CHAPTER 6: ENTERING FOREIGN MARKET

Case study: Ikea entered China

- IKEA introduction: IKEA is a furniture business group owned by Swedish billionaire
Ingvar Kamprad. After more than 50 years of establishment, IKEA has become a
giant multinational corporation with furniture shopping centers located in 31 different
countries and 76,000 employees. IKEA's annual sales reach over 12 billion euros.
With hundreds of stores across Europe, Asia, Australia and the US, IKEA serves more
than 410 million customers.
- IKEA in China: The company has been in China since 1998. Over the years, IKEA
opened 37 stores in China. China was for several years the fifth biggest market by
revenue for Ingka Group, which runs most IKEA stores globally. In the 2018 financial
year, China market made up 6% of IKEA's global sales, the same share as the UK.

I. UNDERSTAND THE NECESSITY TO OVERCOME LIABILITY OF

FOREIGNNESS
Liability of foreignness: The inherent disadvantage foreign firms experience in host
countries because of their nonnative status

This problem shows up in two main ways:

- First, institutional differences across nations can significantly impact foreign firms'
operations. In India, for instance, foreign retailers have faced discriminatory
regulations, when they cannot sell their own inventory and can only serve as
platforms selling other merchants’ products.
- Second, consumer bias against foreign firms can persist even in the globalized
era. Formally, procurement guidelines in most governments discriminate against
foreign firms. For example, the US government promotes “buy American,” in
Vietnam we have “người Việt Nam ưu tiên dùng hàng Việt Nam". Informally,
consumers may concern about foreign products' safety or quality. For instance, China
products are often considered as low quality products in Vietnam; in Japan, some
consumers worry that foreign rice may be “poisonous.”

How do foreign firms crack new markets?

- The answer: to deploy overwhelming resources and capabilities. By delivering
superb value to customers, foreign firms can overcome these obstacles. For example,
even though the US government has banned Huawei from building 5G networks in
the US, other US's allies like Germany have allowed Huawei to do this work. While
Germany has concerns about Huawei, the benefits that Huawei offers are simply too
good to ignore. No other company can offer such high-quality products at such a low
price.
→ Lesson: To overcome liability of foreignness, make your resources, capabilities,
and ultimately contributions (in terms of performance, jobs, and taxes to host
countries)
 II. ARTICULATE A COMPREHENSIVE MODEL OF FOREIGN MARKET
ENTRIES
Once the decision to internationalize is made, managers must determine the location, timing,
and mode of entry. Underlying each decision is a set of strategic considerations drawn from
the three leading perspectives in the strategy tripod, which form a comprehensive model.

Industry-Based Considerations
Industry-based considerations are primarily drawn from the five forces framework.

- Rivalry among established firms may prompt certain moves. Firms, especially those
in oligopolistic industries, often match each other in foreign entries.
 - The higher the entry barriers, the more intensely firms will attempt to compete
abroad. A strong presence overseas in itself can be seen as a major entry barrier. By
tapping into wider and bigger markets, international sales can increase scale
economies and deter entry.
- The bargaining power of suppliers may prompt certain foreign market entries, often
called backward vertical integration because they involve multiple stages of the value
chain. Many extractive industries feature extensive backward integration in order to
provide a steady supply of raw materials to late-stage production.
- The bargaining power of buyers may lead to certain foreign market entries, often
called forward vertical integration. Many electronics producers sell their products
through retail chains, which as corporate buyers often extract significant price
concessions. By passing such retail chains, Apple has undertaken forward vertical
integration by establishing a series of Apple Stores in major cities worldwide.
- The market potential of substitute products may encourage firms to bring them
abroad. In every round, producers of substitute products had tremendous incentive to
hawk their wares globally.
Overall, how an industry is structured and how its five forces are played out significantly
affect foreign entry decisions. Next, we examine the influence of resource-based
considerations.

Ikea's case:
- Before IKEA entered into China in 1998 there was not any home furnishing
experiential marketing in Chinese market
- IKEA has established a comprehensive value chain in China, including product
design, sourcing, production, and sales, to minimize external market risks and ensure
a steady supply of resources.
- IKEA’s global procurement network and strategic factory locations allow it to achieve
economies of scale and reduce costs as it expands internationally.

