “Without establishing networks there is only a little chance to

succeed”. Thereby networks with potential customers are established by attending and

presenting the company at relevant trade fairs, recommendations of previous customers

or other industry events429.

427

Cf. Interview with A. Scheriau, Vienna, 30 July 2015 428




4.2. Cross-case analysis

After analysing each case separately, in a next step similarities and differences through all

cases are identified. Thereby the cases are compared with reference to the objectives and

research questions.

4.2.1. Motivation for going international

In the literature review various reasons for internationalization, which can be separated

into reactive and proactive motives (see chapter 2.1.1), and motives for entering emerging

markets (see chapter 2.3.3) are stated. By comparing the interviews it is shown that

almost all interview partners (seven out of eight - namely café+co, Landhof, Almdudler,

Wollsdorf, Darbo, Schlumberger and INTECO) state to be primarily pushed to start

operations in foreign markets because of the small or already saturated Austrian market

(reactive motive) as the following example statements indicate: “The market in Austria is

too small”430, “From the very beginning it was obvious that we have to operate abroad

because with our products we are limited in Austria and cannot grow”431 and “We are

operating in a saturated market”432. In order to achieve growth and profit goals (proactive

reason), all of the interviewed firms enter emerging markets because these countries offer

enormous profit and sales potential. Other firms (Almdudler and Schlumberger) enter

emerging nations since their brands are already recognized by local customers and an

increase of brand awareness is targeted. Another reactive reason mentioned by two

interviewees (Wollsdorf and INTECO) to start its business in emerging countries is the

proximity to customers, suppliers and other relevant networks as the following statements

show: “The car industry is located abroad”433, “Proximity to customers is very very

important, proximity to suppliers not that much”434. Interviewed firms in the industrial B2B

sector (Wollsdorf and INTECO) are primarily contacted by potential customers abroad. As

a result these firms commence exporting or/and establish sole ventures in emerging

countries due to received orders. Other respondents are operating in emerging markets

because of risk diversification (café+co and INTECO), economies of scale (Schlumberger)

or managerial urge (Almdudler, Darbo, Heindl and INTECO).

To sum up, based on the interviews the author of this thesis perceives that the interviewed

Austrian firms are mainly reactively driven to internationalize because of the small or

already saturated Austrian market. In order to achieve profit and growth advantages,

emerging countries are entered due to their offered sales potential. This is consistent with

an OeKB study from 2014, which identifies market size, market growth and sales potential

as most significant driver for Austrian firms to enter BRICS. Other incentives identified in

the interviews are: risk diversification, product features and technologies, cost

advantages, increasing brand awareness, competitive pressures, firm-internal desire and

430







customer proximity. The motivators identified in the literature are similar to those

mentioned by the interviewed firms. However, Austrian firms especially emphasize on the

need to go abroad due to the very small home market and the growth and sales potential

in emerging countries.

4.2.2. Internationalization theories

The findings of the interviews do not provide evidence for one single type of theory for

each interviewed firm. Nevertheless, by reviewing chapter 2.1.2 and analysing the

interviews the authors perceives a tendency of the interviewed Austrian firms towards the

business network internationalization process model.

The eclectic paradigm is applicable to some extent because two of the interviewed firms

(Wollsdorf and INTEOC) name location advantages referring customer proximity and

transport advantages as internationalization motive. However cost advantages by foreign

production is not explicitly stated as motivator.

The stage model, which assumes that firms enter foreign markets stepwise, is applied by

one interviewed company in one market. INTECO initially entered China through direct

exporting. With increasing experience and volume of orders a sales branch was

established and by further growing business in China, a sole venture was founded.

According to the network model, firms participate in international networks to get access

to required resources. This model seems not applicable for any of the interviewed firms as

no interviewee is motivated to operate in emerging markets in order to get access to

resources such as raw materials.

The author perceives the business network internationalization process model as most

applicable for the interviewed Austrian firms since all respondents emphasize on the

importance of participating in relevant networks. The findings demonstrate that good

networks and business relationships are of immense importance by internationalization

and crucial for success. Thereby networks occur in many ways such as customer

networks, distribution networks, supplier networks or wholesale networks. The theory also

states that firms enter new markets due to networks with important partners or decide to

go abroad because the business partner does. This is practically demonstrated by four

respondents (café+co, Wollsdorf, Darbo and INTECO): “Networks and relationships are

very important otherwise you need not to enter if you do not have the right person on

site”435, “We are following our customers to enter new markets”436. Furthermore, three

interview partners (café+co, Almdudler and Heindl) state that they have gained access to

relevant data or achieved learning effects through participating in exclusive networks:

“During a market analysis for market entry in a new market it is important to know what is

going on there. Who? What? When? Why? These are the typical questions and it is for

sure not unimportant to have relevant contacts that support you with these issues”437!

