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    1. 1. Entering Foreign Markets Part II: Business-Level Strategies Global Strategy Mike W. Peng chapter 6
    2. 2. Outline <ul><li>Overcoming the liability of foreignness </li></ul><ul><li>Understanding the propensity to internationalize </li></ul><ul><li>A comprehensive model of foreign market entries </li></ul><ul><li>Where to enter? </li></ul><ul><li>When to enter? </li></ul><ul><li>How to enter? </li></ul><ul><li>Debates and extensions </li></ul><ul><li>The savvy strategist </li></ul>
    3. 3. Overcoming the Liability of Foreignness <ul><li>The Liability of Foreignness - the inherent disadvantage foreign firms experience in host countries because of their non-native status </li></ul><ul><li>Differences in formal and informal institutions govern the rules of the game in different countries </li></ul><ul><li>Foreign firms are often discriminated against </li></ul><ul><li>Foreign firms deploy overwhelming resources and capabilities to offset the liability of foreignness </li></ul>
    4. 4. Understanding the Propensity to Internationalize <ul><li>The underlying factors </li></ul><ul><ul><li>The size of the firm </li></ul></ul><ul><ul><li>The size of the domestic market </li></ul></ul><ul><li>The propensity </li></ul><ul><ul><li>Enthusiastic internationalizer </li></ul></ul><ul><ul><li>Follower internationalizer </li></ul></ul><ul><ul><li>Slow internationalizer </li></ul></ul><ul><ul><li>Occasional internationalizer </li></ul></ul>
    5. 5. Firm Size, Domestic Market Size, and Propensity to Internationalize Figure 6.1
    6. 6. A Comprehensive Model of Foreign Market Entries Figure 6.2
    7. 7. A Comprehensive Model of Foreign Market Entries (cont’d) <ul><li>Industry-based considerations </li></ul><ul><ul><li>Rivalry </li></ul></ul><ul><ul><li>Entry barriers </li></ul></ul><ul><ul><li>Bargaining power of suppliers </li></ul></ul><ul><ul><li>Bargaining power of buyers </li></ul></ul><ul><ul><li>Substitute products </li></ul></ul><ul><li>Resource-based considerations </li></ul><ul><ul><li>Value of firm-specific resources and capabilities </li></ul></ul><ul><ul><li>The rarity of firm-specific assets </li></ul></ul><ul><ul><li>Transaction costs </li></ul></ul><ul><ul><li>Methods of organizing firm-specific resources and capabilities </li></ul></ul>
    8. 8. A Comprehensive Model of Foreign Market Entries (cont’d) <ul><li>Institution-Based Considerations </li></ul><ul><ul><li>Regulatory risks: Obsolescing bargain </li></ul></ul><ul><ul><li>Trade barriers: </li></ul></ul><ul><ul><ul><li>Tariff barriers </li></ul></ul></ul><ul><ul><ul><li>Nontariff barriers (safety inspections, local content requirements, entry modes restrictions) </li></ul></ul></ul><ul><ul><li>Currency risks: Speculation and hedging </li></ul></ul><ul><li>Synthesis - Different considerations may pull the foreign entrant in different directions </li></ul>
    9. 9. Where to Enter? Location-Specific Advantages <ul><li>Location Specific Advantages </li></ul><ul><ul><li>Geographical advantages </li></ul></ul><ul><ul><li>Agglomeration - clustering of economic activities </li></ul></ul><ul><li>Strategic Goals: Seeking natural resources, markets, efficiency and innovation </li></ul><ul><li>Cultural/Institutional Distances and Foreign Entry Locations </li></ul><ul><ul><li>Cultural distance - the difference between two cultures </li></ul></ul><ul><ul><li>Institutional distance - comparing the regulatory, normative, and cognitive institutions </li></ul></ul><ul><ul><li>Two schools of thought: stage models vs strategic goals </li></ul></ul>
