Individual Essay for IBS
Selected Question:
Imagine a UK-based MNE is developing strategic plans to
enter an emerging market.
ID Number:10359543
Devrim(imagined MNE)
Devrim is a famous revolutionary multinational British car brand, traded on London stock
market, found in 1940 and headquartered in Manchester. Devrim is the fifth largest
multinational automaker operating in a large number of countries. Devrim's manufacturing
and R&D facilities are located in several countries. Devrim conducts its supply chain
activities from the UK to China to Mexico.
Introduction:
In this paper, entry strategies into Turkey for Devrim will be developed from different
perspectives. Initially, advantages and disadvantages associated with each entry mode will be
uncovered based on empirical findings of previous researches on entry modes. Afterwards, a
strategic action plan will be proposed in the conclusion part based on the strengths and
drawbacks of each entry mode.
According to the findings of Pan and David’s paper(2000) based on 14,080 business activities,
three sorts of factors(firm-specific, country-specific, industry-specific) have a varying degree
of impact on each level of the hierarchy of entry modes. Managers initially decide between
equity and non-equity entry modes by identifying risks associated with the host country and its
industry, then determining on the lower levels of the hierarchy of entry modes based on firmspecific factors(Pan & David, 2000).
In this paper, the prementioned hierarchic pattern will be followed while making propositions
on strategic entry modes for the selected host country(Turkey). Accordingly, we first analyse
the advantages and disadvantages associated with equity and non-equity modes. Once the
decision is made between equity and non-equity modes, entry modes in lower levels of
hierarchy will be examined. After all the analysis is completed based on the comparison of each
entry mode, favoured strategic action will be proposed for the host country.
Prior to examining advantages and challenges associated with each entry mode, for the sake of
coherency, it is necessary to identify Turkey’s market potential and the degree of required
resource commitment for each entry mode which are highly related to the choice of entry
modes.
Features of Turkey’s Market:
The table(1) below illustrates Turkey’s market potential based on five criteria:
Turkey’s market potential
Population:
80,745,020(2017)
Gross Domestic
851.1(13th largest economy in the world, 2017)
Product(billion):
Per capita:
$10,540.6(2017)
Purchase Power Parity:
$2,173,000,000,000(14th in the world, 2017)
Vehicle Sales:
956,194(2017)
Source:(Data.worldbank.org, n.d.), (Worldometers.info, n.d.), (Cia.gov, n.d.), OECD,
TurkStat, Figure 1.
Vehicle Sales
1,200,000
1,000,000
968,017 983,729 956,194
864,439
800,000
777,761
760,913
600,000
494,023
853,378
767,681
557,126
400,000
200,000
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Sales
Source: ODD, (Invest.gov.tr, n.d.), Figure 2
According to the report on Turkey’s automotive industry published by Republic of Turkey
Prime Ministry Investment Support & Promotion Agency(Invest.gov.tr, n.d.), the vehicle sales
per year dramatically increased from 494,023 to 956,194 over the period between 2008 and
2017. Further, the rising middle class and young population(nearly half of total population
under age 30) solidifies the domestic demand and keeps Turkey’s competitive advantageous
position over other markets.
Entry Modes
The Degree of Resource
Commitment
1.Wholly Owned Subsidiary/WOS(Equity Mode)
Very High
2.Acquisition(Equity Mode)
High
3.Joint Venture/JV(Equity Mode)
Moderate to High
4.Export(Non-Equity Mode)
Low to Moderate
5.Licencing(Non-Equity Mode)
Low
Source:(Erramilli & Rao, 1990), Figure 2
The %70 of acquisitions reported failed due to overpayment for targets and difficulties in
integration process(Peng, 2014, p. 383). Further, to generate arguments on acquisitions, microlevel analyses are needed. The entry mode of acquisition is omitted in this paper due to given
reasons.
Country-specific factors:
In order to identify country-specific factors, one leg of the strategy tripod, the institution-based
view is applied to the case.
From Institution-based View:
Institutional environment of countries, because it influences the degree of liability of
foreignness of firms, plays a decisive role on the success or failure of businesses(Peng, Wang,
& Jiang, 2008). Even though there is a shift from liability of foreignness to liability of
outsidership(Johanson & Vahlne, 2009) due to deficiency of the liability of foreignness in
explaining internationalisation process of today’s firms, the liability of foreignness does still
matter. Corporations who are not familiar with rules of the game(North, 1990) in the host
country, are more likely to fail.