Resource-Based Considerations

- The value of firm-specific resources and capabilities plays a key role behind decisions
to internationalize. It is often the superb value of firm-specific assets that allow
foreign entrants such as GM in China, Toyota in the United States, and Louis Vuitton
in Japan to overcome the liability of foreignness. In the absence of overwhelmingly
valuable capabilities, Amazon, eBay, Home Depot, and Uber quit China; Walmart
exited Germany and South Korea; and Deutsche Bank withdrew from the United
States—all in tears.
 - The rarity of firm-specific assets encourages firms that possess them to leverage such
assets overseas. Patents, brands, and trademarks legally protect the rarity of certain
product features. It is not surprising that patented and branded products (such as cars
and smartphones) are often aggressively marketed overseas.
- If firms are concerned that their imitable assets may be expropriated in certain
countries, they may choose not to enter. In other words, the transaction costs may be
too high. This is primarily because of dissemination risks, defined as the risks
associated with the imitation and diffusion of firm-specific assets. The worst
nightmare is to have nurtured a competitor.
- The organization of firm-specific resources and capabilities as a bundle favors firms
with strong complementary assets integrated as a system and encourages them to
utilize these assets overseas. Many multinationals are organized in a way that protects
them against entry and favors them as entrants into other markets.
In summary, the resource-based view suggests an important set of underlying considerations
underpinning entry decisions. In the case of imitability and dissemination risk, it is obvious
that these issues are related to property rights protection, which leads to our next topic.

Ikea's case:
- IKEA's expansion from China to Europe has accumulated a large amount of capital,
which provides the economic foundation for its expansion to other regions.
- IKEA has a large number of patent assets.
- IKEA faces a constant battle against copycats in China. Some furniture stores keep
IKEA catalogues in their store and tell customers that they can reproduce the furniture
at a lower price

Institution-Based Considerations

- Regulatory risks are defined as those risks associated with unfavorable government
policies. Foreign firms doing business with countries ruled by unfriendly governments
obviously confront a great deal of such risks.
A well-known regulatory risk is the obsolescing bargain, referring to the deal struck by
multinational enterprises (MNEs) and host governments, which change their requirements
after the entry of MNEs. It typically unfolds in three rounds:
+ In round one, the MNE and the government negotiate a deal. The MNE usually is not
willing to enter in the absence of government assurance of property rights or some
incentives (such as tax holidays).
+ In round two, the MNE enters and, if all goes well, earns profits that may become
visible.
 + In round three, the government, often pressured by domestic political groups, may
demand renegotiations of the deal that seems to yield “excessive” profits to the
foreign firm (which, of course, regards these as “fair” and “normal” profits). The
previous deal, therefore, becomes obsolete.
- Trade barriers (barrier blocking international trade) include (1) tariff and nontariff
barriers and (2) entry mode restric-tions. Tariff barriers, taxes levied on imports, are
government-imposed entry barriers. Non tariff barriers - nontariff administrative
means to discourage imports—are more subtle. Certain entry modes also have
restrictions. Many countries limit or even ban wholly owned subsidiaries of foreign
firms.
- Currency risks stem from unfavorable movements of the currencies to which firms
are exposed.
In response, firms can engage in currency hedging or strategic hedging. Currency
hedging protects firms from exposure to foreign-exchange fluctuations. However, this
is risky in case of wrong bets on currency movements. Strategic hedging means
spreading out activities over several countries in different currency zones to offset the
currency losses in certain regions through gains in other regions.