    10. 10. Where to Enter? Location-Specific Advantages (cont’d) Table 6.1 Source: First two columns adapted from J. Dunning, 1993, Multinational Enterprises and the Global Economy (pp. 82–83), Reading, MA: Addison-Wesley. STRATEGIC GOALS LOCATION-SPECIFIC ADVANTAGES ILLUSTRAVTIVE LOCATIONS MENTIONED IN THE TEXT Natural Resource Seeking Possession of natural resources and related Transport and communication infrastructure Oil in the Middle East, Russia, and Venezuela Market Seeking Abundance of strong market demand and customers willing to pay Seafood in Japan Efficiency Seeking Economies of scale and abundance of low-cost factors Manufacturing in China Innovation Seeking Abundance of innovative individuals, firms, and universities IT in Silicon Valley and Bangalore, financial services in New York and London and aerospace in Russia STRATEGIC GOALS LOCATION-SPECIFIC ADVANTAGES ILLUSTRAVTIVE LOCATIONS MENTIONED IN THE TEXT Natural Resource Seeking Possession of natural resources and related Transport and communication infrastructure Oil in the Middle East, Russia, and Venezuela Market Seeking Abundance of strong market demand and customers willing to pay Seafood in Japan Efficiency Seeking Economies of scale and abundance of low-cost factors Manufacturing in China Innovation Seeking Abundance of innovative individuals, firms, and universities IT in Silicon Valley and Bangalore, financial services in New York and London and aerospace in Russia
    11. 11. First Mover Advantages and Late Mover Advantages Table 6.2 FIRST MOVER ADVANTAGES LATE MOVER ADVANTAGES (OR FIRST MOVER DISADVANTAGES) Proprietary, technological leadership Opportunity for free ride on first mover investments Resolution of technological and market uncertainty Preemption of scarce resources Establishment of entry barriers for late entrants First mover’s difficulty to adapt to market changes Avoidance of clash with dominant firms at home Relationships and connections with key stakeholders Such as customers and governments
    12. 12. When to Enter? <ul><li>First mover advantages </li></ul><ul><ul><li>Developing proprietary, technological leadership </li></ul></ul><ul><ul><li>Preempting scarce assets </li></ul></ul><ul><ul><li>Establishing entry barriers </li></ul></ul><ul><ul><li>Becomes the dominant firm </li></ul></ul><ul><ul><li>Opportunity for relationships with key stakeholders </li></ul></ul><ul><li>Late mover advantages: benefit from first mover investments, experience, and inflexibility </li></ul>
    13. 13. How to Enter? Scale of Entry: Commitment and Experience <ul><li>Large-Scale Entries </li></ul><ul><ul><li>Benefit from a strategic commitment </li></ul></ul><ul><ul><li>Drawbacks of large-scale entries: Limited strategic flexibility and potential huge losses </li></ul></ul><ul><li>Small-scale entries </li></ul><ul><ul><li>Focus on accumulating experience </li></ul></ul><ul><ul><li>“Learning by doing” </li></ul></ul><ul><ul><li>Drawbacks of small-scale entries </li></ul></ul><ul><ul><ul><li>A lack of strong strategic commitment </li></ul></ul></ul><ul><ul><ul><li>Difficulties in building market share </li></ul></ul></ul>
    14. 14. How To Enter? Modes of Entry: Two Steps <ul><li>First step </li></ul><ul><ul><li>Strategists must prioritize variables </li></ul></ul><ul><ul><li>A decision model is helpful </li></ul></ul><ul><ul><li>Non-equity vs equity modes </li></ul></ul><ul><ul><ul><li>Level of commitment </li></ul></ul></ul><ul><ul><ul><li>Contractual and ownership alternatives </li></ul></ul></ul><ul><li>Foreign direct investment advantages </li></ul><ul><ul><li>Ownership </li></ul></ul><ul><ul><li>Location </li></ul></ul><ul><ul><li>Internalization </li></ul></ul>
    15. 15. How To Enter? <ul><li>The second step: See the following four slides </li></ul>
    16. 16. The Choice of Entry Modes: A Decision Model Figure 6.3 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.
