Chapter 10 - Class slides PDF

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CHAPTER 10 ENTERING FOREIGNMARKETS ›

LIABILITY OF FOREIGNNESS • •

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Inherent disadvantage faced by foreign firms in host countries because of their nonnative status Manifested in two ways - Differences in how formal and informal institutions govern the rules of the game in different countries - Discrimination of foreign firms

OVERCOMING THE LIABILITY OF FOREIGNNESS Differences in formal institutions may lead to regulatory risks due to differences in political, economic, and legal systems. Informally, numerous differences in cultures, norms, and values create another major source of liability of foreignness. The institution-based view suggests that firms need to undertake actions deemed legitimate and appropriate by the various formal and informal institutions governing market entries.

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10.1.

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Institution-based view - Firms need to take actions deemed legitimate by formal and informal institutions that govern market entries Resource-based view - Foreign firms need to deploy overwhelming resources and capabilities o Significant competitive advantage should remain even after offsetting the liability of foreignness

INSTITUTIONS, RESOURCES, AND FOREIGN MARKET ENTRIES

FACTORS FOR CHOOSING FOREIGN ENTRY LOCATIONS • •

Strategic goals Location-specific advantages: (1) knowledge spillovers among closely located firms, (2) industry demand that creates a skilled labor force (3) industry demand that facilitates a pool of specialized suppliers and buyers. o Agglomeration: explains why certain cities and regions can attract businesses even in the absence of obvious geographic advantages.

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Cultural and institutional distances Certain locations simply possess geographical features that are difficult for others to match.

10.2.

MATCHING STRATEGIC GOALS WITH LOCATIONS

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WAYS TO OVERCOME CULTURAL AND INSTITUTIONAL DISTANCES • •

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Firms can enter culturally similar countries during the first stage of internationalization - Gain more confidence to enter culturally distant countries in later stages Firms can give more importance to strategic goals than culture and institutions

ENTRY TIMINGS • •

10.3.

Firms seeking natural resources have to go to particular foreign locations where those resources are found. Market-seeking firms go to countries that have a strong demand for their products and services. Efficiency-seeking firms often single out the most efficient locations featuring a combination of scale economies and low-cost factors. Innovation-seeking firms target countries and regions renowned for generating world-class innovations.

First-mover advantage: Benefit that accrues to firms that enter the market first and that later entrants do not enjoy Late-mover advantage: Benefit that accrues to firms that enter the market later and that early entrants do not enjoy

FIRST-MOVER ADVANTAGES AND LATE-MOVER ADVANTAGES

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Although first movers may have an opportunity to win, their pioneering status is not a guarantee of success. Entry timing cannot be viewed in isolation. It is through interaction with other strategic variables that entry timing has an impact on performance. SCALE OF ENTRY • •

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MODES OF ENTRY •

In the first step, considerations for small-scale versus large-scale entries usually boil down to the equity (ownership) issue.

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Methods used to enter a foreign market Non-equity mode: Mode of entering foreign markets through exports and/or contractual agreements - Tends to reflect relatively smaller commitments to overseas markets Equity mode: Mode of entering foreign markets through joint ventures and/or wholly owned subsidiaries - Indicates a relatively larger, hard-to-reverse commitment - Calls for the establishment of independent organizations overseas

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10.4.

Amount of resources committed to entering a foreign market Large-scale entries: - Show a strategic commitment to certain markets - Assure local customers and suppliers in the long run - Deter potential entrants Drawbacks of large-scale entries - Limited strategic flexibility - Huge losses can occur if the large-scale bets are wrong Small-scale entries: - Are less expensive and limit downside risk - Focus on organizational learning - Lack the commitment necessary to build market share and to capture first-mover advantages

CHOICE OF ENTRY MODELS: A COMPREHENSIVE MODEL

A comprehensive model of potential modes of entry into foreign markets. Non-equity modes tend to reflect relatively smaller commitments to overseas markets. Equity modes indicate a relatively larger, harder-to-reverse commitment. ›

NON-EQUITY MODES - TYPES OF EXPORTS

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Direct exports - Basic mode of entry - Capitalize on economies of scale in production concentrated in the home country Indirect exports - Involve exporting through domestically based export intermediaries

› NON-EQUITY MODES - TYPES OF CONTRACTUAL AGREEMENTS •

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Licensing/franchising agreements - Licensor/franchisor sells the rights to intellectual property to licensee/franchisee for a royalty fee Turnkey projects: Clients pay contractors to design and construct new facilities and train personnel Co-marketing: Efforts among a number of firms to jointly market their products and services Build-operate-transfer (BOT) agreement - Involves building and operating a facility for a period of time before transferring operations to a domestic agency or firm - Used to establish a longer-term presence Research and development (R&D) contracts: Outsourcing agreements in R&D between firms

› EQUITY MODES • •

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Joint venture (JV): New corporate entity jointly created and owned by two or more parent companies Wholly owned subsidiary (WOS) - Subsidiary located in a foreign country that is entirely owned by the parent multinational - Means to set up a WOS o Greenfield operations: Building new factories and offices from scratch o Acquisitions

MODES OF ENTRY: ADVANTAGES AND DISADVANTAGES PT 1

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PT 2

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10.6. IMPLICATIONS FOR ACTION • • •

Understand the rules of game- both formal and informal- governing competition in foreign markets Develop overwhelming resources and capabilities to offset the liability of foreignness Match efforts in market entry with strategic goals

KEY TERMS • Location-specific advantage • Cultural distance • Institutional distance • First-mover advantage • Late-mover advantage • Scale of entry • Mode of entry • Non-equity mode • Equity mode • Turnkey project • Build-operate-transfer (BOT) agreement • Research and development (R&D) contract • Dumping • Co-marketing • Joint venture (JV) • Wholly owned subsidiary (WOS) • Greenfield operation SUMMARY • Institution-based view and resource-based view shed a lot of light on firms’ internationalization • Choosing locations depends on strategic goals and cultural and institutional distances • Entry timing can impact a firm’s performance • While entering a new market, entrepreneurs must consider the pros and cons of various entry modes • Managers should understand the rules governing global competition and develop skills to counter foreign liabilities...