Entering Foreign Markets Chapter 9 Entering Foreign Markets

LEARNING OBJECTIVES After studying this chapter, you should be able to: Understand how institutions and resources affect liability of foreignness Match the quest for location-specific advantages with strategic goals (where to enter) Compare and contrast first- and late-mover advantages (when to enter) Follow the comprehensive model of foreign market entries (how to enter) Participate in three leading debates on foreign market entries Draw implications for action

LIABILITY OF FOREIGNNESS the inherent disadvantage foreign firms experience in host countries because of their nonnative status differences in formal and informal institutions governing the rules of the game in different countries local firms are already well versed in these rules, but foreign firms have to learn the rules quickly foreign firms are often still discriminated against, sometimes formally and other times informally

WHERE TO ENTER? location-specific advantages - favorable locations in certain countries may give firms operating there an advantage agglomeration - beyond geographic advantages, location-specific advantages also arise from the clustering of economic activities in certain locations natural resource seeking - resources are tied to particular foreign locations

WHERE TO ENTER? innovation seeking - firms target countries and regions renowned for generating world-class innovations market seeking - firms go after countries that offer strong demand for their products and services efficiency seeking - firms single out the most efficient locations featuring a combination of scale economies and low-cost factors

Cultural/Institutional Distances and Foreign Entry Locations cultural distance - difference between two cultures along some identifiable dimensions (such as individualism) institutional distance - extent of similarity or dissimilarity between the regulatory, normative, and cognitive institutions of two countries stage models - school of thought that believes that firms will enter culturally similar countries during their first stage of internationalization and that they may gain more confidence to enter culturally distant countries in later stages

WHEN TO ENTER? first-mover advantages - advantages that first entrants into a market obtain and that later movers do not enjoy first-movers - may also encounter significant disadvantages, which in turn become late-mover advantages

HOW TO ENTER? scale of entry small-scale entries: large-scale entries: demonstrate strategic commitment to certain markets, assuring local customers and suppliers for the long haul deters potential entrants hard-to-reverse strategic commitments limit strategic flexibility elsewhere and incur huge losses if these large-scale “bets” turn out wrong small-scale entries: less costly focus on organizational learning by getting firms’ feet “wet”—learning by doing—limiting the downside risk

First Step Equity vs Nonequity Modes nonequity mode - exports and contractual agreements that tend to reflect relatively smaller commitments to overseas markets equity mode - JVs and wholly owned subsidiaries indicative of relatively larger, harder to reverse commitments

Second Step on Making Actual Selections direct export - most basic mode of entry capitalizes on economies of scale in production concentrated in the home country and affords better control over distribution indirect export - exporting through domestically based export intermediaries licensing/franchising - agreement in which the licensor/franchisor sells the rights to intellectual property such as patents and know-how to the licensee/franchisee for a royalty fee

Second Step on Making Actual Selections turnkey project - projects in which clients pay contractors to design and construct new facilities and train personnel build-operate-transfer (BOT) agreement - nonequity mode of entry used to build a longer term presence R&D contract - outsourcing agreements in R&D between firms

Second Step on Making Actual Selections co-marketing - efforts among a number of firms to jointly market their products and services joint venture - corporate entity formed and jointly owned by two or more parent companies wholly owned subsidiary - entity that is controlled through the ownership of shares in the subsidiary by the parent entity

Second Step on Making Actual Selections green-field operation - wholly owned subsidiary created by building new factories and offices from scratch acquisition - wholly owned subsidiary created through direct foreign investment

Liability versus Asset of Foreignness Being foreign can be an asset (that is, a competitive advantage). However, whether foreignness is indeed an asset or a liability remains tricky.

Global versus Regional Geographic Diversification Despite the widely held belief (and frequently voiced criticism from antiglobalization activists) that MNEs are expanding “globally,” surprisingly, even among the largest Fortune Global 500 MNEs, few are truly “global”. Should most MNEs further globalize?

Cyberspace versus Conventional Entries The arrival of the Internet has sparked a new debate: Whose rules of the game should e-commerce follow?