Entering Foreign Markets 6 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.

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.

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.

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.

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

A Comprehensive Model of Foreign Market Entries Copyright © 2009 Cengage. All rights reserved. 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 Copyright © 2009 Cengage. All rights reserved.

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 Copyright © 2009 Cengage. All rights reserved.

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 Copyright © 2009 Cengage. All rights reserved.

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

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 Copyright © 2009 Cengage. All rights reserved. Table 6.2

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.

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.

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.

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

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

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 Copyright © 2009 Cengage. All rights reserved. Table 6.3

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 Copyright © 2009 Cengage. All rights reserved. Table 6.3 (cont’d)

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 Copyright © 2009 Cengage. All rights reserved. Table 6.3(cont’d)

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. 4

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. 4