ENTERING FOREIGN MARKETS

How do companies such as Incat enter foreign markets/ Why do they enter certain countries but not others/

Why did Incat establish a JV (Bollinger /Incat USA) with a host – country firm instead of setting up a wholly

owned subsidiary (WOS)? These are some of the key questions we will address in this chapter. Entering

foreign markets is one of the most important topics in international business. First, we will draw on the

institution and resource based views to discuss ways to overcome the liability of foreignness. Then we will

focus on three crucial dimensions; where (W), when (W) and how (H)- known as the 2 W I H dimensions. Our

discussion continues with a comprehensive model, followed by a debate about geographic diversification. We

conclude with practical tips for entering foreign markets.

OVERCOMING THE LIABILITY OF FOREIGNNESS

It is not easy to succeed in an unfamiliar environment. Recall from Chapter I that foreign firms have to

overcome a liability of foreignness, which is the inherent disadvantage that foreign firms experience in host

countries because of their non-native status. “Such as liability is manifested in at least two ways. First,

numerous differences in formal and informal institutions govern the rules of the game in different countries.

While local firms are already well versed in these rules, foreign firms have to learn the rules quickly. For

example, EADS, Airbus’s parent company, hired a number of retired US military officers to better compete

for the US defense contracts. Rupert Murdoch (owner of News Corporation) had to become a US citizen in

order to acquire US broadcast properties.

Second although customers in this age of globalization supposedly no longer discriminate against foreign

firms, the reality is that foreign firms are often still discriminated against, sometimes formally and other times

informally. In government procurement, buy national (such as “buy American) is often required. In consumer

products the discrimination against foreign firms is less but still far from disappearing. For example, activists

in India accused both Coca-Cola and Pepsi Co that their products contained higher than permitted levels of

pesticides but did not test any Indian soft drinks, even though pesticides residues are present in virtually all

groundwater in India. Although both Coca-Cola and PepsiCo denied these charges, their sales suffered.

Against such significant odds, how do foreign firms crack new markets? The answer boils down to our two

core perspective introduced earlier. These perspective are applied to foreign markets in Exhibit 10.1. The

institution-based view suggests that firms need to undertake actions deemed legitimate and appropriate by the

various formal and informal institutions governing market entries. Differences in formal institutions may lead

to regulatory risks due to differences in political, economic and legal system (see Chapter 2). There may be

numerous trade and investment barriers on a national or regional basis (see chapter 5, 6 and 8). In addition,

the existence of multiple currencies and currency risks as a result – may be another formal barrier (see Chapter

7.) Informally, numerous differences in cultures, norms and values created another major source of liability

of foreignness (see Chapter 3).

The resource –based view argues that a foreign firm needs to deploy overwhelming resources and capabilities

so that after offsetting the liability of foreignness it still possesses a imitable (I) and organizationally derived

(O) or VRIO, framework introduced in Chapter 4, we can suggest that Incat’s technology Is overwhelmingly

valuable and rare. Its warship was first deployed by the Royal Australian Navy and caught the eye of the US

military in joint operations. Yet, no US rivals are able to imitate Incat’s technology. Finally, Incat’s strong

organizational capability in designing and manufacturing as well as servicing these high –tech warships

around the world has proven to be tremendous asset.

WHERE TO ENTER

Similar to real estate, the motto for international business is “location, location” In fact such as spatial

perspective (that is doing business outside of one’s home country) is a defining feature of international

business. Two sets of consideration drive the location of foreign entries: (I) strategic goals and ( 2) cultural

and institutional distances.

Location –specific advantages and strategic Goals.

Favorable locations in certain countries may give firms operating there what are called location specific

advantages location –specific advantages are the benefits a firm reaps from features specific to a particular

place. Certain locations simply possess geographical features that are difficult for others to match. For

example, Singapore is an ideal stopping point for air traffic between Europe and Australia and for sea traffic

between the Middle East and East Asia. Singapore thus has attracted a lot of shipping companies and airlines.

