CHAPTER 6
ENTERING FOREIGN MARKETS
CHAPTER OUTLINE
I. OPENING CASE: Emerging Markets: SABMiller in Nigeria
A. SABMiller was founded in South Africa in 1895 as South African Breweries (SAB)
1. SABMiller is currently the world’s second-largest beer company measured by
revenues (behind the Belgian–Brazilian Anheuser-Busch InBev)
2. In 1999, SAB moved its headquarters to London
B. Nigeria is the largest beer market after South Africa
1. Nigerian population is young and growing
2. Nigeria is attractive to SABMiller because of its influence—Nigerian music and
movies are visible throughout Africa
3. Guinness and Nigerian Breweries were strong incumbents prior to SABMiller’s entry
C. In 2009, SABMiller entered Nigeria, but not Lagos, a Guinness and Nigerian Breweries
stronghold
1. SABMiller acquired a run-down brewery in Port Harcourt and another one in Ilesha
2. In 2012 it built a brand new, greenfield plant in Onitsha and developed a new beer
specifically for the Onitsha plant: Hero
D. Nigeria has its challenges
1. Boko Haram, a fundamentalist Islamist group, kills innocent people who engage in
“un–Islamic” practices, such as drinking alcohol, resulting in hundreds of deaths
2. In 2014, the outbreak of Ebola in western Africa spread to Lagos
3. Land is expensive and disputes are frequent, making it hard to construct new factories
or offices
4. Power outage is frequent
5. Transportation is perilous
E. SABMiller has learned an important lesson the hard way: be even more careful about
what you are getting into
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II. OVERCOMING THE LIABILITY OF FOREIGNNESS
A. Overcoming the Liability of Foreignness, the inherent disadvantage foreign firms
experience in host countries because of their nonnative status
1. Differences exist in formal and informal institutions that govern the rules of the game
in different countries (such as regulatory, language, and cultural differences)
III. UNDERSTANDING THE PROPENSITY TO INTERNATIONALIZE
A. Two underlying factors for firms to go abroad
1. The size of the firm
2. The size of the domestic market
B. Propensity
1. Enthusiastic internationalizer: Exhausts opportunities in a small country quickly
2. Follower internationalizer: Follows larger counterparts abroad as suppliers
IV. A COMPREHENSIVE MODEL OF FOREIGN MARKET ENTRIES
A. Industry-Based Considerations
1. Rivalry among established firms may prompt certain moves
5. The market potential of substitute products may encourage firms to bring them abroad
B. Resource-Based Considerations
1. The higher the value of firm-specific resources and capabilities (especially intangible
assets such as brands, know-how and software), the more likely it is that firms will
aggressively leverage them overseas
2. The rarity of firm-specific assets encourages firms that possess them to leverage such
assets overseas
C. Institution-Based Considerations
1. Regulatory Risks
a. Associated with unfavorable government policies
b. Obsolescing bargain, referring to a deal struck by an MNE and a host
government, which changes the requirements after the entry of the MNE
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2. Trade Barriers
a. Tariff and nontariff barriers encourage foreign entrants to produce locally and
discourage them from exporting
b. Local content requirements mandate that a “domestically produced” product can
still be subject to tariff and nontariff barriers unless a certain fraction of its value
is truly produced domestically
c. Restrictions on certain entry modes
3. Currency Risks
a. Stem from the unfavorable currency movements to which firms are exposed
b. Can be reduced by speculation and hedging
4. Informal aspects such as cultural distance and institutional norms impact foreign
market entries
V. WHERE TO ENTER?
A. Location-Specific Advantages and Strategic Goals
1. Location-Specific Advantages
a. Geographical advantages
b. Agglomeration, or clustering economic activities in certain locations
i. Knowledge spillovers among closely located firms that attempt to hire
individuals from competitors
2. Strategic Goals
a. Natural resources-seeking: Certain resources are tied to particular foreign
locations
b. Market-seeking: Go to countries that offer the highest price and strongest demand
for the products and services
B. Cultural/Institutional Distances and Foreign Entry Locations
1. Cultural distance: The difference between two cultures along some identifiable
dimensions
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2. Institutional Distance: The extent of similarity or dissimilarity between the
