1. Entering Foreign Markets Dr. Ellen A. Drost
Adapted from Peng, 2006

2. Outline Why go abroad? A comprehensive model of foreign market entries
Where to enter?
When to enter?
How to enter?
Debates and extensions
Implications for strategists

3. Why Go Abroad? Answers typically include: Opening Case: Wal-Mart
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.
Opening Case: Wal-Mart
The answer can be “all of the above”

4. 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.

5. 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 (e.g., Volkswagen in China and CEE)
Superior technologies
SIA 6.1: A warship named Joint Venture
Superior organizational, marketing, and financial capabilities

6. 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

7. A Comprehensive Model of Foreign Market Entries
Adapted from Peng, 2006
Figure 6.2

8. A Comprehensive Model of Foreign Market Entries
Institution-Based Considerations
Regulatory risks: Obsolescing bargain
Trade barriers:
Tariff barriers
Non-tariff barriers (safety inspections, local content requirements, entry modes restrictions)
Currency risks: Speculation and hedging
Cultural distances
Institutional norms

9. 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.
However, different considerations may pull foreign entrants in different directions.
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).

10. 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.

11. Where to Enter? Location-Specific Advantages (cont’d)
Source: First two columns adapted from J. Dunning, 1993, Multinational Enterprises and the Global Economy (pp. 82–83), Reading, MA: Addison-Wesley.
Table 6.2

12. Where to Enter? Cultural/Institutional Distances and Foreign Locations (cont’d)
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 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%

13. Where to Enter? Cultural/Institutional Distances and Foreign Locations (cont’d)
Two schools of thought :
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

14. First Mover Advantages and Late Mover Advantages
Adapted from Peng, 2006
Table 6.3

15. 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
Integrative Case 1.3: The Chinese auto industry
First mover success / failure: Volkswagen / Peugeot
Late mover success / failure: GM / Ford
Entry timing, although important, is not the sole determinant of success and failure of foreign entries.

16. 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.
Closing Case: Hutchison Whampoa invests in 3G

17. 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.

18. 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 6.3 is helpful.

19. 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.
Figure 6.3
Adapted from Peng, 2006

20. 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.

21. Structuring modes of entry to reduce opportunism
WHAT FORM SHOULD THE ENTRY MODE TAKE? Contractual Alliances Equity Marketing Consortium Wholly Owned R&D Joint Venture Turnkey License Franchise Short-term Long-term  difficult to control difficult to monitor difficult to enforce difficult to negotiate

22. Strategic Alliances and Networks
Overall, strategic alliances and networks are cooperative interfirm relationships
Strategic alliances formed by multiple firms to compete against other such groups and against traditional single firms
Also known as constellations
Star Alliance: United, Lufthansa, Air Canada, SAS, etc.
Sky Team: Delta, Air France, Korean Air, etc.
One World: American, British, Cathay Pacific, Qantas, etc.

23. Alliances versus Joint Ventures
Not all strategic alliances are joint ventures.
A joint venture (JV) is a new organization—a “corporate child” created by two or more parent firms which hold partial equity ownership in the new venture.
Sony Ericsson
A non-JV alliance is two (or more) firms working together—“getting married” but not having “children.”
Renault is a strategic investor in alliance with Nissan. Both operate independently and they have not created a new firm.
Adapted from Peng, 2006

24. A Three-Stage Decision Model of Strategic Alliance and Network Formation figure 7.3
Adapted from Peng, 2006

25. Managing the alliance WHAT ABOUT PARTNER SELECTION?
Differences can create value
Similarities minimize cost

26. Modes of Entry: Advantages and Disadvantages, Table 6.3
Adapted from Peng, 2006
Table 6.4 (cont’d)

27. Modes of Entry: Advantages and Disadvantages
Adapted from Peng, 2006
Table 6.4 (cont’d)

28. Entry Debate 1: 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. 4

29. Entry Debate 2: Developed Economies vs. Emerging Economies
Per capita GDP > $9,000; 80% of global GDP
156 emerging economies
Currently account for only 20% global GDP
12 big emerging economies (especially BRIC)
Represent 73% of the 20% of global GDP
Argentina India Poland South Korea Brazil Indonesia Russia Thailand China Mexico South Africa Turkey
Markets of tomorrow: High risk, high return? 4

30. Entry Debate 3: Cyberspace Entries vs. Conventional Entries
The Internet
Is it evolutionary or just a new technology?
How to govern e-commerce?
SIA 6.4: Yahoo in France
It is still nation-states that matter. 4

31. Implications for Strategists
Foreign entries are a foundation for international business.
Issues are complex, and the challenge is to simplify and prioritize.
Managers and companies will make mistakes and will not always get it right; but for many companies, going overseas is unavoidable
Be bold, but always be careful! 4