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Global Strategy 1e Michael Peng Global Strategy Mike W Peng c h a p t e r 6 Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly acce.
chapte r Chapter Entering Foreign Markets Global Strategy Strategy Global Mike W Peng Mike W Peng Copyright Copyright © © 2014 2014 Cengage Cengage Learning Learning All All Rights Rights Reserved Reserved May May not not be be scanned, scanned, copied copied or or duplicated, duplicated, or or posted posted to to a publicly publicly accessible accessible website, website, in in whole whole or or in in part part Outline • Overcoming the liability of foreignness • A comprehensive model of foreign market entries • Where to enter? • When to enter? • How to enter? • Debates and extensions ã The savvy strategist Copyright â 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Overcoming the Liability of Foreignness • The Liability of Foreignness - the inherent disadv antage 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 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 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 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Firm Size, Domestic Market Size, and Propensity to Internationalize Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Figure 6.1 A Comprehensive Model of Foreign Market Entries 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 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part A Comprehensive Model of Foreign Market Entries (cont’d) • Institution-Based Considerations Regulatory 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 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 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 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Where to Enter? Matching Strategic Goals with Locations STRATEGIC GOALS STRATEGIC GOALS LOCATION-SPECIFIC ADVANTAGES LOCATION-SPECIFIC ADVANTAGES EXAMPLES IN THE TEXT ILLUSTRAVTIVE LOCATIONS MENTIONED IN THE TEXT Natural Resource Seeking Natural Resource Seeking Possession of natural resources andand related Possession of natural resources related Transport andand communication infrastructure Transport communication infrastructure Oil inOil the East,East, Russia, and Venezuela inMiddle the Middle Russia, and Venezuela Market Seeking Market Seeking Abundance of strong market demand andand Abundance of strong market demand customers willing to pay customers willing to pay GM Seafood in China in Japan Efficiency Seeking Efficiency Seeking Economies of scale andand abundance of of Economies of scale abundance low-cost factors low-cost factors Manufacturing in China (especially in Shanghai) Manufacturing in China Innovation Seeking Innovation Seeking Abundance of innovative individuals, firms, Abundance of innovative individuals, firms, andand universities universities IT inIT Silicon Valley and and Bangalore, telecom in Dallas, in Silicon Valley Bangalore, financial services and in aerospace Russia New Yorkinand London and aerospace in Russia Source: First two columns adapted from J Dunning, 1993, Multinational Enterprises and the Global Economy (pp 82–83), Reading, MA: Addison-Wesley Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CULTURAL/INSTITUTIONAL DISTANCES AND FOREIGN ENTRY LOCATIONS Cultural Culturaldistance distance- difference differencebetween betweentwo two cultures along cultures along identifiable identifiabledimensions dimensions Ex: individualism Ex: individualism Institutional Institutionaldistance distance–– the theextent extentof ofsimilarity similarity or ordissimilarity dissimilarity between betweenregulatory, regulatory, normative normativeand and cognitive cognitiveinstitutions institutionsof of two twocountries countries Stage model – suggests that firms enter culturally similar countries first Alternative model – highlights the importance of strategic goals rather than cultures and institutions 11 12 When to Enter? • First mover advantages Developing 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 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 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 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 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 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 16 How To Enter? • The second step: See the following three slides Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part 18 Modes of Entry: Advantages and Disadvantages Table 6.3 Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Modes of Entry: Advantages and Disadvantages Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part Table 6.3 (cont’d) Debates and Extensions • Liability versus Asset of Foreignness Some foreignness can be an asset (“cool”): the “country of origin” effect • Global versus Regional Triad Concentration Geographic Diversification Should MNEs truly globalize? • Old-line versus emerging multinationals: OLI versus LLL Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part The Savvy Strategist • Thoroughly understand the dynamism underlying the industry in a foreign market you are looking into • Develop overwhelming capabilities to offset the liability of foreignness • Understand the rules of the game • Match entries with specific goals Copyright © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part ... whole or in part Table 6. 3 (cont’d) Debates and Extensions • Liability versus Asset of Foreignness Some foreignness can be an asset (“cool”): the “country of origin” effect • Global versus Regional... game in different countries • Foreign firms are often discriminated against • Foreign firms deploy overwhelming resources and capabilities to offset the liability of foreignness Copyright © 2014... a publicly accessible website, in whole or in part Figure 6. 1 A Comprehensive Model of Foreign Market Entries A Comprehensive Model of Foreign Market Entries (cont’d) • Industry-based considerations