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Constraints and Opportunities of Market Entry Strategies for Multinational Enterprises in Emerging Markets

Master's Thesis 2011 70 Pages

Business economics - Business Management, Corporate Governance

Excerpt

TABLE Of CONTENTS

INTRODUCTION

1. METHODOLOGY

2. DEFINITIONS

3. IMPORTANT CHARACTERISTICS AND CHALLENGES OF EMERGING MARKETS

4. ADVANTAGES AND DISADVANTAGES OF MARKET ENTRY MODES
4.1 joint Venturo
4.2 Greenfield
4.2 Acquisition

5. APPROACHES TO EVALUATE THE EFFICIENCY OE MARKET ENTRY MODES

6, CASE STUDIES
6.1 Will-.Mari company background and history
6.2 Wal-Mart's market entry failure in South Korea

6.3 Wal-Mart's successili India

CONCLUSION

BIBLIOGRAPHY.

INTRODUCTION

During the last few decades, globalization has created an increasingly competitive landscape and with established markets becoming saturated, multinational enterprises (MNEs) have turned towards emerging markets in order to capitalise on new opportunities for economic growth (London and Hart 2004). Especially through the recent global crisis, the key role of developing and emerging countries, as they have sought to sustain global economic growth, has become the focal point of worldwide interest (Rao 2010).

According to McKinsey (2010), "an ongoing shift in global economic activity from developed to developing economies, accompanied by growth in the number of consumers in emerging markets, are the global developments that executives around the world view as the most important for business and the most positive for their own companies profits over the next five years."

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Source: (IMF2011). Strategic Trends2011(online).

The results of recent surveys, such as those by the International Monetary Fund, predict that developing and emerging markets will grow by 6.3% in 2011 In turn this has evoked a significant sense of urgency among several MNE executives (Rao 2010).

Furthermore, a survey by McKinsey (2011) found that in the coming decade more then 45% of global GDP growth will be contributed by China, India, Russia, Indonesia, Turkey and Mexico. Likewise, in about 15 years time about 57% of the one billion households with an income > 20.000$ per annum will be in developing countries.

As Cavusgil et al (2002, p. 166) pointed out, "...once thought of as backward and low tech, these regions are now rapidly transforming their economies." By adopting new production techniques and technologies, markets such as China, India and South Korea have become vital places for production. Many companies from traditional developed nations have capitalised on this trend, shifting their production and research and development (R&D) facilities, and strengthening their distribution and service networks in emerging markets. In so doing, foreign market activities have reached a new stage of development: beyond the BRIC-countries second-tier emerging markets are becoming an economic driving force, which means that companies must adapt their product and service strategies in an effort to develop sustainable success by not only reaching premium customers but also "Micro-Potentials", the huge mass of customers with small budgets (KPMG 2011; Pacek and Thorniley 2007).

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Source: (CreditSuisse Global Wealth Databook2011). World wealth levels(online).

Identified as "NEXT 11" (listed in Table I) by Goldman Sachs, these aforementioned second-tier markets are expected to position themselves among leading economies within the next few years because of their superior growth rates and population (KPMG 2011). According to KPMG (2011), the upcoming "NEXT 11" will challenge the role of big players such as China as price and cost leaders, which will lead to a new role allocation: while cheap producers tend to shift more and more towards these upcoming countries, China is forced to focus on innovation and quality in order to stay competitive, which then renders it a player in the traditional domain of western industrial nations. As KPMG (2011) argues, it is only a matter of time until MNEs all over the world meet each other at eye-level as emerging markets are rapidly becoming commercially mature in spite of their comparatively lower domestic standards of living. This is driven by thriving competition as both domestic and international firms expand at exceptional speed (Pacek and Thorniley 2007). As Meyer (2004) states, MNEs play a vital role in connecting developed and undeveloped economies by transmitting knowledge, capital, value systems and ideas across borders.

McKinsey (2011) observed that globalization and its accompanying development of worldwide networks and comprehensive infrastructures significantly reduces the risk of international activity. But despite the enormous growth potential, the air for foreign investments of western companies is becoming restricted and access to scarce resources will be even more difficult (Goldman Sachs 2011).

