1
Chapter 10: Entering Foreign Markets
Chapter Outline
LO1: Identify ways in which institutions and resources affect the liability of
foreignness.
1. Key Concepts
2. Discussion Exercise
As detailed in the chapter, the liability of foreignness is rooted in institutional
differences and discrimination against foreign firms. Another contributing factor is
the manner in which a particular culture is perceived in another. For example, the
stereotypical image of the “ugly American” in many foreign countries may influence
how American products are viewed there. In the examples given above, ask the
students how a particular product’s point of origin might affect how it is received by
American consumers. What is an effective way to take advantage of that perception
or to neutralize it? How would one market a product that may be viewed negatively
because of its point of origin?
LO2: Match the quest for location-specific advantages with strategic goals.
2
Chapter 10: Entering Foreign Markets
1. Key Concepts
This section focuses on the question of “Where” to enter. Favorable locations in
certain countries may give firms operating there what are called location-specific
advantages. Certain locations simply possess geographical features that are difficult
for others to match. Given that different locations offer different benefits, it is
imperative that a firm match its strategic goals with potential locations. The four
strategic goals are as follows. Firms seeking natural resources have to go to
particular foreign locations where those resources are found. Market-seeking firms
go to countries that have a strong demand for their products and services. Efficiency-
seeking firms often single out the most efficient locations featuring a combination of
scale economies and low-cost factors. Innovation-seeking firms target countries and
regions renowned for generating world-class innovations. In addition to strategic
goals, another set of considerations centers on cultural/institutional distances.
2. Key Terms
3. Research Exercise
LO3: Compare and contrast first-mover and late-mover advantages.
1. Key Concepts
3
Chapter 10: Entering Foreign Markets
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. However,
first movers may also encounter significant disadvantages which, in turn, become
late-mover advantages.
2. Key Terms
3. Discussion Exercise
With a population of 1.3 billion and a GDP growth at or above 10 percent, China is
poised to become the most dominant consumer base in the world. It is no surprise,
then, that for several years, a whole host of companies have made attempts to sell
their wares in China. Companies that enter China, however, face significant late-
mover disadvantages. Consider, for example, mobile phones—any
telecommunications firm that wants to enter the Chinese market faces huge hurdles.
China Mobile, the largest service provider in the nation, announced that they added
5.26 million new subscribers in the month of August 2009, bringing their total to
502.9 million. These figures dwarf those of Verizon, the largest service provider in
the U.S., which added 1.1 million subscribers in the second quarter of 2009, bringing
their total to 87.7 million. China Mobile also has a huge technological advantage, as
its network covers all 31 of China’s provinces and reaches 97 percent of China’s
population. Since China Mobile is a state-owned company, it benefits from
protectionist policies. Given these advantages, do late entrants to China’s
telecommunications market have a chance for success? How can firms utilize late-
mover advantages to compete effectively with China Mobile?
LO4: List the steps in the comprehensive model of foreign market entries.
1. Key Concepts
This section considers on what scale—large or small—a firm may enter foreign
markets. Considerations for small-scale versus large-scale entries usually boil down
to the equity (ownership) issue. Equity modes call for the establishment of
independent organizations overseas. Non-equity modes do not require such
independent establishments. These options include strategies such as direct exports,
4
Chapter 10: Entering Foreign Markets
turnkey projects, joint ventures, and acquisitions.
2. Key Terms
Build-operate-transfer (BOT) agreement: 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
3. Discussion Exercise
The modes of entry into a foreign market discussed in this section focus on
establishing a physical presence in a foreign country. But, thanks to the Internet,
there are now ways to establish a virtual presence. Take, for example, Google, which
has a unique domain name for each of the 160 countries in which its search engine is
localized (google.ca; google.co.th; google.co.uk). Further, it offers a range of other
products, such as its News Reader, Gmail, and the web browser Chrome, that are
available in local versions. While the products are free, Google generates tremendous
revenue from advertising. Thus, Google operates a business that has a global reach
5
Chapter 10: Entering Foreign Markets
but not necessarily a global physical presence.
How does Google’s virtual presence facilitate its entry into foreign markets? How
does it hinder its entry into foreign markets? What different factors does a virtual
company need to consider compared to physical companies when entering foreign
markets?
LO5: Explain what you should do to make your firm’s entry into a foreign market
successful.
1. Key Concepts
Debate: Ethical Dilemma/Emerging Markets
Foreignness: Liability versus Asset
1. Key Concepts
While we do not need to spill more ink on the term “liability of foreignness,” one
contrasting view argues that under certain circumstances, being foreign can be an
asset (that is, a competitive advantage). German cars are viewed as of higher quality
than locally made cars in the United States and Japan. In China, consumers
discriminate against Made-in-China luxury goods. Conceptually, 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. Although IKEA is now registered and
headquartered in Leiden, the Netherlands (and thus technically a Dutch company), it
relentlessly displays Swedish flags in front of its stores in an effort to leverage the
positive country-of-origin effect of Sweden.
