Article review

Article Review: Foreign Market Entry

This paper reviews six articles, all of which dwell on the subject of foreign market entry. The first article is by Malhotra, Sivakumar, & Zhu (2009), and focus is on distance factors and the selection of target market, with specific reference to the impact of market potential. In the second article, Anderson (2009) focuses on how companies strive to maintain local potential even as they venture into global expansion efforts. In the third article, Czinkota, Grossman, Javalgi, & Nugent (2009) focus on the efforts of service firms to enter into foreign markets, in which case the of MBA programs in the US is presented. In a different article, Ellis (2007) explores various paths taken in foreign market entry, and the role that distance from market plays in internationalization is explored. In contrast, for Huanga & Sternquist (2007), the discussion is on foreign market entry decisions by retailers and the subject is debated from an institutional perspective. The last article is by Nielsen (2010), in which case the role of foreign market entry on the internalization of top management team is explored.

In the six articles, different factors influencing foreign market entry are explored. One of these factors is distance from the markets. According to Malhotra, Sivakumar, & Zhu (2009), distance factors play a key role in the selection of the target market. However, there is need for a company’s management to explore market potential before embarking on internationalization efforts (Malhotra, Sivakumar, & Zhu, 2009).

In the case of multinational firms, particularly those from the developing world, the decision to embark on cross-border acquisitions (CBAs) is normally influenced greatly by distance factors, with target market potential playing a mediating role (Malhotra, Sivakumar, & Zhu, 2009). The distance factors encompass not just the geographical distance but also cultural distance, whereby there are dissimilarities in cultures of the home country and those of the target country. According to Malhotra, Sivakumar, & Zhu (2009), geographical and cultural distance tend to have a negative impact on foreign market entry; in contrast, economic and administrative distances impact positively on foreign market entry (Malhotra, Sivakumar, & Zhu (2009).

The issue of administrative and economic distance is also discussed in the article by Nielsen (2010). In Nielsen’s (2010) article, though, the case of top management is explored, and the mediating role of firm performance is put into consideration. According to Nielsen (2010), internationalization of the top management team greatly enhances chances of success in foreign market entry efforts.

Distance factors greatly influence the target markets that are selected. For instance, cultural distance is a major factor in determining the potential of success in a target market, and one of the reasons for this is that at the global scope, cultural differences are normally analyzed from a national perspective (Malhotra, Sivakumar, & Zhu, 2009). On the other hand, administrative distance, also sometimes referred to as political distance, arises out of differences in political and bureaucratic procedures of these countries. This distance may frustrate the efforts of some companies to reach out to certain foreign markets (Malhotra, Sivakumar, & Zhu, 2009).

In the article by Anderson (2009), focus is on the need to maintain local potential even when venturing into foreign markets. It would make no business sense for a company to venture in the international market only to neglect the local market, which it has taken years to capture from competitors and nurture. According to Anderson (2009), value chain structure is normally developed in a manner that is specific to a local setting, and it normally poses serious implications for expansions of firms at the global level.

Anderson (2009) gives the example of a US-based brokerage firm, which grew to the extent of venturing into the Canadian market. Later on, the logical step in the expansion drive was to venture into the UK market. In making this move, the company appears to have put into consideration different distance factors, including geographical distance, cultural distance, economic distance, and administrative distance. Geographically, Canada is close to the US, considering that the two countries share a border that stretches from the Pacific Ocean to the Atlantic Ocean. Moreover, culturally, administratively, and economically, the US, UK, and Canada are very much related.

According to Anderson (2009), as a company grows, the value chain structure undergoes an evolution process. This evolution process may vary significantly in the subsidiaries operating in different countries. This is because countries employ different strategies of categorizing activities into segments. This creates differences in the operations of subsidiaries in different countries, even though the subsidiaries may share similarities in organizational and contractual issues.

Although the efforts by the US-based retail brokerage firm to venture into the UK market appeared to be based on straightforward plans, which were largely a replica of the venture into the Canadian market, the resultant failure came as a shock to the firm’s management. Anderson (2009) notes many multinational companies face a problem similar to the company’s failed venture into the UK market. According to Anderson, this occurs because the companies underestimate the crucial role played by the structure of the local industry as well as capabilities of potential partners. Anderson argues that traditional analytical methods rightly explain that for global expansion efforts to succeed, company-specific capabilities and skills have to outweigh all country-specific difficulties and challenges. This argument differs from that of Malhotra, Sivakumar, & Zhu (2009), who hinge the likelihood of success primarily on distance factors.

            In all the articles, there is emphasis on the need for a market entry strategy by companies. A market entry strategy is particularly important for service firms, for example education institutions. In a case relating to service firms, Czinkota, Grossman, Javalgi, & Nugent (2009) investigate how US business schools that offer MBS programs are finding their way into foreign markets. According to Czinkota, Grossman, Javalgi, & Nugent (2009), there is no sufficient empirical evidence on how these business schools find their way into various foreign markets. It is on this basis that the researchers embarked on an investigation into the key factors that influence the choice of foreign market entry mode by US business schools, with primary data being obtained from administrators of MBA (Master of Business Administration) schools.