We may regard the continuous expansion of international business as an unending saga in search of location

–specific advantages. (See chapter 6 for further examples)

We also learned in Chapter 6 about agglomeration, or location –specific advantages that arise from the

clustering of economic activities in certain locations. The basic idea dates back at least to Alfred Marshall, a

British economist who first published it in 1890. Recall that location – specific advantage stem from (I)

knowledge spillovers among closely located firms that attempt to hire individuals from competitors (2)

industry demand that creates a skilled labour force whose members may work for different firms without

having to move out of the region and (3) industry demand that facilitates a pool of specialized suppliers and

buyers to also locate in the region. Agglomeration explains why certain cities and regions can attract business

even in the absence of obvious geographic advantages. For example, due to agglomeration, Dallas has the

world’s heaviest concentration of telecommunications companies. US firms such as AT&T, EDS, HP,

Raytheon, Texas Instruments (TI) and Verizon cluster there. Moreover, numerous leading foreign telecom

firms such as Alcatel, (now Alcatel-Lucent0 Ericsson, Fujitsu, Huawei, Nortel, Siemens and

STMicroelectronics have also converged in this region.

Given that different locations offer different benefits; it is imperative that a firm match strategic goals with

potential locations. The four strategic goals are shown in Exhibit 10.2. First, firm seeking natural resources

have to go to particular foreign locations where these resources are found. For example, the Middle East,

Russia and Venezuela are all rich in oil. Even when the Venezuela government became more hostile, Western

oil firms had to put up with it.

Second, market-seeking firms go to countries that have a strong demand for their products and services. For

example, the Japanese appetite and willingness to pay for seafood has motivated seafood exporters around the

world-ranging from nearby China and Korea to distant Norway and Peru- to ship their catch to Japan in order

to fetch top dollars (or yens).

Third efficiency- seeking firms often single out the most efficient locations featuring a combination of scale

economies and low cost factors. It is search for efficiency that induced numerous multinational enterprises

(MNEs) to enter China. China now manufactures two thirds of the world photocopiers, shoes, toys and

microwave ovens; one half of the DVD players, digital camaras, and textiles, one third of the desktops

computers; and one quarter of the mobile phones, television sets, and steel. Shanghai alone reportedly has a

cluster of over 300 of the Fortune Global 500 firms. It is important to note that China does not present the

absolutely lowest labor costs in the world and Shanghai is the highest cost city in China. However, its

attractiveness lies in its ability to enhance efficiency for foreign for foreign entrants by lowering total costs.

Finally, innovation-seeking firms target countries and regions renowned for generating world- class

innovations, such as Silicon Valley and Bangalore (In IT), Dallas (in telecom) and Russia (in aerospace). Such

entries can be viewed as an option to maintain access as to innovations resident in the host in country thus,

generating information spillovers that may lead to opportunities for future organizational learning and growth

“(see chapter 12 for details).

It is important to note that these four strategic goals, while analytically distinct, are not mutually exclusive. A

firm may have to weigh more than one concern as it decides where to locate. Also location-specific advantages

may grow, change and/or decline, prompting a firm to relocate. If policy makers fail to maintain the

institutional attractiveness (for example, by raising taxes) and if companies overcrowd and bid up factor costs

such as land and talents, some firms may move out of certain locations previously considered advantageous.

For example, Mercedes and BMW proudly projected a 100% “made in Germany image until the early 1990s.

Now both companies produce in variety of countries such as Brazil, China, Mexico, South Africa, the United

States and Vietnam and Instead boast “Made by Mercedes and Made by BMW. Both the relative decline of

Germany’s location-specific advantages and the rise of other countries’ advantages (see the Opening Case in

Chapter 6) prompted Mercedes and BMW to shift their emphasis from location-specific advantages to firm –

specific advantages.

CULTURAL / INSTITUTIONAL DISTANCES AND FOREIGN ENTRY LOCATIONS

In addition to strategic goals, another set of considerations centers on cultural / institutional distances (see also

Chapters 2 and 3) Cultural distance is the difference between two culture along identifiable dimensions such

as individualism. Considering culture as an informal part of the institutional frameworks governing a particular

country Institutional distance is the extent of similarity or dissimilarity between the regulatory, normative

and cognitive institutions of two countries. “Broadly, speaking cultural distance is a subset of institutional

distance. For example, many Western cosmetics products firms, such as L’Oréal, have shied away from Saudi

Arabia, citing its stricter rules of personal behavior. In essence, Saudi Arabia’s cultural and institutional

distance from Western cultures is too large.

