6

cchapter
h a p t
e r

Entering Foreign
Markets
Part II:

Business-Level Strategies

Global Strategy
Mike W. Peng
Copyright 2009 Cengage.
All rights reserved.

PowerPoint Presentation by John Bowen, Columbus State Community College

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

62

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

63

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

64

Firm Size, Domestic Market Size, and

Propensity to Internationalize

Copyright 2009 Cengage. All

Figure 6.1

65

A Comprehensive Model of
Foreign Market Entries

Copyright 2009 Cengage. All

Figure 6.2

66

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

Copyright 2009 Cengage. All

67

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

Copyright 2009 Cengage. All

68

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

Copyright 2009 Cengage. All

69

Where to Enter?
Location-Specific Advantages (contd)

STRATEGIC
GOALS
STRATEGIC
GOALS

LOCATION-SPECIFIC
ADVANTAGES
LOCATION-SPECIFIC
ADVANTAGES

ILLUSTRAVTIVE
LOCATIONS
MENTIONED
IN THE
TEXTTEXT
ILLUSTRAVTIVE
LOCATIONS
MENTIONED
IN THE

Natural
Resource
Seeking
Natural
Resource
Seeking

Possession
of natural
resources
andand
related
Possession
of natural
resources
related
Transport
andand
communication
infrastructure
Transport
communication
infrastructure

Oil inOil
the
East,East,
Russia,
and Venezuela
inMiddle
the Middle
Russia,
and Venezuela

Market
Seeking
Market
Seeking

Abundance
of strong
market
demand
andand
Abundance
of strong
market
demand
customers
willing
to pay
customers
willing
to pay

Seafood
in Japan
Seafood
in Japan

Efficiency
Seeking
Efficiency
Seeking

Economies
of scale
andand
abundance
of of
Economies
of scale
abundance
low-cost
factors
low-cost
factors

Manufacturing
in China
Manufacturing
in China

Innovation
Seeking
Innovation
Seeking

Abundance
of innovative
individuals,
firms,
Abundance
of innovative
individuals,
firms,
andand
universities
universities

IT inIT
Silicon
Valley
and Bangalore,
financial
services
in Silicon
Valley
and Bangalore,
financial
services
in New
YorkYork
and London
and aerospace
in Russia
in New
and London
and aerospace
in Russia

Source: First two columns adapted from J. Dunning, 1993, Multinational Enterprises
and the Global Economy (pp. 8283), Reading, MA: Addison-Wesley.

Copyright 2009 Cengage. All

Table 6.1
610

First Mover Advantages and Late Mover Advantages

FIRST 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 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

Copyright 2009 Cengage. All

Table 6.2

611

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

612

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

613

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

614

How To Enter?
The second step: See the following four slides

Copyright 2009 Cengage. All

615

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: 535554.

Copyright 2009 Cengage. All

Figure 6.3

616

Modes of Entry: Advantages and Disadvantages

ENTRY MODES

ADVANTAGES

DISADVANTAGES

Economies of scale in production

concentrated in home country

High transportation costs for

bulky products

Better control over distribution

(relative to indirect export)

Marketing distance from

customers

1. Non-equity modes: Exports

Direct Exports

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

Table 6.3

617

Modes of Entry: Advantages and Disadvantages

ENTRY MODES

ADVANTAGES

DISADVANTAGES

Low development costs

Little control over technology

and marketing

2. NON-EQUITY MODES:
CONTRACTUAL AGREEMENTS
Licensing/Franchising

Low risk in overseas expansion

May create competitors

Inability to engage in global
coordination
Turnkey projects

R&D contracts

Ability to earn returns from

process technology in countries
where FDI is restricted

May create efficient competitors

Ability to tap into the best

locations for certain innovations
at low costs

Difficult to negotiate and enforce

contracts

Lack of long-term presence

May nurture innovative

competitors
May lose core innovation
capabilities

Comarketing

Ability to reach more customers

Copyright 2009 Cengage. All

Limited coordination

Table 6.3 (contd)

618

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

Acquisitions

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)

Fast entry speed

Post-acquisition integration
problems

Copyright 2009 Cengage. All

Table 6.3(contd)

619

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 ecommerce follow?
Is the Internet borderless or subject to
specific governments?

Copyright 2009 Cengage. All

620

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

621