435



Cf. Interview with U. Friedrich, Vienna, 6 July 2015


The transaction cost analysis mainly focuses on cost minimization. None of the

interviewed companies, that has own production sites in emerging markets, indicate to

operate in this markets solely because of cost reduction. Wollsdorf, for example, entered

China through a wholly owned subsidiary primarily because of the importance of the

Chinese market and to be closer to key customers. INTECO established an own

production site in China mainly due to customer proximity and volume of orders. Since

simple parts of INTECO’s constructions are produced in China, production cost

advantages and decreasing transportation costs are also considered as incentives.

One interviewed firm, namely INTECO, can be categorized as born global due to its focus

on technical innovations, knowledge-based resources and the fact that INTECO was

international-oriented since its foundation: “From the very beginning it was obvious that

we have to operate abroad because with our products we are limited in Austria”438.

4.2.3. Entry mode choice and factors influencing the entry mode

According to the literature, firms can choose between investment entry modes, contractual

entry modes and export entry modes (see chapter 2.2.1). From the interviews it can be

concluded that Austrian firms prefer export as entry strategy in emerging markets (seven

interviewed firms use i.a. export modes). Some Austrian firms additionally use investment

modes for entering emerging markets (three interviewed firms) because of i.a. product

features, transport/production costs or customer proximity. No interviewed firm is entering

emerging markets through contractual entry strategies. Changing the mode of entry in

future may be an option for respondents (Landhof, Heindl, Schlumberger and INTECO), if

the business abroad is successful or local market conditions change.

Table 13: Chosen type of entry modes in emerging markets

Type of entry mode in EMs Austrian firm

Investment entry modes café+co International holding GmbH




Export entry modes Landhof GesmbH & Co KG

Almdudler Limonade A. & S. Klein GmbH & Co KG


A. Darbo AG

Walter Heindl Ges.m.b.H


INTECO special melting technologies GmbH Source: compiled by the researcher based on the interviews

By analysing the interviews according to factors influencing the market entry mode

decision (see chapter 2.2.2), it is demonstrated that all categories of factors somehow

influence the mode selection. However, the management’s attitudes towards risk, control

and flexibility are the main decisive criteria when deciding for an entry mode. 438



Market size in terms of sales potential, purchasing power and market growth (external

factors) are identified as influential factors by interviewees like Landhof, Almdudler, Heindl

and Schlumberger as the following example statement indicate: “The choice of entry

mode mainly depends on the purchasing power and market conditions. Moreover how will

the food market develop in future”439. According to the literature, firms prefer to enter a

market with big market size through solve ventures. Other external factors mentioned in

the interviews (café+co, Almdudler, Heindl, Darbo and Schlumberger) are country risks in

form of political uncertainties, demand uncertainty and sociocultural differences regarding

cultural values, business practices or taste preferences. When these factors are perceived

as high, the literature recommends export modes.

As influential internal factors, firm size and product differentiation advantages are named.

Interviewees, such as Almdudler and Schlumberger, quote that due to their limited

financial resources they do not commit huge amounts to new markets and thus choose

the most suitable mode referring to the cost of entrance. Product-related factors such as

know-how, brand management or technological expertise also influence the mode

decision due to competitive advantages (café+co, Almdudler, Landhof, Wollsdorf and

INTECO). Theoretically investment modes are preferred by a large firm size and product

differentiation.

From the interviews the author of the thesis perceives management related characteristics

(control, flexibility and risk) as the most influential criteria when electing an entry strategy.

For all interviewed firms it is of immense importance to have control over the quality of the

products. Some respondents also emphasize on total control over its brand management

(Almdudler), product-specific know-how (café+co, Landhof, Wollsdorf and INTECO).

