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Copyright © 2009 Cengage. PowerPoint Presentation by John Bowen, Columbus State Community CollegeAll rights reserved. Copyright © 2009 Cengage. PowerPoint Presentation by John Bowen, Columbus State Community CollegeAll rights reserved.

Entering Foreign Markets

Entering Foreign Markets

Part II: Business-Level Strategies

Global StrategyGlobal StrategyMike W. PengMike W. Peng

chapter

chapter

66

Copyright © 2009 Cengage. All rights reserved. 6–2

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


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


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


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 (cont’d)

• Industry-based considerations Rivalry

Entry barriers

Bargaining power of suppliers

Bargaining power of buyers

Substitute products

• 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


A Comprehensive Model of Foreign Market Entries (cont’d)

• Institution-Based ConsiderationsRegulatory 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


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


Where to Enter?Location-Specific Advantages (cont’d)

Table 6.1Source: First two columns adapted from J. Dunning, 1993, Multinational Enterprises and the Global Economy (pp. 82–83), Reading, MA: Addison-Wesley.

STRATEGIC GOALS LOCATION-SPECIFIC ADVANTAGES ILLUSTRAVTIVE LOCATIONS MENTIONED IN THE TEXT

Natural Resource Seeking Possession of natural resources and relatedTransport and communication infrastructure

Oil in the Middle East, Russia, and Venezuela

Market Seeking Abundance of strong market demand andcustomers willing to pay

Seafood in Japan

Efficiency Seeking Economies of scale and abundance of low-cost factors

Manufacturing in China

Innovation Seeking Abundance of innovative individuals, firms, and universities

IT in Silicon Valley and Bangalore, financial servicesin New York and London and aerospace in Russia

STRATEGIC GOALS LOCATION-SPECIFIC ADVANTAGES ILLUSTRAVTIVE LOCATIONS MENTIONED IN THE TEXT

Natural Resource Seeking Possession of natural resources and relatedTransport and communication infrastructure

Oil in the Middle East, Russia, and Venezuela

Market Seeking Abundance of strong market demand andcustomers willing to pay

Seafood in Japan

Efficiency Seeking Economies of scale and abundance of low-cost factors

Manufacturing in China

Innovation Seeking Abundance of innovative individuals, firms, and universities

IT in Silicon Valley and Bangalore, financial servicesin New York and London and aerospace in Russia


First Mover Advantages and Late Mover Advantages

Table 6.2

FIRST MOVER ADVANTAGES LATE MOVER ADVANTAGES (OR FIRST MOVER DISADVANTAGES)

Proprietary, technological leadership Opportunity for free ride on first mover investments

Resolution of technological and market uncertaintyPreemption of scarce resources

Establishment of entry barriers for late entrants First mover’s difficulty to adapt to market changes

Avoidance of clash with dominant firms at home

Relationships and connections with key stakeholdersSuch as customers and governments


When to Enter?

• First mover advantagesDeveloping 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


How to Enter?Scale of Entry: Commitment and

Experience• Large-Scale Entries

Benefit from a strategic commitmentDrawbacks of large-scale entries: Limited strategic flexibility and potential huge losses

• Small-scale entriesFocus on accumulating experience“Learning by doing”Drawbacks of small-scale entries

A lack of strong strategic commitmentDifficulties in building market share


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


How To Enter?

• The second step: See the following four slides


The Choice of Entry Modes: A Decision 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.


Modes of Entry: Advantages and Disadvantages

Table 6.3

ENTRY MODES ADVANTAGES DISADVANTAGES

High transportation costs for bulky products

Economies of scale in production concentrated in home countryDirect Exports

Better control over distribution (relative to indirect export)

Marketing distance from customers

Trade barriers

Indirect Exports Concentration of resources on production

Less control over distribution (relative to direct export)

Inability to learn how to operate overseas

No need to directly handle export processes

1. Non-equity modes: Exports



Table 6.3 (cont’d)


2. NON-EQUITY MODES:CONTRACTUAL AGREEMENTS

Licensing/Franchising Low development costs Little control over technology and marketing Low risk in overseas expansion

May create competitors

Inability to engage in global coordination

Turnkey projects Ability to earn returns from process technology in countries where FDI is restricted

May create efficient competitors

Lack of long-term presence

R&D contracts Ability to tap into the best locations for certain innovations at low costs

Difficult to negotiate and enforce contracts

May nurture innovative competitors

May lose core innovation capabilities

Limited coordination Ability to reach more customersComarketing



Table 6.3(cont’d)


3. Equity modes: Joint ventures Sharing costs and risks Divergent goals and interests of partners Access to partners’ knowledge

and assets Limited equity and operational control

Politically acceptable Difficult to coordinate globally

4. Equity modes: Whollyowned subsidiaries

Green-field projects Complete equity and operational control

Potential political problems and risks

Protection of technology and know-how

High development costs

Ability to coordinate globally Slow entry speed (relative to acquisitions) Same as green-field (above), except slow speed

Same as green-field (above)Acquisitions

Fast entry speed Post-acquisition integration problems


Debates and Extensions

• Liability versus Asset of ForeignnessSome foreignness can be an asset (“cool”): the “country of origin” effect

• Global versus Regional Triad Concentration Geographic DiversificationShould MNEs truly globalize?

• Cyberspace Entries versus Conventional EntriesWhose “rules of the game” should e-commerce follow?

Is the Internet borderless or subject to specific governments?


The Savvy Strategist

• Consider industry, resource, and institution views

• Match entries with specific goals

• Consider the four fundamental questions in strategy

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