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Instructor Manual
Chapter 12: Foreign Entry Strategies
(Prepared by Klaus E. Meyer, March 2019)
Introduction to the Topic
Learning Objectives
1. Explain why MNEs establish subsidiaries abroad (why to enter)
2. Identify relevant location-specific advantages that attract foreign investors (where to enter)
3. Compare and contrast first- and late-mover advantages (when to enter)
4. Compare and contrast alternative modes of entry (how to enter)
5. Explain the interdependence of operations and entry strategies
6. Apply the institution-based view to explain constraints on foreign entry strategies
7. Participate in leading debates on foreign entry strategies
8. Draw implications for action
General Teaching Suggestions
This chapter deals with the popular topic of entry strategy, that is ‘how do companies set up
their operations when they first enter a new location or market?’ The chapter approaches the
topic the topic from a decision makers’ perspective and thus differs from many other
textbooks that approach it theoretically and limit the discussion to the choice of entry mode.
While entry mode is an important element of an entry strategy, it is not identical to entry
strategy. Our framework (Fig 12.1) thus emphasizes the independence of entry mode
decisions with in particular location and timing decisions – as well as operational decisions
such as marketing, logics and HR.
To motivate the topic, you as instructor may ask how do businesses set up subsidiaries in
[country of your choice]? What do they have to consider before committing their money?
Opening Case Discussion Guide
The opening case outlines the strategies of entry by a Chinese upstart that has established
itself successfully in the US market and is eying European markets as well. It established a
greenfield in the US but made an acquisition in Europe. Yet, note what they were looking for
in the acquisition: only the brand name! They acquired other resources in different way, for
example by hiring key individuals: a sale manager in the US, a technician in Germany. I
discussed this aspect of the case in a blog that you can combine with the material in this
chapter: http://www.forbes.com/sites/ceibs/2016/01/25/is-a-chinese-takeover-good-or-bad-
for-your-job/#116eff367ccb. In January 2016 Pearl River Piano acquired Schimmel Piano,
the largest piano manufacturer in Germany (by units), and thus moved up further on the value
chain from ‘designed in Germany made in China’ to ‘designed and made in Germany’.
To motivate a discussion, you may ask ‘do you think a Chinese made, Chinese-branded piano
maker could become world leader in a very traditional industry such as piano-making? What
are the barriers they are likely to encounter? How do you think they may build their market
position in Europe and the US?
Chapter Outline, Section by Section
Section 1: Strategic Objectives of Establishing Foreign Subsidiaries
Key Ideas
The section emphasizes that before designing any foreign operations, a decision maker needs
to be clear about the objectives of this investment. Any investment proposal needs to be
assessed against its objectives. The section introduces the common categorization of FDI
motives originally proposed by John Dunning.
Key Concepts
foreign subsidiaries
operations abroad set up by foreign direct investment
entry strategy
a plan that specifies the objectives of an entry and how to achieve them
natural resource seeking
Investors’ quest to pursue natural resources in certain locations.
market seeking FDI
Investors’ quest to go after countries that offer strong demand for their products and services.
efficiency-enhancing FDI
Investors’ quest to single out the most efficient locations featuring a combination of scale economies
and low-cost factors.
capability-enhancing FDI
Investors’ quest for new ideas and technologies that to upgrade their own technological and managerial
capabilities.
Section 2: Where to Enter?
Key Ideas
The discussion of location choice is introduced by outlining how different investment
motives, introduced in the previous section, lead to investment in different types of location.
This section builds on the discussion of ‘locational advantages’ within the OLI framework
introduced in Chapter 6. Instructors may want to review parts Chapter 6 at this stage.
Key Concepts
location-specific advantages
advantages that can be exploited by those present at a location
Section 3: When to Enter?
Key Ideas
This section discusses the timing of entry with focus on market-seeking types of investors.
While first-mover advantages are widely talked about, for many first late mover advantages
may actually induce them to wait before committing to a new market (Table 12.2).
Key Concepts
first-mover advantages
Advantages that first movers obtain and that later movers do not enjoy.
late-mover advantages
Advantages that late movers obtain and that first movers do not enjoy.
Section 4: How to Enter?
