Foreign Market Entry
Class 05_06
Pedro Coelhoso
Thoughts for the Day
 All our social problems arise from doing the wrong things righter. The
more efficient you are at doing the wrong thing, the wronger you
become. It is much better to do the right thing wronger than the wrong
thing righter. If you do the right thing wronger and correct it, you get
better.
Russell Ackoff (1919-2009)
Outline for Today
 Administrative Announcements
 More on the link between strategy and institutions
 Where are we in the course?
 Foreign Country Entry
 Why go abroad?
 Why and Where to enter?
 Why and Where and How to enter?
 Main Points and Implications
 Set-up for next class
Strategy and Institutions
 Khanna T, Palepu K. 1997. “Why focused strategies may be
wrong for emerging markets”. Harvard Business Review, 75(4):
41-51.
 They argue that focused strategies may be wrong for
emerging markets as the required institutions may not be
present to support this western-world mindset. They suggest
that “companies must adapt their strategies to fit their
institutional context”.
Applying Perspectives on
International Strategy
These impact how
firms behave.
Industry-based
Competition
Firm-specific
Resources &
capabilities
Institutional
Conditions:
- Formal
- Informal
Acquisitions/Restructuring
Global Competitive Dynamics
Entering Foreign Mkts
Country Selection
Local Competition
Locating activities across
countries
Structure
Strategic
Decisions
International
Strategy
Implementation/
Performance
Learning/Alliances
Changes in National Regulations of
Foreign Direct Investment (FDI), 1991–
2002
Source: United Nations, 2003, World Investment Report 2003 (p. 13), New York and Geneva: United Nations.
 WSJ: September 15, 2009 Update:
 Sept 2009: 130 protectionist measures planned
 For 2009, 90% of goods affected by protectionist measures
 Ratio of discriminatory vs. liberalizing trade laws is 6:1.
 Most targeted countries: China, U.S., Japan
Why Go Abroad?
 Answers traditionally include:
 More customers:
 Economies of scale
 Economies of scope.
 Reduce the dependence on one country.
 To replicate the success at home in new settings.
 Possibly: The answer can be “all of the above”
Why NOT go abroad:
Overcoming the Liability of Foreignness
 The Liability of Foreignness
 The inherent disadvantage foreign firms experience in host countries
because of their non-native status.
 Liability can be seen in two dimensions:
 Differences in formal and informal institutions in different countries (e.g.,
regulatory, language, and cultural differences).
 Customers discriminate against foreign firms, sometimes formally and other
times informally.
Why NOT go abroad?
Overcoming the Liability of Foreignness
 To offset the liability of foreignness, foreign firms must employ
overwhelming resources and capabilities:
 Superior knowledge about institutions for that market
 Volkswagen in China and CEE
 Superior technologies for that market
 Australian warship named JointVenture
 Superior organizational, marketing, and financial capabilities for that
market
 WARNING: Not every firm is ready for going abroad.
INTERNATIONALIZATION:
GO or NO GO
Figure 6.1
A Comprehensive
Model of Foreign
Market Entries
Figure 6.2
(Why and) Where to Enter?
Location-Specific Advantages
 Location-Specific Advantages
 Geographical features difficult to match by others.
 Singapore, Austria, Turkey, Miami
 Clustering of economic activities (agglomeration).
 Knowledge spillover among closely located firms that attempt to hire
individuals from competitors.
 A regional skilled labor force available to work for different firms.
 A regional pool of specialized suppliers and buyers.
Why and Where to Enter?
Location-Specific Advantages (cont’d)
Why
Where
Source: First two columns adapted from J. Dunning, 1993, Multinational Enterprises
and the Global Economy (pp. 82–83), Reading, MA: Addison-Wesley.
Table 6.2
Where to Enter? Cultural/Institutional
Distances and Foreign Entry Locations
 Cultural Distance
 The difference between two cultures along some identifiable
dimensions (such as power distance).
 Institutional Distance (besides culture)
 The extent of similarity or dissimilarity between the regulatory,
normative, and cognitive institutions of two countries.
 Firms from common-law countries are more likely to be interested in
other common-law countries
 Colony-colonizer links boost trade by 900%
Why and Where to Enter?
Cultural/Institutional Distances and
Foreign Entry Locations (cont’d)
 Two schools of thought have emerged:
 Stage models: Enter culturally similar countries during the first
stage of internationalization and, as they gain confidence, enter
culturally more distant countries in later stages.
 Strategic Model: Considerations of strategic goals such as
market and efficiency are more important than
cultural/institutional considerations as suggested by stage
models.
The Choice of Entry Modes: A Hierarchical
Model
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.
Figure 6.3
How to Enter?
Scale of Entry: Commitment and Experience
 Large-Scale Entries
 Benefit from a strategic commitment
 Drawbacks of large-scale entries: Limited strategic flexibility
and potential huge losses
 Small-scale entries
 Focus on accumulating experience
 “Learning by doing”
 Drawbacks of small-scale entries
 A lack of strong strategic commitment
 Difficulties in building market share
Copyright © 2009
Cengage. All rights
reserved.
6–17
Risk / Return of International
Market Entry Modes
RETURN
Joint Ventures
Wholly Owned
Subsidiary
Franchising
Licensing
Exporting
RISK
Modes of Entry: Advantages and
Disadvantages
Table 6.4
Modes of Entry: Advantages and
Disadvantages
Table 6.4 (cont’d)
Modes of Entry: Advantages and
Disadvantages
Table 6.4 (cont’d)
Why and Where and How to Enter?
Making Strategic Choices
 A company may have a variety of entry choices for different countries
and tasks.
 Entry strategies may change over time.
 Starbucks: Franchising  JV WOS
 China’s Haier in the United States: Direct exports  FDI (green-
field projects)
 Liability versus Asset of Foreignness
 Cyberspace Entry vs Conventional Entry: Rules to Use?
 Global versus Regional Triad Concentration
Main Points and Implications
 Foreign entry is the foundation for international business.
 Competing considerations: Industry level, Firm level, and
Institutional level.
 Competing considerations for where to enter: natural resource,
market, efficiency, and innovation seeking.
 Selection between options (trade-offs) will depend on goals and risk
acceptance regarding mode of entry.

Entry strategies, even when successful, do not guarantee
international success. They are just the beginning. The challenge is to
simplify and prioritize.
Set-Up for Next Class (Dec 17)
 Strategic Alliances and Acquisitions
 Reading: Peng Text, Chapters 7; Franchising
 Other Preparation: Read series of articles on Danone in China. Prepare
a 4-5 page analysis of the situation using the questions provided.
 Learning Objectives: We will learn about an increasingly important
arrangement between firms that is more formal than a contract but does
not involve buying another firm with some comparison to acquisitions.