Others focus on control over distribution (Landhof, Almdudler, Darbo, Wollsdorf, Heindl,

INTECO and Schlumberger). INTECO, for example, sends teams to production sites

worldwide in order to assure quality standards. Almdudler emphasize on consistency

regarding its brand image: “Brand protection, brand consistency and implementation

across all markets are of major importance”440. For café+co service quality control

referring to its vending machines is highly important. Landhof, for instance, keeps the

production located in Austria because of local know-how and expertise. High flexibility is

desired by all interviewed firms. Flexibility is especially required by worldwide enquiries,

volatile demand or unstable market conditions. Thirdly the perception towards risk

influences the choice of entry strategy. Managers are either risk averse or risk seeking.

For the interviewed firms, risk is mainly associated with resource commitment. The

majority of interviewees (six out of eight - namely Landhof, Almdudler, Wollsdorf, Darbo,

Schlumberger and Heindl) show a tendency towards being risk-averse, some because of

the firm size: “We are an Austrian SME and we do not invest in anything. We are not a

MNE with ten millions of toy money and establish firms on the off chance”441, “We are not

a MNE that just tries, launching campaigns, and if it is not successful – bad luck”442.

The tacit nature of know-how (Transaction specific factor) is also perceived to play a role

in the entry mode decision, which is demonstrated by two interviewed Austrian companies

(Wollsdorf and INTECO), operating in the industrial sector.

439






By comparing entry modes of the interviewed firms, management’s perception towards

risk/control/flexibility and chapter 2.2 it is seen, that literature and practice slightly differ.

The main reasons for the interviewed managers, why direct export is used, are the high

degree of flexibility and the low level of financial resources involved. Moreover control

over operations abroad, quality of the products, services and brand, technical expertise

and know-how are highly desired. However, the requested level of control may be lower

than direct exporting actually provides. By using direct export, companies have to be

aware that a portion of control is handed over to the distributors: “Control is important but

someone must admit that a portion of control is handed to others at some point”443. Thus

the choice of the most suitable distributors is crucial for export success. Based on the

interviews it is concluded, that suitable distributors need to have relevant networks with

potential retailers and customers and possess local market knowledge. Moreover it is

recommendable to monitor and check the distributors regularly or to choose another entry

mode such as branch exporting. Branch exporting provides more control over distribution

abroad, but also requires more financial resources and includes a lower degree of

flexibility. Another reason why export modes are chosen is, that production sites are

preferred to be located in Austria when technical expertise and knowledge are considered

as competitive advantage or it makes economically no sense to additionally produce

abroad. Investment modes are preliminary elected due to customer proximity, significant

volumes of orders, a high level of control involved and cost advantages. The choice of

joint venture, acquisition or green field investment mainly depends on the country risk or

financial possibilities.

To sum up, according to the results of the study it is perceived that Austrian firms mainly

choose entry modes in emerging markets referring to the desired level of risk, control and

flexibility involved.

4.2.4. Market entry barriers in emerging markets

All interviewed firms are confronted with a number of trade barriers that hinder or prevent

entrance in emerging markets. Legal uncertainty regarding complex regulations,

corruption and laws are stated as major obstacles by the respondents and is therefore

assumed as the most crucial entry barrier e.g.: “Governmental requirements must be

fulfilled. If you are not able to succeed, you don’t have to think further”444. Changing

regulations, requirements and bureaucratic procedures lead to high levels of uncertainty

“…sometimes you don’t know in advance what you will be confronted with”445. In the food

branch especially regulations concerning ingredients can hinder market entrance.

Almdudler, for example, decided to not enter South Korea because Almdudler would have

to reveal all of its ingredients. Another crucial entry barrier for almost every interviewed

firm (seven out of eight - namely café+co, Landhof, Almdudler, Wollsdorf, INTECO,

Schlumberger and Heindl) is sociocultural difference. For the managers sociocultural

barriers occur in many forms such as language barriers, differences in tastes, ethics and

lifestyle, negotiation practices, gift-giving traditions and religion. To overcome these

barriers, the interviewed firms adapt, at least one element of its marketing mix to local

443





market requirements. “We have to act local in order to overcome barriers”446 is one

statement which demonstrates the importance for foreign firms to adapt somehow to local

market conditions. For companies whose products are related to Austria and where

tourism plays a significant role (Almdudler, Heindl and Schlumberger) it is crucial, that

potential customers understand the Austrian lifestyle in order to get connected with the

brand image: “If Almdudler’s brand is not understood, it is difficult as a consumer to

understand Almdudler’s USP”447. Local and international competition and hence,

competitive pressure, also constitute as barrier for three interviewed firms (café+co,

Schlumberger and INTECO): “Competitive pressure! Especially where local products are

available”448. Three interviewees (Landhof, Darbo and INTECO) identify access to

relevant market information in emerging markets as obstacle because sometimes the

availability of relevant data is limited.

