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hapte c chapter r

Entering Foreign Markets

Part II: Business-Level Strategies

Global Strategy
Mike W. Peng
Copyright 2009 Cengage. All rights reserved. PowerPoint Presentation by John Bowen, Columbus State Community College

Outline
Overcoming the liability of foreignness Understanding the propensity to internationalize A comprehensive model of foreign market
entries

Where to enter? When to enter? How to enter? Debates and extensions The savvy strategist
Copyright 2009 Cengage. All rights reserved. 62

Overcoming the Liability of Foreignness

The Liability of Foreignness - the inherent
disadvantage foreign firms experience in host countries because of their non-native status

Differences in formal and informal institutions

govern the rules of the game in different countries

Foreign firms are often discriminated against Foreign firms deploy overwhelming resources
and capabilities to offset the liability of foreignness
Copyright 2009 Cengage. All rights reserved. 63

Understanding the Propensity to Internationalize

The underlying factors
The size of the firm The size of the domestic market

The propensity
Enthusiastic internationalizer Follower internationalizer

Slow internationalizer
Occasional internationalizer
Copyright 2009 Cengage. All rights reserved. 64

Firm Size, Domestic Market Size, and Propensity to Internationalize

Figure 6.1
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A Comprehensive Model of Foreign Market Entries

Figure 6.2
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 Industry-based considerations
Rivalry Entry barriers Bargaining power of suppliers Bargaining power of buyers Substitute products

A Comprehensive Model of Foreign Market Entries (contd)

Resource-based considerations
Value of firm-specific resources and capabilities

The rarity of firm-specific assets

Transaction costs Methods of organizing firm-specific resources and capabilities
Copyright 2009 Cengage. All rights reserved. 67

A Comprehensive Model of Foreign Market Entries (contd)

Institution-Based Considerations
Regulatory risks: Obsolescing bargain Trade barriers:
Tariff

barriers

Nontariff

barriers (safety inspections, local content requirements, entry modes restrictions)

Currency risks: Speculation and hedging

Synthesis - Different considerations may pull the

foreign entrant in different directions
Copyright 2009 Cengage. All rights reserved. 68

Where to Enter?
Location-Specific Advantages
Location Specific Advantages
Geographical advantages Agglomeration - clustering of economic activities

Strategic Goals: Seeking natural resources, markets,

efficiency and innovation

Cultural/Institutional Distances and Foreign Entry

Locations
Cultural distance - the difference between two cultures Institutional distance - comparing the regulatory, normative, and cognitive institutions Two schools of thought: stage models vs strategic goals

Copyright 2009 Cengage. All rights reserved.

69

Where to Enter?
Location-Specific Advantages (contd)

STRATEGIC GOALS STRATEGIC GOALS

Natural Resource Seeking Natural Resource Seeking

LOCATION-SPECIFIC ADVANTAGES LOCATION-SPECIFIC ADVANTAGES

Possession of natural resources andand related Possession of natural resources related Transport andand communication infrastructure Transport communication infrastructure

ILLUSTRAVTIVE LOCATIONS MENTIONED IN THE THE TEXT ILLUSTRAVTIVE LOCATIONS MENTIONED IN TEXT Oil in the Middle East, Russia, and Venezuela Oil in the Middle East, Russia, and Venezuela Seafood in Japan Seafood in Japan

Market Seeking Market Seeking

Abundance of strong market demand andand Abundance of strong market demand customers willing to paypay customers willing to
Economies of scale andand abundance of Economies of scale abundance of low-cost factors low-cost factors Abundance of innovative individuals, firms, Abundance of innovative individuals, firms, andand universities universities

Efficiency Seeking Efficiency Seeking Innovation Seeking Innovation Seeking

Manufacturing in China Manufacturing in China IT in IT in Silicon Valley Bangalore, financial services Silicon Valley and and Bangalore, financial services in NewNew York London and aerospace in Russia in York and and London and aerospace in Russia

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

Table 6.1
610

Copyright 2009 Cengage. All rights reserved.

