Entering Foreign Markets

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Chapter 9

• Entering Foreign Markets

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LEARNING OBJECTIVES

• After studying this chapter, you should be able
  to
• Understand how institutions and resources affect
  liability of foreignness
• Match the quest for location-specific advantages
  with strategic goals (where to enter)
• Compare and contrast first- and late-mover
  advantages (when to enter)
• Follow the comprehensive model of foreign market
  entries (how to enter)
• Participate in three leading debates on foreign
  market entries
• Draw implications for action

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LIABILITY OF FOREIGNNESS

• the inherent disadvantage foreign firms
  experience in host countries because of their
  nonnative status
• differences in formal and informal institutions
  governing the rules of the game in different
  countries
• local firms are already well versed in these
  rules, but foreign firms have to learn the rules
  quickly
• foreign firms are often still discriminated
  against, sometimes formally and other times
  informally

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WHERE TO ENTER?

• location-specific advantages - favorable
  locations in certain countries may give firms
  operating there an advantage
• agglomeration - beyond geographic advantages,
  location-specific advantages also arise from the
  clustering of economic activities in certain
  locations
• natural resource seeking - resources are tied to
  particular foreign locations

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WHERE TO ENTER?

• innovation seeking - firms target countries and
  regions renowned for generating world-class
  innovations
• market seeking - firms go after countries that
  offer strong demand for their products and
  services
• efficiency seeking - firms single out the most
  efficient locations featuring a combination of
  scale economies and low-cost factors

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Cultural/Institutional Distancesand Foreign
Entry Locations

• cultural distance - difference between two
  cultures along some identifiable dimensions (such
  as individualism)
• institutional distance - extent of similarity or
  dissimilarity between the regulatory, normative,
  and cognitive institutions of two countries
• stage models - school of thought that believes
  that firms will enter culturally similar
  countries during their first stage of
  internationalization and that they may gain more
  confidence to enter culturally distant countries
  in later stages

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WHEN TO ENTER?

• first-mover advantages - advantages that
• first entrants into a market obtain and that
  later movers do not enjoy
• first-movers - may also encounter significant
  disadvantages, which in turn become late-mover
• advantages

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HOW TO ENTER?

• scale of entry
• large-scale entries
• demonstrate strategic commitment to certain
  markets, assuring local customers and suppliers
  for the long haul
• deters potential entrants
• hard-to-reverse strategic commitments limit
  strategic flexibility elsewhere and incur huge
  losses if these large-scale bets turn out wrong
• small-scale entries
• less costly
• focus on organizational learning by getting
  firms feet wetlearning by doinglimiting the
  downside risk

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First Step Equity vs Nonequity Modes

• nonequity mode - exports and contractual
  agreements that tend to reflect relatively
  smaller commitments to overseas markets
• equity mode - JVs and wholly owned subsidiaries
  indicative of relatively larger, harder to
  reverse commitments

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Second Stepon Making Actual Selections

• direct export - most basic mode of entry
  capitalizes on economies of scale in production
  concentrated in the home country and affords
  better control over distribution
• indirect export - exporting through domestically
  based export intermediaries
• licensing/franchising - agreement in which the
  licensor/franchisor sells the rights to
  intellectual property such as patents and
  know-how to the licensee/franchisee for a royalty
  fee

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Second Stepon Making Actual Selections

• turnkey project - projects in which clients pay
  contractors to design and construct new
  facilities and train personnel
• build-operate-transfer (BOT) agreement -
  nonequity mode of entry used to build a longer
  term presence
• RD contract - outsourcing agreements in RD
  between firms

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Second Stepon Making Actual Selections

• co-marketing - efforts among a number of firms to
  jointly market their products and services
• joint venture - corporate entity formed and
  jointly owned by two or more parent companies
• wholly owned subsidiary - entity that is
  controlled through the ownership of shares in the
  subsidiary by the parent entity

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Second Stepon Making Actual Selections

• green-field operation - wholly owned subsidiary
  created by building new factories and offices
  from scratch
• acquisition - wholly owned subsidiary created
  through direct foreign investment

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Liability versus Asset of Foreignness

• Being foreign can be an asset (that is, a
  competitive advantage).
• However, whether foreignness is indeed an asset
  or a liability remains tricky.

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Global versus Regional GeographicDiversification

• Despite the widely held belief (and frequently
  voiced criticism from antiglobalization
  activists) that MNEs are expanding globally,
  surprisingly, even among the largest Fortune
  Global 500 MNEs, few are truly global.
• Should most MNEs further globalize?

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Cyberspace versus Conventional Entries

• The arrival of the Internet has sparked a new
  debate Whose rules of the game should e-commerce
  follow?

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