Global Strategy Mike W. Peng c h a p t e r 66 Copyright © 2005 South-Western.PowerPoint...

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Copyright © 2005 South-Western. PowerPoint Presentation by David Ahlstrom, Chinese University of Hong KongAll rights reserved. and Charlie Cook, The University of West AlabamaCopyright © 2005 South-Western. PowerPoint Presentation by David Ahlstrom, Chinese University of Hong KongAll rights reserved. and Charlie Cook, The University of West Alabama

Entering Foreign Entering Foreign MarketsMarkets

Part II: Business-Level StrategiesPart II: Business-Level Strategies

Copyright © 2005 South-Western. All rights reserved. 6–2

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.


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 inst

itutions 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.


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


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


Firm Size, Domestic Market Size, and Propensity to Internationalize

Figure 6.1


A Comprehensive Model of Foreign Market Entries

Figure 6.2


A Comprehensive Model of Foreign Market Entries

• Industry-Based ConsiderationsRivalry among established competitors

Attack, counter-attack, or avoid High entry barriers

More active foreign market entriesBargaining power of suppliers

Entry through backward vertical integrationBargaining power of buyers

Entry through forward vertical integration (e.g. Sony acquiring Columbia pictures)

Threat of substitute products from abroad


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


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


A Comprehensive Model: A Synthesis

• How each of the three perspectives on strategy—industry-, resource-, and institution-based—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).


Where to Enter?Location-Specific Advantages

• Location-Specific AdvantagesGeographical 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.


Where to Enter? Cultural/Institutional Distances and

Foreign Entry Locations

• Cultural DistanceThe difference between two cultures along some

identifiable dimensions (such as power distance).

• Institutional DistanceThe 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)


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


When to Enter?

• First or Late Mover AdvantagesWhile 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.


How to Enter?Scale of Entry: Commitment and

Experience• Large-Scale Entries

BenefitsA demonstration of strategic commitment to certain

markets, which both assures local customers and suppliers and deters potential entrants.

DrawbacksLarge-scale entry limits strategic flexibility

elsewhere.Entrants must incur sizable losses if the large-scale

entry “bet” turns out to be wrong.


How to Enter? (cont’d)Scale of Entry: Commitment and

Experience• Small-Scale Entries

BenefitsLess 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.


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.


The Choice of Entry Modes: A Hierarchical Model

Figure 6.3Source: Adapted from Y. Pan & D. Tse, 2000, The hierarchical model of market entry modes (p. 538), Journal of International Business Studies, 31: 535–554.


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-MNEEquity 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.


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


Modes of Entry: Advantages and Disadvantages

Table 6.4 (cont’d)


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.


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.

Global Strategy Mike W. Peng c h a p t e r 66 Copyright © 2005 South-Western.PowerPoint...

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