    17. 17. Modes of Entry: Advantages and Disadvantages Table 6.3 ENTRY MODES ADVANTAGES DISADVANTAGES <ul><li>High transportation costs for </li></ul><ul><li>bulky products </li></ul><ul><li>Economies of scale in production </li></ul><ul><li>concentrated in home country </li></ul>Direct Exports <ul><li>Better control over distribution </li></ul><ul><li>(relative to indirect export) </li></ul><ul><li>Marketing distance from </li></ul><ul><li>customers </li></ul><ul><li>Trade barriers </li></ul>Indirect Exports <ul><li>Concentration of resources on </li></ul><ul><li>production </li></ul><ul><li>Less control over distribution </li></ul><ul><li>(relative to direct export) </li></ul><ul><li>Inability to learn how to operate </li></ul><ul><li>overseas </li></ul><ul><li>No need to directly handle </li></ul><ul><li>export processes </li></ul>1. Non-equity modes: Exports
    18. 18. Modes of Entry: Advantages and Disadvantages Table 6.3 (cont’d) ENTRY MODES ADVANTAGES DISADVANTAGES 2. NON-EQUITY MODES: CONTRACTUAL AGREEMENTS Licensing/Franchising <ul><li>Low development costs </li></ul><ul><li>Little control over technology </li></ul><ul><li>and marketing </li></ul><ul><li>Low risk in overseas expansion </li></ul><ul><li>May create competitors </li></ul><ul><li>Inability to engage in global </li></ul><ul><li>coordination </li></ul>Turnkey projects <ul><li>Ability to earn returns from </li></ul><ul><li>process technology in countries </li></ul><ul><li>where FDI is restricted </li></ul><ul><li>May create efficient competitors </li></ul><ul><li>Lack of long-term presence </li></ul>R&D contracts <ul><li>Ability to tap into the best </li></ul><ul><li>locations for certain innovations </li></ul><ul><li>at low costs </li></ul><ul><li>Difficult to negotiate and enforce </li></ul><ul><li>contracts </li></ul><ul><li>May nurture innovative </li></ul><ul><li>competitors </li></ul><ul><li>May lose core innovation </li></ul><ul><li>capabilities </li></ul><ul><li>Limited coordination </li></ul><ul><li>Ability to reach more customers </li></ul>Comarketing
    19. 19. Modes of Entry: Advantages and Disadvantages Table 6.3(cont’d) ENTRY MODES ADVANTAGES DISADVANTAGES 3. Equity modes: Joint ventures <ul><li>Sharing costs and risks </li></ul><ul><li>Divergent goals and interests of </li></ul><ul><li>partners </li></ul><ul><li>Access to partners’ knowledge </li></ul><ul><li>and assets </li></ul><ul><li>Limited equity and operational </li></ul><ul><li>control </li></ul><ul><li>Politically acceptable </li></ul><ul><li>Difficult to coordinate globally </li></ul>4. Equity modes: Wholly owned subsidiaries Green-field projects <ul><li>Complete equity and operational </li></ul><ul><li>control </li></ul><ul><li>Potential political problems and </li></ul><ul><li>risks </li></ul><ul><li>Protection of technology </li></ul><ul><li>and know-how </li></ul><ul><li>High development costs </li></ul><ul><li>Ability to coordinate globally </li></ul><ul><li>Slow entry speed (relative to </li></ul><ul><li>acquisitions) </li></ul><ul><li>Same as green-field (above), </li></ul><ul><li>except slow speed </li></ul><ul><li>Same as green-field (above) </li></ul>Acquisitions <ul><li>Fast entry speed </li></ul><ul><li>Post-acquisition integration </li></ul><ul><li>problems </li></ul>
    20. 20. Debates and Extensions <ul><li>Liability versus Asset of Foreignness </li></ul><ul><ul><li>Some foreignness can be an asset (“cool”): the “country of origin” effect </li></ul></ul><ul><li>Global versus Regional Triad Concentration Geographic Diversification </li></ul><ul><ul><li>Should MNEs truly globalize? </li></ul></ul><ul><li>Cyberspace Entries versus Conventional Entries </li></ul><ul><ul><li>Whose “rules of the game” should e-commerce follow? </li></ul></ul><ul><ul><li>Is the Internet borderless or subject to specific governments? </li></ul></ul>
    21. 21. The Savvy Strategist <ul><li>Consider industry, resource, and institution views </li></ul><ul><li>Match entries with specific goals </li></ul><ul><li>Consider the four fundamental questions in strategy </li></ul>

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