1. Entering Foreign Markets6
Entering Foreign Markets
chapter
Part II: Business-Level Strategies
Global Strategy Mike W. Peng
Copyright © 2009 Cengage. PowerPoint Presentation by John Bowen, Columbus State Community College All rights reserved.

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
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3. 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
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4. 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
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5. Firm Size, Domestic Market Size, and Propensity to Internationalize
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Figure 6.1

6. A Comprehensive Model of Foreign Market Entries
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Figure 6.2

7. 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
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8. A Comprehensive Model of Foreign Market Entries (cont’d)
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
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9. Where to Enter? 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
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10. Where to Enter? Location-Specific Advantages (cont’d)
STRATEGIC GOALS
STRATEGIC GOALS
LOCATION-SPECIFIC ADVANTAGES
LOCATION-SPECIFIC ADVANTAGES
ILLUSTRAVTIVE LOCATIONS MENTIONED IN THE TEXT
ILLUSTRAVTIVE LOCATIONS MENTIONED IN THE TEXT
Natural Resource Seeking
Natural Resource Seeking
Possession of natural resources and related
Transport and communication infrastructure
Possession of natural resources and related
Transport and communication infrastructure
Oil in the Middle East, Russia, and Venezuela
Oil in the Middle East, Russia, and Venezuela
Market Seeking
Market Seeking
Abundance of strong market demand and
customers willing to pay
Abundance of strong market demand and
customers willing to pay
Seafood in Japan
Seafood in Japan
Efficiency Seeking
Efficiency Seeking
Economies of scale and abundance of
low-cost factors
Economies of scale and abundance of
low-cost factors
Manufacturing in China
Manufacturing in China
Innovation Seeking
Innovation Seeking
Abundance of innovative individuals, firms,
and universities
Abundance of innovative individuals, firms,
and universities
IT in Silicon Valley and Bangalore, financial services
in New York and London and aerospace in Russia
IT in Silicon Valley and Bangalore, financial services
in New York and London and aerospace in Russia
Source: First two columns adapted from J. Dunning, 1993, Multinational Enterprises and the Global Economy (pp. 82–83), Reading, MA: Addison-Wesley.
Copyright © 2009 Cengage. All rights reserved.
Table 6.1

11. First Mover Advantages and Late Mover Advantages
LATE MOVER ADVANTAGES (OR FIRST MOVER DISADVANTAGES)
Proprietary, technological leadership
Opportunity for free ride on first mover investments
Preemption of scarce resources
Resolution of technological and market uncertainty
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 stakeholders
Such as customers and governments
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Table 6.2

12. 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
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13. 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
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14. 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
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15. How To Enter? The second step: See the following four slides
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16. 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: 535–554.
Copyright © 2009 Cengage. All rights reserved.
Figure 6.3

17. Modes of Entry: Advantages and Disadvantages
ENTRY MODES
ADVANTAGES
DISADVANTAGES
1. Non-equity modes: Exports
Economies of scale in production
concentrated in home country
High transportation costs for
bulky products
Direct 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)
No need to directly handle
export processes
Inability to learn how to operate
overseas
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Table 6.3

18. Modes of Entry: Advantages and Disadvantages
ENTRY MODES
ADVANTAGES
DISADVANTAGES
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
Comarketing
Ability to reach more customers
Limited coordination
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Table 6.3 (cont’d)

19. Modes of Entry: Advantages and Disadvantages
ENTRY MODES
ADVANTAGES
DISADVANTAGES
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: Wholly
owned 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)
Acquisitions
Same as green-field (above)
Same as green-field (above),
except slow speed
Fast entry speed
Post-acquisition integration
problems
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Table 6.3(cont’d)

20. 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?
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21. 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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