In addition to formal institutional constraints, firms also need to develop a sophisticated

understanding of numerous informal aspects such as cultural distances and institutional
norms. Because Chapter 4 discusses these issues at length, we will not repeat them here other
than to stress their importance.
Overall, the value of the core proposition of the institution-based view—“institutions
matter”—is magnified in foreign entry decisions. Rushing abroad without a solid under-
standing of institutional differences can be hazardous and even disastrous. Failure to under-
stand the driving forces behind institutional changes that result in obsolescing bargains will
catch foreign entrants off-guard

Ikea's case:
- China’s accession into the WTO was in 2001. However, IKEA entered into China in
1998. Before China’s accession into the WTO the local policy for protecting the local
enterprise had a very serious disadvantage for multinational enterprises in China.
- China’s regulation is quite weak when it comes to copycats.
- China was a new and untested market far from the cultural conditions IKEA comes
from in Scandinavia

III. MATCH THE QUEST FOR LOCATION-SPECIFIC ADVANTAGES WITH

STRATEGIC GOALS (WHERE TO ENTER)

WHERE TO ENTER?
 Like real estate, the motto for international business is “Location, location, location”. Two
sets of considerations drive the location of foreign entries: Strategic goals; and cultural and
institutional distances.

A. Location - Specific Advantages and Strategic Goals:

- Favorable locations in certain countries may give firms operating in those countries
location - specific advantages. These advantages are the benefits a firm reaps from
features specific to a particular location. Certain locations simply possess
geographical features that are difficult for others to match.
- For example: Dubai is a fantastic stopping point for air traffic between Australasia
and Europe, and between Asia and Africa.

- Agglomeration: Clustering economic activities in certain locations - stem from:

+ Knowledge spillovers among closely located firms that attempt to hire individuals
from competitors
+ Industry demand that creates a skilled labor force whose members may work for
different firms without having to move out of the region
+ Industry demand that facilities a pool of specialized suppliers and buyers to also
locate in the region

- Given that different locations offer different benefits, it is imperative that a firm match
its strategic goals with potential locations. There are four strategic goals:

STRATEGIC LOCATION - SPECIFIC EXAMPLE

GOALS ADVANTAGES

Natural Possession of natural resources and Oil in The Middle East,

resource-seeking related transport and communication Russia, Argentina, and
infrastructure Venezuela

Market-seeking Abundance of strong market demand Automakers and business jet

and customers willing to pay producers enter China

Efficiency-seeking Economies of scale and abundance US and Canada firms in

of low-cost factors Mexico

Capability-seeking Abundance of world-class Britain and Sweden

capabilities (high-end car making)

Natural Firms have to go to particular locations where they have the

resource-seeking: resources.
 (For example: The Middle East, Russia, Argentina, and Venezuela are
all rich in oil.Even when the Venezuelan government became more
hostile, Western oil firms had to put up with it so that they could
maintain the company)

Market-seeking: Firms go to countries that have a strong demand for their products and
services.

(For example: China is now the largest car market in the world, and
practically every automaker in the world has elbowed its way into this
huge market)

Efficiency-seekin Firms often single out the most efficient locations featuring a
g: combination of scale economies and low-cost factors.

For example: In manufacturing industries, many US and Canadian

firms have to go to Mexico

Capability-seekin Firms target countries and regions renowned for world-class

g: capabilities.
For example: For world-class capabilities in the design,
manufacturing, and marketing of high-end cars, Tata and Geely went
after Britain and Sweden to acquire Jaguar-Land Rover and Volvo

However, location-specific advantages may grow, change or decline, prompting firms to

relocate if policy makers fail to maintain the institutional attractiveness or firms overcrowd
and bid up factor costs (land and talents)

Ikea's case:
- First, the market has great potential. China has a large population. With the
development of the economy, people pay more attention to the quality and appearance
of products. The fashionable design of IKEA caters to the love of young consumers,
and the price in IKEA is closer to the consumption level of young people, so it has a
greater development potential.
- Second, abundant human resources. High-quality educational resources enable IKEA
to recruit high-quality management personnel, professional technical personnel and
excellent sales personnel after entering China, which can meet IKEA's localized
business needs. Moreover, local labor costs in China are lower than those in
developed countries, which is conducive to the development of IKEA.
⇒ Market - seeking strategy and Efficiency-seeking strategy

B. Cultural and Institutional Distances and Foreign Entry Locations

- Cultural distance is the difference between two cultures along some identifiable
dimensions (such as individualism)
- Institutional distance is the extent of similarity or dissimilarity between the regulatory,
normative, and cognitive institutions of two countries.
 - There are 2 schools of thought:

1 Associated with stage models Firms will enter similar countries during their first
stage of internationalization and may gain more
confidence to enter culturally distant countries in
later stages

For example: Belgian firms to first enter France

and for Mexican firms to first enter Texas, taking
advantage of common cultural, language, and
historical ties.

