6 1 overcoming the liability of foreignness it is not easy to s

1. 6-1 OVERCOMING THE LIABILITY OF FOREIGNNESS
It is not easy to succeed in an unfamiliar environment. foreign
firms have to overcome a liability of foreignness, which is the
inherent disadvantage that foreign firms experience in host
countries because of their nonnative status. Such a liability is
manifested in at least two ways. First, numerous differences in
formal and informal institutions govern the rules of the game in
different countries. While local firms are already well versed in
these rules, foreign firms have to invest significant resources to
learn such rules. Some of the rules are in favor of local firms.
For example, after working for years to familiarize itself with
US defense procurement rules, European Aeronautic Defence
and Space (EADS), the maker of Airbus, in 2008 won a major
$35 billion contract to supply the US Air Force with next-
generation refueling tankers. Then EADS (along with its US
partner, Northrop Grumman) was disappointed to find out that
Boeing was able to twist the arms of politicians and change the
rules. In 2010, Boeing emerged as the winner of this rich prize
and EADS (which more recently changed its name to the Airbus
Group) had to drop out.
Second, although customers in this age of globalization
supposedly no longer discriminate against foreign firms, the
reality is that foreign firms are often still discriminated against,
sometimes formally and other times informally. For example,
activists in India accused both Coca-Cola and PepsiCo that their
products contained higher-than-permitted levels of pesticides
but did not test any Indian branded soft drinks, even though
pesticide residues are present in virtually all groundwater in
India. Although both Coca-Cola and PepsiCo denied these
charges, their sales suffered.
The Notion of Foreignness
Against such significant odds, how do foreign firms crack new

2. markets? The answer boils down to our two core Perspectives.
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. Differences
in formal institutions may lead to regulatory risks due to
differences in political, economic, and legal systems. There may
be numerous trade and investment barriers on a national or
regional basis. In addition, the existence of multiple
currencies—and currency risks as a result—may be another
formal barrier. Informally, numerous differences in cultures,
norms, and values create another major source of liability of
foreignness. The resource-based view argues that foreign firms
need to deploy overwhelming resources and capabilities that
after offsetting the liability of foreignness, there is still
significant competitive advantage left. Applying the VRIO
framework.
Overall, our two core perspectives shed a lot of light on firms’
internationalization. Sometimes, instead of having to overcome
the liability of foreignness, some firms may leverage their asset
of foreignness. Nevertheless, how to enter foreign markets
remains an art rather than a science. Next, we investigate the
2W1H dimensions associated with foreign market entries.
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6-2 WHERE TO ENTER
What's behind China's growing presence in Latin America?
Similar to real estate, the motto for IB is “location, location,
location.” In fact, such a spatial perspective (that is, doing
business outside of one’s home country) is one of the defining
features of IB. Two sets of considerations drive the location of
foreign entries: (1) strategic goals and (2) cultural and
institutional distances.
Location-Specific Advantages and Strategic Goals

3. Favorable locations in certain countries may give firms
operating there what are called location-specific advantages.
Location-specific advantages are the benefits a firm reaps from
features specific to a particular place. Certain locations simply
possess geographical features that are difficult for others to
match. Leading seaports and airports naturally attract a lot of
foreign entrants. For example, Miami, the self-styled “Gateway
of the Americas,” is an ideal location both for North American
firms looking south and Latin American firms coming north.
Vienna is an attractive site as multinational regional
headquarters for Central and Eastern Europe. Dubai is an ideal
stopping point for air traffic between Europe and Asia and
between Africa and Asia. Two billion people live within four
hours of flying time from Dubai, and four billion can be reached
within seven hours. Dubai’s airport is already the third busiest
international airport in terms of passengers behind only London
Heathrow and Hong Kong airports. Similarly, Rotterdam, the
Netherlands, is the main hub for sea-bound transportation into
and out of Europe. More than 500 liner services connect
Rotterdam with over 1,000 ports worldwide. Overall, we may
regard the continuous expansion of global business as an
unending saga in search of location- specific advantages.
In the past chapters we learned about agglomeration—location
specific advantages that arise from the clustering of economic
activities in certain locations. The basic idea dates back at least
to Alfred Marshall, a British economist who first published it in
1890. Recall that location- specific advantages stem from (1)
knowledge spillovers among closely located firms that attempt
to hire individuals from competitors, (2) industry demand that
creates a skilled labor force whose members may work for
different firms without having to move out of the region, and
(3) industry demand that facilitates a pool of specialized
suppliers and buyers to also locate in the region. For example,
due to agglomeration, Dallas has the world’s heaviest
concentration of telecom companies. US firms such as AT&T,
HP, Raytheon, Texas Instruments (TI), and Verizon cluster

4. there. Moreover, numerous leading foreign telecom firms such
as Alcatel-Lucent, Ericsson, Fujitsu, Huawei, Siemens,
STMicroelectronics, and ZTE have also converged in this
region.
Given that different locations offer different benefits, it is
imperative that a firm match its strategic goals with potential
locations. The four strategic goals are shown in the Exhibit
below.
Firms seeking natural resources have to go to particular foreign
locations where those resources are found. For example, the
Middle East, Russia, and Venezuela are all rich in oil. Even
when the Venezuelan government became more hostile, Western
oil firms had to put up with it.
Market-seeking firms go to countries that have a strong demand
for their products and services, and the ability of the consumers
to pay for them. As China becomes the largest car market in the
world, practically all the automakers in the world are now
elbowing into it. General Motors (GM) has emerged as the
leader. In 2010, GM for the first time sold more cars in China
than in the United States. As demand for business aviation takes
off in China, business jet makers are now intensely eyeing the
new market.
Seeking market and investment in the Middle East
Efficiency-seeking firms often single out the most efficient
locations featuring a combination of scale economies and low-
cost factors. It is the search for efficiency that induced
numerous multinational enterprises (MNEs) to enter China.
China now manufactures two-thirds of the world’s photocopiers,
shoes, toys, and microwave ovens; and one-third of the desktop
computers, mobile phones, television sets, and steel. Shanghai
alone reportedly has a cluster of over 400 of the Fortune Global
500 firms. It is important to note that China does not present the
absolutely lowest labor costs in the world, and Shanghai is the