            In Ellis’ (2007) study, the main question is on whether distance to market has effect on internationalization of firms. Ellis (2007) shares the views made by Malhotra, Sivakumar, & Zhu (2009), stating that geographical, psychic, and cultural distance to markets has an impact on firm internalization in many ways. Moreover, Ellis observes that this view is shared by many economists, geographers, and business scholars. However, there is inconclusive evidence supporting this broad proposition (Ellis, 2007).

            On the basis of this background information, Ellis comprehensively assesses four hypothesis relating to sequence of entry into market, location of markets, relationship between markets with sequential links, and the rate of expansion into foreign markets. This is in contrast with the study by Malhotra, Sivakumar, & Zhu (2009), which investigates the geographic, administrative, cultural, and economic distance. Another difference in these two studies is that Malhotra, Sivakumar, & Zhu (2009) explore the moderating role of potential of the target market in the foreign market ventures while Ellis (2007) does not.

            Methodologically, Ellis bases his study on a sample of 1132 foreign market entries that are non-repetitively used by diverse exporters, who operate in dissimilar geographical locations within China. In this way, there is substantial variation of market entry data with regard to the constructs of research interest. In contrast, Malhotra, Sivakumar, & Zhu (2009) the context of investigation is multinational firms originating from developing countries. The firms selected come from eighteen developing countries, and the criterion for inclusion is that they need to have completed cross-border acquisitions (CBAs) between 1990 and 1996. Regression analysis and ordinary least squares are used to measure the effect that distance factors have on foreign market entry as well as the interaction effect that market potential has in such ventures.

            In Ellis’ study, the results showed no link between distance to markets and sequence of entry into the markets. In this way, the study effectively challenged the traditional notion that emphasizes the simple relationship between distance to market and sequence of market entry. The study is highly significant because of the way it demonstrates the so-called ‘near-market effect’ and its application to low-risk modes of entry such as export business. In the exporting business, executive export locations in most cases turn out to have cultural similarities. This suggests that exporters may be able to transfer the lessons learnt between similar or closely related markets. Such a relationship is not stated or implied in the study by Malhotra, Sivakumar, & Zhu (2009).

In the articles analyzed in this paper, there is focus on both the internal and external environment of a business enterprise. The factors analyzed point out to the ways in which these environments influence the outcome of efforts of foreign market entry. Moreover, different business enterprises operating in different sectors are explored. Examples include the cases of US MBA programs (Czinkota, Grossman, Javalgi, & Nugent (2009), US brokerage firms (Anderson (2009), and retailers Huanga & Sternquist (2007).

Of these articles, Huanga & Sternquist (2007) are the only ones who adopt a theoretical perspective in the analysis of decisions relating to foreign market entry. In this paper, the case of retailers’ internalization efforts is presented through the lens of institutional theory. In institutional theory, emphasis is on the relationship that exists between an organization and its environment. The political, sociological, and cognitive elements of business institutions are explored, in order to ascertain the different ways in which they build up to form the firm’s internal and external business environment. Huanga & Sternquist (2007) argues that many far-reaching managerial implications can be discerned through institutional theory, and they can be an excellent reference point in explanations on retailers’ internalization efforts.

In summary, the articles dwell largely on distance factors and their impact on foreign market entry. Geographical, economic, cultural, economic, and administrative factors, are all seen to have bearing on distance factors. However, Ellis (2007) challenges the traditional notion that emphasizes on the simple relationship between distance to market and sequence of market entry. Moreover, the articles show similarities in the way factors influence foreign market entry in firms operating in firms operating in different sectors.

References

Anderson, J. (2009) Expanding globally with local vision: Foreign market entry and the value chain, Journal of Business Strategy, 30(5), pp. 32-39.

Czinkota, M., Grossman, D., Javalgi, R., & Nugent, N. (2009) Foreign market entry mode of service firms: The case of U.S. MBA programs, Journal of World Business, 44(5), 274–286.

Ellis, P. (2007) Paths to foreign markets: Does distance to market affect firm internationalization? International Business Review, 16(2), 573–593.

Huanga, Y. & Sternquist, B. (2007) Retailers’ foreign market entry decisions: An institutional perspective, International Business Review, 16(4), 613–629.

Malhotra, S., Sivakumar, K. & Zhu, P. (2009) Distance factors and target market selection: The moderating effect of market potential, International Marketing Review, 26(6), 651-673.

Nielsen, S. (2010) Top Management Team Internationalization and Firm Performance: The Mediating Role of Foreign Market Entry, Management International Review, 50(2), 185–206.

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