regulatory, normative, and cognitive institutions of two countries
3. Two schools of thought
VI. WHEN TO ENTER?
A. First Mover Advantages
1. Developing proprietary, technological leadership
2. Preempting scarce assets
B. Late Mover Advantages
1. Taking a free ride on first movers’ pioneer investments
2. Joining the game with massive firepower when some of the uncertainties, such as
technological and market uncertainties, are removed after the explorations of first
movers
3. Taking advantage of first movers’ inflexibility by leapfrogging over them
C. Choice of Strategy
VII. HOW TO ENTER?
A. Scale of Entry: Commitment and Experience
1. Large-scale entries benefit from a strategic commitment, assuring local customers and
suppliers, and deterring potential entrants
2. Drawbacks of large-scale entries
a. Limited strategic flexibility
B. Modes of Entry: The First Step on Equity versus Non-Equity Modes
1. Strategists must prioritize variables in deciding the mode of entry
2. A decision model is helpful to the endeavor of key variables considerations
3. Non-equity modes
a. Smaller commitments to overseas markets
b. Exports, contractual agreements
4. Equity modes
a. Larger, harder-to-reverse commitments
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b. Establishing independent organizations overseas
c. Joint ventures (JVs), wholly owned subsidiaries
5. MNE enters foreign markets via equity modes through foreign direct investment
(FDI)
C. Modes of Entry: The Second Step on Making Actual Selections: During the second step,
managers consider variables within each group of non-equity and equity modes
1. Non-equity modes
a. Direct exports
i. Most basic mode of entry
b. Indirect exports: Exporting through domestically based export intermediaries
i. Used by small firms unable to export on their own or by large firms
aiming at exploring unfamiliar countries
ii. The agendas and objectives of the intermediaries and exporters may not be
the same
iii. This approach does not provide exporters much opportunity to know how
products are doing overseas
c. Contractual agreements
i. Licensing/franchising
d. Turnkey projects
i. Projects in which clients pay contractors to design and construct new
facilities and train personnel; contractors hand clients the “key” to the
facilities ready for operations upon completion of the project
ii. Likely to earn returns from process technology in countries where FDI is
restricted
e. R&D contracts
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i. Outsourcing agreements in R&D between firms
f. Comarketing refers to efforts among a number of firms to jointly market their
products and services
i. The advantage is that it reaches more customers
ii. The drawbacks include limited control and coordination
2. Equity modes
a. Joint ventures (JV)
i. Jointly owned by two or more parent companies
ii. It has three principal forms: Minority JV (less than 50% equity), 50/50 JV
(equal equity), and majority JV(more than 50% equity)
b. Wholly-owned subsidiaries (WOS)
i. Green-field operations; building factories and offices from scratch
ii. Advantages:
(a) Complete equity and management control
(b) Better protection of proprietary technology and know-how
(c) Allow for centrally coordinated global actions
iii. Drawbacks
(a) Expensive and risky both financially and politically
(b) Adds new capacity and causes intense competition
(c) Slow entry speed
iv. Acquisition—another way to establish a WOS
(a) Advantages: Adds no new capacity; faster entry speed
(b) Disadvantage: Post-acquisition integration problems
VIII. DEBATES AND EXTENSIONS
A. Liability versus Asset of Foreignness
B. Global versus Regional Geographic Diversification
1. Few MNEs are truly global, most MNEs are concentrated in the Triad regions.
Should MNEs truly globalize? Many firms will globalize over time
C. Old-line versus Emerging Multinationals: OLI versus LLL
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1. Emerging multinationals are challenging the conventional wisdom of the OLI
advantage
2. They typically do not own better proprietary technology, and their management
capabilities are usually not world class. They may possess the L and I of the OLI but
they definitely miss the O
3. The LLL (linkage, leverage, and learning) framework helps us understand emerging
IX. THE SAVVY STRATEGIST
A. Industry view: Understand the dynamism underlying the industries in the foreign market
B. Resource view: Develop overwhelming capability to overcome the liability of
foreignness
C. Institution view: Understand the rules of the game, both formal and informal, governing
competition
D. Match entries with specific goals
E. Four fundamental questions in strategy
1. Why firms differ in their propensity to internationalize boils down to size of the firm
and the domestic market
2. How firms behave in foreign entries depends on how considerations for industry
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CHAPTER SIX – LECTURE NOTES AND TEACHING TIPS
SUMMARY OF THE OPENING CASE: Emerging Markets: SABMiller in Nigeria
The opening case features the struggles and successes of SABMiller as it develops markets in
Africa.
Teaching Tip: Ask students why Africa might present obstacles not present in other countries,
particularly developing countries. How might SABMiller’s roots as South African help set it
apart from the competition?
OVERCOMING THE LIABILTY OF FOREIGNESS
To succeed in an unfamiliar environment is not easy. These foreign firms have to overcome a
liability of foreignness, which is the inherent disadvantage foreign firms experience in host
countries because of their nonnative status.