Two schools of thought have emerged in overcoming these distances. The first is associated with the stage

model According the stage model, firms will enter culturally similar countries in later stages. This idea is

intuitively appealing. It makes sense for Belgian firms to enter France first and Russian firms to enter the

Ukraine first to take advantage of common cultural and language traditions. On average, business between

countries that share a language is three times greater than between countries without common language. Firms

from common-law counties (English-speaking countries and Britain’s former colonies) are more likely to be

interested in other common law countries. Colony-colonizer links boost trade significantly. In general, MNEs

from emerging economies perform better in other developing countries, presumable because of their closer

institutional distance and similar stages of economic development. Overall, some evidence documents certain

performance benefits of competing in culturally and institutionally adjacent countries.

Citing numerous counter examples, a second school of thought argues that it is more important to consider

strategic goals such as market and efficiency and rather than culture and institutions. For example, major

Western oil producers on Sakhalin Island, a remote, part of the Russian Far East, have no choice but to accept

Russia’s unfriendly strong-arm tactics to grab more shares and profits-tactics described as “thuggish ways”

by Economist” Because Western oil majors have few alternatives elsewhere, cultural, institutional, and

geographic distance in this case does not seem relevant; the oil producers simply have to be there and let the

Russians flex their muscles to dictate the terms. Some counter-intuitive (although inconclusive) evidence

suggests that for any particular host country, firms from distant countries do not necessarily underperform

those from neighboring countries. “Overall, in the complex calculus underpinning entry decisions, location

represents only one several important considerations. As shown next, entry timing and modes are also crucial.

WHEN TO ENTER?

Entry timing refers to whether there are compelling reasons to be an early or late entrant in a [articular country.

Some firms look for f first-mover advantages, defined as the benefits that accrue to firms that enter the

market first and that later entrants do not enjoy. However, first mover may also encounter significant

disadvantages which, in turn, becomes late mover advantages. Exhibit 10.3 shows a number of first mover

advantages.

First movers may gain advantage through proprietary technology, as evidence in the Opening Case by Incat’s

wave –piercing technology. First movers may also make preemptive investments. A number of Japanese

MNEs have cherry picked leading local suppliers and distributors in Southeast Asia as new members of the

expanded Keiretsu networks (alliances of Japanese business relationships and shareholdings) and have

blocked access to the suppliers and distributors by late entrants from the West. In addition, first movers may

erect significant entry barriers for late entrants, such as high switching costs due to brand loyalty.

Parents who have used a particular brand of disposable diapers (such as Huggies or Pampers) for their first

baby often use the same brand for any subsequent babies.

Intense domestic competition may drive some non-dominant firms abroad to avoid clashing with dominant

firms head-on in their home market. Matsushita, Toyota and NEC were the Market leaders in Japan, but Sony

Honda and Epson all entered the United States in their respective industries ahead of the leading firms. Finally,

first movers may build precious relationships with key stakeholders such as customers and governments.

Motorola, for example, entered China in the early, 1980s and has benefited from its lengthy presence in the

country. Later, China adopted Motorola’s technology as its national paging standard, locking out other rivals

(at least) for the initial period).

The potential advantages of first movers may be counter balanced by various disadvantages, listed in the

second part of Exhibit 10.3 on the previous page. Numerous first-mover firms- such as EMI in CT scanners,

de Haviland in jet airliners, and Netscape in Internet browsers- have lost market dominance in the long run. It

is such late-mover firms as General Electric, Boeing and Microsoft (Explorer) respectively, that win.

Specifically, late-mover advantages are manifested in three ways. First, late movers may be able to free on the

huge pioneering investments of first movers. For example, Hong Kong’s Hutchison Whampoa is a first mover

in 3G telecommunications technology. Because it is introducing 3G technology in nine countries

simultaneously, the firm incurs huge advertising expenses both to educate customers on what 3G technology

is and why it has the best product. A late mover can free ride on the customer education and only needs to

focus on why it has better product.

Second, first movers face greater technological and market uncertainties. After some of these uncertainties are

removed, late movers may join the game with massive free power. Some MNEs such as IBM and Matsushita

are known to be hard-hitting later movers.

Finally, as incumbents, first movers may be locked into a given set of fixed assets or reluctant to cannibalize

existing product lines in favor of new ones. Late movers may be able to take advantage of the inflexibility of

first movers by leapfrogging them. For example, first movers in traditional photo technology, such Kodak and

Fujifilm have recently been pushed aside by later movers, led by Canon, Samsung and Sony, which excel in

digital technology.