Market entry barriers also differ between branches. Interviewed firms that are operating in

the food industry (café+co, Landhof, Darbo, Almdudler, Schlumberger and Heindl) are

particularly confronted with regulation barriers regarding ingredients and sociocultural

differences referring to taste and cultural habits. For firms operating in industrial B2B

sector (Wollsdorf, INTECO), regulations, cultural issues regarding negotiations practices

and lack of information are mainly harmful.

Referring to the results of the study, the author of the thesis perceives legal uncertainty as

the most harmful entry barrier for Austrian firms in emerging markets, followed by

sociocultural differences. This outcome is supported by a research study by the OeKB

Research Services in 2014, which also states regulations as most crucial barrier of

Austrian firms to operate in BRICS449. However, the findings of this study further identifies

lack of information and competition as crucial entry barriers for Austrian firms in emerging

markets. Infrastructure gaps and capital requirements, which are stated in the literature,

are not explicitly mentioned by the respondents.

4.2.5. Success drivers of Austrian firms in emerging markets

The current literature identifies various success drivers for foreign firms in emerging

markets (see chapter 2.4). According to the findings of the interviews, marketing mix

adaptations to local emerging market conditions and the product/brand itself are assumed

as the key success factors of Austrian firms in emerging markets. All interviewed firms

adapt at least one element of its marketing mix to local market requirements. Adaptations

are done regarding product features, taste, packaging, labeling, advertisement or prices.

Secondly, high product/service quality, the product’s USP and the brand’s reputation are

identified by almost every respondent (seven out of eight - namely café+co, Landhof,

Almdudler, Wollsdorf, INTECO, Schlumberger and Heindl) as crucial for success. Thirdly,

participating in relevant networks and the choice of distribution partners by direct

exporting are named as further success criteria (café+co, Almdudler, Darbo and INTECO)

as the following example statements show: “Without building networks you have few

446




Cf. OeKB Research Services (2014), p. 150


chances”450, “For us the choice of the right distribution partner is of immense

importance”451. From the findings it is also assumed that early timing of market entry is

crucial for success in emerging markets. The following example statements lead i.a. to

this assumption: “Speed is king452” or “In emerging market speed plays an important role.

Because we are operating in a kind of niche it is of importance if you are the first or the

second on the market in emerging markets”453. For firms whose products are related to

Austria and tourism plays a significant role (Almdudler, Heindl and Schlumberger), the

positive image of Austria and cultural heritage are i.a. seen as success drivers. For others,

such as Landhof, INTECO and Heindl, it is important to quickly adapt to market and

demand changes or have significant market knowledge.

To conclude, several success drivers are identified by the interview partners. Referring to

the findings of the thesis, it is perceived that marketing mix adaptations are the most

crucial success drivers for Austrian firms in emerging markets, followed by the

product/brand itself (including product quality), networks, entry timing, flexibility to adapt to

changes and market knowledge. The factors of this study are similar to those in the

literature review and a study by the OeKB Research Services. Thereby participation in

relevant networks and relationships are identified as preliminary success factor for

Austrian firms in BRICS, followed by product quality, reputation as reliable business

partner and market knowledge454.

450





Cf. OeKB Research Services (2014), p. 149


5. Conclusion, implications and limitations

In this final chapter, the conclusions along with implications of the study as well as

limitations are presented.

5.1. Summary and conclusion

The economic rise of emerging markets provides huge opportunities to foreign firms and

impacts the global economic leadership order. Even if the list of countries, which are

currently termed as emerging markets, is disputed, Austrian firms are indeed aware of the

importance of these markets. Rising international trade activities and a growing middle

class with increasing buying power are only two opportunities to mention. Since there is

only limited literature available considering Austrian firms in emerging markets, this study

provides insights for the Austrian business in these countries. In order to answer the main

research question of the thesis “how do Austrian firms enter emerging markets

successfully?” the sub research questions have to be clarified first.