UNDERSTANDING THE PROPENSITY TO INTERNATIONALIZE
In addition to overcoming the liability of foreignness, foreign firms have to understand the
propensity to internationalize in order to decide whether to do business abroad. This propensity
A COMPREHENSIVE MODEL OF FOREIGN MARKET ENTRIES
Strategists must make a series of decisions regarding the location, timing, and mode of entry,
collectively known as the where, when, and how aspects. There is actually a set of strategic
considerations underlying each decision.
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TI retaliated by incurring a loss. This forced the Japanese firms to defend their profit sanctuary at
home, where their whole profit base was exposed. This is sometimes called a cross subsidization
strategy, and it is crucial for firms to encourage their government to secure access to foreign
Third, 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 (see
Chapter 3). Many extractive industries feature extensive backward integration overseas (such as
bauxite mining), in order to provide a steady supply of raw materials to late-stage production
(such as aluminum smelting). Because natural resources are not always found in politically stable
countries, many firms have no choice but to enter politically uncertain countries.
Fourth, the bargaining power of buyers may lead to certain foreign market entries, often called
forward vertical integration. Apple, for example, has established a series of Apple stores in major
cities worldwide in order to avoid working with retail chains.
Resource-Based Considerations
The VRIO framework introduced in Chapter 3 sheds considerable light on entry decisions by
focusing on their value, rarity, imitability, and organization aspects.
First, the value of firm-specific resources and capabilities plays a key role behind decisions to
internationalize. Often the superb value of firm-specific assets allows foreign entrants to
overcome the liability of foreignness. Therefore, the higher the value of these assets (especially
intangible assets such as brands, know how, and software), the more likely firms will
Third, if firms are concerned that their imitable assets might be expropriated in certain countries,
they may choose not to enter. In other words, the transaction costs may be too high primarily
because of dissemination risks, defined as the risks associated with the unauthorized diffusion of
firm-specific assets. If a foreign company grants a license to a local firm to manufacture or
market a product, “it runs the risk of the licensee, or an employee of the licensee, disseminating
the know-how or using it for purposes other than those originally intended.”
often allows them to win oil and gas exploration contracts in various countries.
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Institution-Based Considerations
Finally, the institutional-based considerations focus on the three major formal institutional
constraints confronting foreign entrants: regulatory risks, trade barriers, and currency risks.
Teaching Tip: The instructor can discuss some well-known obsolescing schemes in recent years.
Many governments in Africa, Asia, and Latin America in the 1950s, 1960s, and 1970s
expropriated MNE assets through nationalization by turning them over to state-owned
enterprises (SOEs). Marxists governments were often at the forefront of these nationalizations or
other obsolescing schemes. Ask students to research the outcomes of these schemes, and if these
are still in force today. Depending on the answer, ask them why the schemes are still in force or
why they are not.
Trade Barriers
Trade barriers include tariff and nontariff barriers, local content requirements, and restrictions on
Nontariff Barriers
Nontariff barriers are more subtle. For example, the Japanese customs inspectors, in the name of
Local Content Requirements
Many governments have imposed local content requirements mandating that a “domestically
produced” product can still be subject to tariff and nontariff barriers unless a certain fraction of
its value (such as 51% in the United States) is truly produced domestically. The Brazilian
government imposes a 70% local content requirement for all the equipment ordered by Petrobras.
Restrictions on Entry Modes
Many countries limit or even ban wholly foreign-owned subsidiaries. In the United States,
foreign airlines are not allowed to operate wholly owned subsidiaries or acquire U.S. airlines.
Currency Risks
Currency risks stem from the unfavorable currency movements to which firms are exposed. If
the Chinese yuan appreciates, domestic and foreign firms in China may lose a significant chunk
of their low-cost advantage.
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prevent or reduce losses from currency movements. This was one of the key motivations behind
Toyota’s 1998 decision to set up a new factory in France, instead of expanding its existing
British operations (which would cost less in the short run). Being in France which is in the
Eurozone allows Toyota to more effectively hedge than in Britain which is not in the Eurozone.
In addition to formal institutional constraints, firms need to develop a sophisticated
understanding of numerous informal aspects such as cultural distances and institutional norms, as
elaborated in Chapter 4.
WHERE TO ENTER?