5. highest cost city in China. However, its attractiveness lies in its
ability to enhance efficiency for foreign entrants by lowering
total costs.
Innovation-seeking firms target countries and regions renowned
for generating world-class innovations, such as Silicon Valley
and Bangalore (in IT), Dallas (in telecom), and Paris (in
perfumes). Such entries can be viewed as “an option to maintain
access to innovations resident in the host country, thus
generating information spillovers that may lead to opportunities
for future organizational learning and growth.”
What are the top cities for tech in the world?
It is important to note that location-specific advantages may
grow, change, and/or decline, prompting a firm to relocate. If
policy makers fail to maintain the institutional attractiveness
(for example, by raising taxes) and if companies overcrowd and
bid up factor costs such as land and talents, some firms may
move out of certain locations previously considered
advantageous. For example, the Chinese government has raised
minimum wages and tightened environmental regulations. Also,
thanks to the “one child” policy that was first implemented in
the 1980s, the number of low-skill youth entering the labor
market has declined. These changes have eroded the location-
specific advantages of coastal China centered on low cost. As a
result, many labor-intensive, cost-conscious firms have either
moved to inland China (where labor cost has remained
relatively low) or Southeast Asian countries such as Indonesia,
Malaysia, Thailand, and Vietnam (where labor cost is now
lower than that of coastal China).
Cultural/Institutional Distances and Foreign Entry Locations
In addition to strategic goals, another set of considerations
centers on cultural/institutional distances. Cultural distance is
the difference between two cultures along identifiable
dimensions such as individualism. Considering culture as an
informal part of institutional frameworks governing a particular

6. country, institutional distance is “the extent of similarity or
dissimilarity between the regulatory, normative, and cognitive
institutions of two countries.” Broadly speaking, cultural
distance is a subset of institutional distance. For example, many
Western cosmetics products firms, such as L’Oreal and
Victoria’s Secret, have shied away from Saudi Arabia, citing its
stricter rules of personal behavior. In essence, Saudi Arabia’s
cultural and institutional distance from Western cultures is too
large.
Halal cosmetics offer new beauty twist to Muslim faithful
Two schools of thought have emerged in overcoming these
distances. The first is associated with the stage model.
According to the stage model, firms will enter culturally similar
countries during their first stage of internationalization and will
then gain more confidence to enter culturally distant countries
in later stages. This idea is intuitively appealing: It makes sense
for Belgian firms to enter France first and for Mexican firms to
enter Texas first to take advantage of common cultural and
language traditions. On average, business between countries
that share a language is three times greater than between
countries without a common language. Firms from common-law
countries (English speaking countries and Britain’s former
colonies) are more likely to be interested in other common-law
countries. Colony–colonizer links (such as Britain’s ties with
the Commonwealth and Spain’s with Latin America) boost trade
significantly. Overall, certain performance benefits seem to
exist when competing in culturally and institutionally adjacent
countries.
Citing numerous counterexamples, a second school of thought
argues that it is more important to consider strategic goals such
as market and efficiency rather than culture and institutions. For
example, despite the often hostile Congress and the typically
unfriendly US media, many Chinese firms are eager to do
business in the United States. Because the United States is the

7. largest market, cultural and institutional distances between
China and the United States do not seem to matter. Overall, in
the complex calculus underpinning entry decisions, location
represents only one of several important considerations. As
shown next, entry timing and modes are also crucial.
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6-3 WHEN TO ENTER?
Entry timing refers to whether there are compelling reasons to
be an early or late entrant in a particular country. Some firms
look for first-mover advantages, defined as the benefits that
accrue to firms that enter the market first and that later entrants
do not enjoy. Speaking of the power of first-mover advantages,
“Xerox,” “FedEx,” and “Google” have now become verbs, such
as “Google it.” In many African countries, “Colgate” is the
generic term for toothpaste. Unilever, a late mover, is
disappointed to find out that some of its African customers call
its own toothpaste “the red Colgate.” However, first movers
may also encounter significant disadvantages which, in turn,
become late-mover advantages.
· First movers may gain advantage through proprietary
technology. Think about Apple’s iPod, iPad, and iPhone.
· First movers may also make preemptive investments, specially
for scarce resources . A number of Japanese MNEs have cherry-

8. picked leading local suppliers and distributors in Southeast Asia
as new members of the expanded keiretsu networks (alliances of
Japanese businesses with interlocking business relationships
and shareholdings) and have blocked access to the suppliers and
distributors by late entrants from the West.
· First movers may erect significant entry barriers for late
entrants, such as high switching costs due to brand loyalty.
Buyers of expensive equipment are likely to stick with the same
producers for components, training, and other services for a
long time. That is why American, British, French, German, and
Russian aerospace firms competed intensely for Poland’s first
post–Cold War order of fighters— America’s F-16 eventually
won.
· Intense domestic competition may drive some non-dominant
firms abroad to avoid clashing with dominant firms head-on in
their home market. Matsushita, Toyota, and NEC were the
market leaders in Japan, but Sony, Honda, and Epson all entered
the United States in their respective industries ahead of the
leading firms.
· First movers may build precious relationships with key
stakeholders such as customers and governments. For example,
Citigroup, JP Morgan Chase, and Metallurgical Corporation of
China have entered Afghanistan, earning a good deal of
goodwill from the Afghan government that is interested in
wooing more foreign direct investment (FDI).
The potential advantages of first movers may be
counterbalanced by various disadvantages. Numerous first-
mover firms— such as EMI in CT scanners and Netscape in
Internet browsers— have lost market dominance in the long run.
It is such late-mover firms as General Electric and Microsoft
(Explorer), respectively, that win. Specifically, late mover
advantages are manifested in three ways:
· Late movers may be able to free ride on the huge pioneering
investments of first movers. In Saudi Arabia, Cisco invested
millions of dollars to rub shoulders of dignitaries, including the

