reaserch briefing market entry modes

8/3/2019 Reaserch Briefing Market Entry Modes

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Monica Riviere

Research Briefing


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What we have What we need ?

Asset complementarity

What we know What we dont know ?

International experience

What we want What can we have ?

Options


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Research question: what options do firms have to sustain their

competitive advantages through international expansion and how do

these options explain the mode of entry

Theories used:Resource Based View and Real Option Reasoning

Epistemology: Positivism

Research motivation:

to improve our understanding how firms make their entry choicethat lead to superior performance

to advance RBV with elements of Real Option Theory

to provide managers with a normatively superior model of entry


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Resource Based View

firms valuable, rare and not perfectly

imitable resources explain how firmscreate and sustain competitiveadvantages (Barney, 1991)

the costs that the RBV consider are not

those derived from opportunistic behavior

but the cost of coordination,

communication and combinations (Kogut

and Zander, 1993)- Knowledge Based

the entry mode predicted by RBV will

consider the most efficient ways to

transfer, coordinate and combineknowledge within the MNE subsidiaries

Real Option Reasoning

focuses on managing the costs associated

with uncertainty while providing access to

future opportunities (Myers, 1977)

Investment in the capability to respondprofitably to future uncertainty

(Kulatilaka, 2008)

real [assets (the investment)] options

[bear the right but not the obligation to

undertake later business decisions]

type of options: - growth options

- switching options


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Despite extensive research, mode of entry findings remain

inconclusive (Morschett et al, 2009; Verbeke & Li, 2009; Brouthers

et al., 2008)

The mix between firms unique capabilities (RBV) and follow-on

opportunities (ROR) has not yet been used to explain entry modes

There is a concentration of research on the firms growth options

and less is talked about a firm switching options

ROR not yet used to distinguish between establishment modes:

greenfields vs. acquisitions (extensive research on JV mode as

real option)


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Establishment mode

Greenfield Acquisition

Ownership

mode

shared Greenfield JV Partial Acquisition

full Greenfield WOS Full acquisition

Brouthers, Hennart (2007)

Moderating effect:global vs. multi-domesticstrategy

Entry mode = f (international experience,level of uncertainty

Ownership

mode

shared

Hypothesis 1: Firms with low level of

international experience, entering a foreignmarket where the level of uncertainty is high,

adopt a growth-option, shared entry mode

full

Hypothesis 2: Firms with high level of

international experience, entering a foreign

market, adopt a switching-option, wholly own

entry mode (greenfield or full acquisition)

Moderatingeffect:global vs. multi-domesticstrategy

Establishment mode

Greenfield Acquisition

Establishmentmode vs. =

f (market forcomplementary

assets, nature of

uncertainty)

Hypothesis 4: Firms

whose competitive assetsare complemented by

local inputs in a way thatcreates synergies and

guard against endogenous

uncertainty, adopt a

switching-optionestablishment mode

greenfield.

Hypothesis 3: Firms whose

competitive assets arecomplemented by local

assets in a way that createssynergies and guard against

exogenous uncertainty,

adopt a growth-option

establishment mode acquisition


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Firms who adopt a global strategic orientation, primarily focuson synergy creation between its business units

Firms who adopt a multi-domestic strategic orientationprimarily focus on synergy creation between parent andeach subsidiary

Control variables: firm size, firm age, and firms performancebefore expansion, financial slack, firms productdiversification level and industry growth


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Quantitative analysis for the mode of entry(entry/establishment)

a sample of US firms investments in UE (Bureau of Ec.Analysis)- 2007 Benchmark Survey

econometric model:multinomial model host-country dummies to control for country effect

Questionnaires to evaluate performance- managersassessment regarding:

Subjective financial achievement- economic goal Subjective non-financial achievement strategic goal

Heckmans procedure to control for self-selection biases


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Maturity = number of years within the industry 2-digit SIC code

International flexibility = the number of years doing business outside the homecountry, number the countries in which the firm operates and number of foreignsubsidiaries as a percentage of total number of subsidiaries

The level of uncertainty= country risk, demand volatility, competition

concentration and volatility in exchange rates.The nature of uncertainty= as follows:internal uncertainty - firms level of

investment in training and firms management expertise, external uncertaintywill consider - rapidly changing technological, macroeconomic, social andregulatory factors

Synergy creation within firms subsidiary network = sharing between firmssubsidiaries with respect to: distribution system, management expertise, R&Dresources and personnel, technological know-how, marketing expertise andpersonnel and production personnel, will be considered. Parent - unit subsidiaryfor the multi-domestic strategy, with the same logic

Control variables: firm size, firm age, and firms performance before expansion,financial slack, firms product diversification level and industry growth

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Takes into account uncertainty about future parameters that determine the value ofthe project, as well as management ability to respond to the evolution of thoseparameters

The project is modeled in terms of:

Uncertainty: the volatility in the change in value over time

Value: the starting value (spot price)- is usually proxied viamanagement's best guess of NPV

Management ability to respond to changes in value over

time is modeled at each decision point


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Level of uncertainty the highest, the greatest the value

of option

Nature of uncertainty- exogenous vs. endogenous

Competition

Option exercise cost- ex: bargaining cost over acquisition

of a JV

Tong & Li, 2008


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Switching options = a sequence of transactions in

which exercise of one option creates one or more

additional options.

Investment-disinvestment, entry-exit, expansion-

contraction, and suspension-reactivation decisions are

switching options.


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Is the asset complementarity that the global strategy players seek a within

network one?

And if so, does it reflect on their propensity to choose switching options asexpansion strategy?

Do these switch options pertain to non-shared mode of entry?Conversely, is the assets complementarity the multi-domestic players seek a

target by target one?

Does it reflect on their propensity to choose steady grow options asexpansion strategy?

Do these growth options pertain to shared modes of entry?

And finally, does a model that considers modes of entry through the options

firms invest in as real options, ultimately lead to superior performance?

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