1. 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

2. 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.
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3. 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.
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4. 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
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5. 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
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6. Firm Size, Domestic Market Size, and Propensity to Internationalize
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Figure 6.1

7. A Comprehensive Model of Foreign Market Entries
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Figure 6.2

8. 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
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9. 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
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10. 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
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11. 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).
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12. 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.
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13. 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)
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14. 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
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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
Entry timing, although important, is not the sole determinant of success and failure of foreign entries.
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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.
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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.
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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 6.4 is helpful.
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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.
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Figure 6.3

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.
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21. 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
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22. Modes of Entry: Advantages and Disadvantages
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Table 6.4 (cont’d)

23. 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.
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24. 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.
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