9. king, in order to help officials grasp the promise of the Internet
in fueling economic development. But it lost out to late movers
such as Ericsson that offered lower cost solutions. For instance,
the brand-new King Abdullah Economic City awarded an $84
million citywide telecom project to Ericsson whose bid was
more than 20% lower than Cisco’s—in part because Ericsson
did not have to offer a lot of basic education and did not have to
entertain that much. “We’re very proud to have won against a
company that did as much advance work as Cisco did,” an
elated Ericsson executive noted.
· First movers face greater technological and market
uncertainties. Nissan, for example, has launched the world’s
first all-electric car, the Leaf, which can run without a single
drop of gasoline. However, there are tremendous uncertainties.
After some of these uncertainties are removed, late movers such
as BMW, GM, and Toyota have joined the game with their own
electric cars.
· As incumbents, first movers may be locked into a given set of
fixed assets or are reluctant to cannibalize existing product
lines in favor of new ones. Late movers may be able to take
advantage of the inflexibility of first movers by leapfrogging
them. Although Greyhound, the incumbent in intercity bus
service in the United States, is financially struggling, it cannot
get rid of the expensive bus depots in inner cities that are often
ill-maintained and dreadful. Megabus, the new entrant from
Britain, simply has not bothered to build and maintain a single
bus depot. Instead, Megabus uses curbside stops (like regular
city bus stops), which have made travel by bus more appealing
to a large number of passengers.
Overall, evidence points out both first-mover advantages and
late-mover advantages. Unfortunately, a mountain of research is
still unable to conclusively recommend a particular entry timing
strategy. Although first movers may have an opportunity to win,
their pioneering status is not a guarantee of success. For
example, among the three first movers into the Chinese
automobile industry in the 1980s, Volkswagen captured

10. significant advantages, Chrysler had very moderate success, and
Peugeot failed and had to exit. Although many of the late
movers that entered in the 1990s struggled, GM, Honda, and
Hyundai gained significant market shares. It is obvious that
entry timing cannot be viewed in isolation, and entry timing per
se is not the sole determinant of success and failure of foreign
entries. It is through interaction with other strategic variables
that entry timing has an impact on performance.
The Half-Truth of First Mover Advantage
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7-4 HOW TO ENTER
In this section, we first consider on what scale—large or
small—a firm may enter foreign markets. Then we look at a
comprehensive model for entering foreign markets. The first
step is to determine whether to pursue an equity or non-equity
mode of entry. As we will see, this crucial decision
differentiates MNEs (involving equity modes) from non-MNEs
(relying on non-equity modes). Finally, we outline the pros and
cons of various equity and non-equity modes.
Scale of Entry: Commitment and Experience
One key dimension in foreign entry decisions is the scale of
entry, which refers to the amount of resources committed to
entering a foreign market. Large-scale entries demonstrate a
strategic commitment to certain markets. This helps assure local
customers and suppliers (“We are here for the long haul!”)
while deterring potential entrants. The drawbacks of such a
hard-to-reverse strategic commitment are (1) limited strategic
flexibility elsewhere and (2) huge losses if these large-scale

11. bets turn out to be wrong.
Small-scale entries are less costly. They focus on organizational
learning by getting a firm’s feet wet— learning by doing—while
limiting the downside risk. For example, to enter the market of
Islamic finance whereby no interest can be charged (according
to the Koran), Citibank set up a subsidiary Citibank Islamic
Bank. On a small scale, it was designed to experiment with
different interpretations of the Koran on how to make money
while not committing religious sins. Overall, the longer foreign
firms stay in host countries, the less liability of foreignness
they experience. The drawback of small-scale entries is a lack
of strong commitment, which may lead to difficulties in
building market share and capturing first-mover advantages.
Modes of Entry: The First Step on Equity versus Non-equity
Modes
Entry mode decision - Internationalization - Global Marketing
Managers are unlikely to consider the numerous modes of
entry—methods used to enter a foreign market—at the same
time. Given the complexity of entry decisions, it is imperative
that managers prioritize and consider only a few key variables
first and then consider other variables later. The comprehensive
model shown in Exhibit below is helpful.
In the first step, considerations for small-scale versus large-
scale entries usually boil down to the equity (ownership)
issue. None-equity modes include exports and contractual
agreements, and tend to reflect relatively smaller commitments
to overseas markets. Equity modes, on the other hand, are
indicative of relatively larger, harder-to-reverse commitments.
Equity modes call for the establishment of independent
organizations overseas (partially or wholly controlled). Non-
equity modes do not require such independent establishments.
Overall, these modes differ significantly in terms of cost,
commitment, risk, return, and control.
The distinction between equity and non-equity modes is not

12. trivial. In fact, it is what defines an MNE: An MNE enters
foreign markets via equity modes through FDI. A firm that
merely exports/imports with no FDI is usually not regarded as
an MNE. As discussed at length in Chapter 6, an MNE, relative
to a non-MNE, enjoys the three-pronged advantages of
ownership, location, and internalization—collectively known as
the OLI advantages. Overall, the first step in entry mode
considerations is crucial. A strategic decision must be made in
terms of whether or not to undertake FDI and to become an
MNE.
Modes of Entry: The Second Step on Making Actual Selections
During the second step, managers consider variables within
each group of non-equity and equity modes. If the decision is to
export, then the next consideration is direct exports or indirect
exports.
Direct exports are the most basic mode of entry, capitalizing on
economies of scale in production concentrated in the home
country and providing better control over distribution. The
world’s largest piano maker, Pearl River, exports its pianos
from China to over 80 countries. This strategy essential ly treats
foreign demand as an extension of domestic demand, and the
firm is geared toward designing and producing first and
foremost for the domestic market. While direct exports may
work if the export volume is small, it is not optimal when the
firm has many foreign buyers. Marketing 101 suggests that the
firm needs to be closer, both physically and psychologically, to
its customers, prompting the firm to consider more intimate
overseas involvement such as FDI. Direct exports may also be
accused of dumping, triggering anti-dumping actions.
Another export strategy is indirect exports— namely, exporting
through domestically based export intermediaries. This strategy
not only enjoys the economies of scale in domestic production
(similar to direct exports) but is also relatively worry free. A
significant amount of export trade in commodities such as