Key Ideas
This section introduces entry modes, which many consider the central element of an entry
strategy. We cover here both the acquisition-versus-greenfield and the equity stake aspects of
entry modes, discussing advantages, disadvantages (costs) and risks of each mode in turn. In
focus of Walmart in Europe when investors use acquisitions or greenfield entry, and their
pitfalls.
In the discussion of entry modes, note that we get away from the simplistic discussion of
advantages and disadvantages of alternative modes, but emphasizing the different sorts of
risks that different modes are exposed to (Table 12.3). In particular, the simplistic view that
‘JVs are lower risk than WOS’, which I hear even amongst serious scholars, should not be
allowed to stand. (JVs are only lower risk in that the initial financial commitment is lower).
Key Concepts
modes of entry
the format of foreign market entry
non-equity mode
(exports and contractual agreements) that tends to reflect relatively smaller commitments to overseas
markets.
equity mode
A mode of entry (JVs and wholly owned subsidiaries) that is indicative of relatively larger, harder to
reverse commitments.
wholly owned subsidiaries (WOS)
A subsidiary located in a foreign country that is entirely owned by the parent multinational.
greenfield operation
Building factories and offices from scratch (on a proverbial piece of “green field” formerly used for
agricultural purposes).
acquisition
takeover of another business
joint venture (JV)
A new corporate entity given birth and jointly owned by two or more parent companies
partial acquisition
acquisition of an equity stake in another firm
strategic alliances
collaboration between independent firms using equity modes, non-equity contractual agreements, or
both.
Section 5: How to Organize Your Operations?
Key Ideas
This section explains the interdependencies of the aspects of entry modes discussed so far
with operational aspects of the running of the new subsidiary. It thus links this chapter with
the operations chapters later in the book.
Key Concepts
No new concepts
Section 6: Institutions and Foreign Entry Strategies
Key Ideas
This section explores a variety of different constraints created by host country institutions
that affect foreign investors’ design of their entry strategy, notably entry mode and location.
The approach here is to explore different mechanisms by which institutional constraints affect
business strategies.
Key Concepts
No new concepts
Section 7: Debates and Extensions
Key Ideas
The first debate concerns the question when foreign investors should go in with a large up-
front investment, and when they should do slow.
The second debate draws on my own research that differentiates types of acquisition entry
strategies that vary considerably in their implications (Table 12.5).
Key Concepts
scale of entry
the amount if resources committed to foreign market entry
platform investment
An investment that provides a small foothold in a market or location
brownfield acquisition
acquisition where subsequent investment overlays the acquired organization
multiple acquisition
a strategy based on acquiring and integrating multiple businesses
staged acquisition
acquisition where ownership transfer takes places over stages
Section 8: Implications for Practice
Key Ideas
This concluding section emphasizes to conduct thorough strategic analysis before committing
to a new market: analyse the institutions, analyse your own resources, and match the
operation to be established with our strategic objectives.
Key Concepts
No new concepts.
Review Questions
Review questions are provided to students on the website accompanying the book. They
directly ask to summarize the material provided in the text. Instructors may also use the
questions to structure their lectures or review sessions.
Review Questions
(as provided to students on the website)
Material in the Book
1. What are the main objectives that foreign investors
pursue when establishing subsidiaries abroad?
2. How do companies choose where to set up
subsidiaries?
3. How do emerging economy firms acquire
capabilities abroad?
4. What are advantages and disadvantages of being a
first-mover in a country?
5. How can second movers overtake first movers?
6. What are the basic (equity) entry modes?
7. What are the advantages and disadvantages of
establishing a greenfield operation?
acquiring a local firm to enter a foreign country?
9. When would firms choose to enter by joint venture
rather than with a wholly owned subsidiary?
10. What are the risks associated with different modes
of foreign entry?
11. What are the managerial challenges arising in joint
ventures?
Page 336-337
Page 338-339
In Focus 12.1
Page 340-342
Page 341-342
Page 342-345
Page 344
Page 345, In Focus 12.1
Page 345-347, In Focus 12.2
Table 12.3, page 344-348
Page 345-347
12. What are partial acquisitions, and when are they
used?
13. How can investors vary their acquisition strategies
to make the best of opportunities in difficult local
business environment?
14. How do host country institutions influence foreign
entry strategies?
