|
|
By Peter N. Golder and Debanjan Mitra
Most of the research on the internationalization process focuses on two factors as the primary determinants of foreign market entry: cultural similarity and economic attractiveness. Many researchers find that cultural similarity with respect to the domestic market is an important determinant of entry, while others have found that market entry decisions are positively related to country size and the levels of development, trade, and infrastructure. But no current study has considered the role of knowledge developed by a firm s subsidiaries in similar markets on subsequent foreign market entries. Intuitively, it makes sense that the knowledge of the economic and cultural environment of a foreign market will affect the probability of entering that market. Theories of organizational learning argue that firms develop knowledge based on their experiences. This store of knowledge constitutes an important resource and is a source of competitive advantage. At first, of course, knowledge comes entirely from the home market, and companies make comparisons between the characteristics of the home market and those of potential new markets. But such knowledge can also be generated in foreign markets in which the firm already operates that are similar to potential new markets. Operating in Argentina, for example, may have provided Wal-Mart with some insights as to how to run a store in Chile. We have dubbed this phenomenon near-market knowledge. But the term does not refer to markets that are geographically close. Rather, it refers to markets that are economically and culturally similar. Such knowledge can be broken down into near-market cultural knowledge, and near-market economic knowledge. These terms refer to a firm s understanding of the culture and economy, respectively, of potential new markets based on knowledge generated from operating in similar markets. When multinational corporations (MNCs) internationalize, they can use such near-market knowledge to select other foreign markets where the firm is more likely to succeed. We set out to gauge the influence and relative importance of near-market cultural and economic knowledge by gathering extensive data and using it to test the validity of several widely accepted assumptions about foreign-market entry.
Prevailing Assumptions First, we assume that cultural distance is negatively related to foreign market entry timing. In other words, companies will hesitate to enter markets that are culturally unfamiliar to them. Nearly all research on the impact of culture on foreign market entry has considered the distance between a firm s domestic culture and the culture of each potential market. Differences in culture have been found to affect brand image strategies, consumer innovativeness, negotiations, and marketing decision-making. When companies operate in countries with different cultures, they need to modify their operations in these areas as well as other elements of the marketing mix. Since such modifications increase costs and risks, companies are likely to enter countries with cultures similar to the domestic market before entering countries with less similar cultures.
Likewise, most people assume that economic distance is negatively related to foreign market entry timing. Why? Firms seem more likely to be successful operating in countries with economic characteristics that are similar to the firm s home market. Similar economic characteristics may reflect potentially important similarities between countries where knowledge transfer is valuable. For example, similar economic conditions might be associated with similarities in consumer demand and business institutions like distribution channels and media. Since knowledge of these factors can help firms succeed in foreign markets, companies are likely to enter countries whose economies are comparatively similar to the familiar domestic market. The same set of assumptions pertains when dealing with near-market knowledge. Since companies can acquire and share knowledge throughout their organizations, they will likely make some effort to transfer knowledge generated from operating in foreign markets to other similar markets. The knowledge generated in successful markets should increase the probability of entering similar markets. When companies have positive experiences in foreign markets, the cultural and economic knowledge generated in those markets will lead to earlier entry in similar markets. Both concepts cultural and economic knowledge are dynamic and change over time, with companies experience. Perhaps the most important factor in foreign market entry decisions is the economic attractiveness of a country. All things being equal, firms are likely to choose more prosperous and accessible economies. The extensive literature on foreign direct investment (FDI) supports this view. FDI theory argues that firms face various disadvantages in foreign markets and invest only when expected benefits exceed those costs. These benefits depend on the economic characteristics of each country. Finally, in general, researchers have regarded economic factors as playing a larger role in companies foreign market entry timing decisions than cultural decisions. Companies can mitigate the negative impact of cultural distance by gaining experience in similar foreign markets and by hiring managers with knowledge of the local culture. But while companies can learn about consumer demand and economic institutions, they have practically no influence on the economic prosperity, size, and infrastructure of a country.
Identifying Frequent Entrants As we set out to test these assumptions, we conducted an extensive search for the complete entry data of many multinational firms. We focused on consumer products companies, based in a variety of domestic markets, that have successfully entered many countries. (The companies in our final sample generate more than half of their revenue outside their domestic markets). All these firms have survived for at least several decades, hold leading market share positions, and have not withdrawn from any foreign market entered. Using largely public sources, we were able to identify foreign market entry data for 19 of the 35 firms that satisfied these criteria. The average year of the most recent entry across these firms was 1992. We contacted all 19 companies and corroborated 292 of our entry events, finding only negligible differences for less than 1.5 percent of these observations. The final data set includes 12 firms from the United States, two from the United Kingdom, two from Japan, and one each from the Netherlands, France, and Switzerland.
