1. Foreign Market Entry
Class 05_06
Pedro Coelhoso

2. Thoughts for the Day
All our social problems arise from doing the wrong things righter. The more efficient you are at doing the wrong thing, the wronger you become. It is much better to do the right thing wronger than the wrong thing righter. If you do the right thing wronger and correct it, you get better.
Russell Ackoff ( )

3. Outline for Today Administrative Announcements
More on the link between strategy and institutions
Where are we in the course?
Foreign Country Entry
Why go abroad?
Why and Where to enter?
Why and Where and How to enter?
Main Points and Implications
Set-up for next class

4. Strategy and Institutions
Khanna T, Palepu K “Why focused strategies may be wrong for emerging markets”. Harvard Business Review, 75(4):
They argue that focused strategies may be wrong for emerging markets as the required institutions may not be present to support this western-world mindset. They suggest that “companies must adapt their strategies to fit their institutional context”.

5. Applying Perspectives on International Strategy
Entering Foreign Mkts
Country Selection
Local Competition
Locating activities across countries
These impact how
firms behave.
Acquisitions/Restructuring
Global Competitive Dynamics
Industry-based
Competition
Structure
Strategic
Decisions
Firm-specific
Resources &
capabilities
International
Strategy
Implementation/
Performance
Institutional
Conditions:
- Formal
- Informal
Learning/Alliances

6. Changes in National Regulations of Foreign Direct Investment (FDI), 1991–2002
Source: United Nations, 2003, World Investment Report 2003 (p. 13), New York and Geneva: United Nations.
WSJ: September 15, 2009 Update:
Sept 2009: 130 protectionist measures planned
For 2009, 90% of goods affected by protectionist measures
Ratio of discriminatory vs. liberalizing trade laws is 6:1.
Most targeted countries: China, U.S., Japan

7. Why Go Abroad? Answers traditionally include: More customers:
Economies of scale
Economies of scope.
Reduce the dependence on one country.
To replicate the success at home in new settings.
Possibly: The answer can be “all of the above”

8. Why NOT go abroad: Overcoming the Liability of Foreignness
The inherent disadvantage foreign firms experience in host countries because of their non-native status.
Liability can be seen in two dimensions:
Differences in formal and informal institutions in different countries (e.g., regulatory, language, and cultural differences).
Customers discriminate against foreign firms, sometimes formally and other times informally.

9. Why NOT go abroad? Overcoming the Liability of Foreignness
To offset the liability of foreignness, foreign firms must employ overwhelming resources and capabilities:
Superior knowledge about institutions for that market
Volkswagen in China and CEE
Superior technologies for that market
Australian warship named Joint Venture
Superior organizational, marketing, and financial capabilities for that market
WARNING: Not every firm is ready for going abroad.

10. INTERNATIONALIZATION: GO or NO GO
Figure 6.1

11. A Comprehensive Model of Foreign Market Entries
Figure 6.2

12. (Why and) 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.

13. Why and 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

14. 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 (besides culture)
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%

15. Why and Where to Enter? Cultural/Institutional Distances and Foreign Entry Locations (cont’d)
Two schools of thought have emerged:
Stage models: Enter culturally similar countries during the first stage of internationalization and, as they gain confidence, enter culturally more distant countries in later stages.
Strategic Model: Considerations of strategic goals such as market and efficiency are more important than cultural/institutional considerations as suggested by stage models.

16. 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

17. 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
Copyright © 2009 Cengage. All rights reserved.

18. Risk / Return of International Market Entry Modes
Wholly Owned Subsidiary
Joint Ventures
Franchising
Licensing
Exporting
RISK

19. Modes of Entry: Advantages and Disadvantages
Table 6.4

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

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

22. Why and Where and 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.
Starbucks: Franchising  JV  WOS
China’s Haier in the United States: Direct exports  FDI (green-field projects)
Liability versus Asset of Foreignness
Cyberspace Entry vs Conventional Entry: Rules to Use?
Global versus Regional Triad Concentration

23. Main Points and Implications
Foreign entry is the foundation for international business.
Competing considerations: Industry level, Firm level, and Institutional level.
Competing considerations for where to enter: natural resource, market, efficiency, and innovation seeking.
Selection between options (trade-offs) will depend on goals and risk acceptance regarding mode of entry.
Entry strategies, even when successful, do not guarantee international success. They are just the beginning. The challenge is to simplify and prioritize.

24. Set-Up for Next Class (Dec 17)
Strategic Alliances and Acquisitions
Reading: Peng Text, Chapters 7; Franchising
Other Preparation: Read series of articles on Danone in China. Prepare a 4-5 page analysis of the situation using the questions provided.
Learning Objectives: We will learn about an increasingly important arrangement between firms that is more formal than a contract but does not involve buying another firm with some comparison to acquisitions.