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Source: (Goldman Sachs 2011). Population growth leads to rising consumption and increasing pressure on scarce resources (online).

Therefore, it is not only about energy sources, but also about raw materials that are essential for technology production and are mainly owned by emerging and developing countries (KPMG 2011).

In this regard, Root (1987) once argued that a company's prosperous future lies in its ability to determine an efficient market entry strategy and hence stay competitive in an international environment. The definite determination of an efficient entry mode proves to be difficult, which is also emphasized by another study conducted by Horn et al (2005), which reports that "for every successful market entry, about four fail". Inexperienced start-ups are not the only ones to suffer setbacks, but so do a lot of sophisticated companies and seasoned CEOs who should know better (Horn et al 2005). As Bianchi and Ostale (2006) point out, being successful in one's home country is no guarantee for international success. According to Peng (2009) the biggest challenge that every company experiences when entering a foreign market is "the liability of foreignness", which can be defined as the inherent disadvantage of an innovative status. Foreign companies very often make the serious mistake and try to economize on a detailed and all-encompassing market analysis. The lack of awareness of the numerous differences that exist in informal and formal institutions, such as language, regulatory or cultural differences, may not only lead to the wrong entry mode decision, but also to complete failure (Pacek and Thorniley 2007).

Consequently, the right choice of entry mode constitutes a key strategic decision for every MNE that intends to expand into a promising emerging market (Buckley and Casson 1998) as emphasized by Terpstra and Sarathy (1991, p. 361): "We cannot overemphasize the importance of the choice of method of entry into foreign markets. It is one of the most critical decisions in international marketing."

In general, companies who want to enter an emerging market are likely to have the choice between a vast range of entry modes. While in the early stages of internationalization corporations only had the choice between export and foreign direct investments (FDI), nowadays the range varies from equity-based projects such as wholly owned subsidiaries (WOS) or joint ventures (JV), to non-equity undertakings including exporting, and contractual modes such as franchising or licensing (Terpstra and Sarathy 1991). According to Anderson and Gatignon (1986), each of these modes differs in regards to risk and return potential and hence presents a unique combination of advantages and disadvantages.

Over the last decade, strategic management scholars (Miller and Droge 1986; Miles and Snow 1978; Porter 1980) have argued that companies with diverse business strategy orientations show different behaviours, which are reflected in their preferences for particular controlling and organizing mechanisms, their willingness to take risks, and resource allocation priorities. As Liang et al (2009) found, such distinctions are also likely to be demonstrated through strategic choices companies make by entering foreign markets. In this context, Pan and Tse (2000) argue that the determination of a market entry mode is usually made by a company while deciding on the level of ownership and control it seeks in the foreign project and the level of risk it is therefore willing to take.

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Source adaptedfrom: (Lu et al 2011). Factors influencing internationalfashion retailers' entry mode choice.

Literature on the factors related to entrant firm characteristics and host-country conditions, which form a company's unique entry strategy, is prolific and debate abounds.

It cannot be argued that one entry mode is superior to another, but rather, it shall be examined in depth within the following sections that risk and return prospects of any market entry mode may be economically beneficial in the appropriate circumstances.

Because of their significant relevance for this paper, the terms and concepts of "multinational enterprises" and "emerging markets" will first be defined, before giving a short overview of several motives for MNEs to enter emerging markets.

Once given an idea about the importance for contemporary MNEs to consider emerging markets as an opportunity for economic growth, the special characteristics and challenges of emerging markets will be observed from different points of view. Keeping in mind the various conditions that might influence the mode of entry decision, the following part analyzes and intends to interpret the various market entry modes as well as their respective advantages and disadvantages. In the final section of the literature review different approaches to evaluate the efficiency of the chosen entry mode will be provided. Finally, to underpin the theoretical examinations about opportunities and constraints of entry modes with practical examples, Wal-Marts failure in the South Korean economy as well as the successful entry in India will be illustrated in detail.