Teaching Tip: Ask students if they can think of reasons why firms enter a certain region. For
example, firms often go to China to secure lower manufacturing costs. They also go there for the
possibility of selling goods in China. Firms have different reasons for locating some operations
in India (outsourcing, some software development) or Singapore (more technical, light
manufacturing, other intellectual property work such as product-testing). Ask students to discuss
why these differences exist and how firms decide where to produce a new genetically engineered
medicine that must be produced in part in Asia because of local content regulations and
certifications requirements there.
Given that different locations offer different benefits, strategic goals must be matched with
locations. These strategic goals include seeking natural resources, market, efficiency, and
innovation. Based on different strategic goals, foreign firms will have to examine different
aspects of a location before deciding where to enter. Overall, these four strategic goals, while
analytically distinct, are not mutually exclusive.
Some MNEs may be efficiency-, market-, and innovation-seeking at the same time. Another
important consideration is that location-specific advantages may grow, evolve, and/or decline. If
policymakers fail to maintain the institutional attractiveness and companies overcrowd and bid
up factor costs, some firms may move out of certain locations that were previously considered
advantageous.
For instance, Mercedes and BMW, which had proudly projected a 100 percent “Made in
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Germany” image until the early 1990s, are now replacing that image with “Made by Mercedes”
and “Made by BMW” products that are now manufactured in countries such as Brazil, China,
Mexico, South Africa, Vietnam, and even the United States. Such an emphasis on firm-specific
advantages illustrates both the relative decline of Germany’s location-specific advantages (and
rise in costs) and the improvement of other countries’ capabilities and advantages.
Another set of considerations centers on cultural/institutional distances, defined as the difference
WHEN TO ENTER?
Teaching Tip: Start this section off by asking students about first mover advantages. What
creates that advantage, particularly in entering a new market? Did Starbucks have first-mover
advantage in Europe (they were the first big coffee shop chain)? How about in China? Students
might argue that firms should always be first movers into a potentially large market such China,
Indonesia, Russia, or India. This section emphasizes that the question should be addressed more
critically than just assuming the first firm in has some extra advantage; it may have some
disadvantages as well.
Conscientious entry timing considerations center on whether compelling reasons exist to be early
or late entrants when moving into certain countries. Often firms prefer first mover advantages.
However, first movers may also encounter significant disadvantages, which in turn become late
mover advantages.
First mover advantages stem from gaining proprietary, preempting scarce assets, establishing
entry barriers, avoiding clashes with dominant firms in domestic markets, and creating good
relationships with key stakeholders. On the other hand, the potential advantages of first movers
may be counterbalanced by various disadvantages. Late movers may benefit from the
Specifically, late mover advantages are manifested in three ways:
First, late movers may be able to take a free ride on first movers’ investments.
Second, while most first movers assume considerably more operational risks and face numerous
technological and market uncertainties, late movers are able to join the game with massive
firepower after some of these uncertainties are removed.
Finally, late movers may be able to take advantage of first movers’ inflexibility by leapfrogging
over them. This inflexibility includes locking into a given set of fixed assets or the reluctance to
cannibalize existing product lines in favor of new ones. That is, they can see what technological
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HOW TO ENTER?
Teaching Tip: Many Western firms are seeking to enter China or India, usually to take advantage
of the lower labor costs in those countries. In addition, firms may want access to those
potentially large and developing markets. Ask the students if they think all firms must locate in
those countries, and why.
In an effort to guide market entry decisions, this section first focuses on the large versus small
scale of entry. Then it introduces a hierarchical model guiding the decision-making in market
entry. The first step in this model is to determine whether the modes of entry would be equity- or
non-equity-based. This crucial decision differentiates an MNE (which employs equity modes)
from a non-MNE (which relies on non-equity entry modes). Finally, we outline the second step
in this model, which details the pros and cons of various groups of equity and non-equity modes.
One key issue in foreign entry decisions is the scale of entry. The decision on scale of entry
depends on the company’s commitment and experience in foreign markets. Large-scale entries
benefit from a strategic commitment, assuring local customers and suppliers, deterring potential
entrants. Some drawbacks of large-scale entries are the limited strategic flexibility and possible
huge losses if these large-scale “bets” turn out to be wrong. On the other hand, small-scale
An MNE with assets, for example, in both oil-importing and producing countries, has an
advantage which is known as the ownership advantage. This advantage negates the impact of
market relationship between an importer and an exporter. This process is called internalization,
which transforms external markets with in-house links; and the MNE thus reduces cross-border
transaction costs and increases efficiency. This advantage is called internalization advantage.
An MNE that operates in certain desirable locations enjoy a combination of ownership, location,
and internalization advantages. They are collectively labeled as OLI advantages.