13. textiles, woods, and meats, which compete primarily on price, is
indirect through intermediaries. Indirect exports have some
drawbacks. For example, third parties such as export trading
companies may not share the same agendas and objectives as
exporters. Exporters choose intermediaries primarily because of
information asymmetries concerning risks and uncertainties
associated with foreign markets. Intermediaries with
international contacts and knowledge essentially make a living
by taking advantage of such information asymmetries. They
may have a vested interest in making sure that such asymmetries
are not reduced. Intermediaries, for example, may repackage the
products under their own brand and insist on monopolizing the
communication with overseas customers. If the exporter is
interested in knowing more about how its products perform
overseas, indirect exports would not provide such knowledge.
The next group of non-equity entry modes involves the
following types of contractual agreement: (1) licensing or
franchising, (2) turnkey projects, (3) research and development
contracts, and (4) co-marketing.
In licensing/franchising agreements, the licensor/franchisor
sells the rights to intellectual property such as patents and
know-how to the licensee/franchisee for a royalty fee. The
licensor/franchisor thus does not have to bear the full costs and
risks associated with foreign expansion. Coca-Cola, for
example, has licensed its trademark to clothing manufacturers in
Brazil. On the other hand, the licensor/franchisor does not have
tight control over production and marketing. Pizza Hut, for
example, was disappointed when its franchise in Thailand
discontinued the relationship and launched a competing pizza
restaurant to eat Pizza Hut’s lunch.
In turnkey projects, clients pay contractors to design and
construct new facilities and train personnel. At project
completion, contractors hand clients the proverbial key to
facilities ready for operations—hence the term “turnkey.” This
mode allows firms to earn returns from process technology

14. (such as power generation) in countries where FDI is restricted.
The drawbacks, however, are twofold. First, if foreign clients
are competitors, selling them state-of-the-art technology
through turnkey projects may boost their competitiveness.
Second, turnkey projects do not allow for a long-term presence
after the key is handed to clients. To obtain a longer-term
presence, build-operate-transfer agreements are now often used
instead of the traditional build-transfer type of turnkey projects.
A build-operate-transfer (BOT) agreement is a non-equity mode
of entry used to build a longer-term presence by building and
then operating a facility for a period of time before transferring
operations to a domestic agency or firm. For example, Safi
Energy, a consortium among GDF Suez (France), Mitsui
(Japan), and Nareva Holdings (Morocco), has been awarded a
BOT power-generation project in Morocco.
Research and development (R&D) contracts refer to outsourcing
agreements in R&D between firms. Firm A agrees to perform
certain R&D work for Firm B. Firms thereby tap into the best
locations for certain innovations at relatively low costs.
However, three drawbacks may emerge. First, given the
uncertain and multidimensional nature of R&D, these contracts
are often difficult to negotiate and enforce. While delivery time
and costs are relatively easy to negotiate, quality is often
difficult to assess. Second, such contracts may cultivate
competitors. A number of Indian IT firms, nurtured by such
work, are now on a global offensive to take on their Western
rivals. Finally, firms that rely on outsiders to perform a lot of
R&D may lose some of their core R&D capabilities in the long
run.
Co-marketing refers to efforts among a number of firms to
jointly market their products and services. Toy makers and
movie studios often collaborate in co-marketing campaigns with
fast-food chains such as McDonald’s to package toys based on
movie characters in kids’ meals. Airline alliances such as One
World, Sky Team, and Star Alliance engage in extensive co-

15. marketing through code sharing. The advantages are the ability
to reach more customers. The drawbacks center on limited
control and coordination.
Next are equity modes, all of which entail some FDI and
transform the firm to become an MNE. A joint venture (JV) is a
corporate child, a new entity jointly created and owned by two
or more parent companies. It has three principal forms:
Minority JV (less than 50% equity), 50–50 JV (equal equity),
and majority JV (more than 50% equity). JVs, such as Shanghai
Volkswagen, have three advantages. First, an MNE shares costs,
risks, and profits with a local partner, so the MNE possesses a
certain degree of control but limits risk exposure. Second, the
MNE gains access to knowledge about the host country; the
local firm, in turn, benefits from the MNE’s technology, capital,
and management. Third, JVs may be politically more acceptable
in host countries.
In terms of disadvantages, JVs often involve partners from
different backgrounds and with different goals, so conflicts are
natural. Furthermore, effective equity and operational control
may be difficult to achieve since everything has to be
negotiated—in some cases, fought over. Finally, the nature of
the JV does not give an MNE the tight control over a foreign
subsidiary that it may need for global coordination. Overall, all
sorts of non-equity-based contractual agreements and equity-
based JVs can be broadly considered as strategic alliances.
The last entry mode is to establish a wholly owned subsidiary
(WOS), defined as a subsidiary located in a foreign country that
is entirely owned by the parent multinational. There are two
primary means to set up a WOS. One is to establish greenfield
operations, building new factories and offices from scratch (on
a proverbial piece of “green field” formerly used for
agricultural purposes). For example, Microsoft established a
wholly owned greenfield R&D center in Beijing. There are three
advantages. First, a greenfield WOS gives an MNE complete