=> Business between countries that share a

language on average is three times greater than
between countries without a common language

2 Considerations of strategic It argues that market and efficiency are more

goals are more important important than cultural and institutional
considerations
Overall, in the complex calculus underpinning entry decisions, locations represent but one of
several important sets of considerations. As shown next, entry timing and modes are also
crucial.

Ikea's case:
- After the stable development of IKEA, it started the process of gradual expansion
from Northern Europe to other parts of the world.
- IKEA's journey in Asia began in Japan in 1974, followed by Hong Kong, Singapore,
Taiwan, and Malaysia. Despite the proximity of Hong Kong, China wasn't considered
a prime market until 1998.
- Even in China, IKEA's stores are affected by different cultures in different places. In
places that are more like Western culture, the stores are less changed. IKEA started by
opening stores in places that were similar to Western culture and then moved to places
that were more different.
⇒ Associated with stage models
IV. COMPARE AND CONTRAST FIRST-MOVER AND LATE-MOVER
ADVANTAGES (WHEN TO ENTER)

WHEN TO ENTER?
- Entry timing refers to whether there are compelling reasons to be an early or late
entrant in a particular country.

- Some firms look for first-mover advantages, defined as the benefits that accrue to
firms that enter the market first and that later entrants do not enjoy
 First - mover advantages

1 Proprietary, technological leadership

2 Preemption of scarce resources

3 Establishment of entry barriers for later entrants

4 Avoidance of clash with dominant firms at home

5 Relationships with key stakeholders such as governments

• First movers may gain advantage through proprietary technology. Think about Apple's
iPhone.
• First movers may also make preemptive investments. (Japanese multinationals have
cherry-picked leading local suppliers => prevented late entrants from the West from
accessing these local firms)
• First movers may erect entry barriers for late entrants, such as high switching costs.
• Intense domestic competition may drive some nondominant firms abroad to avoid clashing
with dominant firms head-on at home (Matsushita, Toyota, and NEC were leaders in their
respective industries in Japan, but Sony, Honda, and Epson all entered the United States
ahead of the leading firms.)
• First movers may build precious relationships with key stakeholders such as customers and
governments.
- The potential advantages of first movers may be counterbalanced by various
disadvantages that result in late-mover advantages

Late - mover advantages

1 Opportunity to free ride on first mover investments

2 Resolution of technological and market uncertainties

3 First mover’s difficulty to adapt to market changes

Overall, evidence points out both first-mover advantages and late-mover advantages.
Unfortunately, a mountain of research is still unable to conclusively recommend a particular
entry timing strategy. Although first movers may have an opportunity to win, their pioneering
status is not a guarantee of success.

It is obvious that entry timing cannot be viewed in isolation and entry timing is not the sole
determinant of success and failure of foreign entries. It is through interaction with other
strategic variables that entry timing has an impact on performance-as discussed next.

Ikea's case:
- Before IKEA came to China in 1998, the Chinese furniture market business was
relatively fragmented and there was no obvious monopoly.
 - There were no stores that let people try out furniture.
- IKEA saw this chance and became the first big furniture store in China. It was hard to
change this situation once it started.
⇒ Experience the advantages of being a first - mover.

V. FOLLOW A DECISION MODEL THAT OUTLINES SPECIFIC STEPS FOR

FOREIGN MARKET ENTRIES (HOW TO ENTER)
How to Enter?
Managers have to make decisions about the scale of entries, and then determine whether to
pursue equity or non-equity modes of entry. Finally, they outline the pros and cons of various
equity and none-quity modes.

