Global Strategy 1e.
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Transcript Global Strategy 1e.
6
chapter
Entering Foreign
Markets
Part II: Business-Level Strategies
Global Strategy
Mike W. Peng
Copyright © 2005 South-Western.
All rights reserved.
PowerPoint Presentation by David Ahlstrom, Chinese University of Hong Kong
and Charlie Cook, The University of West Alabama
Why Go Abroad?
• Answers typically include:
To reach larger economies of scale by selling to more
customers in other countries.
To reduce the risk of over dependence on one
country by spreading sales in multiple countries.
To replicate the success at home in new settings.
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6–2
Why Go Abroad?
Overcoming the Liability of Foreignness
• The Liability of Foreignness
The inherent disadvantage foreign firms experience in
host countries because of their non-native status.
Liability is manifested in two dimensions:
The
numerous differences in formal and informal
institutions in different countries (e.g., regulatory,
language, and cultural differences). Failure to
recognize these rules may cost foreign firms dearly.
Customers
discriminate against foreign firms,
sometimes formally and other times informally.
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6–3
Why Go Abroad?
Overcoming the Liability of Foreignness
• To offset the liability of foreignness, foreign firms
must employ overwhelming resources and
capabilities (in some aspects).
Superior knowledge about institutional intricacies in
various countries
Superior technologies
Superior organizational, marketing, and financial
capabilities
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6–4
Why Go Abroad?
Understanding the Propensity to Internationalize
• Not every firm is ready for going abroad.
Prematurely venturing overseas may be detrimental
to overall firm performance, especially for smaller
firms whose margin for error is very small.
• Factors underlying the motivation to go abroad:
Size of the firm
Size of the domestic market
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6–5
Firm Size, Domestic Market Size, and
Propensity to Internationalize
Figure 6.1
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6–6
A Comprehensive Model of
Foreign Market Entries
Figure 6.2
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6–7
A Comprehensive Model
of Foreign Market Entries
• Industry-Based Considerations
Rivalry among established competitors
Attack, counter-attack, or avoid
High entry barriers
More active foreign market entries
Bargaining power of suppliers
Entry through backward vertical integration
Bargaining power of buyers
Entry through forward vertical integration (e.g.
Sony acquiring Columbia pictures)
Threat of substitute products from abroad
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6–8
A Comprehensive Model of
Foreign Market Entries (cont’d)
• Resource-Based Considerations
On firm-specific resources and capabilities:
Value:
The more valuable, the better overseas
Rarity:
The rarer, the better
Imitability:
The easier to be imitated, the more
dangerous overseas
Organization:
The more bundled as a system, the
better
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6–9
A Comprehensive Model of
Foreign Market Entries (cont’d)
• Institution-Based Considerations
Regulatory risks: Obsolescing bargain – change of attitudes by
the host country governments toward the MNCs after their
entries
Trade barriers:
Tariff barriers
Nontariff barriers (safety inspections, local content
requirements, entry modes restrictions)
Currency risks: Speculation and hedging
Cultural distances
Institutional norms
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6–10
A Comprehensive Model: A Synthesis
• How each of the three perspectives on
strategy—industry-, resource-, and institutionbased—sheds additional light on foreign entry
decisions.
• To make an optimal decision, given these
conflicting forces, strategists often have to make
a series of entry decisions along the 2W1H
dimensions (where, when, and how).
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6–11
Where to Enter?
Location-Specific Advantages
• Location-Specific Advantages
Geographical features difficult to match by others.
Singapore, Austria, Turkey, Miami
Clustering of economic activities (agglomeration).
Knowledge spillover among closely located firms
that attempt to hire individuals from competitors.
A regional skilled labor force available to work for
different firms.
A
regional pool of specialized suppliers and
buyers.
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6–12
Where to Enter?
Cultural/Institutional Distances and
Foreign Entry Locations
• Cultural Distance
The difference between two cultures along some
identifiable dimensions (such as power distance).
• Institutional Distance
The extent of similarity or dissimilarity between the
regulatory, normative, and cognitive institutions of
two countries.
Firms from common-law countries are more likely to
be interested in other common-law countries
Colony-colonizer links boost trade by 900% (e.g.
Great Britain – Commonwealth countries and France
– West Africa)
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6–13
Where to Enter?
Cultural/Institutional Distances and
Foreign Entry Locations (cont’d)
• Two schools of thought have emerged:
Stage models in which firms enter culturally similar
countries during the first stage of internationalization
and, as they gain confidence, enter culturally more
distant countries in later stages.
Critics of stage models argue that considerations of
strategic goals such as market and efficiency are
more important than cultural/institutional
considerations as suggested by stage models
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6–14
When to Enter?
• First or Late Mover Advantages
While evidence supports first mover advantages,
there is also evidence supporting a late mover
strategy.
Although first movers may have an opportunity to
gain advantage, pioneering status is not a birthright
for success
• Entry timing, although important, is not the sole
determinant of success and failure of foreign
entries.
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6–15
How to Enter?
Scale of Entry: Commitment and Experience
• Large-Scale Entries
Benefits
A demonstration of strategic commitment to certain
markets, which both assures local customers and
suppliers and deters potential entrants.
Drawbacks
Large-scale entry limits strategic flexibility
elsewhere.
Entrants must incur sizable losses if the large-scale
entry “bet” turns out to be wrong.
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6–16
How to Enter? (cont’d)
Scale of Entry: Commitment and Experience
• Small-Scale Entries
Benefits
Less costly if entry is unsuccessful.
Organization learns through hands-on experience
in host countries.
Drawbacks
A lack of strong strategic commitment, which may
lead to difficulties in building market share and
capturing first mover advantages.
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6–17
How To Enter?
Modes of Entry: The First Step
• Factors Affecting the Choice of Entry Mode:
Among numerous modes of entry, strategists are
unlikely to consider all of them at the same time.
Given the complexity, strategists must prioritize by
considering only a few manageable key variables first
and then consider other variables later.
A
hierarchical model shown in Figure 6.3 and
explained in Table 6.4 is helpful.
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6–18
The Choice of Entry Modes: A Hierarchical 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 © 2005 South-Western. All rights reserved.
Figure 6.3
6–19
How To Enter?
Modes of Entry: The First Step (cont’d)
• The crucial first step: equity or non-equity modes
• This is what defines a multinational enterprise
(MNE) and a non-MNE
Equity modes: Through foreign direct investment (FDI)
Direct control and management of value-adding
activities overseas—key word is direct, as opposed to
foreign portfolio investment (FPI)
If a firm does not have FDI, it can still engage in
international business (through non-equity modes), but
it is not an MNE.
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6–20
How To Enter?
The MNE advantages: OLI
• Ownership (O): Better management and coordination
internationally
• Location (L): Location, location, location! (see “Where to
enter” section)
• Internalization (I): Replacing arm’s-length market
transactions, which usually have high transaction costs
internationally, with internal relationships among MNE
subsidiaries in different countries
• Relative to the non-MNE, the MNE has a powerful set of
OLI advantages
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6–21
Modes of Entry: Advantages and Disadvantages
Table 6.4 (cont’d)
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6–22
How to Enter?
Making Strategic Choices
• A company may have a variety of entry choices
for different countries and tasks.
Entry strategies may change over time.
Entry strategies, even when successful, do not
guarantee international success; post-entry strategies
are also crucial.
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6–23
Entry Debate:
High Control vs. Low Control
• High control: Better?
• Low control: Not necessarily bad?
No evidence that WOS always perform better than
JVs.
Firms from some countries (e.g., Japan) usually
prefer to have high control, whereas those from other
countries may not have such a preference.
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6–24