According to the literature, firms can be motivated to operate abroad reactively or

proactively455. From the interviews it is concluded, that the contacted Austrian firms are

preliminary reactively motivated to commence operations abroad. That means that the

present local market conditions are unsatisfactorily. The small and already saturated

Austrian market pushes firms to extend their business to foreign markets. Thus, in order to

achieve growth and profit goals, the interviewed Austrian firms enter emerging markets

mainly because these countries offer tremendous sales and profit potentials. In addition,

the contacted companies start their operations in emerging markets due to risk

diversification, product features and technologies, cost advantages, brand reputation,

competitive pressures, firm-internal desire and customer proximity.

The findings of the study also provide knowledge concerning applicable

internationalization theories for Austrian firms. In the thesis six common

internationalization approaches are discussed. From the interviews a tendency of Austrian

firms contacted towards the business network internationalization process model can be

assumed due to the fact, that all interviewed firms emphasize on the importance of

participating in networks.

In general, networks in various forms are highly important and crucial for the interviewed

Austrian firms regarding market entrance, overcoming trade barriers and as success

drivers. Specific emerging markets to enter are mainly selected due to their sales potential

or proximity to customers. By entering a new market, a number of entry modes are

available which can be classified into investment, contractual and export entry modes (see

chapter 2.2). According to the interviews, it can be concluded that the contacted Austrian

firms primarily prefer export strategies to enter emerging countries because export modes

involve the lowest level of committed financial resources with maximum flexibility. For

Austrian firms also control over foreign operations, product and brand quality as well as

455

Cf. Albaum/Duerr (2008), p. 76


over know-how is highly desired. However, by using direct export control cannot be fully

guaranteed. The second type of entry strategies, the interviewed Austrian firms are using

in emerging markets, are investment modes. Joint ventures, acquisitions or green field

investments are chosen due to customer proximity, volume of orders, cost advantages,

country risk perceptions and desire for maximum control. Besides the management’s

attitude towards risk, control and flexibility, other criteria that influence the choice of entry

modes named are: market size, country risk, demand uncertainty, sociocultural

differences (external factors), firm size, product differentiation advantages (internal

factors) and tacit nature of know-how (Transaction specific factor). Nevertheless, referring

to the results of the study it can be assumed, that the management’s attitudes mainly

stimulate the entry mode decision.

By entering emerging markets researchers detect several trade barriers and obstacles

foreign firms are confronted with (see chapter 2.3.4). For the interviewed Austrian

companies mainly legal uncertainties in terms of complex regulation, laws or tariffs hinder

or even prevent entry, followed by sociocultural differences. A lack of information and

fierce competition can additionally impede market entrance.

Lastly, the question of which factors contribute to success of Austrian firms in emerging

markets is answered. Referring to the study, it is assumed that marketing mix adaptations

are mainly crucial for success in emerging countries. All interviewed firms adapt at least

one element of their marketing mix to local market conditions and consumer demands.

Secondly, the product and brand itself is essential for success. Thereby a high product

and service quality is absolute inevitable. Other criteria for success, determined in the

research, are participation in relevant networks, entry timing, flexibility and market

knowledge.

By reviewing the insights and results of the study, a successful market entry of Austrian

firms in emerging markets includes the following points:

First of all Austrian firms need to be motivated to operate in emerging countries by

recognizing the sales and growth potentials offered in these markets. Risk-averse

managers may also be convinced to enter these markets when analysing the target

market in detail and the fact, that even two neighboring countries, namely the Czech

Republic and Hungary, are currently classified as emerging countries. Indeed the

management’s risk attitude perceives opportunities offered by emerging markets as

attractive to either enter or not to enter. Secondly, sufficient market knowledge of the

target country must be acquired in order to prepare the entry process and identify

potential barriers. In doing so, relationships with business partners or governments may

help since access to relevant market data can be limited. Networks are generally

perceived as highly crucial in all elements of the market entry process and to drive

success. Moreover, sociocultural differences between Austria and the target market as

well as potential local and international competitors have to be considered. Indeed,

various barriers can hinder or prevent foreign firms to enter emerging nations. Even if

relevant data is collected, sudden changes in regulations or laws can occur. Thus,