1. METHODOLOGY

This dissertation is based on a deductive approach to qualitative data analysis (King 1988; Brown 2007), within which secondary research is conducted in order to create a contemporary and systematic literature review. In the course of the literature review theoretical definitions are provided, academic literature findings are outlined and substantiated by recent examples derived from the economic world. Further, the examined methodological approach in this work is emphasized by two contrary market entry case studies of a single company. This approach was chosen in order to illustrate the complexity of market entry decision for an MNE in emerging markets. Moreover it outlines which factors should be considered in order to adjust its entry strategy successfully to individual market conditions.

In the conducted organizational research, case studies are appropriate to examine and illustrate research frameworks, especially in unique or differentiated instances (Eisenhardt, 1989; 1991). According to Whitley (1992), the employed case study methodology represents a long established valid instrument of typical academic inquiry, which nowadays provides particular support in international research matters (Ghauri 2004). As highlighted by Yin (2003) the question of whether a case research approach is suitable- especially in the present context-is indicated by particular circumstances, such as the intention for an in depth-contextual analysis of a particular, either unique or infrequently appearing situation. In addition, Flyvbjerg (2004) noted the complexity of circumstances requiring a necessary examination of cases as a whole. Finally, Bonoma (1985) added the use of induction to broaden perspectives on an issue being researched. As Dyer and Wilkins (1991) argued, "...even a single case is deemed appropriate for discovery of new theoretical relationships and questioning the established ones." (Gandolfi and Strach 2009, p.189).

In order to accomplish the research appropriately, sources utilized were online data­bases, such as sciencedirect.com, jstor.org, springerlink.com or emeraldinsight.com as well as scholar.google.com. and books.google.com. Furthermore several online articles, publications from consultancy companies such as McKinsey, industry reports and newspapers were used and additional books were purchased at Amazon.co.uk. The literature research could be mainly divided in two categories, books and online articles. The later one was mainly used in order to ascertain the timeliness of data for the research on the topic, while books were particularly used for definitions and for broader descriptions of theoretical frameworks. Due to the practical application of the research topic, almost only recently published online books were used to obtain academic findings and positions, as the availability of valuable books in the library of the University of St. Andrews was very limited.

2. DEFINITIONS

How to define an MNE correctly is widely discussed in the literature as Vernon (1972, p.8) highlights "The term multinational enterprise is sometimes confusing and always unprecise." One of the most accepted in academic as well as business circles nowadays is provided my Dunning and Lundan (2008, p.3) " A multinational or transnational enterprise is an enterprise that engages in foreign direct investment (FDI) and owns or, in some way, controls value-added activities in more than one country." In short, MNEs operate at the intersection point between foreign investments, international trade and production (Caves 1996). Because of their geo-centric orientation MNEs are able to benefit from a wide range of special economic opportunities that exist in the markets they are operating in (Perlmutter 1969). While in 2004 a survey conducted by the United Nations Conference on Trade and Development reported about 70.000 MNEs with more than 900.000 subsidiaries operating all over the world, more than 82.100 MNEs were reported in 2008.

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As the globalization of the world economy is prospering and the competitiveness between "global players" is thus increasing, CEOs as well as top management teams are in the middle of debates about how to identify appropriate internationalization strategies in terms of where and how to enter a foreign market. Surprisingly, most corporations try to stick to their traditional ways of doing business, which leads to the result that many MNEs are still struggling to find the right entry mode for the specific emerging market they want to enter (Khanna et al 2005).

About 25 years ago the World Bank created the term "Emerging Markets". The notion of the term was to serve as a selling phrase in order to encourage funds to invest in developing markets with high potential (KPMG 2007). A quarter century later the emerging economies concept is still one of the most and over and over newly discussed topics in the business world. Mistakenly a lot of Western managers consider these markets still mistakenly as only large, untapped economies. The reality is, as Cavusgil et al (2002) claim, that emerging markets are also becoming not only sourcing locations but also competitors for developed countries. Furthermore, it is also vital to realize that despite of the aspect that the term "emerging markets" refers to capital markets in developing countries, not every of the developing countries can be defined as an emerging economy (Herrmann 2005). The Emerging Market index developed by the rating company Standard & Poor's (S&P) and the International Finance Corporation (IFC) established the following criteria for these markets of which at least one has to be fulfilled:

- As defined by the World Bank, it has to be situated in a low or middle-income tier
- No financial depth; ratio of market capitalization to GDP is low
- Extensive discriminatory controls for foreign investors
- Characterized by a lack of market regulation, transparency, depth and operational efficiency (Standard & Poor's 2006)

Source adaptedfrom: Standard & Poor's (2006). S&P Emerging Market Index (online).

