Study Notes on Foreign Market Entry

Chapter 10: Foreign Market Entry

Learning Objectives

  • By the end of this chapter, you should be able to:

    • 10-1: Explain how institutions and resources affect liability of foreignness.

    • 10-2: Match the quest for location-specific advantages with strategic goals (where to enter).

    • 10-3: Compare and contrast first-mover and late-mover advantages (when to enter).

    • 10-4: Outline the comprehensive model of foreign market entries (how to enter).

    • 10-5: Participate in four leading debates concerning foreign market entry.

    • 10-6: Draw implications for action.

10-1 Overcoming Liability of Foreignness

  • Liability of Foreignness: Refers to the costs associated with entering and competing in foreign markets due to being an outsider.

  • Overcoming Liability of Foreignness involves strategies that take into account institutional and market dynamics.

  • Institutional void: Defined as the absence of market-supporting infrastructure which leads to challenges for foreign firms operating in a host country.

Discussion Activity 1

  • Focus Question: How do foreign firms suffer from liability of foreignness?

    • Possible impacts include higher costs, difficulties in gaining legitimacy, and trust from local consumers and stakeholders.

10-2 Where to Enter?

  • Location-Specific Advantage: The competitive benefits derived from the unique characteristics of a geographical area (e.g., resources, market demand).

Table 10.1: Matching Strategic Goals with Locations

  1. Natural resource seeking:

    • Goal: Acquire natural resources and infrastructure

    • Examples: Oil in regions such as the Middle East, Russia, Argentina, Venezuela

  2. Market seeking:

    • Goal: Tap into strong customer demand

    • Example: GM’s operations in China

  3. Efficiency seeking:

    • Goal: Attain economies of scale and low-cost inputs

    • Examples: US and Canadian firms in Mexico; European firms in Eastern Europe, Morocco, and Turkey

  4. Innovation seeking:

    • Goal: Generate innovation by leveraging local talent and resources

    • Examples: IT firms in Silicon Valley and Bangalore, telecom in Dallas, wind projects in Denmark

Discussion Activity 2

  • Focus Question: Describe how four strategic goals may affect the decision of where to enter.

10-3 When to Enter?

Table 10.2: First-Mover Advantages and Late-Mover Advantages

  • First-Mover Advantages:

    • Definition: Benefits available to firms first entering a new market.

    • Examples:

      • Proprietary technology (e.g., Apple’s iPhone),

      • Preemption of resources (e.g., Japanese MNEs in Southeast Asia),

      • Building barriers to entry for subsequent entrants (e.g., Poland’s F-16 contract),

      • Relationships with stakeholders (e.g., Citigroup, JP Morgan in Afghanistan).

  • Late-Mover Advantages:

    • Definition: Benefits available to firms that enter the market later.

    • Examples:

      • Opportunity to leverage prior investments from first movers (e.g., Amazon leveraging Flipkart’s marketing).

      • Resolution of market uncertainties (e.g., Tesla waiting for market stabilization before heavy investments).

10-4 How to Enter?

  • Scale of Entry: The magnitude of resources allocated to entering a market determines the strategic approach.

Entry Modes

  • Nonequity Mode: Smaller commitment to foreign markets (e.g., exports and contractual agreements).

    • Examples Include:

      • Direct Exports: Focus on home production but face high transport costs;

      • Indirect Exports: Less control, but focuses on core production and avoids export complexities.

  • Equity Mode: Larger commitment to foreign markets (e.g., joint ventures, wholly owned subsidiaries).

    • Examples Include:

      • Joint Ventures: Cost sharing, access to partner assets, but potential for operational conflict.

      • Wholly Owned Subsidiaries: Full control and protection of intellectual property but high risk and cost.

Comprehensive Entry Mode Model

  • Figure 10.3: Choice of Entry Modes shows the strategic decision landscape for foreign market entry.

Implications of Entry Modes

  • Turnkey Projects: Clients pay firms for facility design and operation before transferring management.

  • Build-Operate-Transfer: Establish an operational presence before transfer to local management.

10-5 Debates and Extensions

Debate 1: Liability vs. Asset of Foreignness

  • Country-of-Origin Effect: Describes how the perception of firms from a specific country can influence their market success.

  • Arguments suggest that in specific contexts, being a foreigner might provide competitive advantages, questioning the liability perspective.

Debate 2: Old-Line vs. Emerging Multinationals

  • OLI Framework (Ownership, Location, Internalization) generally suits established MNEs with strong capabilities, while emerging multinationals may operate under a LLL Framework (Linkage, Leverage, Learning).

Debate 3: Global vs. Regional Geographic Diversification

  • Many leading Multinational Enterprises (MNEs) concentrate efforts more regionally than globally despite their size.

Debate 4: Contractual vs. Noncontractual Approaches of Entry

  • Discuss the dynamics where noncontractual opportunities emerge when contractual ones fail, emphasizing the importance of reciprocity in building international partnerships.

Discussion Activity 3

  • Consider ethical dilemmas around market entry strategies and the implication of moving production abroad at the expense of domestic jobs.

10-6 Management Savvy

Implications for Action

  • Understand both formal and informal market rules in foreign countries.

  • Develop competencies to counterbalance the liabilities faced as foreign entrants.

  • Align market entry strategies with broader strategic goals such as geographic diversification.