The factors we used to measure near-market economic knowledge were somewhat more straightforward. Essentially, we used three sets of variables: measures of economic attractiveness, economic distance between the home market and potential markets, and near-market economic knowledge. Economic attractiveness can be calculated by the measurement of four variables: consumer prosperity, as measured by Gross National Product per capita; economic size, as measured by Gross National Product; population density; and the development of infrastructure, as measured by the density of railroad networks. Economic distance is calculated as the difference of such measures across countries. Our measures of near-market economic knowledge capture the economic similarity between each foreign market and the similar foreign markets in which the firm already operates, based on the four economic attractiveness measures for each country. Just as is the case with near-market cultural knowledge, near-market economic knowledge will change over time as firms enter additional similar markets, operate for more years in those markets, and as the basic economic attractiveness variables change over time. We then ran all the data through a hazard model, which models the rate at which market entry occurs based on dependent and independent variables. In this instance, the dependent variable is the time, in years, between the year of incorporation and the year each country is entered through the initial establishment of a sales or manufacturing subsidiary in that country. Our independent variables are the measures of cultural distance, near-market cultural knowledge, economic attractiveness, economic distance, and near-market economic knowledge. When we finished the tests, we polled senior executives at the firms directly to gauge their opinions.
Examining the Results What did we find? Table 2 shows that on average, it took 24 years for these firms to enter their first foreign markets. However, this time has decreased significantly to nine years for newer companies. This suggests that firms have sought international opportunities more quickly over time. There was no significant difference in time to first entry among firms based in different countries. Table 2 also shows that, on average, firms have entered 37 countries. Therefore, the typical firm in our sample has yet to enter many countries. We did find that the newest firms were significantly more likely to have entered more foreign markets than the middle-aged firms in our sample. However, there was no significant difference between the newest and the oldest firms. Overall, we believe that Table 2 shows a common number of countries entered over time and across firms from different countries. These findings suggest that newer firms move through the internationalization process more quickly. It also suggests that there is some central tendency for the number of countries in which firms choose to operate. We analyzed the results further to determine which factors seem to have an impact on foreign-market entry. And here the results were somewhat surprising.
In addition, one of our assumptions was that companies will be more likely to enter countries with market conditions that are similar to their domestic market. But our results did not find that the measure of economic distance, overall, bore any particular relation to market entry. However, we did find that one of the variables economic prosperity distance had a significant bearing on market entry. This variable may be more likely than the other economic distance variables to reflect knowledge that might be valuable in other markets. For example, consumers in foreign markets with GNP per capita similar to the domestic market are more likely to buy similar types of products and have access to similar types of media.
With respect to the economic questions, we found that higher near-market economic knowledge is associated with higher probability of entry. And we found that all four economic attractiveness variables are positively associated with foreign market entry timing. Not surprisingly, firms tend to enter these high-potential markets earlier. Finally, the weight of our findings suggests that even though near-market cultural knowledge is significant, as we suspected, economic factors are relatively more important determinants of foreign market entry timing.
Asking the CEOs To validate our model results, we sought input from executives at successful multinational firms. Since top executives are responsible for international entry decisions, we contacted only the Chief Executive Officer and the other top executive most directly responsible for international operations at each firm. Nine of these executives agreed to answer questions about how economic and cultural factors influence their foreign market entry decisions.
In Table 3 we present the survey questions along with the mean response for each question. These responses support our model results. In particular, knowledge generated in similar markets is important to these executives. When selecting foreign markets, they highly value experience gained in markets that are economically and culturally similar. Moreover, once they have entered countries, they transfer knowledge and managers from similar countries. The survey also confirmed that executives place more importance on economic factors than cultural factors. Finally, these responses support our finding that cultural distance from the home market is not an important determinant of foreign market entry. However, an alternative explanation for this result may be that most of the executives who participated work at companies that have already entered many countries similar to their home market. These responses support our thesis about near-market knowledge and the importance of including our new measures of near-market cultural and economic knowledge.
What it All Means
Companies making foreign market entry decisions today can learn from the successful multinationals in our data. Today s internationalizing firms may be wise to place less emphasis on cultural differences and more on economic factors. However, the successful multinationals in our data may have been able to overcome some of the negative effects of cultural distance by hiring local managers and transferring knowledge from similar markets. Indeed, our results confirm the importance of considering both economic and cultural factors in modeling foreign market entry timing. And since both sets of factors play some role, it is not surprising that small cultural distances do not always lead to strong performance. Finally, the primary implication of our findings for today s expanding companies is to consider developing experience in foreign markets that will provide the best basis for entering other similar markets. By investing in a small country first and learning about the cultural and economic characteristics of its consumers and business institutions, a firm may be more successful when entering a larger country with similar characteristics. Peter N. Golder is associate professor of marketing at NYU Stern. Debanjan Mitra is an assistant professor at the University of Florida and an alumnus of the NYU Stern Ph.D. program. A longer version of this article was published in the Journal of Marketing Research in August 2002.
|
||||||||||||||||||||||||||||||