6
Chapter 10: Entering Foreign Markets
2. Key Term
Closing Case Discussion Guide
Thai Union’s Foreign Market Entries
A family business founded in Thailand in 1977 by a Chinese immigrant, Thai Union
Frozen Products Plc has become one of the world’s largest seafood processors, with
subsidiaries in France, India, Indonesia, Japan, Norway, the United States, and Vietnam.
Thai Union’s international growth started with exports to Japan and the United States in
1988. In Japan, a joint venture (JV) with a local trading partner soon followed. In Europe,
Thai Union made a big splash in 2010 by acquiring MW Brands, a French manufacturer
and distributor of canned seafood.
Thai Union’s strategy focuses on exploiting its lower cost base arising from the following
aspects: (1) low-cost skilled labor in Thailand and seafood caught off the Thai coast, and
(2) product diversification that enables full exploitation of the raw seafood. The best parts
of fish and shrimp become high-end food products, while the residual is used for, for
example, pet food.
The purchase of European firms is primarily motivated by market-seeking motives, but
also adds fishing and processing capacity. With the acquisition of MW Brands, the share
of Europe in Thai Union’s total sales jumped from 11 percent to over one-third, thus
reducing its dependence on the U.S. market. In 2015, Thai Union pursued a $1 billion bid
for Bumble Bee Foods in the United States in an effort to move into higher margin,
premium products. In short, if you are a seafood lover, Thai Union has probably come to
a plate near you—or in front of you.
Video Case
Watch “Researching and Understanding Markets” by Luke Johnson of Channel 4
Television.
Introduction
7
Chapter 10: Entering Foreign Markets
When answering the following questions, encourage students to imagine that their
company is seeking to expand into another country through the use of an acquisition or at
least a major equity position in a local firm.
1. Which would be better, to gain control of a small firm that you then seek to expand,
or to acquire a company that is among the top five in its industry? Give reasons for
your answer.
2. What would be the benefit of expanding in an industry that is fragmented?
3. Johnson indicates that sometimes, instead of investing in a given industry, it may be
best to expand into one that can benefit from that industry. How does he use FedEx
and UPS as an example of that concept? Evaluate the pros and cons of that approach.
4. Johnson points out the benefit of looking for a niche. Do you think there is more or
less risk in entering a niche overseas market through acquisitions?
5. Pick a specific firm or industry and show how you would use Johnson’s advice in
entering a foreign market.
8
Chapter 10: Entering Foreign Markets
Additional Discussion Material
(From Prep Cards)
Critical Discussion Questions
1. During the 1990s, many North American, European, and Asian MNEs set up
operations in Mexico, tapping into its location-specific advantages such as (1)
proximity to the world’s largest economy (the United States), (2) market-opening
policies associated with NAFTA membership, and (3) abundant, low-cost, and high-
quality labor. None of these has changed much. Yet, by the 15th anniversary of
NAFTA (2014), a significant number of MNEs were starting to curtail operations in
Mexico and move to China. Use institution-based and resource-based views to
explain why this was the case.
2. From institution-based and resource-based views, identify the obstacles confronting
MNEs from emerging economies interested in expanding overseas. How can such
firms overcome these obstacles?
3. On Ethics: Entering foreign markets, by definition, means not investing in a firm’s
home country. For example, since 2000, GN Netcom shut down some operations in
its home country of Denmark, while adding headcounts in China. Nissan closed
factories in Japan and added a new factory in the United States. What are the ethical
dilemmas here? What are your recommendations?
9
Chapter 10: Entering Foreign Markets
Review Questions
1. What does the institution-based view indicate about how a firm should deal with the
liability of foreignness? What does the resource-based view suggest?
2. What are some of the location-specific advantages found in agglomeration, the
clustering of economic activities in a concentrated area?
3. What are the advantages and disadvantages for first movers? What are the
advantages and disadvantages for late movers?
4. Summarize the pros and cons for each of the non-equity and equity modes of entry.
10
Chapter 10: Entering Foreign Markets
Exhibit 10.5 summarizes the advantages and disadvantages of the various forms of
equity and non-equity modes of entry.
5. What is the heart of the debate on geographic diversification?
6. Describe two ways in which foreign firms suffer from liability of foreignness.
7. Describe two attributes that can be found in foreign locations and how these might
relate to a firm’s strategic goals.
8. What is the difference between cultural distance and institutional distance?
Cultural distance is the difference between two cultures along identifiable
dimensions such as individualism.
11
Chapter 10: Entering Foreign Markets
9. Why might a firm choose to expand into a culturally similar country? Why might it
choose to expand into a foreign country with very different qualities from its home
location?
10. How does a large-scale entry differ from a small-scale entry?
11. Name the two types of entry modes associated with exports, and explain how they
work.
12. Summarize the four types of non-equity contractual agreements.
12
Chapter 10: Entering Foreign Markets
13. What are some of the hallmarks of each of the three types of equity modes?
14. Devise your own example of how a firm might use its capabilities to overwhelmingly
offset the liability of foreignness as it moves into a new foreign market.
15. If you were a manager charged with choosing a new location for your firm’s
business, how would you go about matching the location options with your firm’s
strategic goals?