6 Chapter 6 chapter Entering Foreign Markets Global

6 Chapter 6 chapter Entering Foreign Markets Global Strategy Global Mike W. Peng Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Outline • Overcoming the liability of foreignness • A comprehensive model of foreign market entries • Where to enter? • When to enter? • How to enter? • Debates and extensions • The savvy strategist Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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 Copyright © 2014 Cengage Learning. All foreignness Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Understanding the Propensity to Internationalize • The underlying factors Ø The size of the firm Ø The size of the domestic market • The propensity Ø Enthusiastic internationalizer Ø Follower internationalizer Copyright © 2014 Cengage Learning. Ø Slow internationalizer All Rights Reserved. May not be scanned, copied or duplicated, or Ø Occasional internationalizer posted to a publicly accessible website, in whole or in part.

Firm Size, Domestic Market Size, and Propensity to Internationalize Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 6. 1

A Comprehensive Model of Foreign Market Entries 6

A Comprehensive Model of Foreign Market Entries (cont’d) • Industry-based considerations Ø Rivalry Ø Entry barriers Ø Bargaining power of suppliers Ø Bargaining power of buyers Ø Substitute products • Resource-based considerations Ø Value of firm-specific resources and capabilities Ø The rarity of firm-specific assets Ø Transaction costs Ø Methods organizing firm-specific Copyright © 2014 of Cengage Learning. All Rightsresources Reserved. and Maycapabilities not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A Comprehensive Model of Foreign Market Entries (cont’d) • Institution-Based Considerations Ø Regulatory risks: Obsolescing bargain Ø Trade barriers: v Tariff barriers v Nontariff barriers (safety inspections, local content requirements, entry modes restrictions) Ø Currency risks: Speculation and hedging Copyright © 2014 Cengage Learning. - May Different All Synthesis Rights Reserved. not be considerations may foreign entrant in different directions scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. • pull the

Where to Enter? Location-Specific Advantages • Location Specific Advantages Ø Geographical advantages Ø Agglomeration - clustering of economic activities • Strategic Goals: Seeking natural resources, markets, efficiency and innovation • Cultural/Institutional Distances and Foreign Entry Locations Ø Cultural distance - the difference between two cultures Ø Institutional distance - comparing the regulatory, normative, and cognitive Copyright © 2014 institutions Cengage Learning. All Rights Reserved. not be stage models vs strategic goals Ø Two schools May of thought: scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Where to Enter? Matching Strategic Goals with Locations STRATEGIC GOALS LOCATION-SPECIFIC ADVANTAGES EXAMPLES IN THE TEXT ILLUSTRAVTIVE LOCATIONS MENTIONED IN THE TEXT Natural Resource Seeking Possession of natural resources andand related Possession of natural resources related Transport andand communication infrastructure Transport communication infrastructure Oil in. Oil the East, Russia, and Venezuela in. Middle the Middle Russia, and Venezuela Market Seeking Abundance of strong market demand andand Abundance of strong market demand customers willing to pay GM Seafood in China in Japan Efficiency Seeking Economies of scale andand abundance of of Economies of scale abundance low-cost factors Manufacturing in China (especially in Shanghai) Manufacturing in China Innovation Seeking Abundance of innovative individuals, firms, andand universities IT in IT Silicon Valley and Bangalore, telecom in Dallas, in Silicon Valley and Bangalore, financial services and aerospace inand Russia in New York 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 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CULTURAL/INSTITUTIONAL DISTANCES AND FOREIGN ENTRY LOCATIONS Cultural distance difference between two cultures along identifiable dimensions. Ex: individualism. Institutional distance – the extent of similarity or dissimilarity between regulatory, normative and cognitive institutions of two countries. Ø Stage model – suggests that firms enter culturally similar countries first. Ø Alternative model – highlights the importance of strategic goals rather than cultures and institutions. 11

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When to Enter? • First mover advantages Ø Developing proprietary, technological leadership Ø Preempting scarce assets Ø Establishing entry barriers Ø Becomes the dominant firm Ø Opportunity for relationships with key stakeholders • Late mover advantages: benefit from first mover investments, experience, and inflexibility Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

How to Enter? Scale of Entry: Commitment and Experience • Large-Scale Entries Ø Benefit from a strategic commitment Ø Drawbacks of large-scale entries: Limited strategic flexibility and potential huge losses • Small-scale entries Ø Focus on accumulating experience Ø “Learning by doing” Ø Drawbacks of small-scale entries Copyright © 2014 Cengage Learning. v A lack of strong strategic commitment All Rights Reserved. May not be scanned, copied or duplicated, or v Difficulties in building market share posted to a publicly accessible website, in whole or in part.

How To Enter? Modes of Entry: Two Steps • First step Ø Strategists must prioritize variables Ø A decision model is helpful Ø Non-equity vs equity modes v Level of commitment v Contractual and ownership alternatives • Foreign direct investment advantages Ø Ownership Copyright © 2014 Cengage Learning. Ø Location All Rights Reserved. May not be Ø Internalization scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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How To Enter? • The second step: See the following three slides Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Modes of Entry: Advantages and Disadvantages Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 6. 3

Modes of Entry: Advantages and Disadvantages Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 6. 3 (cont’d)

Debates and Extensions • Liability versus Asset of Foreignness Ø Some foreignness can be an asset (“cool”): the “country of origin” effect • Global versus Regional Triad Concentration Geographic Diversification Ø Should MNEs truly globalize? • Old-line versus emerging multinationals: OLI versus LLL Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Savvy Strategist • Thoroughly understand the dynamism underlying the industry in a foreign market you are looking into • Develop overwhelming capabilities to offset the liability of foreignness • Understand the rules of the game • Match entries with specific goals Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.