16. equity and management control, thus eliminating the headaches
associated with JVs. Second, this undivided control leads to
better protection of proprietary technology. Third, a WOS
allows for centrally coordinated global actions. Sometimes, a
subsidiary will be ordered to launch actions that by design will
lose money. In the semiconductor market, TI faced competition
from Japanese rivals such as NEC and Toshiba that maintained
low prices outside of Japan by charging high prices in Japan and
using domestic profits to cross-subsidize overseas expansion.
By entering Japan via a WOS and slashing prices there, TI
incurred a loss but forced the Japanese firms to defend their
home market. This was because Japanese rivals had a much
larger market share in Japan. When the price level in Japan
collapsed thanks to the aggressive price cutting unleashed by
TI’s WOS in the country, NEC and Toshiba would suffer much
more significant losses. Consequently, Japanese rivals had to
reduce the ferocity of their price wars outside of Japan. Local
licensees/franchisees or JV partners are unlikely to accept such
a subservient role as being ordered to lose money.
In terms of drawbacks, a greenfield WOS tends to be expensive
and risky, not only financially but also politically. Its
conspicuous foreignness may become a target for nationalistic
sentiments. Another drawback is that greenfield operations add
new capacity to an industry, which will make a competitive
industry more crowded. For example, think of all the Japanese
automobile plants built in the United States, which have
severely squeezed the market share of US automakers and
forced Chrysler and GM into bankruptcy. Finally, greenfield
operations suffer from a slow entry speed of at least one to
several years (relative to acquisitions).
The other way to establish a WOS is through an acquisition.
Fiat’s acquisition of Chrysler is a case in point. Although this is
the last mode we discuss here, it represents approximately 70%
of worldwide FDI. Acquisition shares all the benefits of
greenfield WOS but enjoys two additional advantages: (1)
adding no new capacity and (2) faster entry speed. In terms of

17. drawbacks, acquisition shares all of the disadvantages of
greenfield WOS except adding new capacity and slow entry
speed. But acquisition has a unique and potentially devastating
disadvantage: post-acquisition integration problems.
Overall, while we have focused on one entry mode at a time,
firms in practice are not limited by any single-entry mode. For
example, IKEA stores in China are JVs, and its stores in Hong
Kong and Taiwan are separate franchises. In addition, entry
modes may change over time. Starbucks, for instance, first used
franchising. It then switched to JVs and, more recently, to
acquisitions.
South Africa
Company Overview
Costco Wholesale Corporation, popularly known as Costco, is
an American company. It is the largest membership-only
warehouse club in the United States. Since 2013, Costco is

18. aggressively expanding globally with its retail innovation
practices that have developed cult-like followers, usually
recognized as the Costco craze. The company currently has
more than 200 Costco warehouses internationally, operating in
eight countries outside the USA (Farfan, 2019). Globalization
provided the opportunity to the retail giants to expand their
business beyond the boundaries of the nations. However, several
elements are critical while selecting the country for expansion.
Justification for International Expansion (The OLI framework,
specifically the VRIO analysis of the value proposition)
Chapter3 and 7 PPT.
In order to create an accurate V.R.I.O analysis for Costco we
needed to create the framework for the company to decide the
Value, Rarity, Imitability, and Organization. First, we had to
figure out the factors that would be compared between each of
the V.R.I.O. and with this decision we saw that they are an
international presence and are well-known so the first would be
their Strong Global Presence. Next, we wanted to focus on the
products themselves and have a location that can provide access
to fresh foods (like seafoods) without having to worry about
intermediate storage facilities to prolong freshness. Finally, we
see that the system of membership with shoppers is an important
capability as this is something that is seen in very few stores
and this can gauge the average incomes of those that live in the
vicinity.
The rationale for the three chosen countries
Our team brought the three main criteria to the table when
searching for the countries of potential expansion for Costco.
The following are our reasonings for why we chose these
countries:
1) Each location represents a central hub of technological
advancement, increased population, and a location that the
countries deem as a suitable place to establish their
headquarters.

19. 2) Fresher foods can be higher quality and have a higher
accessibility as each of these locations are coastal.
3) Average income is suitable for a consumer to want to
purchase a membership from Costco and buy in large quantities.
S.W.O.T. analysis of the three chosen countries
South Africa
Portugal
Panama
Market Opportunities
Human Resources Management Practices (
（Here maybe some relative informa tion about it can be used.)
Expansion Strategy (IRF)
Chapter7 Reading and may can refer to Key Strategies of
Costco in China from this link:
https://www.fbicgroup.com/sites/default/files/Costco_Report.pd
f
Structure (IRF) Chapter7 ‘s Reading
Three Possible Entry Modes (The last part of Chaper6)
Justification for Entry Mode (Suggestion: you can refer to the
last video from chapter6, link: )
SWOT:
Costco Expansion in Johannesburg, South Africa
Costco Wholesale Corporation, popularly known as
Costco, is an American company. It is the largest membership-
only warehouse club in the United States. Since 2013, Costco is

20. aggressively expanding globally with its retail innovation
practices that have developed cult-like followers, usually
recognized as the Costco craze. The company currently has
more than 200 Costco warehouses internationally, operating in
eight countries outside the USA (Farfan, 2019). Globalization
provided the opportunity to the retail giants to expand their
business beyond the boundaries of the nations. However, several
elements are critical while selecting the country for expansion.
This essay evaluates the expansion of Costco in Johannesburg,
South Africa.
Johannesburg is the largest city in South Africa, classified
as a megacity located in the Gauteng province. It is recognized
as one of the 50 largest urban areas globally, and the population
is close to 5.92 million (World Population Review, 2021).
Further, Gauteng province is the wealthiest province in South
Africa. It is necessary to evaluate internal and external factors
to assess whether South Africa is the right destination for
Costco’s expansion. The SWOT analysis highlighting internal
and external aspects of South Africa (Frue, 2019) is given in the
next section. SWOT analysis of South Africa
Strength: Internal
1. Wide-ranging languages, cultures, and customs is the primary
strength of South Africa. The people speak a different language,
follow diverse traditions and religions (Frue, 2019).
2. The mining industry in South Africa has attracted Europeans
since long for its raw materials such as copper, gold, and cobalt.
The corporations such as BMW have invested heavily in the
South African market, proving the destination is attractive for
the business (Frue, 2019).
3. One thousand seven hundred forty miles of the coastal area
provides an advantage to South Africa. The ports, such as
Johannesburg, allow easy logistics.
4. The population of the country is large, close to 53 million.
5. The access to the South African Development Community
(SADC) countries is good.
6. The political stability is relatively good in South Africa.

