Entering Foreign Markets Part II: Business-Level Strategies Copyright © 2005 South-Western. PowerPoint Presentation by David Ahlstrom, Chinese University of Hong Kong All rights reserved. and Charlie Cook, The University of West Alabama

Why Go Abroad? Answers typically include: To reach larger economies of scale by selling to more customers in other countries. To reduce the risk of over dependence on one country by spreading sales in multiple countries. To replicate the success at home in new settings. Copyright © 2005 South-Western. All rights reserved.

Why Go Abroad? Overcoming the Liability of Foreignness The inherent disadvantage foreign firms experience in host countries because of their non-native status. Liability is manifested in two dimensions: The numerous differences in formal and informal institutions in different countries (e.g., regulatory, language, and cultural differences). Failure to recognize these rules may cost foreign firms dearly. Customers discriminate against foreign firms, sometimes formally and other times informally. Copyright © 2005 South-Western. All rights reserved.

Why Go Abroad? Overcoming the Liability of Foreignness To offset the liability of foreignness, foreign firms must employ overwhelming resources and capabilities (in some aspects). Superior knowledge about institutional intricacies in various countries Superior technologies Superior organizational, marketing, and financial capabilities Copyright © 2005 South-Western. All rights reserved.

Why Go Abroad? Understanding the Propensity to Internationalize Not every firm is ready for going abroad. Prematurely venturing overseas may be detrimental to overall firm performance, especially for smaller firms whose margin for error is very small. Factors underlying the motivation to go abroad: Size of the firm Size of the domestic market Copyright © 2005 South-Western. All rights reserved.

Firm Size, Domestic Market Size, and Propensity to Internationalize Copyright © 2005 South-Western. All rights reserved. Figure 6.1

A Comprehensive Model of Foreign Market Entries Copyright © 2005 South-Western. All rights reserved. Figure 6.2

A Comprehensive Model of Foreign Market Entries Industry-Based Considerations Rivalry among established competitors Attack, counter-attack, or avoid High entry barriers More active foreign market entries Bargaining power of suppliers Entry through backward vertical integration Bargaining power of buyers Entry through forward vertical integration (e.g. Sony acquiring Columbia pictures) Threat of substitute products from abroad Copyright © 2005 South-Western. All rights reserved.

A Comprehensive Model of Foreign Market Entries (cont’d) Resource-Based Considerations On firm-specific resources and capabilities: Value: The more valuable, the better overseas Rarity: The rarer, the better Imitability: The easier to be imitated, the more dangerous overseas Organization: The more bundled as a system, the better Copyright © 2005 South-Western. All rights reserved.

A Comprehensive Model of Foreign Market Entries (cont’d) Institution-Based Considerations Regulatory risks: Obsolescing bargain – change of attitudes by the host country governments toward the MNCs after their entries Trade barriers: Tariff barriers Nontariff barriers (safety inspections, local content requirements, entry modes restrictions) Currency risks: Speculation and hedging Cultural distances Institutional norms Copyright © 2005 South-Western. All rights reserved.

A Comprehensive Model: A Synthesis How each of the three perspectives on strategy—industry-, resource-, and institution-based—sheds additional light on foreign entry decisions. To make an optimal decision, given these conflicting forces, strategists often have to make a series of entry decisions along the 2W1H dimensions (where, when, and how). Copyright © 2005 South-Western. All rights reserved.

Where to Enter? Location-Specific Advantages Geographical features difficult to match by others. Singapore, Austria, Turkey, Miami Clustering of economic activities (agglomeration). Knowledge spillover among closely located firms that attempt to hire individuals from competitors. A regional skilled labor force available to work for different firms. A regional pool of specialized suppliers and buyers. Copyright © 2005 South-Western. All rights reserved.

Where to Enter? Cultural/Institutional Distances and Foreign Entry Locations Cultural Distance The difference between two cultures along some identifiable dimensions (such as power distance). Institutional Distance The extent of similarity or dissimilarity between the regulatory, normative, and cognitive institutions of two countries. Firms from common-law countries are more likely to be interested in other common-law countries Colony-colonizer links boost trade by 900% (e.g. Great Britain – Commonwealth countries and France – West Africa) Copyright © 2005 South-Western. All rights reserved.