As an exact definition of the term is still to be found, other definitions besides the S&P/IFC index might also be considered, such as developed by Cavusgil et al (2002), who suggest the following defining criteria:

(a) begun an economic reform process targeted on alleviating issues, i.e. of poor infrastructure, poverty and overpopulation,

and

(b) achieved constant growth in GNP (gross national product) per capita, and therefore may really and truly be named emerging economies.

Nevertheless, there are also economies such as Hongkong, which fulfil these criteria pretty well but are still classified as emerging markets. The reason for still being classified as "emerging" might be the level of economical and/or political uncertainty or lacking stability (Pearson Education 2011).

As mentioned before, emerging markets will play a key role for MNEs over the next decades, thus it is not only vital to determine the concept appropriately but also to give an overview about the special characteristics of such economies, that will be examined in the following section, on which the entry mode decision should be based on.

3. IMPORTANT CHARACTERISTICS AND CHALLENGES OF EMERGING MARKETS

While the utter driving force among all global players represents the desire for profit maximization and growth, the concrete motives of MNEs certainly occur from different backgrounds (Arnold 2003). For example, some companies attempt to escape the stagnation of their home market to gain additional market share and resources elsewhere. In some circumstances, an MNE might undertake a foreign market entry not only for financial reasons but also to expand its know-how. Another reason describes the so called "bandwagon effect", by which others feel the need to equalize with the international expansion of domestic competitors (Root 1987; Ekeledo and Sivakumar 1998). And yet another common strategic choice for service companies in particular is, to decide to follow their domestic customers abroad. On the other hand, the rationale for manufacturing companies is more likely to exist in the possibility to achieve economies of scale, which decreases the average of costs and therefore benefits their competitive position (Root 1987). But, despite their several motives and backgrounds, they all have to certainly deal with different conditions and challenges in emerging markets. As of course every market is different, some of the most significant characteristics should be observed by MNEs from different points of view, which will be illustrated in the following.

Peng et al (2008, p.920) critically pointed out, when observing emerging economies from different points of view, the institution-based view has long been only acknowledged as the "one leg that helps sustain the strategy tripod". While the industry- based view developed by Porter (1980) examines how a market is structured and how the five forces impact the foreign entry decision, the resource-based view, represented by Barney (1991), suggests an important set of company specific diversities that drive the entry mode decision. These two traditional perspectives can be criticized for largely ignoring the informal and formal institutional foundation that examines the context of rivalry among industries and firms. This incorrect assumption of institutions only being a background determinant, is not surprising, as both aforementioned views are developed out of research on the competitive environment in the US, in which a relatively stable and market-based institutional framework is given (Peng et al 2008). According to Kesternich and Schnitzer (2009) some recent empirical studies identified that for MNEs formal and informal institutions are being seen as one of the most significant determinants when considering foreign investment in emerging markets.

The key role of institutions is to reduce devastating uncertainties amongst companies, which are about to enter a new market. But as accurate forecasts about so called "country risk factors", which embrace political, social and economic uncertainties in a nation (Malhotra et al 2003) are still uncertain, an accurate market analysis is of vital importance. While in developing countries business practices are primarily regulated by formal institutions, emerging countries are mainly governed by informal institutions, such as strong cultural imprinting (Reiner et al 2008). Defined as the body of values, norms and shared by a group of people, culture represents not only the main challenge when doing business internationally, but also the key determinant in how all business areas work together. According to Hofstede (1980) "Culture is more often a source of conflict than of synergy. Cultural differences are a nuisance at best and often a disaster." One of the most famous examples represents Wal-Marťs failure in Germany because of its total misunderstanding and underestimation of the German culture. Wal-Mart designed its stores in US formats, which was absolutely disliked by German customers, as well as its introduced customer service initiatives, such as a bag packing service (Fernie et al., 2006). Its advertisement slogan "Everyday low prices" backfired, as it was not able to beat German retail discounters such as Lidl and Aldi pricewise, which also shows that it failed to understand the market conditions (Gerhard and Hahn, 2005,

Fernie et al., 2006). Moreover, the fact that Wal-Mart initially employed only English­speaking managers also evidently demonstrates its lack of adaptation.