21. 7. The infrastructure, which is the most critical factor for any
business, is good.
8. The diverse industrial base is making South Africa an
excellent destination for international businesses.
Weaknesses: Internal
1. The crime rate in South Africa is high, and it ranked third
worldwide.
2. Since the country has an extensive coastal line, it is prone to
natural disasters. Johannesburg is a coastal city (Frue, 2019).
3. Although the cost of labor is cheap, the volume of unskilled
labor is high.
Opportunities: External
1. The demand for the imported goods in South Africa is high.
2. The South African economy is becoming more and more
consumer-driven (Hung Lau, 2012).
3. The growth of the middle class in South Africa improved
consumption.
4. The demand for technology is rising continuously.
Threats: External
1. The cost of energy is rising, which may increase the supply
chain costs.
2. The strikes and social inequality in South Africa are common
and may impact Costco’s operations frequently.
3. The wages are slowly increasing, and the lack of skilled
workers may affect productivity. Conclusion
The SWOT analysis shows several strengths and
opportunities of South Africa, such as diverse culture,
increasing consumption, political stability, demand for imported
goods, and low labor costs, which shows positive signs for
Costco. However, Costco must consider the threats such as
strikes and social inequality to design Costco operations
policies in South Africa to ensure smooth running without staff
disputes. In a nutshell, South Africa seems an attractive
destination for Costco considering its diverse culture and
increasing consumption. Also, South Africa, especially
Johannesburg, can be pivotal for Costco to expand its

22. operations in the prospective African countries, for example,
SADC members.
References
Cuofano, G. Costco SWOT Analysis In A Nutshell.
FourWeekMBA.
Farfan, B. (2019). Discover Costco’s Secret to Conquering the
Retail Sector. The Balance Small Business. Retrieved 12
February 2021, from .
Frue, K. (2019). SWOT Analysis of South Africa Reveals How
to Boost the Economy. PESTLE Analysis. Retrieved 12
February 2021, from .
Hung Lau, K. (2012). Demand management in downstream
wholesale and retail distribution: a case study. Supply Chain
Management: An International Journal, 17(6), 638-654.
International Trade, A. (2020, October 01). South Africa -
market opportunities. Retrieved February 24, 2021, from
Pratap, A. (August 1, 2019). Costco SWOT Analysis.
Notesmatic.
World Population Review. (2021). Johannesburg Population
2021 (Demographics, Maps, Graphs).
Worldpopulationreview.com. Retrieved 12 February 2021, from
.

23. South Africa OverviewOverview
South Africa is the southernmost country on the African
continent. It shares borders with Mozambique, Zimbabwe,
Botswana, Namibia, Swaziland, and Lesotho. South Africa is
renowned for its cultural diversity, great natural beauty, and
diverse topography. Three cities, including Bloemfontein, Cape
Town, and Pretoria serve as the country’s capitals. Specifically,
the judicial capital is Bloemfontein, the legislative capital is
Cape Town, and the legislative capital is Pretoria. Johannesburg
is one of the country’s largest cities. It is also the chief
financial and industrial metropolis of South Africa. The other
large cities in South Africa include East London, Durban, Port
Elizabeth, and Germiston.
South Africa has a dual economy, which draws on its vastly
evolved intellectual capital, abundant mineral resources, fertile
agricultural lands, and tourist attractions. However, the nation
has one of the world’s highest rates of inequality, with a
consumption expenditure Gini index of 0.63 in 2015 (World
Bank, 2019). Millions of South African citizens, particularly
blacks, are still poor. Despite this and other challenges, the
South African market remains an attractive destination for
companies all over the world. The country is one of Africa’s
best-operating environments, which makes it among the most
sought-after investment destinations for international companies
looking to expand their operations. It continues to be a
conducive destination, especially to the U.S. investment. Thus,
this nation is a viable market for Costco. Demographics
South Africa has a population of 59,308,690 people of diverse
languages, origins, religions, and cultures, and 66.3 percent of
this population is urban (Worldometer, 2020). In this nation,
families have an average of 3.4 members, and women head over
four in ten of these families (43 percent) (National Department
of Health (NDoH) et al., 2018). The life expectancy at birth for
both sexes in South Africa is 64.9 years, with that of males
being 61.5 years and that of females being 68.4 years
(Worldometer, 2020). Notably, life expectancy has continued to

24. rise over the years in South Africa.
South Africa’s fertility rate has declined significantly over the
years. Specifically, the Total Fertility Rate in this nation has
declined from 6.1 births per woman in 1955 to 2.4 births per
woman in 2020 (Worldometer, 2020). The use of contraceptives
has contributed to this decline in fertility. According to NDoH
et al. (2018), 60% of sexually active females in South Africa are
using contraception, and nearly all of them are utilizing a
modern method.
Both infant mortality and deaths under age 5 have continued to
decline in South Africa. The infant mortality in this country in
2020 reduced to 23.57 from 134.21 (per 1,000 live births) and
deaths under age 5 reduced to 30.67 from 227.67 (per 1,000 live
births).
Regarding education, 86% of men and 89% of women aged 15
to 49 years have some secondary education (NDoH et al., 2018).
Additionally, nearly all men and women aged 15 to 49 year s (95
percent and 96 percent respectively) are literate and only 2
percent of men and women have not attended school at all
(NDoH et al., 2018).
Political Environment
The political transition of South Africa is acknowledged as
among the most remarkable political feats of the previous
century (World Bank, 2019). The country has a bicameral
parliament (the National Assembly that is made up of 400
members and the National Council of Provinces that is made up
of 90 members). The South African government is formed in the
National Assembly. The country’s president is the majority
party leader in the National Assembly and acts as both the head
of government and head of state. The African National Congress
(ANC) has continued to dominate South African politics and has
since 1994 been driving the nation’s policy agenda. The other
main political parties include the South African Communist
Party (SACP), Inkatha Freedom Party (IFP), Democratic
Alliance (DA), Economic Freedom Fighters (EFF), and
Congress of South African Trade Unions (COSATU).