The degree of cultural and psychic distance between Turkey and the UK is the determinant of
liability of foreignness and ultimately success or failure of Devrim in this case. To measure the
cultural distance between Turkey and the UK, indices of both countries on Hofstede's cultural
dimensions(Hofstede, 1984) are given below:
Comparison of Informal Instituons between the UK and
Turkey
100
89
90
80
70
85
66
69
66
60
40
46
45
50
35
37
51
49
35
30
20
10
0
Power Distance
Individualism
Masculinity
Uncertainty
Avoidance
The Republic of Turkey
Long Term
Orientation
Indulgence
The UK
Source: (Hofstede Insights, n.d.), Figure 3
According to the figure(3), there is a large gap between indices for each dimension except longterm orientation, this, in turn, highlights the cultural differences between the UK and Turkey.
Therefore, Devrim has to realign its work organisation based on Turkey’s cultural
characteristics to mitigate the transaction costs occurring through operations if the company opt
for entering Turkey with high resource commitment(JV, WOS). On the other hand, realigning
process itself may damage the firm’s effectiveness and ultimately leads to higher transactional
costs. Accordingly, it can be argued that it would be more efficient and appropriate for Devrim
to enter Turkey through entry modes requiring low resource commitment when merely informal
institutions were taken into consideration.
Although it is risky for investing company to enter a foreign country with high resource
commitment when it is not familiar with the host country’s culture, the findings of Gollnhofer
and Turkina’s research(2015) suggest that firms enter countries with high resource commitment
when there is a high cultural distance between the host and home countries to gain control over
their operations. Therefore, in order to gain control over its activities, Devrim may choose to
enter Turkey through equity entry modes, particularly by WOS. This is because if Devrim opts
for JV with an incumbent, cultural distance between them may hamper the integration process
and eventually result in high transaction cost.
Formal institutions are developed and established to mitigate the uncertainty of future by
eliminating opportunistic behaviours causing market imperfections. In emerging companies,
the absence of strong formal institutions leads to higher transactional cost(Peng et al., 2008).
Therefore, it is necessary to consider Turkey’s formal institutional setting while determining
the most strategic entry mode.
Comparison of institutional(formal) environment between the UK and Turkey based on
worldwide governance indicators(Kaufmann, Kraay, & Mastruzzi, 2011) is presented in the
figure(4) below:
Both Countries' Scores on Each Indicator(2017)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
The Republic of Turkey
The UK
Source: (Info.worldbank.org, n.d.), Figure 4
According to the figure(4), Turkey shows a weak quality of the institutional environment as
opposed to the UK. Especially since failed coup attempt in July 2016, freedom status of Turkey
has downgraded from “partly free” to “not free” in 2018 according to Freedom House’s report
on democracy rating (Freedomhouse.org, 2018). Furhetmore, Turkey’s government system has
switched from parliamentary system to executive presidential system which expands President
Recep Tayyip Erdogan’s power over legislative and executive branches of government.
As a result of the fall of separation of powers, the degeneration in meritocracy escalates within
state institutions(Michel, 2017), this, in turn, decelerates the bureaucracy and ultimately
increases transactional costs. However, although Turkey can be regarded as an unstable country
due to the low quality of political institutions, the ruling government has never imposed
restrictions on foreign companies owing to conflicts Turkey has with their home countries. For
instance, even though Turkey has severe problems with Israel, the enmity between the two
countries ends when it comes to trade relations (Heinrich, 2017).
Empirical Evidence(Kwon and Konopa, 1993) suggests that despite existing high political risk
in a host country, companies enter the host country with high resource commitment. This
implies that the attractiveness of market entices MNEs to take risks stemming from the political
setting of the host country. In other words, the higher the expectation of high asset turnover
rate, the more likely companies are to take risks. In our case, Turkey has high political risks,
but when the sheer size of its market is taken into account, it can be argued that it is worth to
enter Turkey with high resource commitment.
Regarding intellectual property rights in Turkey, even though there are regulations protecting
IP rights, Turkey does not provide sufficient protection for intellectual property as opposed to
the UK(Internationalpropertyrightsindex.org, n.d.). Therefore, due to the deficiency in IP
protection in Turkey, entering into JV or licencing may end up with infringement of intellectual
property rights by the partner company.
Turkey has been following economic policies contrary to the laws of orthodox economics. As
a result of the uncontrolled monetary and fiscal expansion, Turkey’s inflation rate hit the 14
year-high by %25.24(Tcmb.gov.tr, 2018), which in turn leads to a considerable loss in the value
of Turkish Lira. There is a positive relationship between the convertibility of local currency and
the degree of resource commitment(Kwon and Konopa, 1993). Therefore, entering Turkey with
high resource commitment may end up with failure due to the risks stemming from the
vulnerability of Turkish lira towards speculative attacks.