In order to give an overview about the cultural differences for foreign entrants to consider, a summary of Hofstede's most significant factors influencing international business relationships as well as management practices, such as negotiations tactics and decision making, are shown in the following table.

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Another important role regarding informal institutions plays the ethical aspect. According to Peng (2009, p. 107) "ethics refer to the norms, principles and standards of conduct governing individual and firm behaviour." Ethics help to fight corruption, often defined as the misuse of public authority for private benefits typically in the form of bribery. The consequence of corruption leads to the distortion of the basis for rivalry that should be based upon services and products, and consequently to a misallocation of resources and deceleration of economic development (Peng 2009). In fact, many emerging economies could be called corrupt, but before judging, Western managers should be aware that the perception of bribery is socially conditioned and culturally relative. To build up fostering relationships, in many cultures payments and gifts are essential parts of this connection, and sometimes the fine line between gift and bribe can be blurred, which might be followed by legal actions against the corporation (Cavusgil et al 2002).

Having examined the two most important informal determinants when considering emerging market entry, the focus in the following part lies on the formal institutional constraints challenging foreign entrants, such as political risk. Hamada et al (2004) defines political risk as the entirety of decisions, conditions or events that are of governmental or political nature, which according to Yaprak and Sheldon (1984) indirectly or directly interfere with or prohibit business transactions of foreign companies, entail modifications of contractual agreements or even lead to wholly or partially expropriation. Hamada et al (2004) proposed to classify political risks, which are typically experienced by MNEs, in three main categories: expropriation, political violence and transfer.

The term Expropriation risk is also known as nationalization risk and refers to losses, caused by arbitrary or even discriminatory actions taken or permitted by the host government. The foreign company is not only threatened to lose control over its investments it might also suffer from being deprived of its ownership. This might result in bankruptcy according to Yannaca-Small (2004), if the host government refuses to pay any compensations for such losses, as in case of debt the MNE might not be able to fulfil its lenders obligations. Furthermore, the host government might try to overtake the MNE in a series of creeping acts, such as deploying a mix of additional fees or taxes and other devices and charges to increase its share of the MNE or project profits after the firm made the investment (Hoffman 2007). Moreover, host governments might also attempt to renegotiate contractual agreements or even modify policies as soon as the MNE invested in their country (Peng 2009). For instance, IBM and Coca-Cola both left India in the 1970s because of the statutory restrictions that the government set up after they both already made initial investments. IBM finally withdrew from India, when the government required IBM to share its technological innovations with domestic rivals. Further, the Indian government required Coca-Cola 1. to assign 60% of its equity to a local firm 2. to unveil its "secret formula" and 3. to design twofold trademarks for the Indian consumers so that they would acquaint themselves with a local emblem. Consequently, Coca-Cola utterly rejected all of the governmental requirements and left India as well, as it was afraid of being expropriated by revealing its "secret formula" once the newly created trademark would become accepted (Minor 2011).

Politically motivated actions that lead to losses through disappearance, damages or destruction of tangible assets all represent determinants of political violence risk. These aspects caused by events such as war or civil disturbance in the foreign market, including insurrection, revolutions, terrorism, coups de etat or sabotage drastically jeopardize business operations that are of vital importance to the financial viability of the whole investment project and obligations to lenders (Jensen 2005; Ferrari and Rolfini 2008).

A recent example to be mentioned in this context is the bloody civil revolution in Lybia. The Chinese government was under constraint to withdraw its labour force from its ongoing business projects, even though the Chinese companies tried to be political neutral at all times by providing extremely bountiful credits to its clients and not marking their business projects dependent on their governmental reforms (Wanner 2011).

