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Foreign Market Entry

Class 05_06 Pedro Coelhoso

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 (1919-2009)

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

Strategy and Institutions


Khanna T, Palepu K. 1997. Why focused

strategies may be wrong for emerging markets. Harvard Business Review, 75(4): 41-51.

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.

Applying Perspectives on International Strategy


These impact how firms behave.
Industry-based Competition Firm-specific Resources & capabilities
Acquisitions/Restructuring
Global Competitive Dynamics
Entering Foreign Mkts Country Selection Local Competition Locating activities across countries

Structure

Strategic Decisions

International Strategy

Implementation/ Performance

Institutional Conditions: - Formal - Informal

Learning/Alliances

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

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

Why NOT go abroad: Overcoming the Liability of Foreignness


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.

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.

INTERNATIONALIZATION: GO or NO GO

Figure 6.1

A Comprehensive Model of Foreign Market Entries

Figure 6.2

(Why and) Where to Enter? Location-Specific Advantages


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.

Why and Where to Enter? Location-Specific Advantages (contd)


Why Where

Source: First two columns adapted from J. Dunning, 1993, Multinational Enterprises and the Global Economy (pp. 8283), Reading, MA: Addison-Wesley.

Table 6.2

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%

Why and Where to Enter? Cultural/Institutional Distances and Foreign Entry Locations (contd)
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.

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: 535554.

Figure 6.3

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.

617

Risk / Return of International Market Entry Modes


RETURN Joint Ventures Wholly Owned Subsidiary

Franchising

Licensing

Exporting

RISK

Modes of Entry: Advantages and Disadvantages

Table 6.4

Modes of Entry: Advantages and Disadvantages

Table 6.4 (contd)

Modes of Entry: Advantages and Disadvantages

Table 6.4 (contd)

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 Chinas 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

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.

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.

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