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 opportunity to win their pioneering status is not a guarantee of success. For example,

among the three first movers into the Chinese automobile industry in the early 1980s, Volkswagen has

captured significant advantages, Chrysler has had very moderate success, and Peugeot failed and had to exit.

Although many of the late movers that entered in the late 1990s are struggling. General Motors(GM), Honda

and Hyundai have gained significant market shares. It is obvious that entry timing cannot be viewed in

Isolation and entry timing per se 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.

HOW TO ENTER?

In this section, we will first consider on what scale- large or small- affirm should enter foreign markets. Then

we will look at a comprehensive model for entering foreign markets. The first step is to determine whether to

pursue an equity or non-equity mode of entry. As we will see, this crucial decision differentiates MNEs

(involving equity modes) from non-MNEs (relying on non-equity models) Finally, we outline the pros and

cons of various equity and non-equity modes.

SCALE OF ENTRY: COMMITMENT AND EXPERIENCE

One key dimension in foreign decisions is the scale of entry, which refers to the amount of resources

committed to entering a foreign market. A number of European financial services firms such as ABN Amro,

HSBC, and ING Group have recently spent several billion dollars to enter the United States through a series

of acquisitions. Such large-scale entries demonstrate a strategic commitment to certain markets. This helps

assure local customers and suppliers (We are here for the long haul!) as well as deter potential entrants. The

drawbacks of such a hand to reverse strategic commitment are (1) limited strategic flexibility elsewhere and

(2) huge losses if these large-scale bet turn out to be wrong. For example, HSBC’s 2003 acquisition of

Household in order enter the US subprime mortgage marker ended up burning an $11billion hole on its balance

sheet in 2008 due to the financial market meltdown. small scale entries are less costly; they focus on

organizational learning by getting a firm’s feet wet- learning by doing – while limiting the downside risk. For

example, to enter the mark t of Islamic finance whereby no interest can be charges (according to the Koran)

Citibank set up a subsidiary Citibank Islamic Bank. It was designed to experiment with different

interpretations of the Koran on how to make money while not committing religious sins. It is simply not

possible to acquire such ability outside the Islamic World. Overall, there is evidence that the longer foreigns

firms stay in host countries, the less liability of foreignness they experience. The drawback of small-scale

entries is a lack of strong commitment, which may lead to difficulties in building market share and capturing

first –mover advantages.

MODES OF ENTRY: THE FIRST STEP ON EQUITY VERSUS NON-EQUITY MODES

Managers are unlikely to consider the numerous modes of entry, or methods used to enter a foreign market,

all at the same time. Given the complexity of entry decisions, it imperative that managers prioritize and

consider only a few key variables and then consider other variables later.

The comprehensive model shown in the Exhibit 10,4 and explained in Exhibit 10.5 on the next page is helpful.

In the first step, considerations for small –versus large scale entries usually boil down to the equity(ownership)

issue. Non-equity modes include exports and contractual agreements and tend to reflect relatively smaller

commitments to overseas markets, Equity modes, on the other hand, include JVs and WOSs and are indicative

of relatively larger harder-to-reverse commitments. Equity modes call for the establishment of independent

organizations overseas (partially or wholly controlled). Non-equity modes do not require such independent

establishments. Overall, these modes differ significantly in terms of cost, commitment, risk, return and control.

(See the numerous examples in the next section.)

The distinction between equity and non-equity modes is not trivial. In fact, it is what defines MNE: an MNE

enters foreign markets via equity modes through foreign direct investment (FDI). A firm that merely

exports/imports with no FDI is usually not regarded as an MNE. A s discussed at length in the Chapter 6, an

MNE, relative to a non MNE, enjoys the three pronged advantages of ownership, location and internalization,

collectively known as the OLI advantages. Overall, the first step in entry mode considerations is crucial. A

strategic decision has to be made in terms of whether or not to undertake FDI and to become an MNE.

MODES OF ENTRY THE SECOND STEP ON MAKING ACTUAL SELECTIONS

During the second step manager’s variables within each group of non-equity and equity modes. If the decision

is to export, then the next consideration is direct exports or indirect exports (also discussed in Chapter 9).

Direct exports are the most basic mode of entry, capitalizing on economies scale in production concentrated

in the home country and providing better control over distribution. 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, it is not

optimal when the firm has a large number of foreign buyers. Marketing 101 suggests that the firm needs to be

closer, both physically and psychologically, to its customers, prompting the firm to consider more intimate

overseas involvement such as FDI. In addition, direct exports may provoke protectionism, triggering

antidumping actions (see the in Focus feature).