The last concept developed byAlbaum and Duerr (2008, p. 362), who define transferrisk as a "Risk arising from government policies that restrict the transfer of capital, payments, products, technology and persons into or out the host country." Those aforementioned determinants as well as unfavourable currency movements might consequently lead to major losses for companies operating across boarders.

Especially in this context Argentina is an illustrative case. In the 1990s, MNEs had to deal with a relatively low level of risk within Argentina's business environment in terms of FDIs, but in 2001/2 the economical crisis changed the conditions significantly. As stated in GoCurrency (2011) „In 2001, the fixed exchange rate was removed and the Peso was quickly devalued. The exchange rate was then left to float, causing further devaluation (about 4 Pesos per Dollar) and continued inflation (about 80%.)". The collapse the Argentinean financial system forced the government to impose restrictions on capital transactions and employed the "Pesofication" of contractual agreements and financial assets. The political actions taken, lead to the rewriting or even cancellation of a lot of contractual agreements, and foreign investors were under constraint to convert their funds into Pesos, which hindered them to engage in capital flight, which finally resulted in major losses for the foreign companies (Jensen 2005).

As mentioned before, it is vital for MNEs not only to interact appropriately in the regulatory environment they are in and hence to reduce the formal and/or informal uncertainties but also to use the acknowledgements to generate competitive advantage. Porter (2008) outlines in its approach "Diamond of national advantage", the national playground, that a market creates for its industries, based on four interacting factors, impacted by formal as well as informal institutions: rivalry and strategy, supporting and related industries and demand and factor conditions (Porter 2008, Johnson et al. 2008). Each of these determinants influences fundamental factors, which are necessary in order to achieve international competitive advantage, such as

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Source adaptedfrom:Johnson et al (2008). Exploring corporate strategy: text and cases.

Finally, the market as well as the company ultimately achieve sustainable competitive advantage, when the national environment allows for and supports a rapid aggregation of specialized assets and skills by permanently providing information and insight in the process and product requirements, which puts a certain degree of pressure on the firms to create, develop and invest in innovations (Porter 2008, Johnson et al. 2008).

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Source adaptedfrom: Porter (2000). Location, competition, and economic development: local clusters in a global economy.

In conclusion, MNEs should not only develop a sophisticated understanding for various informal institutional aspects, they also need to understand formal institutional constraints. As Peng (2009, pp.164-165) clearly states "The value of the core proposition of the institution-based view on strategy, "Institutions matter", is magnified in foreign entry decisions. Rushing abroad without solid understanding of institutional differences can be hazardous and even disastrous.".

Having examined the most important challenges for MNEs in emerging markets from an institutional based perspective, the resource-based view that according to Das and Teng (2000, p.36) emphasizes the "...value maximization of a firm through pooling and utilizingvaluable resources." will be outlined in the following section.

When making the decision about how to enter an emerging market, the value and uniqueness of company specific capabilities and resources play a key role. According to Barney (1991) resources should meet the conditions of being valuable, rare, imperfectly
imitable and non-substitutable, whereas Amit and Schoemaker (1993) supplementary develop the characterization with the aspects of low tradability, complementarity, appropriatability and durability. Especially when entering a new market, the outstanding value of company specific assets is very often the cause that permits foreign entrants to overcome the "liability of foreigness" (Peng 2009).