Where to Enter? Cultural/Institutional Distances and Foreign Entry Locations (cont’d) Two schools of thought have emerged: Stage models in which firms enter culturally similar countries during the first stage of internationalization and, as they gain confidence, enter culturally more distant countries in later stages. Critics of stage models argue that considerations of strategic goals such as market and efficiency are more important than cultural/institutional considerations as suggested by stage models Copyright © 2005 South-Western. All rights reserved.

When to Enter? First or Late Mover Advantages While evidence supports first mover advantages, there is also evidence supporting a late mover strategy. Although first movers may have an opportunity to gain advantage, pioneering status is not a birthright for success Entry timing, although important, is not the sole determinant of success and failure of foreign entries. Copyright © 2005 South-Western. All rights reserved.

How to Enter? Scale of Entry: Commitment and Experience Large-Scale Entries Benefits A demonstration of strategic commitment to certain markets, which both assures local customers and suppliers and deters potential entrants. Drawbacks Large-scale entry limits strategic flexibility elsewhere. Entrants must incur sizable losses if the large-scale entry “bet” turns out to be wrong. Copyright © 2005 South-Western. All rights reserved.

How to Enter? (cont’d) Scale of Entry: Commitment and Experience Small-Scale Entries Benefits Less costly if entry is unsuccessful. Organization learns through hands-on experience in host countries. Drawbacks A lack of strong strategic commitment, which may lead to difficulties in building market share and capturing first mover advantages. Copyright © 2005 South-Western. All rights reserved.

How To Enter? Modes of Entry: The First Step Factors Affecting the Choice of Entry Mode: Among numerous modes of entry, strategists are unlikely to consider all of them at the same time. Given the complexity, strategists must prioritize by considering only a few manageable key variables first and then consider other variables later. A hierarchical model shown in Figure 6.3 and explained in Table 6.4 is helpful. Copyright © 2005 South-Western. All rights reserved.

The Choice of Entry Modes: A Hierarchical Model Source: Adapted from Y. Pan & D. Tse, 2000, The hierarchical model of market entry modes (p. 538), Journal of International Business Studies, 31: 535–554. Copyright © 2005 South-Western. All rights reserved. Figure 6.3

How To Enter? Modes of Entry: The First Step (cont’d) The crucial first step: equity or non-equity modes This is what defines a multinational enterprise (MNE) and a non-MNE Equity modes: Through foreign direct investment (FDI) Direct control and management of value-adding activities overseas—key word is direct, as opposed to foreign portfolio investment (FPI) If a firm does not have FDI, it can still engage in international business (through non-equity modes), but it is not an MNE. Copyright © 2005 South-Western. All rights reserved.

How To Enter? The MNE advantages: OLI Ownership (O): Better management and coordination internationally Location (L): Location, location, location! (see “Where to enter” section) Internalization (I): Replacing arm’s-length market transactions, which usually have high transaction costs internationally, with internal relationships among MNE subsidiaries in different countries Relative to the non-MNE, the MNE has a powerful set of OLI advantages Copyright © 2005 South-Western. All rights reserved.

Modes of Entry: Advantages and Disadvantages Copyright © 2005 South-Western. All rights reserved. Table 6.4 (cont’d)

How to Enter? Making Strategic Choices A company may have a variety of entry choices for different countries and tasks. Entry strategies may change over time. Entry strategies, even when successful, do not guarantee international success; post-entry strategies are also crucial. Copyright © 2005 South-Western. All rights reserved.

Entry Debate: High Control vs. Low Control High control: Better? Low control: Not necessarily bad? No evidence that WOS always perform better than JVs. Firms from some countries (e.g., Japan) usually prefer to have high control, whereas those from other countries may not have such a preference. Copyright © 2005 South-Western. All rights reserved. 4