25. South Africa has a favorable investment climate. The South
African government encourages foreign investment in every
sector of the economy. It is vital to highlight that the country’s
independent judiciary, free press, mature services and financial
sector, robust legal sector dedicated to maintaining the rule of
law, good infrastructure, and stable institutions have continued
to fortify its investment climate. In South Africa, there are no
restrictions or sanctions on doing business with any jurisdiction
or nation. Consequently, the favorable investment environment
in this nation will contribute to the success of Costco there.
Nevertheless, Costco should be concerned about political
instability in South Africa. As noted by Essel & Mostert (2013),
less developed and emerging market economies are more likely
to experience political instability than developed market
economies. South Africa is one of the emerging market
economies that are still grappling with political instability from
time to time. In particular, this country’s political environment
is at times clouded by political intolerance, violence,
corruption, popular protests, and mismanagement.
Consequently, the company should be worried about these
political risks.Legal Environment
South Africa has a well-developed legal sector. The nation’s
legal system is based on statute, common law (that is Roman-
Dutch in its origin), customary law, and case law (in which the
courts apply the country’s common and statutory law but
similarly frequently refer to foreign jurisdictions, for example,
Australia, Canada, the United Kingdom, and the United States
for guidance) (Kleitman, 2021).
South Africa has a robust intellectual property protection
regime. The Constitution of South Africa protects intellectual
property rights from arbitrary deprivation and the country has,
in recent years, made substantial steps in the deployment,
management, administration, and protection of IP (The
Department of Trade and Industry, 2018). The country is a party
to several international conventions and agreements relating to
IP protections (including copyright, trademarks, patents, and

26. designs) (Kleitman, 2021). Consequently, the value of Costco’s
innovation and ideas will be safeguarded in this nation.
Several series of statutes (robustly influenced by the
international employment standards and the Bill of Rights
contained in the nation’s Constitution) have been promulgated
in South Africa to implement employment legislation reform
since the nation became a democracy in 1994 (Kleitman, 2021).
Costco will be required to comply with several employment
laws. Among these laws are the Labour Relations Act 1995
(LRA), Employment Equity Act 1998 (EEA), Skills
Development Act, and the Basic Conditions of Employment Act
(BCEA).
The company should be concerned about the implementation of
the Broad-Based Black Economic Empowerment Act (BBBEE).
Specifically, the South African government enacted this Act in
2003 to address the apartheid inequalities and reconcile South
Africans. The Act supports black businesses and calls upon
companies that operate in the country to integrate black South
Africans into the workplace. Costco should be ready to
implement this Act for it to succeed in South Africa.Economic
Environment
South Africa is one of the largest economies in the continent of
Africa. It is a middle-income emerging market. Notably, this
nation has a highly developed economy as well as advanced
economic infrastructure that apart from making it one of the
leading African economies, also make it home to 75 percent of
the biggest African companies (Export Entreprises SA, 2021).
The country boasts of its well-developed transport, energy,
communications, financial, and legal sectors and a plentiful
supply of natural resources. The South African government
under the current President, Cyril Ramaphosa, has been doing
its best to restore macroeconomic stability within the nation by
investing in substantial policy improvements (Export
Entreprises SA, 2021). However, despite these efforts, the
country’s global competitiveness has decreased due to spending
pressures, increasing public debt, and inefficient state-owned

27. enterprises.
Additionally, just like the economies of other nations across the
world, the economy of South Africa has also been hit by the
ongoing COVID-19 recession. In 2020, this economy collapsed
as a result of the coronavirus pandemic, reporting a growth
balance of -8.0 percent (Export Entreprises SA, 2021). The
restrictions on business activity and human movement in South
Africa in 2020 led to a substantial decline in workplace activity
and an increase in unemployment. Prior to the coronavirus
pandemic, South Africa was already facing serious economic
challenges with not just unemployment but also with inequali ty
and poverty (PwC, 2021).
South Africa’s unemployment rate has continued to be the
highest in the world. The COVID-19 pandemic has led to a
significant increase in the rate of unemployment in this nation.
For instance, in 2020, the country’s rate of unemployment
increased exponentially to 37 percent up from 28.7 percent in
2019 (Export Entreprises SA, 2021). The unemployment rate in
South Africa is expected to continue being high in the years to
come. In particular, the International Monetary Fund estimates
that this rate will continue being stable in both 2021 and 2022
at 36.5 percent and 37 percent respectively (Export Entreprises
SA, 2021). The rates of unemployment have remained much
higher among the black majority and young population in South
Africa, further exacerbating poverty and inequality. The
coronavirus pandemic has worsened several of the fundamental
issues surrounding poverty, such as food insecurity and hunger,
in South Africa and forecasts are at the moment estimating that
this ongoing pandemic might push up to a million South
Africans into poverty (Export Entreprises SA, 2021).
South Africa’s economic growth is anticipated to pick up in
2021. Specifically, the economy of South Africa is expected to
experience positive growth in 2021 following the 2020 COVID-
19 pandemic. As per the October 2020 forecast of the
International Monetary Fund, this economy is expected to grow
at 3 percent of the Gross Domestic Product and to stabilize at