In order to deliver customer value, each product or service has to be adjusted to the individual target group in terms of cultural, societal, infrastructural peculiarities and economic needs and wants, as there is no adaptive strategy. Barney (1991) claims that if the feature of a resource is not valuable or cannot enable the company to create value, it is no potential resource to generate competitive advantage. This approach highlights, that not all resources are of equal importance for a MNE's achievement and that the management should carefully evaluate its assets before taking an entry mode decision. For instance, when CEMEX took the decision to enter the Mexican market with its newly developed products, it built a learning lab on the spot (Weiser 2007). The company transferred its personnel to its target communities for a protracted period of time. While working and living there its staff members had the possibility to gain deeper knowledge of the market and its consumers in terms of needs and wants as well as purchasing patterns. By making use of this approach CEMEX was able to gather firsthand knowledge and expertise, which finally helped the company to develop a completely new and suitable marketing strategy to distribute its products to its local low-income customers (Weiser 2007). An additional and utterly interesting example that emphasizes the importance of economical needs and cultural distinctions represents the Haier Group case. When it entered the Chinese market in the 1990s it discovered that low-income consumers in rural-areas believed that to purchase a washing machine only for the purpose of doing their laundry is disproportionate (Sharp Paine and Crawford 1998). Hence they used their washing machines for cleaning fruits, vegetables and such. Haier reacted accordingly and asked its engineers for technological modifications and attached easy to understand instructions securely on its washing machines. These modifications provided its customers not only with the additional benefit to clean their vegetables without destroying the washer drums or pipes but also to safe energy and water. Haier further used its knowledge about the special needs and wants of its customers as well as how to create additional value to its products and created a washing machine with which its consumers were able to produce cheese from its goats and cows milk (Sharp Paine and Crawford 1998).

Moreover, on the one hand the scarcity of firm-specific assets represents another factor that encourages companies to leverage such assets in emerging markets. From a legal perspective, brands, trademarks, and patents should protect the scarcity of their particular product features. But on the other hand, this is not common in every market and MNEs may choose not to enter an emerging market, because they are worried that imitable assets could be expropriated in certain countries. Hence, transaction costs play a significant role when it comes to such considerations. This is mainly because of the so called "dissemination risks", which are defined as "...the risks associated with the unauthorized imitation and diffusion of firm-specific assets." (Peng 2009, pp. 165). So happened to Pizza Hut in 2001, when its long-time franchise operator disseminated its know-how and established its own chain named "The Pizza Company", which according to Peng (2009) recently reached a market share of about 70% in Thailand.

It can be said that the resource-based perspective suggests a vital set of fundamental considerations substantiating entry mode decisions. In the case of dissemination risks and imitability, it is evident that these problems are interrelated with property rights protection, which is also reflected by the aforementioned institutional-based view.

Porters (1980) famous 5-forces concept framed the aspects and its subcomponents of the industry-based perspective, which should be analyzed by the MNE before taking an operational decision. Due to the limited scope of this dissertation, the industry-based view shall be covered in a consolidated manner, as the characteristics of its foundational framework possess general applicability to any kind of market.

Therefore the following table gives an overview about the broad dimensions and subcomponents to consider.

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Porter (1980) argues, that the stronger each of the 5 forces is, the more limited is the capability of established firms to increase prices and achieve greater profits. Within this framework, the first aspect to be mentioned is the level of rivalry among established companies, as it threatens to depress profits. According to Knickerbocker (1973) companies, especially in oligopolistic industries, often challenge each other when it comes to foreign entries. For instance, a firm could apply the principle of leverage, by identifying competitors' strategic investments and commitments and turn them into its advantage, which creates a difficult situation for the rival to retaliate successfully.

When Dell entered the IT- market, Compaq and Hewlett Packard found it exceptionally difficult to find a way to imitate Dells unique business model, as they were afraid of alienating their existing dealers. This situation came up roses for Dell, as it was able to gain market share at the expense of Hewlett Packard and Compaq (Yannopoulos 2011).

Second, the higher the barrier to enter a market, the more intense will be the attempt among companies to compete abroad. Porter (1980) argues, that a major barrier can be seen in the strong presence of companies overseas. Sales can significantly increase economies of scale and deter entry, by entering wider and bigger markets on an international basis.

Third, according to Hill and Jones (2007, p.55) the bargaining power of suppliers refers to the balance of power between suppliers and its customer companies. If suppliers are week, firms have the possibility to put them under control by forcing down their prices as well as demanding inputs of higher quality. Alternatively, if suppliers are powerful, they are able to squeeze out profits by raising the input prices (services, materials and labour) for companies in their industry market: Intel for instance, is the world's largest and leading supplier of microprocessors for PCs. Because of its status and the fact that almost every standardized PC runs on Intel microprocessors, personal computer companies are heavily dependent on its supplies (Hill and Jones 2007).