As you will recall from chapter 9, another export strategy is indirect exports – namely, exporting through

domestically based export intermediaries. This strategy not only enjoys the economies of scales in domestic

production. (similar to direct exports) but is also relatively worry free. A significant amount of export trade in

commodities such as textiles, woods and meats, which compete primarily on price, is indirect through

intermediaries. Indirect exports have some drawbacks. For example, third parties such as export trading

companies may not share the same agendas and objectives as exporters. Exporters choose intermediaries

primarily because of information asymmetries concerning risks and uncertainties associated with foreign

markets. Intermediaries with international contacts and knowledge essentially make a living by taking

advantage of such information asymmetries. They may have a vested interest in making sure that such

asymmetries are not reduced. 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.

The next group of non-enquiry modes involves the following types of contractual agreement: (I) licensing or

franchising (2) turnkey projects, (3) research and developments contracts and (4) co-marketing. Recall from

chapter 9 that in licensing / franchising agreements, the licensor / franchisor sells the rights to intellectual

property such as patents and know-how to the licensee/ franchisee for a royalty fee. The licensor / franchisor,

thus does not have to bear the full costs and risks associated with foreign expansion. On the other hand, the

licensor/ franchisor does not have tight control over production and marketing. Its worst fear is to find that it

nurtured a competitor as, Pizza Hut found out in Thailand. Pizza Hut’s long –term licensee in Thailand, once

it learned Pizza Hut’s tricks, terminated the licensing agreement and set up its own pizza restaurant chain.

In Turnkey projects, clients pay contractors to design and construct new facilities and train personnel. At

project completion, contractors hand clients the proverbial key to facilities ready for operations, hence the

term “turnkey”. This mode allows firms to earn returns from process technology (such as power generation)

in countries where FDI is restricted. The drawbacks, however are two fold, First, if foreign clients are

competitors, selling them state-of the art-technology through turnkey project may boost their competitiveness.

Second turnkey projects do not allow for a long term presence after the key is handed to clients. To obtain a

longer term presence, build –operate-transfer agreements are now often used, instead of the traditional build-

transfer type of turnkey projects. A build-operate transfer (BOT) agreement is a non-equity mode of entry

used to build a longer term presence by building and then operating a facility for a period of time before

transferring operations to a domestic agency or firm. For example, a consortium of German, Italian and Iranian

firms obtained a large –scale BOT power-generation project in Iran. After completion of the construction, the

consortium will operate the project for 20years before transferring it to the Iranian government.

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 coasts, such as aerospace research in Russia. However, three drawbacks may

emerge. First, given the uncertain and multidimensional nature of R & D, these contracts are often difficult to

negotiate and enforce. While delivery time and costs are relatively easy to negotiate, quality is often difficult

to assess. Second, such contracts ay cultivate competitors. A number of Indian information technology firs,

nurtured by such work, are now on a global offensive to take on their Western rivals, as the Chapter 1 Opening

Case illustrated. 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.

Co-marketing refers to efforts among a number of firms to jointly market their products and services. Toy

makers and movies studios often collaborate in co-marketing campaigns with fast food chains such as

McDonald’s to package toys based on movie characters and kids’ meals. Airline alliances such as One World

and Star Alliance engage in extensive co-marketing through code sharing. The advantages are the ability to

reach more customers. The drawbacks center on limited control and coordination.

Next are equity modes, all of which entail some FDI and transform the firm to an MNE. A Joint venture (JV)

is a corporate child, a new entity created and jointly 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 such as Bollinger/Incat USA in the opening case, have three advantages. First an MNE shares

costs, risks and profits with a local partner, so the firm possess a certain degree of control but limits risk

exposure. Second the MNE gains access to the knowledge about the knowledge about the host country, the

local firm, in turn, benefits from the MNE’s technology, capital and management. Third JVs may be politically

more acceptable in host countries.

In terms of disadvantages, JVs often involve partners from different backgrounds and with different goals, so

conflicts are natural. Furthermore, effective equity and operational control may be difficult to achieve since

everything has to be negotiated- in some cases, fought over. Finally, the nature of the JV does not give and

MNE the tight control over a foreign subsidiary that it might need for global coordination (such as

simultaneously launching new products around the world). Overall, all sorts of non-equity-based contractual

agreements and equity-based JVs can be broadly considered as strategic alliances (within the dotted area in

Exhibit 10.4 on page 149). Chapter 11 will discuss them in detail.