15. How do operational questions affect decisions over
location, mode and timing of foreign entry?
16. How should companies prepare a strategic decision
over a foreign entry?
Page 348
Page 351-353
Page 349-350
Page 348-349
Page 353
Critical Discussion Questions
At the end the chapter, we provide discussion questions that aim to stimulate students
thinking beyond memorizing the material learned in the chapter. They are designed to be
used at a basis for in-class discussions, group work, or individual assignments. Below,
provide some indicative answers of issues that may be raised in response to these questions.
Discussion Questions
(as provided in the book)
Indicative Responses
1. Since joining the EU, countries
like Poland and Hungary have
seen an increase of foreign direct
investment. Yet, some foreign
investors move their operations
from these countries to locations
1. On the resource side, the key concept to
use is unit labour costs (wages have been
raising faster than productivity in countries
like Poland). On the institutional side, both
Poland and Ukraine (for example) have
experienced improvements of institutions
2. From institution- and resource-
based views, identify the obstacles
confronting MNEs from emerging
economies interested in expanding
overseas. How can such firms
overcome them?
3. In what situations should
companies consider sharing
control over an operation with a
local firm that is directly or
indirectly owned by the host
country’s government?
4. In what situations should branded
consumer goods manufacturers
consider foregoing potential first-
mover advantages and delay their
entry until after a competitor has
2. On the resource side, answers may stress
the need for latest technology, brand
names and distribution channels. From an
institutional perspective, responses may
emphasize informal barriers such as a
negative country of origin image as formal
barriers to FDI do not specifically
disadvantage MNE from these countries.
3. The TC answers are most straight forward:
only if both partners contribute some form
of assets for which no efficient markets
exist, and a takeover of one firm by the
other is not feasible.
4. Here a variety of answers are possible.
Table 12.2 provides the key arguments.
However, students should demonstrate
their strategic thinking in developing their
The closing case provides further opportunities to apply ideas and concepts learned in this
chapter in a real world setting. The Closing Case for this Chapter is “Danone and Wahaha” and
focuses on issues that may lead to conflicts in joint ventures, and the challenges of dissolving
joint ventures. Below are some indicative responses to the case discussion questions.
the key resources and capabilities that
have enabled Thai Union to
successfully enter markets in Europe
to demonstrate their ability to think and
argue strategically. This includes in
particular recognition that objectives and
For use with Peng and Meyer, International Business 3e, 9781473758438, © Cengage Learning
EMEA 2019
and North America?
2. From an institutional perspective,
what factors in the institutional
environment at home and abroad
have enabled or hindered Thai
Union’s global expansion?
3. How would you design Thai Union’s
strategy for the China market? Who
would be appropriate partners, and
what organization form would you
chose?
bargaining positions change over time,
and companies need to think ahead to
consider possible scenarios, and
contractually agree major contingencies
up front. Students should also recognize
that the importance of regulatory
institutions, including competition policy,
in home and host countries.
Further Learning Activities
In addition to the cases and discussion questions provided in the book, instructors may want
to use any of the following activities to further engage students with the material.
1. The Opening Case (Pearl River Piano) in combination with In Focus 11.1 (Tata &
Geely) and the Closing Case (Thai Union) make a nice comparative assignment for
students to explore the motivations, resources and strategies of emerging economy
multinationals from China, India and Thailand. This assignment will also help
clarifying the basic constructs introduced in this chapter (and different types of
ownership advantages, as discussed in Chapter 6)
prepared to discuss the different strategies and motivations that drive FDI (Chapter 6),
and how they are grounded in the firm’s own evolving resources and capabilities
local firm or entrepreneur. The case illustrates many good practices regarding
adaptation, perhaps surprising given McDonald’s image of a global brand. However,
it also highlights problems McDonald’s experienced in the relationship with one of its
local joint venture partners, a conflict that is still ongoing, and among other highlights
challenges of contract enforcement in a ‘weak’ institutional context. The case
discussion thus requires integrating learning from entry strategy (Chapters 11 and 12)
with operational strategy in logistics and marketing (Chapter 17).
4. The Integrative Case ‘Beko Washes Clothes Across Europe’ discusses the
international growth strategy of the Turkish washing machine brand Beko. It covers
initial entry strategies (Chapter 12), development of the brands and its distribution
channels (Chapter 17), mergers and acquisitions (Chapter 14) and eventually
coordination of dispersed units across Europe (Chapter 15).