Location specific competitive advantages derived from distinguishing factor endowments of
related commercial area influence the choice of market entry modes of foreign companies.
Empirical evidence(Kwon and Konopa, 1993; Dunning, 1980) suggests that the location-
specific factor endowments have a decisive effect on multinationals’ form of involvement in
the related country. Companies are likely to enter foreign countries where provide favoured
factor endowments with high resource commitment(Kwon and Konopa, 1993, p. 70).
Regarding Turkey’s profile on factor endowments, Turkey’s labour market is characterised by
cheap and skilled labour. Relatively higher availability of qualified engineers and lower labour
cost compared to other countries in Europe(Invest.gov.tr, n.d.) give a competitive advantage
to companies operating in Turkey. Overall, it can be argued that Turkey’s competitive
advantageous position over the factors of production generates opportunities for foreign
companies to leverage their resources and ultimately entice them to enter Turkey’s market with
high resource commitment.
Industry-specific Factors:
To identify challenges in Turkey’s automotive industry which are thought to profoundly related
to the choice of entry mode, two of Porter’s five forces(1989) are applied.
Threat of Entry(Low)
•
Incumbent firms possess cost advantages by capitalising on Turkey’s factor
endowments and lowering transportation costs, which constitutes cost barriers.
•
Brand recognition or awareness is critical in the automotive market, which
constitutes entry barriers.
•
A large amount of capital is required to enter the industry due to R&D expenses and
high fixed-cost.
•
The government imposes no restrictions on entry, which lowers institutional
barriers.
Source: The table is generated according to own inferences(Figure 5).
Rivalry among Competitors(High)
•
A large number of competitors are operating in the market.
•
The frequency of purchase is low in the market due to the high price of the product,
which constitutes price-sensitive competition between firms.
•
The industry is growing due to strong demand, this, in turn, increases the
competition.
Source: The table is generated according to own inferences(Figure 6).
Empirical evidence(Bell, 1996; Cui & Jiang, 2009) suggests that corporations are more likely
to enter a host country which has high growth industry rate(refer to Figure 2-6) through a JV to
take advantage of the available operational capacity of incumbents. As aforementioned in the
introduction(refer to figure 2), the automotive industry has recorded considerable growth since
2008 owing to strong domestic demand. Accordingly, it would be beneficial for Devrim to enter
Turkey’s market by entering into JV with an incumbent to gain market share rapidly by using
the capabilities of it.
Turkey’s automotive industry is highly price-competitive and, consumers are sensitive to small
changes in prices. For that reason, companies(Ford, Honda, Hyundai, BMC, Renault etc.)
operating in the automotive industry are manufacturing their products in Turkey to capitalise
on low-labour cost and eliminate transportation cost(refer figure 5-6). If Devrim enters
Turkey’s market by exporting, the company will incur a transportation cost which reduces its
competitiveness towards the competitors and ultimately profitability. For that reason, greenfield
investment in Turkey might be needed to take advantage of location-bound resources thereby
gaining competitiveness.
The liberal policy followed by the Turkish Government on trade(refer to figure 5) favours
importation of cars. Accordingly, if Devrim opts for exporting, except transportation cost, no
additional cost decreases Devrim’s price competitiveness.
Firm-specific factors:
When a firm engages in international operations, it needs funds to source its wide range of
activities(marketing, manufacturing, localisation). The degree in which a firm is able to absorb
the costs incurred in such activities determines its form of foreign market involvement (Agarwal
and Ramaswami, 1992). JV is a fruitful option to share the costs when the fact that the car
manufacturing industry is highly capital intensive is taken into account. If Devrim chooses to
set up new manufacturing facilities to capitalise on Turkey’s factor endowments, a massive
amount of investments will be needed. Sharing such capital cost with a partner company lowers
the risks and burden. As suggested in the research(Chen & Hu, 2002), firms are more likely to
enter through joint venture when the capital cost required to set up subsidiaries is high. From
the risk-averse perspective, it is better to enter Turkey through JV. However, Devrim provides
sufficient assets for absorbing these costs; therefore, the company does not need to share the
risks and costs while entering Turkey.
Firms have high propensity to enter through higher control modes when they possess firmspecific resources to develop differentiated products(Agarwal and Ramaswami, 1992, p. 4).