First Mover Advantages and Late Mover Advantages

FIRST MOVER ADVANTAGES Proprietary, technological leadership Preemption of scarce resources Establishment of entry barriers for late entrants Avoidance of clash with dominant firms at home Relationships and connections with key stakeholders Such as customers and governments

LATE MOVER ADVANTAGES (OR FIRST MOVER DISADVANTAGES) Opportunity for free ride on first mover investments Resolution of technological and market uncertainty First movers difficulty to adapt to market changes

Table 6.2
Copyright 2009 Cengage. All rights reserved. 611

When to Enter?
First mover advantages
Developing proprietary, technological leadership Preempting scarce assets Establishing entry barriers

Becomes the dominant firm

Opportunity for relationships with key stakeholders

Late mover advantages: benefit from first mover

investments, experience, and inflexibility

Copyright 2009 Cengage. All rights reserved.

612

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. 613

How To Enter?
Modes of Entry: Two Steps
First step
Strategists must prioritize variables
A decision model is helpful Non-equity vs equity modes

Level of commitment Contractual and ownership alternatives

Foreign direct investment advantages

Ownership Location Internalization
Copyright 2009 Cengage. All rights reserved. 614

How To Enter?
The second step: See the following four slides

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615

The Choice of Entry Modes: A Decision 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
616

Copyright 2009 Cengage. All rights reserved.

Modes of Entry: Advantages and Disadvantages

ENTRY MODES ADVANTAGES DISADVANTAGES

1. Non-equity modes: Exports

Direct Exports Economies of scale in production concentrated in home country Better control over distribution (relative to indirect export) High transportation costs for bulky products Marketing distance from customers Trade barriers Indirect Exports Concentration of resources on production No need to directly handle export processes Less control over distribution (relative to direct export) Inability to learn how to operate overseas

Table 6.3
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Modes of Entry: Advantages and Disadvantages

ENTRY MODES 2. NON-EQUITY MODES: CONTRACTUAL AGREEMENTS Licensing/Franchising Low development costs Low risk in overseas expansion Little control over technology and marketing May create competitors Inability to engage in global coordination Turnkey projects Ability to earn returns from process technology in countries where FDI is restricted Ability to tap into the best locations for certain innovations at low costs May create efficient competitors Lack of long-term presence Difficult to negotiate and enforce contracts May nurture innovative competitors May lose core innovation capabilities Comarketing Ability to reach more customers Limited coordination ADVANTAGES DISADVANTAGES

R&D contracts

Table 6.3 (contd)

Copyright 2009 Cengage. All rights reserved. 618

Modes of Entry: Advantages and Disadvantages

ENTRY MODES 3. Equity modes: Joint ventures ADVANTAGES Sharing costs and risks Access to partners knowledge and assets Politically acceptable Difficult to coordinate globally 4. Equity modes: Wholly owned subsidiaries Green-field projects Complete equity and operational control Protection of technology and know-how Ability to coordinate globally Acquisitions Same as green-field (above) Fast entry speed Potential political problems and risks High development costs Slow entry speed (relative to acquisitions) Same as green-field (above), except slow speed Post-acquisition integration problems DISADVANTAGES Divergent goals and interests of partners Limited equity and operational control

Table 6.3(contd)
Copyright 2009 Cengage. All rights reserved. 619

Debates and Extensions

Liability versus Asset of Foreignness
Some foreignness can be an asset (cool): the country of origin effect

Global versus Regional Triad Concentration

Geographic Diversification
Should MNEs truly globalize?

Cyberspace Entries versus Conventional Entries

Whose rules of the game should e-commerce follow? Is the Internet borderless or subject to specific governments?
Copyright 2009 Cengage. All rights reserved. 620

The Savvy Strategist

Consider industry, resource, and institution
views

Match entries with specific goals Consider the four fundamental questions in
strategy

Copyright 2009 Cengage. All rights reserved.

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