5. The most important element of your company’s success in its domestic market thus far has
been its electronic readiness and competitiveness. This has allowed the organization to
develop very stringent internal processes and controls that are the envy of the industry. As
such, entering a foreign market requires a sufficient level of technological prowess among
possible target locations. An evaluation of the “e-readiness” of specific locations can provide
considerable insight for your company’s anticipated internationalization in Asia. Gather
information and provide an overview of the five most technologically ready Asian locations.
Exercise 1 Answers
One resource which can be used is “EIU: E-readiness Rankings 2009”. This website can be
found by entering the search term “e-readiness” at the globalEDGE™ Resource Desk search
box located at http://globaledge.msu.edu/resourceDesk/. Once at the website, follow the link
to download the briefing paper (found at the bottom). Then, scroll to page 5 of the report
where Singapore, Hong Kong, Taiwan, South Korea, and Japan are found to have the highest
e-readiness among Asian locations. On page 4 of the report, it is discovered that consumer
and business adoption is the most important element of this ranking while legal environment
is the category with the lowest importance.
Search Term: “e-readiness”
Resource Name: EIU: E-readiness Rankings 2009
Website: http://www.eiu.com/site_info.asp?info_name=ereadiness&page=noads&rf=0
2. Global competition is determined in part by both efficiency and innovation. To develop a
foreign market entry strategy for your company, a colleague informed you of a competitiveness
report that is published periodically to evaluate the standing of each specific economy worldwide.
Locate this report for assessment. Which countries rank highest on both measures of efficiency
and innovation? Which regions of the world appear to rank well for each category? What
conclusions may be drawn from this information?
Exercise 2 Answers
One resource which can be used is “World Economic Forum: Global Competitiveness
Report”. This website can be found by entering the search term “competitiveness report” at
the globalEDGE™ Resource Desk search box located at
http://globaledge.msu.edu/resourceDesk/. Once at the World Economic Forum: Global
Competitiveness Report website, click on the “Download the Full Report” link (located in the
middle). After accessing the data available, the top 5 most efficient countries are: the U.S.,
Singapore, Switzerland, Canada, and Hong Kong. In addition, the top 5 most innovative
countries are: the U.S., Japan, Switzerland, Sweden, and Germany. For efficiency, a more
equal global distribution appears to be present (2 North American, 2 Asian, and 1 European
entity) than with innovation (3 European, 1 North American, and 1 Asian entity). While
student answers may vary, the notion of efficiency could be related to implementation
capabilities while innovation could be linked to creative capabilities in each national entity.
Search Term: “competitiveness report”
Resource Name: World Economic Forum: Global Competitiveness Report
Website:
http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm
globalEDGE™ Tag: Country Level
Further Readings
At the end the chapter, suggested further readings are provided. The primary aim is to
provide students a starting point for further work, for example when preparing a class
assignment or dissertation. These references also are recommended for instructors not
familiar with the topic and wishing to ‘get ahead of the students’ before lecturing on a topic.
K.E. Brouthers, 2013, a retrospective on: institutional, cultural and transaction cost influences on entry
mode choice and performance, JIBS, 44:14-22- an assessment of the state-of-the-art on entry-mode
research.
J.H. Dunning & S. Lundan, 2008, Multinational Enterprises and the Global Economy, 2nd ed., Cheltenham:
Elgar – the most comprehensive book reviewing scholarly work on how companies are setting up foreign
investment.
J.-F. Hennart, 2009, Down with MNE-centric theories! Market entry and expansion as the bundling of
MNE and local assets, JIBS, 40, 1432-1454 – A conceptual paper that integrates the perspective of a
foreign investor with that of local partner firms.
K.E. Meyer & Y.T.T. Tran, 2006, Market Penetration and Acquisition Strategies for Emerging
Economies, LRP, 39, 177-197 – A study that illustrates many of the issues discussed in this chapter using
the case of Carlsberg.
A. Verbeke, 2009, International Business Strategy, Cambridge: Cambridge University Press – A textbook
that develops concepts of business strategy out of the economics-based theory of the MNE.