Austrian firms have to be aware that a market entrance in these countries may be

connected with a high degree of uncertainty. Therefore the choice of entry mode has to be

considered wisely and pros and cons weighed. The elected entry mode preliminary


depends on the management’s attitude towards control, flexibility and risk. High risk-

seeking managers may perceive barriers as less harmful and are willing to commit huge

level of resources to a new market. Direct export is advisable by initial entrance because

of the relatively low level of risk and cost involved with high degree of flexibility. Through

suitable distribution partners risk can be reduced, access to relevant networks and

knowledge granted as well as export success achieved. The choice of entry mode is also

related to the industry and products. For industrial B2B companies with sufficient

experience and financial resources, investment modes, such as joint ventures or solve

ventures, may be more suitable due to production cost advantages, proximity to

customers or tacit knowledge. According to the insights of the study, it is assumed that an

early market entry can secure competitiveness and pioneer advantages. To operate

successfully as Austrian firm in emerging markets, it is additionally advised to adapt

elements of the marketing mix to local conditions and consumer demands, while also

assuring high product, service and brand quality.

5.2. Implications and recommendations

Based on the findings of this study, the researcher hereby makes some recommendations

to academia research, Austrian firms and governments.

5.2.1. Suggestions for academia

The thesis provides insights regarding internationalization and the market entry process of

Austrian firms in emerging markets. For future research it will be interesting to carry out a

comparative study with other Austrian firms from different sectors to compare motives for

entering emerging markets, entry strategies, barriers as well as success drivers in order to

increase knowledge. Also, extending this study with a larger sample size while focusing

on one industry, such as food, will contribute to draw more general conclusions and

increase industry-related knowledge.

5.2.2. Suggestions for Austrian firms

Austrian firms that are interested in starting its international operations abroad can

address to various institutions such as the federal ministry of science, research and

economy or AUSSENWIRTSCHAFT AUSTRIA (WKO) for general support or data. The

study shows that Austrian companies need not to be undeterred by entering emerging

markets. Over the past years, the Austrian economy has recorded a rise of trade

interactions between Austrian firms and emerging nations. As the term “emerging market”

is widely discussed, so is the list of countries. Currently also some of Austria’s neighbor

states are termed as emerging nations (Hungary and the Czech Republic). According to

the study, Austrian companies indeed benefit from the opportunities and potentials

emerging markets offer. However, Austrian firms must consider risks and barriers when

entering and operating in emerging countries. To decrease the level of uncertainty

concerning these challenges, participation in relevant networks can help to access crucial

information and overcome barriers. Moreover it is recommendable to attend cultural


trainings or studying literature regarding foreign cultures and habits. Another learning from

the thesis implicates, that an early market entrance can be essential for success,

especially in niche sectors or highly competitive branches. Therefore it is advised to

carefully analyse the local and international competition in the target market. In order to

operate successfully as Austrian firm in emerging markets, companies should adapt at

least some elements of its marketing mix to local market conditions, ensure high

product/service quality, brand reputation and participate in important networks.

To decrease ambiguities regarding operations in emerging markets, the author suggests

to contact AUSSENWIRTSCHAFT AUSTRIA (WKO), which has more than 110 offices

worldwide, offering a broad range of business support services, such as access to

relevant networks in foreign markets, identification of distribution partners and potential

customers abroad as well as providing crucial market and expertise knowledge regarding

e.g. trade barriers or competition456.

5.2.3. Suggestions for governments

Because major areas of Austria’s economy depend on exports457, the government has to

assure beneficial conditions and support for exporting firms. These tasks include, for

instance, providing access to relevant market data, statistics and the generation of strong

business platforms. As this study provides evidence that Austrian firms are partially facing

extremely harmful trade barriers, which even prevent them from entry (especially

regarding legal uncertainty), efforts to transparent international trade policies have to be

reinforced. Good economic relationships with emerging countries’ governments and

international trade agreements can decrease uncertainties regarding arbitrary barriers.

Moreover, foreign firms may be undeterred by the high level of corruption in emerging

markets, such as Russia. Thus, they refuse to enter such markets. In order to attract new

investors, governments need to reinforce their efforts to decrease corruption and secure

solid market conditions.

5.3. Limitations of the study

Several points need to be considered when evaluating the results of this study. First of all,

the sample size (eight interview partners) is too small to draw general conclusions. Since

this study is not focusing on one specific emerging market or sector, results may differ by

considering one specific country or one industry. Furthermore, as only one informant from

each Austrian firm was interviewed, the results may be biased regarding subjective

perceptions of the interview partners.