28. 1.5 percent in 2022 (Export Entreprises SA, 2021). According to
PwC (2021), South Africa will experience a GDP growth of 3.4
percent in 2021. Financial Environment
South Africa boasts of a well-developed financial sector. In
essence, the economy of South Africa includes a modern
industrial and financial sector, which is supported by a
continuously upgraded infrastructure. Notably, this nation
prides itself on its sophisticated financial structure. Its active
stock exchange ranks among the top 20 in the world in terms of
market capitalization (Export Entreprises SA, 2021). The
nation’s securities exchange, Johannesburg Stock Exchange
(JSE), is among the world’s top 30 largest stock exchanges and
the largest in the continent of Africa. The country also has
robust banking systems. In particular, its banking sector
consists of several small banks, the South African Reserve Bank
(central bank), and some large financially strong investment
institutions and banks. The South African currency (Rand) is
among the strongest African currencies.
In South Africa, the accounting year is the same as the tax year
for companies. The country’s accounting regulation bodies
include ASB (Accounting Standards Board) and SAICA (South
African Institute of Chartered Accountants). The professional
accountancy bodies are the South African Institute of
Professional Accountants (SAIPA) and SAICA. The companies
operating in South Africa are required to prepare financial
statements yearly as per the IFRS. Notably, IFRS apply to all
foreign and South African companies. Some businesses are
required to have their financial statements independently
reviewed while others are required to have theirs audited. Every
company is required to keep its accounts in English. As per the
international accounting rules, in South Africa, yearly accounts
must offer information about the notes on the accounts, the
profit and loss account, and the balance sheet.
South Africa’s trade policies have been moving towards a
globally competitive economy away from an extremely
protected, inward-looking economy. During the apartheid, the

29. ability of this nation to trade with other nations was seriously
restricted by the sanctions that developed nations placed on it.
The trade between South Africa and other countries has
increased significantly in post-apartheid. The nation maintains
formal trade relations with several nations through membership
in intercontinental trade institutions, trade agreements, and
treaties. The SADC (Southern African Development
Community) is the centerpiece of this nation’s foreign economic
policy.
Cultural Issues (Geert Hofstede's Cultural Dimensions)
Power Distance
The score of 49 on this dimension suggests that South Africans
accept a hierarchical order to a large extent where everyone has
a place and that needs no further justification (Hofstede
Insights, 2017). Notably, the United States (the home country of
Costco) scores slightly lower on this dimension (40) than South
Africa. In South Africa, centralization is popular, hierarchy in
organizations is viewed as reflecting intrinsic inequalities and
employees expect to be informed what to do (Hofstede Insights,
2017).
Individualism
South Africa scores lower (65) on this dimension than the
United States (91) (Hofstede Insights, 2017). Just like the
United States, South Africa is also an individualistic society,
but the U.S. is more individualistic. Thus, in this nation, the
decisions about promotion and hiring are based on merit only.
Besides, the relationship between the employee and employer in
South Africa is a contract that is based on mutual advantage and
management is the management of individuals.
Masculinity
South Africa scores 63 on the masculinity dimension while the
United States scores 62 (Hofstede Insights, 2017).
Consequently, both societies are driven by achieveme nt,
competition, and success. Just like in the United States, in
South Africa, the stress is on equity and managers are expected
to be both assertive and decisive (Hofstede Insights, 2017).

30. Uncertainty Avoidance
South Africa scores 49 on the uncertainty avoidance dimension
while the United States scores 46, which shows that both
societies have a low preference for avoiding uncertainty
(Hofstede Insights, 2017). The people of both nations are
characterized by a readiness to try something different or new
and a reasonable degree of acceptance for innovative products
and new ideas.
Long-term Orientation
South Africa scores 34 on the long-term orientation dimension
while the United States scores 26, which is slightly lower
(Hofstede Insights, 2017). Consequently, just like Americans,
South Africans also are normative in their thinking, prone to
examine new information to find out if it is true, show great
respect for traditions, and concentrate on attaining quick
results.
Indulgence
South Africa scores 63 on the indulgence dimension while the
United States scores 68, which is a bit higher (Hofstede
Insights, 2017). Therefore, South Africa just like the United
States has an indulgence culture. Just like the Americans, South
Africans also show a willingness to realize their desires as well
as impulses regarding having fun and enjoying life. Both South
Africans and Americans tend to be optimistic and have a
positive attitude.
From the above analysis, it is apparent that South African
culture does not differ from American culture. Consequently,
Costco will not face stumbling cultural blocks in its expansion
into South Africa.
How should Costco adapt?
By comparing US and South Africa’s Hofstede score, we
understand that the culture in South Africa is not much different
then here in the US. The main difference is the individualism
score. People in South Africa are not that individualistic
compared to people in the US. But this should be a good thing
for Costco since they are in the wholesale business. From what

31. we see in the comparison, we don’t think the expansion to South
Africa needs to change the management and the business model
much to meet any more cultural differences. That is besides the
localization parts, of course.
References
Essel, R., & Mostert, F. J. (2013). Political risk factors in South
Africa: Sources, analysis and insurance flexibility. Risk
Governance & Control: Financial markets and institutions 3(1),
34-41.
Export Entreprises SA. (2021, February). Economic and
political outline of South Africa. Santandertrade.com. Retrieved
from
Hofstede Insights. (2017, August 22). Country Comparison.
South Africa versus the United States. Hofstede Insights.
Kleitman, Y. (2021). Doing business in South Africa. Practical
Law.
National Department of Health (NDoH), Statistics South Africa
(Stats SA), South African Medical Research Council (SAMRC),
and ICF South Africa. (2018). Demographic and health survey
2016 key findings. Pretoria, South Africa, and Rockville,
Maryland, USA: NDoH, Stats SA, SAMRC, and ICF.
PwC. (2021, Feb 16). South Africa’s economic outlook. What
can budget 2021 do to help?
The Department of Trade and Industry (2018). Intellectual
property policy of the Republic of South Africa Phase I. The
Department of Trade and Industry.
World Bank. (2019, October 10). South Africa. Overview.
Worldometer. (2020). South Africa demographics 2020
(Population, age, sex, trends).