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Global StrategyGlobal StrategyMike W. PengMike W. Peng
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Copyright © 2009 Cengage. PowerPoint Presentation by John Bowen, Columbus State Community CollegeAll rights reserved. Copyright © 2009 Cengage. PowerPoint Presentation by John Bowen, Columbus State Community CollegeAll rights reserved.
Entering Foreign Markets
Entering Foreign Markets
Part II: Business-Level Strategies
Global StrategyGlobal StrategyMike W. PengMike W. Peng
chapter
chapter
66
Copyright © 2009 Cengage. All rights reserved. 6–2
Outline
• Overcoming the liability of foreignness
• Understanding the propensity to internationalize
• A comprehensive model of foreign market entries
• Where to enter?
• When to enter?
• How to enter?
• Debates and extensions
• The savvy strategist
Copyright © 2009 Cengage. All rights reserved. 6–3
Overcoming the Liability of Foreignness
• The Liability of Foreignness - the inherent disadvantage foreign firms experience in host countries because of their non-native status
• Differences in formal and informal institutions govern the rules of the game in different countries
• Foreign firms are often discriminated against
• Foreign firms deploy overwhelming resources and capabilities to offset the liability of foreignness
Copyright © 2009 Cengage. All rights reserved. 6–4
Understanding the Propensity to Internationalize
• The underlying factors
The size of the firm
The size of the domestic market
• The propensity
Enthusiastic internationalizer
Follower internationalizer
Slow internationalizer
Occasional internationalizer
Copyright © 2009 Cengage. All rights reserved. 6–5
Firm Size, Domestic Market Size, and Propensity to Internationalize
Figure 6.1
Copyright © 2009 Cengage. All rights reserved. 6–6
A Comprehensive Model of Foreign Market Entries
Figure 6.2
Copyright © 2009 Cengage. All rights reserved. 6–7
A Comprehensive Model of Foreign Market Entries (cont’d)
• Industry-based considerations Rivalry
Entry barriers
Bargaining power of suppliers
Bargaining power of buyers
Substitute products
• Resource-based considerations Value of firm-specific resources and capabilities
The rarity of firm-specific assets
Transaction costs
Methods of organizing firm-specific resources and capabilities
Copyright © 2009 Cengage. All rights reserved. 6–8
A Comprehensive Model of Foreign Market Entries (cont’d)
• Institution-Based ConsiderationsRegulatory risks: Obsolescing bargain
Trade barriers:
Tariff barriers
Nontariff barriers (safety inspections, local content requirements, entry modes restrictions)
Currency risks: Speculation and hedging
• Synthesis - Different considerations may pull the foreign entrant in different directions
Copyright © 2009 Cengage. All rights reserved. 6–9
Where to Enter?Location-Specific Advantages
• Location Specific Advantages Geographical advantages Agglomeration - clustering of economic activities
• Strategic Goals: Seeking natural resources, markets, efficiency and innovation
• Cultural/Institutional Distances and Foreign Entry Locations Cultural distance - the difference between two cultures
Institutional distance - comparing the regulatory, normative, and cognitive institutions
Two schools of thought: stage models vs strategic goals
Copyright © 2009 Cengage. All rights reserved. 6–10
Where to Enter?Location-Specific Advantages (cont’d)
Table 6.1Source: 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 relatedTransport and communication infrastructure
Oil in the Middle East, Russia, and Venezuela
Market Seeking Abundance of strong market demand andcustomers 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 servicesin 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 relatedTransport and communication infrastructure
Oil in the Middle East, Russia, and Venezuela
Market Seeking Abundance of strong market demand andcustomers 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 servicesin New York and London and aerospace in Russia
Copyright © 2009 Cengage. All rights reserved. 6–11
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 uncertaintyPreemption 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 stakeholdersSuch as customers and governments
Copyright © 2009 Cengage. All rights reserved. 6–12
When to Enter?