456

Cf. Wirtschaftskammer Österreich (WKO) (2015), w.p. 457

Cf. BMWFW (2014c), w.p.


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7. Appendix

7.1. Interviewguidline for interviewpartners (german)

Master Thesis „Market entry strategies of Austrian firms in emerging markets“

Autor: Tamara Rossegger

Betreuerin: Prof. Dr. Zeynep Bilgin Wührer

Institut für Handel, Absatz und Marketing – Johannes Kepler Universität Linz

Juni/Juli 2015

I) MOTIVATION ZUR INTERNATIONALISIERUNG

Was sind die Beweggründe und Motivatoren für Ihr Unternehmen international zu

operieren?

II) MARKTEINTRITT

In welchen Emerging Markets ist Ihr Unternehmen aktuell tätig?

Welche Markteintrittsstrategien wurden für die jeweiligen Märkte gewählt?

Welche Faktoren haben bei der Entscheidung für die Eintrittsstrategie eine Rolle gespielt?

Gab es Markteintrittsbarrieren zu überbrücken?

III) ERFOLGSFAKTOREN IN EMERGING MARKETS

Welche Faktoren sind für den Erfolg Ihrer Firma in Emerging Markets verantwortlich?


7.2. Interviewguidline for interviewpartners (english

Master Thesis „Market entry strategies of Austrian firms in emerging markets“

Author: Tamara Rossegger

Supervisor: Prof. Dr. Zeynep Bilgin Wührer

Department of Retailing, Sales and Marketing – Johannes Kepler University Linz

June/July 2015

I) MOTIVATION FOR INTERNATIONALIZATON

What motivated your firm to start its operations abroad?

II) ENTRY MODE PROCESS

In which emerging markets is your firm currently operating?

Which market entry modes have been chosen for these markets?

Which factors influenced the choice of entry mode?

Was your firm confronted with entry barriers in emerging markets?

III) DRIVERS OF SUCCESS IN EMERGING MARKETS

Which factors contribute to the success of your firm in emerging markets?


7.3. Interviews - questions

I) MOTIVATION FOR INTERNATIONALIZATON

1) What motivated your firm to start its operations abroad and what was your firm hoping

to achieve by internationalization?

2) Did networks and contacts contribute to the internationalization decision?

II) ENTRY MODE PROCESS

3) In which emerging markets is your firm currently operating?

4) Which market entry modes have been chosen for these markets?

5) Which advantages can you identify with these entry mode strategies?

6) Has your firm ever changed the entry mode?

7) Which factors influenced the choice of entry mode?

8) How risky do you perceive your firm regarding the choice of entry mode?

9) How do you perceive the degree of flexibility by the choice of entry mode?

10) How important do you perceive the level of control by the choice of entry mode of your

firm?

11) Was your firm confronted with entry barriers in emerging markets?

III) DRIVERS OF SUCCESS IN EMERGING MARKETS

12) Which factors contribute to the success of your firm in emerging markets?


7.4. Interview partners - overview

Firm

Interview partner

Job position of respondent

Type

of interview

Duration

of interview

Date

of interview

café+co International Holding GmbH

Mag. Gerald Steger

CEO face-to-face

25 minutes 18.06.2015


Dr. Thomas F. Huber

CEO face-to-face

30 minutes 22.06.2015

Almdudler-Limonade A. & S. Klein GmbH & Co KG

Mag. (FH) Thomas Horak

Export Director

face-to-face

40 minutes 24.06.2015

Wollsdorf Leder Schmidt & Co Ges.m.b.H.

Mag. Andreas

Kindermann

CEO via telephone

30 minutes 25.06.2015

A. Darbo AG Roland Huter Export Manager

via telephone

35 minutes 03.07.2015

Walter Heindl Ges.m.b.H

Ulrich Friedrich

Export Manager

face-to-face

35 minutes 06.07.2015


Mag.(FH) Holger Hügelsberger MBA

Export Manager

face-to-face

35 minutes 29.07.2015


Dipl.-Ing. Alexander Scheriau

Executive Vice President - Director Sales

via telephone

55 minutes 30.07.2015

http://dict.leo.org/ende/index_de.html#/search=face-to-face&searchLoc=0&resultOrder=basic&multiwordShowSingle=on