Fourth, the bargaining power of buyers describes the opposite of the bargaining power of suppliers' force. If the input his highly important for the buyer, this circumstance provides the supplier with power, so does a relatively unimportant input provide the buyer with power to negotiate terms and conditions (Amason 2011).

And finally, the threat of substitutes, products that possess the same characteristics, features and satisfy the same customer needs are of vital importance for the bargaining power of a company. Depending on the number of such equal products and services, the level of competitiveness between companies might be very strong. Therefore the companies either have to increase the switching costs for their customers, focus on differentiation or enhance their performance (Campbell and Stonehouse 2004).

In conclusion, foreign market entry decisions are highly affected by the structure of an industry and how its 5-forces turn out to be.

The illustrated views shall highlight that it is utterly essential to be aware of all the possible challenges and to grasp the actual dynamism in emerging countries that could affect its business operations. MNEs should not underestimate the importance of an in­depth market analysis, as it is important for a deep understanding for its business playground, before making the final decision about the entry mode for a particular market.

In fact, given that the process to enter a foreign market takes about 3-5 years, the choice of the entry mode has a strong impact on its following performance and long-lasting existence. Thus it appears to be a critical determinant, which impacts the competitive advantage of an MNE significantly (Madhok 1997). As not only performance but also the ultimate survival of an MNE in an emerging market is likely to be at stake it seems to be critical to make the right entry mode decision off the cuff. Practical examples reveal that the mistake to decide for the wrong entry mode might result in serious long-term consequences for an MNE as it may "block opportunities and substantially limit the range of strategic options open to the firm" (Ekeledo and Sivakumar 2004, p.68). In 1980, Meryll Lynch tried to enter the Japanese private banking market by "using a mode of entry that was at odds with the restrictive regulations in Japan at that time" (Ekeledo and Sivakumar 2004, p.68; Hill 2002) and went through hard times.

Because the constant need for increasing profitability and growth makes the right choice of entry a frontier issue for managers as well as researchers all over the world (Madhok 1997, Anderson and Gatignon 1986, Wind and Perlmutter 1977), the main entry modes with their advantages and disadvantages shall be outlined in the following.

4. ADVANTAGES AND DISADVANTAGES OF MARKET ENTRY MODES

Once the MNE decided, which emerging market would be best to enter based on its previously conducted market-analysis, it has to choose the correct entry mode for its purposes in the next step. According to the "Hierarchical Model of Market Entry Modes", presented in the table below,

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Source adapted from: Peng (2006). Hierarchical Model of Market Entry Modes.

the main types of entry modes are exports, contractual agreements, Joint Ventures (JV) and Wholly owned subsidiaries (WOS) (Peng 2006). As mentioned before, as every single mode has advantages and disadvantages, the MNE's choice depends clearly on its willingness to take risks and its demand for control and return (Doole and Lowe 2008) illustrated in the table below.

Abbildung in dieser Leseprobe nicht enthalten

According to Peng (2006) MNEs are typically classified as corporations that are engaged in equity modes ¡"...determine whether the modes of entry would be equity or non­equity based. The crucial decision differentiates an MNE (which employs equity modes) from a non-MNE (which relies on non-equity modes)." He further states that "In fact, this crucial distinction is, what defines an MNE: An MNE enters foreign markets via equity- modes through foreign direct investment (FDI), which refers to direct control and management of value-adding activities overseas." (Peng 2006, pp. 230-231). Due to the scope of this dissertation, the emphasis of this study will be placed on equity modes of market entry such as; Joint Ventures, Greenfield Operations and Acquisitions. This is in congruence to the emphasis on equity-based modes of entry in the literature (Peng, 2009)

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Details

Pages
70
Year
2011
ISBN (eBook)
9783668290570
ISBN (Book)
9783668290587
File size
3 MB
Language
English
Catalog Number
v338828
Institution / College
University of St Andrews – Management
Grade
0,9
Tags
constraints opportunities market entry strategies multinational enterprises emerging markets

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Title: Constraints and Opportunities of Market Entry Strategies for Multinational Enterprises in Emerging Markets