Chapter 9
Entering Foreign Markets
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Understand how institutions and resources affect liability of
foreignness
2. Match the quest for location-specific advantages with strategic goals
(where to enter)
3. Compare and contrast first- and late-mover advantages (when to
enter)
4. Follow the comprehensive model of foreign market entries (how to
enter)
5. Participate in three leading debates on foreign market entries
6. Draw implications for action
LIABILITY OF FOREIGNNESS
 the inherent disadvantage foreign firms
experience in host countries because of their
nonnative status
 differences in formal and informal institutions
governing the rules of the game in different
countries
 local firms are already well versed in these
rules, but foreign firms have to learn the rules
quickly
 foreign firms are often still discriminated
against, sometimes formally and other times
informally
WHERE TO ENTER?
location-specific advantages - favorable
locations in certain countries may give firms operating
there an advantage
agglomeration - beyond geographic advantages,
location-specific advantages also arise from the clustering
of economic activities in certain locations
natural resource seeking - resources are tied to
particular foreign locations
WHERE TO ENTER?
innovation seeking - firms target countries and
regions renowned for generating world-class innovations
market seeking - firms go after countries that offer
strong demand for their products and services
efficiency seeking - firms single out the most
efficient locations featuring a combination of scale
economies and low-cost factors
Cultural/Institutional Distances
and Foreign Entry Locations
cultural distance - difference between two cultures
along some identifiable dimensions (such as
individualism)
institutional distance - extent of similarity or
dissimilarity between the regulatory, normative, and
cognitive institutions of two countries
stage models - school of thought that believes that
firms will enter culturally similar countries during their
first stage of internationalization and that they may gain
more confidence to enter culturally distant countries in
later stages
WHEN TO ENTER?
first-mover advantages - advantages that
first entrants into a market obtain and that later movers
do not enjoy
first-movers - may also encounter significant
disadvantages, which in turn become late-mover
advantages
HOW TO ENTER?
scale of entry
large-scale entries:
 demonstrate strategic commitment to certain markets,
assuring local customers and suppliers for the long haul
 deters potential entrants
 hard-to-reverse strategic commitments limit strategic
flexibility elsewhere and incur huge losses if these largescale “bets” turn out wrong
small-scale entries:
 less costly
 focus on organizational learning by getting firms’ feet
“wet”—learning by doing—limiting the downside risk
First Step
Equity vs Nonequity Modes
nonequity mode - exports and contractual
agreements that tend to reflect relatively smaller
commitments to overseas markets
equity mode - JVs and wholly owned subsidiaries
indicative of relatively larger, harder to reverse
commitments
Second Step
on Making Actual Selections
direct export - most basic mode of entry capitalizes
on economies of scale in production concentrated in the
home country and affords better control over distribution
indirect export - exporting through domestically
based export intermediaries
licensing/franchising - agreement in which the
licensor/franchisor sells the rights to intellectual property
such as patents and know-how to the licensee/franchisee
for a royalty fee
Second Step
on Making Actual Selections
turnkey project - projects in which clients pay
contractors to design and construct new facilities and
train personnel
build-operate-transfer (BOT) agreement nonequity mode of entry used to build a longer term
presence
R&D contract - outsourcing agreements in R&D
between firms
Second Step
on Making Actual Selections
co-marketing - efforts among a number of firms to
jointly market their products and services
joint venture - corporate entity formed and jointly
owned by two or more parent companies
wholly owned subsidiary - entity that is
controlled through the ownership of shares in the
subsidiary by the parent entity
Second Step
on Making Actual Selections
green-field operation - wholly owned subsidiary
created by building new factories and offices from scratch
acquisition - wholly owned subsidiary created
through direct foreign investment
Liability versus Asset of Foreignness
Being foreign can be an asset (that is, a
competitive advantage).
However, whether foreignness is indeed an
asset or a liability remains tricky.
Global versus Regional Geographic
Diversification
Despite the widely held belief (and frequently
voiced criticism from antiglobalization
activists) that MNEs are expanding “globally,”
surprisingly, even among the largest Fortune
Global 500 MNEs, few are truly “global”.
Should most MNEs further globalize?
Cyberspace versus Conventional
Entries
The arrival of the Internet has sparked a new
debate: Whose rules of the game should ecommerce follow?