• First mover advantagesDeveloping proprietary, technological leadership
Preempting scarce assets
Establishing entry barriers
Becomes the dominant firm
Opportunity for relationships with key stakeholders
• Late mover advantages: benefit from first mover investments, experience, and inflexibility
Copyright © 2009 Cengage. All rights reserved. 6–13
How to Enter?Scale of Entry: Commitment and
Experience• Large-Scale Entries
Benefit from a strategic commitmentDrawbacks of large-scale entries: Limited strategic flexibility and potential huge losses
• Small-scale entriesFocus on accumulating experience“Learning by doing”Drawbacks of small-scale entries
A lack of strong strategic commitmentDifficulties in building market share
Copyright © 2009 Cengage. All rights reserved. 6–14
How To Enter?Modes of Entry: Two Steps
• First step Strategists must prioritize variables
A decision model is helpful
Non-equity vs equity modes Level of commitment
Contractual and ownership alternatives
• Foreign direct investment advantages Ownership
Location
Internalization
Copyright © 2009 Cengage. All rights reserved. 6–15
How To Enter?
• The second step: See the following four slides
Copyright © 2009 Cengage. All rights reserved. 6–16
The Choice of Entry Modes: A Decision Model
Figure 6.3Source: 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 © 2009 Cengage. All rights reserved. 6–17
Modes of Entry: Advantages and Disadvantages
Table 6.3
ENTRY MODES ADVANTAGES DISADVANTAGES
High transportation costs for bulky products
Economies of scale in production concentrated in home countryDirect Exports
Better control over distribution (relative to indirect export)
Marketing distance from customers
Trade barriers
Indirect Exports Concentration of resources on production
Less control over distribution (relative to direct export)
Inability to learn how to operate overseas
No need to directly handle export processes
1. Non-equity modes: Exports
Copyright © 2009 Cengage. All rights reserved. 6–18
Modes of Entry: Advantages and Disadvantages
Table 6.3 (cont’d)
ENTRY MODES ADVANTAGES DISADVANTAGES
2. NON-EQUITY MODES:CONTRACTUAL AGREEMENTS
Licensing/Franchising Low development costs Little control over technology and marketing Low risk in overseas expansion
May create competitors
Inability to engage in global coordination
Turnkey projects Ability to earn returns from process technology in countries where FDI is restricted
May create efficient competitors
Lack of long-term presence
R&D contracts Ability to tap into the best locations for certain innovations at low costs
Difficult to negotiate and enforce contracts
May nurture innovative competitors
May lose core innovation capabilities
Limited coordination Ability to reach more customersComarketing
Copyright © 2009 Cengage. All rights reserved. 6–19
Modes of Entry: Advantages and Disadvantages
Table 6.3(cont’d)
ENTRY MODES ADVANTAGES DISADVANTAGES
3. Equity modes: Joint ventures Sharing costs and risks Divergent goals and interests of partners Access to partners’ knowledge
and assets Limited equity and operational control
Politically acceptable Difficult to coordinate globally
4. Equity modes: Whollyowned subsidiaries
Green-field projects Complete equity and operational control
Potential political problems and risks
Protection of technology and know-how
High development costs
Ability to coordinate globally Slow entry speed (relative to acquisitions) Same as green-field (above), except slow speed
Same as green-field (above)Acquisitions
Fast entry speed Post-acquisition integration problems
Copyright © 2009 Cengage. All rights reserved. 6–20
Debates and Extensions
• Liability versus Asset of ForeignnessSome foreignness can be an asset (“cool”): the “country of origin” effect
• Global versus Regional Triad Concentration Geographic DiversificationShould MNEs truly globalize?
• Cyberspace Entries versus Conventional EntriesWhose “rules of the game” should e-commerce follow?
Is the Internet borderless or subject to specific governments?
Copyright © 2009 Cengage. All rights reserved. 6–21
The Savvy Strategist
• Consider industry, resource, and institution views
• Match entries with specific goals
• Consider the four fundamental questions in strategy