1. Scale of Entry: Commitment and Experience

● Scale of entry refers to the amount of resources committed to entering a foreign
market.
1.1 Large scale:
● The benefits of large-scale entries are a demonstration of strategic commitment to
certain markets. This both helps assure local customers and suppliers ("We are here
for the long haul!") and deters potential entrants.
● The drawbacks are (1) limited strategic flexibility elsewhere and (2) huge losses if
these large-scale "bets" turn out to be wrong.
1.2 Small scale:
● Small-scale entries are less costly. They focus on "learning by doing" while limiting
the downside risk.
● Example: Tesla only exports its Made-in-USA electronics cars. While limiting its
downside risk, Tesla learns how to work with customers, dealers, and governments
around the world to spread the enthusiasm about EVs.
● The drawbacks of small-scale entries are a lack of strong commitment, which may
lead to difficulties in building market share and in capturing first-mover advantages.
⇒ Overall, the longer foreign firms stay in host countries, the less liability of foreignness
they experience. Many firms, after their small-scale entries are successful, move to embark
on large-scale entries.

2. Modes of Entry: The First Step on Equity versus None-quity Modes

In the first step, considerations for small-scale versus large-scale entries usually lead to the
equity (ownership) issue. These modes differ significantly in terms of cost, commitment, risk,
and control.
● Non-equity modes (exports and contractual agreements) tend to reflect relatively
smaller commitments to overseas markets; non-equity modes do not require such
independent establishments.
● Equity modes (TVs and wholly owned subsidiaries) tend to reflect relatively larger
and harder-to-reverse commitments. Equity modes require the establishment of
independent organizations overseas (partially or wholly owned).
 ● The distinction between equity and non-equity modes is defined as an MNE. An MNE
enters foreign markets via equity modes through FDI. A firm that merely exports or
imports with no FDI is usually not regarded as an MNE.

Question for class:

Why would an oil importer - want to become an MNE by directly investing in the
oil-producing country instead of relying on the market mechanism by purchasing oil
from an exporter in that country?
● An MNE has three principal advantages: ownership (0), location (L), and
internalization (I).
● Let us use an example from the oil industry. By owning assets in both oil-importing
and oil-producing countries, the MNE is better able to coordinate cross-border
activities such as delivering crude oil to the oil refinery in the importing country right
at the moment its processing capacity becomes available (just-in-time) instead of
letting crude oil sit in expensive ships or storage tanks for a long time.
● On the other hand, the oil exporter may demand higher-than-agreed-upon prices,
citing reasons ranging from inflation to natural disasters. The importer has to either
(1) pay more or (2) refuse to pay and suffer from the huge costs of keeping expensive
refinery facilities idle. These transaction costs increase international market
inefficiencies and imperfections. By replacing such a market relationship with a single
organization spanning both countries — a process called internalization, transforming
external markets with in-house links-the MNE reduces cross-border transaction costs
and increases efficiencies. This advantage is called internalization advantage.

⇒ Overall, the first step in entry-mode considerations is extremely critical. A strategic

decision must be made in terms of whether to undertake FDI and become an MNE by
selecting equity modes.

3. Modes of Entry: The Second Step in Making Actual Selections

● During the second step, managers consider variables within each group of none-quity
and equity modes.
● An entry mode is a form of operation that a firm employs to enter foreign markets. If
the decision is to export, then the next consideration is direct versus indirect exports.