The last entry mode is establishing to a wholly owned subsidiary (WOS), defined as subsidiary located in

foreign country that is entirely owned by parent multinational. There are two primary means to set up a WOS.

One is to establish green-field operations, building new factories and offices from scratch (on a proverbial

piece of “greenfield” formerly used for agricultural purposes). There are three advantages. First, a green- field

WOS gives an MNE complete equity and management control, thus eliminating the headaches associated with

JVs. Second, this undivided control leads to better protection of proprietary technology. Third, a WOS allows

for centrally coordinated global actions. Sometimes, a subsidiary will be ordered to launch actions that by

design will lose money. In the semiconductor market, TI faced competition from Japanese rivals such as NEC

and Toshiba that maintained low prices outside of Japan by charging high prices In Japan and using domestic

profits to cross- subsidize overseas expansion. By entering Japan via a WOS and slashing prices there, TI

incurred a loss nut forced the Japanese firms to defend their profit sanctuary at home, where they had more to

lose. This is because Japanese rivals had a much larger market share in Japan, so when the price level in Japan

collapsed thanks to the aggressive price cutting unleased by TI’s WOS in the country, NEC and Toshiba had

to drop prices, thus suffering much more significant losses. Consequently, Japanese rivals had to reduce the

ferocity of their price wars outside of Japan. Local licensees’/ franchisees or JV partners are unlikely to accept

such as subservient role as being ordered to lose money (!).

In terms of drawbacks, a green –field WOS tends to be expensive and risky not only financially but also

politically. The conspicuous foreignness embodied in such a WOS may become a target for nationalistic

sentiments. Another drawback is that green-field operations add new capacity to an industry, which, will make

a competitive industry more crowded. For example, think of all the Japanese automobile plants built in the

United States, which have severely squeezed the market share of US automakers and forced Chrysler and GM

into bankruptcy. Finally, green-field operations suffer from a slow entry speed of at least one to several years

(relative to acquisitions)

The other way to establish a WOS is through an acquisition. Although this is the last mode we discuss here, it

represents approximately 70% of worldwide FDI. Acquisition shares all the benefits of green-field WOS but

enjoys two additional advantages, namely: (1) adding no new capacity and (2) faster entry speed. In terms of

drawbacks, acquisition shares all the disadvantages of green-field WOS except adding new capacity and slow

entry speed. But acquisition has a unique and potentially devastating disadvantages: post-acquisition

integration problems. (See Chapter II for more details).

MANAGEMENT SAVVY

Foreign markets entries represent a foundation for overseas actions. Without these crucial first steps, firms

will remain domestic players. The challenges associated with internationalization are daunting, the

complexities enormous and the stakes high. Returning to our fundamental question, we ask: What determines

success and failure in foreign market entries? The answer boils down to the two core perspectives: institution

and resource based views. Shown in Exhibit 10.7, three implications for action emerge from these perspective.

First, from an institution-based view, managers need to understand the rules of the game, both formal and

informal, governing competition in foreign markets. Failure to understand these rules can be costly. Secondly

from a resources-based view, managers need to develop overwhelming capabilities to offset the liability of

foreignness. For example, over the last two years, which car company has had the highest growth in key

emerging economies such as China. India, and Russia? It is Hyundai Surprised? In both China and Russia,

Hyundai is now the top-selling foreign –brand-car and in India it is a strong second. Hyundai’s secret? Its cars

come with relatively advanced features such as airbags and anti-lock brakes that local rivals do not include.

Relative to more expensive foreign (especially Japanese) rivals, Hyundai cars sell at a more reasonable price.

Such an unbeatable combination may eventually enable Hyundai to join the Top five global automakers.

Finally, mangers need to match entries with strategic goals. If the goal is to deter rivals in their homes markets

through price slashing as TI did in Japan, then be prepared to fight a nasty price war and lose money. If the

goal is to generate decent returns, them it might be necessary to withdraw from some tough markets, as when

Wal-Mart withdraw from Germany and South Korea.

EXHIBIT 10.6

1 IBM

2 Sony

3 Philips

4 Nokia

5 Intel

6 Canon

7 Coca cola

8 Flextronics

9 LVMH