1. Entering Foreign Markets
Chapter 6
Entering Foreign Markets
Global Strategy Mike W. Peng
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2. 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
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3. 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
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4. 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
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5. Firm Size, Domestic Market Size, and Propensity to Internationalize
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Figure 6.1

6. A Comprehensive Model of Foreign Market Entries

7. 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
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8. 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
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9. 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
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10. 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.
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11. 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.

13. 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
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14. 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
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15. 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
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17. How To Enter? The second step: See the following three slides
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19. Modes of Entry: Advantages and Disadvantages
Table 6.3
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20. Modes of Entry: Advantages and Disadvantages
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Table 6.3 (cont’d)

21. 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
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22. 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
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