3.1 NON-EQUITY MODES:

Direct exports:
● Direct exports are the most basic mode of entry, capitalizing on economies of scale in
production concentrated in the home country and providing better control over
distribution.
● Pearl River, for example, exports its pianos from China to more than 80 countries.
This strategy essentially treats foreign demand as an extension of domestic demand,
and the firm is geared toward designing and producing first and foremost for the
domestic market.
 ● While direct exports may work if the export volume is small, this entry mode is not
optimal when the firm has a large number of foreign buyers.
● In addition, direct exports may provoke protectionism, potentially triggering
antidumping actions.
Indirect exports:
● Another export strategy is indirect exports, exporting through domestically based
export intermediaries.
● This strategy not only enjoys the economies of scale similar to direct exports but is
also relatively worry free.
● Indirect exports have some drawbacks. For example, third parties such as export
trading companies may not share the same objectives as exporters. Exporters choose
intermediaries primarily because of information asymmetries concerning foreign
markets. Intermediaries with international contacts and knowledge essentially make a
living by taking advantage of such information asymmetries. They are not interested
in reducing such asymmetries. Intermediaries, for example, may repackage the
products under their own brand and insist on monopolizing the communication with
overseas customers. If the exporter is interested in knowing more about how its
products perform overseas, indirect exports would not provide such knowledge.
Contractual agreements:
● The next group of non-equity entry modes involves the following types of contractual
agreement: (1) licensing or franchising, (2) turnkey projects, 3) research and
development contracts, and (4) co-marketing.
(1) Licensing or franchising
● In licensing and franchising agreements, the licensor or franchisor sells the rights to
intellectual property such as patents and know-how to the licensee or franchisee for a
royalty fee. The licensor or franchisor thus does not have to bear the full costs and
risks associated with foreign expansion. However, the licensor or franchisor does not
have tight control over production and marketing.
(2) Turnkey projects
● In turnkey projects, clients pay contractors to design and construct new facilities and
train personnel. This mode allows firms to earn returns from process technology (such
as construction) in countries where FDI is restricted. The drawbacks, however, are
twofold. First, if foreign clients are competitors, turnkey projects may boost their
competitiveness. Second, turnkey projects do not allow for a long-term presence after
the key is handed to clients.
(3) Research and development (R&D)
● Research and development (R&D) contracts refer to outsourcing agreements in R&D
between firms. Firm A agrees to perform certain R&D work for Firm B. Firms
thereby tap into the best locations for certain innovations at relatively low costs.
Three drawbacks may emerge:
- First, these contracts are often difficult to negotiate and enforce.
- Second, such contracts may cultivate competitors.
- Finally, firms that rely on outsiders to perform a lot of R&D may lose some of
their core R&D capabilities in the long run.
(4) Co-marketing
● Co-marketing refers to efforts among a number of firms to jointly market products
and services. Toy makers and movie studios often collaborate in co-marketing
campaigns with fast-food chains such as McDonald's to package toys based on movie
characters in kids' meals. The advantages are the ability to reach more customers.
● The drawbacks center on limited control and coordination.

2. EQUITY MODES:
Next are equity modes, all of which entail some FDI and transform the firm to an MNE.

Joint venture:
● As a corporate child, a joint venture (V) is a new entity jointly created and owned by
two or more parent companies.
● It has three principal forms: minority JV (less than 50% equity), 50/50 JV (equal
equity), and majority JV (more than 50% equity).
● JVs have three advantages:
- An MNE shares costs, risks, and profits with a local partner, so the MNE
possesses a certain degree of control but limits risk exposure.
- Gains access to knowledge about the host country.
- May be politically more acceptable in host countries.
● Disadvantages:
- JVs often involve partners from different backgrounds and with different
goals, so conflicts are natural.
- Effective equity and operational control may be difficult to achieve because
everything has to be negotiated-in some cases, fought over.
- The nature of the JV does not give an MNE the tight control over a foreign
subsidiary that it may need for global coordination.
⇒ Overall, all sorts of non equity-based contractual agreements and equity-based JVs can be
broadly considered as strategic alliances.

Wholly owned subsidiary (WOS):

● The last entry mode is to establish a wholly owned subsidiary (WOS), defined as a
subsidiary located in a foreign country that is entirely owned by the parent
multinational.
● There are two primary means to set up a WOS:
- One is to establish greenfield operations, building new factories and offices
from scratch. For example, Amazon set up a wholly owned greenfield
subsidiary in India. There are three advantages. First, a greenfield WOS gives
an MNE complete equity and management control. Second, this undivided
control leads to better protection of proprietary technology. Third, a WOS
allows for centrally coordinated global actions. In terms of drawbacks, a
greenfield WOS tends to be expensive and risky, not only financially but also
politically. Its conspicuous foreignness may become a target for nationalistic
 sentiments. Another drawback is that greenfield operations add new capacity
to an industry, which will make a competitive industry more crowded.
● The other way to establish a WOS is an acquisition. Acquisition shares all the benefits
of greenfield WOS and enjoys two additional advantages: (1) adding no new capacity
and (2) faster entry speed. In terms of drawbacks, acquisition shares all of the
disadvantages of greenfield WOS except for adding new capacity and slow entry
speed. But acquisition has a unique disadvantage: post acquisition integration
problems.
Overall, a firm is not limited to using only one entry mode. Skillfully using a bundle of
foreign market entry modes is a hallmark of successful firms globally.

