6
chapter
Entering Foreign
Markets
Part II: Business-Level Strategies
Global Strategy
Mike W. Peng
Copyright © 2005 South-Western.
All rights reserved.
PowerPoint Presentation by David Ahlstrom, Chinese University of Hong Kong
and Charlie Cook, The University of West Alabama
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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6–2
Why 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 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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6–3
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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6–4
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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6–5
Firm Size, Domestic Market Size, and
Propensity to Internationalize
Figure 6.1
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6–6
A Comprehensive Model of
Foreign Market Entries
Figure 6.2
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6–7
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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6–8
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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6–9
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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6–10
A Comprehensive Model: A Synthesis
• How each of the three perspectives on
strategy—industry-, resource-, and institutionbased—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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6–11
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.
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6–12
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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6–13
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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6–14
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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6–15
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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6–16
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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6–17
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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6–18
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.
Copyright © 2005 South-Western. All rights reserved.
Figure 6.3
6–19
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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6–20
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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6–21
Modes of Entry: Advantages and Disadvantages
Table 6.4 (cont’d)
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6–22
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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6–23
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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6–24