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Global Strategy Mike W. Peng c h a p t e r 66 Copyright © 2009 Cengage.PowerPoint Presentation by John Bowen, Columbus State Community College All rights.

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Presentation on theme: "Global Strategy Mike W. Peng c h a p t e r 66 Copyright © 2009 Cengage.PowerPoint Presentation by John Bowen, Columbus State Community College All rights."— Presentation transcript:

1 Global Strategy Mike W. Peng c h a p t e r 66 Copyright © 2009 Cengage.PowerPoint Presentation by John Bowen, Columbus State Community College All rights reserved. Entering Foreign Markets Part II: Business-Level Strategies Global Strategy Mike W. Peng chapter 6 6

2 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

3 Copyright © 2009 Cengage. All rights reserved.6–3 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

4 Copyright © 2009 Cengage. All rights reserved.6–4 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

5 Copyright © 2009 Cengage. All rights reserved.6–5 Firm Size, Domestic Market Size, and Propensity to Internationalize Figure 6.1

6 Copyright © 2009 Cengage. All rights reserved.6–6 A Comprehensive Model of Foreign Market Entries Figure 6.2

7 Copyright © 2009 Cengage. All rights reserved.6–7 A Comprehensive Model of Foreign Market Entries (contd) 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

8 Copyright © 2009 Cengage. All rights reserved.6–8 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

9 Copyright © 2009 Cengage. All rights reserved.6–9 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

10 Copyright © 2009 Cengage. All rights reserved.6–10 Where to Enter? Location-Specific Advantages (contd) Table 6.1 Source: First two columns adapted from J. Dunning, 1993, Multinational Enterprises and the Global Economy (pp. 82–83), Reading, MA: Addison-Wesley. STRATEGIC GOALSLOCATION-SPECIFIC ADVANTAGES ILLUSTRAVTIVE LOCATIONS MENTIONED IN THE TEXT Natural Resource SeekingPossession of natural resources and related Transport and communication infrastructure Oil in the Middle East, Russia, and Venezuela Market SeekingAbundance of strong market demand and customers willing to pay Seafood in Japan Efficiency SeekingEconomies of scale and abundance of low-cost factors Manufacturing in China Innovation SeekingAbundance of innovative individuals, firms, and universities IT in Silicon Valley and Bangalore, financial services in 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 related Transport and communication infrastructure Oil in the Middle East, Russia, and Venezuela Market SeekingAbundance of strong market demand and customers willing to pay Seafood in Japan Efficiency SeekingEconomies of scale and abundance of low-cost factors Manufacturing in China Innovation SeekingAbundance of innovative individuals, firms, and universities IT in Silicon Valley and Bangalore, financial services in New York and London and aerospace in Russia

11 Copyright © 2009 Cengage. All rights reserved.6–11 First Mover Advantages and Late Mover Advantages Table 6.2 FIRST MOVER ADVANTAGESLATE MOVER ADVANTAGES (OR FIRST MOVER DISADVANTAGES) Proprietary, technological leadershipOpportunity for free ride on first mover investments Resolution of technological and market uncertaintyPreemption of scarce resources Establishment of entry barriers for late entrantsFirst movers 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

12 Copyright © 2009 Cengage. All rights reserved.6–12 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

13 Copyright © 2009 Cengage. All rights reserved.6–13 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

14 Copyright © 2009 Cengage. All rights reserved.6–14 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

15 Copyright © 2009 Cengage. All rights reserved.6–15 How To Enter? The second step: See the following four slides

16 Copyright © 2009 Cengage. All rights reserved.6–16 The Choice of Entry Modes: A Decision Model Figure 6.3 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.

17 Copyright © 2009 Cengage. All rights reserved.6–17 Modes of Entry: Advantages and Disadvantages Table 6.3 ENTRY MODESADVANTAGESDISADVANTAGES High transportation costs for bulky products Economies of scale in production concentrated in home country 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) Inability to learn how to operate overseas No need to directly handle export processes 1. Non-equity modes: Exports

18 Copyright © 2009 Cengage. All rights reserved.6–18 Modes of Entry: Advantages and Disadvantages Table 6.3 (contd) ENTRY MODES ADVANTAGESDISADVANTAGES 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

19 Copyright © 2009 Cengage. All rights reserved.6–19 Modes of Entry: Advantages and Disadvantages Table 6.3(contd) ENTRY MODESADVANTAGESDISADVANTAGES 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) Same as green-field (above), except slow speed Same as green-field (above)Acquisitions Fast entry speed Post-acquisition integration problems

20 Copyright © 2009 Cengage. All rights reserved.6–20 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?

21 Copyright © 2009 Cengage. All rights reserved.6–21 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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