Ikea's case:
- Aim at the early entry mode “joint venture” of IKEA in China and subsequent
changing into “wholly owned subsidiary”, this can be explained in two main aspects.
+ First is because of lacking the local market knowledge in the early entry, and a
local strategy partner not only could help IKEA to understand the market
knowledge, but also could together take operational risk of IKEA in the
Chinese market.
+ Second, IKEA's early entry into China, before the country joined the WTO,
faced significant challenges due to protective local policies. Partnering with a
Chinese company was essential to navigate these obstacles and establish a
presence in the market.
⇒ Therefore, the domestic partner is very necessary for IKEA for the first entry into the
Chinese market, and the earlier entry mode “joint venture” could be very reasonable in the
early entry in China.
-
VI. PARTICIPATE IN FOUR LEADING DEBATES CONCERNING FOREIGN
MARKET ENTRIES
Debate 1: Liability versus Asset of Foreignness
Despite the widely understood notion of liability of foreignness, one contrasting view argues
that, under certain circumstances, being foreign can be an asset (a competitive advantage)
For example:In the United States and Japan, German cars are seen as higher quality than
domestic cars.
=>this is known as “the country-of-origin effect”, which refers to the positive or negative
perception of firms and products from a certain country.
Whether foreignness is indeed an asset or a liability remains tricky. To play it safe, Hong
Kong Disneyland endeavored to strike the elusive balance between American image and
Chinese flavor.

Debate 2: Old-Line versus Emerging Multinationals: OLI versus LLL

MNEs presumably possess OLI advantages.
While these emerging multinationals,conforming to the L and I parts of the OLI framework
they typically do not own world-class technology or management capabilities. In other words,
the O part is largely missing.
How can we make sense of these emerging multinationals?
One interesting new framework is the linkage, leverage, and learning (LLL) framework
-Linkage refers to emerging MNEs' ability to identify and bridge gaps
-Leverage refers to emerging multinationals' ability to take advantage of their unique
resources and capabilities, which are typically based on a deep understanding of customer
needs and wants
-Learning :many MNEs from emerging economies openly profess that they go abroad to
learn.
=>There is a great deal of overlap between OLI and LLL frameworks. So the debate boils
down to whether the differences are fundamental, which would justify a new theory such as
LLL advantages, or just a matter of degree,...

Debate 3: Global versus Regional Geographic Diversification

Despite the widely held belief that MNEs expand "globally”, Alan Rugman and colleagues
report that even among the largest Fortune Global 500 MNEs, few are truly "global."
Should most MNEs further "globalize"?
-First, most MNEs know what they are doing, and their current geographic scope may be the
maximum they can manage
-Second, these data only capture a snapshot (the 2000s), and some MNEs may become
more "globalized" over time
=>Lessons: Be careful when using the word global. The majority of the largest MNEs are not
necessarily global in their geographic scope.
Debate 4: Contractual versus Non Contractual Approaches of Entry
Sometimes a non contractual approach may emerge when a contractual approach is
infeasible. Specifically, a foreign entrant may endeavor to penetrate an institutionally
unfamiliar environment where formal market-supporting institutions are lacking
A non contractual approach is otherwise known as reciprocity. Reciprocity is an informal
agreement based on mutual exchange of gratifications.
However, there is no guarantee such a favor will be returned, and the nature and the specifics
of the return cannot be bargained.
Why would reciprocity be chosen in international market entry?
Reciprocity may be especially useful when foreign entrants from developed economies eye
newly opened emerging economies characterized by significant institutional void.The
expression institutional voids refers to the institutional conditions of a country lacking
market-supporting infrastructure that enable efficient operations supported by a contractual
approach
=>In general, the larger the deficiencies produced by institutional voids, the more likely a non
contractual approach may be chosen for initial international market entry
VII. DRAW STRATEGIC IMPLICATIONS FOR ACTION
- Grasp the dynamism underlying the industry in a host country that you are looking
into.
- Develop overwhelming resources and capabilities to offset the liability of foreignness.
- Understand the rules of the game—both formal and informal—governing competition
in foreign markets.
- Match efforts in market entry and geographic diversification with strategic goals.