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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. In turnkey
projects, clients pay contractors to design and construct new facilities and train personnel. A
build-operator-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 a firm. Research and development (R&D) contracts refer to
outsourcing agreements in R&D between firms. Co-marketing refers to efforts among a number
DEBATES AND EXTENSIONS
Teaching Tip: Ask students if they know of anyone who has ever intentionally avoided or
purchased a product or service because of its identification with a particular country or culture.
That could include food, clothing, entertainment, etc. Perhaps some of the students have been
influenced by the country of origin. If so, ask them why they did so, and what could change their
perception of the country and its products.
Liability versus Asset of Foreignness: Which Is It?
Sometimes foreignness can be an asset. It may be viewed as “cool” and “hip.” The “country of
origin” effect involves the perception of a country’s firms and products. With global
communications, people in various parts of the world can observe products and lifestyles
elsewhere and may be attracted by what they see.
Another debate is between the OLI advantage and the LLL framework. Developed economies
that possess high-caliber technology and management know-how operate with the OLI
advantage. Emerging multinationals have the L and the I of the OLI framework but they do not
own proprietary technology and their management capabilities are usually not world class. In
other words, the O is largely missing.
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THE SAVVY STRATEGIST
Teaching Tip: Even IO economists cannot provide conclusive data on first mover strategies. The
Handbook of Industrial Organization contains some of the best research on the subject from an
IO perspective. They argue that the existence of entry barriers should play a major role in
judging whether a firm should be a first or early mover or a late mover/follower. It should be
noted that very few (if any) of the dotcoms possessed any significant barriers to entry or
customer switching costs. Thus their strategies of spending big money to be first and attain some
mystical “critical mass” were not likely to succeed on their own right.
The savvy strategist should consider industry, resource, and institution views.
• Industry view: understand the dynamism underlying the industries in the foreign market
In this section the textbook raises the four fundamental issues in strategy:
1. First of all, firms have to understand why they differ in their propensity to internationalize.
2. Second, how firms behave in terms of foreign entry depends on industry competition, firm
capabilities, barriers to entry (current and potential), and institutional differences.
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POSSIBLE ANSWERS TO CRITICAL DISCUSSION QUESTIONS
1. Pick an industry in which firms from your country are internationally active. What are the top
five most favorite foreign markets for firms in this industry? Why?
Answers will vary. According to Credit Suisse, one of the top five growth industries in China
is the personal computer industry. The foreign markets to explore would be India and other
2. From institution- based and resource-based views, identify the liability of foreigners
confronting MNEs from emerging economies interested in expanding overseas. How can
such firms overcome them?
Institution-based views suggest that such MNEs might encounter not only regulatory risks
3. ON ETHICS: Entering foreign markets, by definition, means not investing in a firm’s home
country. What are the ethical dilemmas here? What are your recommendations as (1) MNE
executives, (2) labor union leaders of your domestic (home country) labor forces, (3) host
country officials, and (4) home country officials?
Student answers may vary. Clearly there are several stakeholders (those affected by the
decision to enter the foreign market) who have very different interests. Those who benefit will
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TOPICS FOR EXPANDED PROJECTS
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, (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
30th anniversary of NAFTA (2014), does Mexico still enjoy such advantages? Why or why
not?
Most people are under the impression that Mexico benefitted immensely from the North
American Free Trade Agreement. The accord pushed American jobs to Mexico where
companies could benefit from low wages and lax regulations. A study by the Carnegie
Endowment for International Peace proves that Mexico hasn’t really benefitted from the
2. ON ETHICS: Foreign entrants are often criticized for destroying local firms and cultures. As
CEO of a leading foreign entrant in a host country, you have been interviewed by a local TV
reporter to comment on this issue on TV. What would you say?
Answers might vary. The debate about culture can be a contentious one. The views on
foreign entrants can vary. They could be seen as the symbols of progress in a world which is
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3. ON ETHICS: As CEO of a social media firm (such as Facebook), you have been informed
that your firm’s service will be discontinued in the host country because it allegedly incites
social unrest. (Egypt really did that in 2011 and the UK threatened to do that in 2010.) How
would you prepare a press release on this incident?
Answers might vary. The Egypt unrest and the London riots have revealed that social media
can have a powerful impact on society. If marketers were the first to take advantage of new
media’s ability to connect with people, social activists have appropriated these techniques to
record news stories and incite social change.
In the case of Egypt, activists used Facebook and other blogging sites to disseminate