Entering Foreign Markets Chapter 6 Entering Foreign Markets Global Strategy Mike W. Peng Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Outline Overcoming the liability of foreignness A comprehensive model of foreign market entries Where to enter? When to enter? How to enter? Debates and extensions The savvy strategist Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Overcoming the Liability of Foreignness The Liability of Foreignness - the inherent disadvantage foreign firms experience in host countries because of their non-native status Differences in formal and informal institutions govern the rules of the game in different countries Foreign firms are often discriminated against Foreign firms deploy overwhelming resources and capabilities to offset the liability of foreignness Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Understanding the Propensity to Internationalize The underlying factors The size of the firm The size of the domestic market The propensity Enthusiastic internationalizer Follower internationalizer Slow internationalizer Occasional internationalizer Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Firm Size, Domestic Market Size, and Propensity to Internationalize Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 6.1

A Comprehensive Model of Foreign Market Entries

A Comprehensive Model of Foreign Market Entries (cont’d) Industry-based considerations Rivalry Entry barriers Bargaining power of suppliers Bargaining power of buyers Substitute products Resource-based considerations Value of firm-specific resources and capabilities The rarity of firm-specific assets Transaction costs Methods of organizing firm-specific resources and capabilities Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A Comprehensive Model of Foreign Market Entries (cont’d) Institution-Based Considerations Regulatory risks: Obsolescing bargain Trade barriers: Tariff barriers Nontariff barriers (safety inspections, local content requirements, entry modes restrictions) Currency risks: Speculation and hedging Synthesis - Different considerations may pull the foreign entrant in different directions Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Where to Enter? Location-Specific Advantages Geographical advantages Agglomeration - clustering of economic activities Strategic Goals: Seeking natural resources, markets, efficiency and innovation Cultural/Institutional Distances and Foreign Entry Locations Cultural distance - the difference between two cultures Institutional distance - comparing the regulatory, normative, and cognitive institutions Two schools of thought: stage models vs strategic goals Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Where to Enter? Matching Strategic Goals with Locations LOCATION-SPECIFIC ADVANTAGES LOCATION-SPECIFIC ADVANTAGES EXAMPLES IN THE TEXT ILLUSTRAVTIVE LOCATIONS MENTIONED IN THE TEXT Natural Resource Seeking Natural Resource Seeking Possession of natural resources and related Transport and communication infrastructure Possession of natural resources and related Transport and communication infrastructure Oil in the Middle East, Russia, and Venezuela Oil in the Middle East, Russia, and Venezuela Market Seeking Market Seeking Abundance of strong market demand and customers willing to pay Abundance of strong market demand and customers willing to pay GM in China Seafood in Japan Efficiency Seeking Efficiency Seeking Economies of scale and abundance of low-cost factors Economies of scale and abundance of low-cost factors Manufacturing in China (especially in Shanghai) Manufacturing in China Innovation Seeking Innovation Seeking Abundance of innovative individuals, firms, and universities Abundance of innovative individuals, firms, and universities IT in Silicon Valley and Bangalore, telecom in Dallas, and aerospace in Russia IT in Silicon Valley and Bangalore, financial services in New York and London and aerospace in Russia Source: First two columns adapted from J. Dunning, 1993, Multinational Enterprises and the Global Economy (pp. 82–83), Reading, MA: Addison-Wesley. Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CULTURAL/INSTITUTIONAL DISTANCES AND FOREIGN ENTRY LOCATIONS Cultural distance - difference between two cultures along identifiable dimensions. Ex: individualism. Institutional distance – the extent of similarity or dissimilarity between regulatory, normative and cognitive institutions of two countries. Stage model – suggests that firms enter culturally similar countries first. Alternative model – highlights the importance of strategic goals rather than cultures and institutions.

When to Enter? First mover advantages Developing proprietary, technological leadership Preempting scarce assets Establishing entry barriers Becomes the dominant firm Opportunity for relationships with key stakeholders Late mover advantages: benefit from first mover investments, experience, and inflexibility Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

How to Enter? Scale of Entry: Commitment and Experience Large-Scale Entries Benefit from a strategic commitment Drawbacks of large-scale entries: Limited strategic flexibility and potential huge losses Small-scale entries Focus on accumulating experience “Learning by doing” Drawbacks of small-scale entries A lack of strong strategic commitment Difficulties in building market share Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

How To Enter? Modes of Entry: Two Steps First step Strategists must prioritize variables A decision model is helpful Non-equity vs equity modes Level of commitment Contractual and ownership alternatives Foreign direct investment advantages Ownership Location Internalization Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

How To Enter? The second step: See the following three slides Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Modes of Entry: Advantages and Disadvantages Table 6.3 Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Modes of Entry: Advantages and Disadvantages Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 6.3 (cont’d)

Debates and Extensions Liability versus Asset of Foreignness Some foreignness can be an asset (“cool”): the “country of origin” effect Global versus Regional Triad Concentration Geographic Diversification Should MNEs truly globalize? Old-line versus emerging multinationals: OLI versus LLL Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4

The Savvy Strategist Thoroughly understand the dynamism underlying the industry in a foreign market you are looking into Develop overwhelming capabilities to offset the liability of foreignness Understand the rules of the game Match entries with specific goals Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4