This is because the investing company may expose to opportunistic attacks by a partnercompany in the related host country. Devrim possess particular capabilities which are risky to
share with a third party in such industry characterised by Schumpeterian dynamics and
characteristics. Therefore, a JV with a host-country company may lead to undesirable
consequences.
Firms who have no experience in foreign markets are likely to choose non-investment
modes(Agarwal and Ramaswami, 1992). In other words, firms’ entry mode choice is highly
correlated with the degree of their experience in multinational operations. However, owing to
the experience gained through global supply chain activities in various countries, Devrim is
able to identify possible opportunities and challenges existing in a foreign market rapidly.
Accordingly, Devrim possess enough maturity in managing global operations to handle with
possible drawbacks occurring due to market imperfections in emerging economies.
Devrim produces highly customised cars compared to its competitors due to high asset
specificity, this, in turn, reduces the codifiability of transactions. According to Kogut and
Zander(1993), companies are likely to own whole operations when the products they are
manufacturing are less codifiable. Accordingly, licensing does not seem a suitable option for
Devrim due to hardness in transferring the tacit knowledge.
Teece(1983, 1986) argues that the higher the tacitness in transactions, the more likely that
multinationals are to opt for WOS. Transferring tacit knowledge might be too difficult due to
its complexity and ultimately leads to higher transaction costs. Empirical evidence(Chen & Hu,
2002) suggests that MNEs transfer knowledge content of their products, marketing skills,
differentiated products, brand names more efficiently when they enter a host country with high
control entry modes. As mentioned before, Devrim’s products are characterised by high
specificity, and therefore, the product development process is highly sophisticated. For that
reason, it is beneficial for Devrim to choose OWS to enter Turkey from this perspective.
In a nutshell, when the company’s maturity in governing the global supply chain is taken into
account, the likelihood of success in entering Turkey by WOS or JV is high. Amongst the higher
control modes(JV, WOS), if Devrim chooses JV to enter Turkey, the company might face with
difficulty in transferring knowledge to partner company. More importantly, the company might
confront with exploitation by the host-country company. On the other hand, by opting for JV,
the company may share the risks and capital cost.
Conclusion:
To determine which type of entry mode(non-equity or equity) would be the best option to
enter Turkey, the points discussed in previous sections are summarized and reviewed in this
section.
From the institutional viewpoint, there are marked differences in the cultural and legal
environment between Turkey and the UK. In Turkey, risks stemming from the unstable
political environment and uncertainties arising from the absence of formal institutions leads to
market imperfections. Further, weak institutional setting reflects the quality of intellectual
property protection. Apart from issues related to institutional conditions, currency
convertibility arises as a problem. For this reason, possible losses may occur during the
remittance of profits and therefore, hedging may be required if the company enters with
equity modes. When these issues are taken into consideration, non-equity modes seem better
option to not expose risks and uncertainties.
However, Turkey possesses characteristics of a lucrative market due to its big market size,
young population and strong domestic demand. Such market characteristics offer the best
prospects of high asset turnover rate. Besides, Turkey provides locational advantages and
factor endowments by which companies derive competitive advantages. Given these reasons,
the advantages of equity modes outweigh the advantages associated with non-equity modes.
From the risk-averse perspective, it is better to opt for non-equity modes to enter Turkey due to
uncertainties arising from Turkey’s institutional environment. However, these risks can be
eliminated by tapping into the business network. Further, when Devrim’s maturity in global
markets is taken into account, the company possesses adequate capabilities and skills to
eliminate institutional risks. Besides, Turkey’s location-bound advantages(proximity to big
markets, factor endowments, ect.) are too great to be ignored. Accordingly, it is safe to say that
the potential benefits of equity modes outweigh the potential drawbacks of it.
In lower levels of the hierarchy of entry modes, it is more significant to consider firm-specific
factors while determining optimal equity entry mode. As highlighted before, the risk of
opportunism associated with JV mode is the most critical deterring factor for Devrim. Due to
the lack of institutions protecting IP in Turkey, Devrim may lose some of its core skills to the
parent company through the JV. Therefore, control power is necessary to eliminate the risk of
exploitation by the parent company. Further, the integration of joint activities and
organisational fit process with the parent company is difficult for Devrim owing to differences
in high formal and informal institutions between Turkey and the UK(refer to figure 3-4).
Overall, regarding the choice between the joint venture and greenfield investment, despite
advantages associated with JV, WOS is far better option for Devrim to enter Turkey when the
ownership advantages of the company are taken into account.
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