MARKET ENTRY GLOBE MARKETING

market entry and expansion

Keith D. Brouthers

INTRODUCTION

Although business expansion into global markets has grown rapidly in the past few decades, research in the area has lagged. Foreign market entry and expansion entails a number of impor- tant marketing strategy decisions including (i) selection of specific target countries, (ii) structuring of foreign subsidiary units, and (iii) management of foreign operations. In this article, we focus on the decision about structuring of international subsidiary units, often referred to as entry-mode choice. Research in this area has tended to focus almost exclusively on firm- and country-specific characteristics, showing little interest in the effects of marketing strategy, and managerial decision-making behavior (see INTERNATIONAL MARKETING CHANNELS). Brouthers and Hennart (2007) provide a detailed review of the entry-mode literature and suggest that scholars have tended to concentrate on rational models of strategic choice, ignoring behavioral aspects. Further, Canabal and White (2008) in their review note that most interna- tional entry-mode research has been published in international business and management jour- nals with only a few contributions in marketing research outlets. This may explain why critically important issues involving marketing strategy have been virtually ignored by researchers so far.

International entry-mode choice, like other marketing strategy decisions, is influenced by a multitude of factors. These can be classified into three distinct groups (Figure 1): firm/country characteristics, top management team effects, and marketing strategy fit. The main theoretical perspectives that have been applied to the entry-mode decision – transaction cost analysis, resource-based view (RBV), and institutional theory – focus on firm and country character- istics. These theories do an excellent job of explaining how differences in country char- acteristics, such as institutional environments (Brouthers, 2002), and firm characteristics, like resource advantages (Brouthers, Brouthers, and Werner, 2008a), lead to specific entry-mode choices. What these theories and related

Country - firm effects

TMT effects

Marketing strategy effects

Figure 1 Dimensions of entry-mode choice.

research studies do not do is to help explain how marketing strategy issues as well as managerial decision-making processes and influences play a part in the entry-mode decision.

In this article, we provide a short overview of the existing entry-mode research and elaborate on areas where future marketing research can make an important contribution. Before we begin the review, we define some of the key terms and concepts that lie behind this research area.

KEY TERMS AND CONCEPTS

Entry modes – also referred to as channel choice, channel selection, modes of entry, or entry struct- ures– vary along a continuum of risk and control (Brouthers and Hennart, 2007). At the high end are wholly owned subsidiary units where a firm owns 95% or more of the equity of the entity, and has made a large financial commitment, which exposes the firm to high risks, but also provides the firm with total control over the foreign operation. At the other extreme, are nonequity license agreements, where firms sell the right to use their product/process to a foreign-based firm, and exporting modes (see STRATEGIC EXPORT MARKETING–ACHIEVING SUCCESS IN A HARSH ENVIRONMENT). At this end of the spectrum, the firm has made only a small financial commitment and is therefore exposed to very low risk, but it also has little control over the foreign operation. Between these extremes are multiple variations including equity joint ventures (including majority, equal, and minority ownership), nonequity cooperative agreements (also commonly called

Wiley International Encyclopedia of Marketing, edited by Jagdish N. Sheth and Naresh K. Malhotra. Copyright © 2010 John Wiley & Sons Ltd

2 market entry and expansion

strategic alliances), and franchising agreements (a complex form of licensing) (see INTER- NATIONAL FRANCHISING). As Canabal and White (2008) note, most studies exploring the entry-mode decision look at the choice between two or more of these mode types.

While exporting is an important entry mode, the marketing literature has tended to examine exporting channel selection as a decision sepa- rate from entry-mode choice. Scholars like Bello and Lohtia (1995) and others (see STRATEGIC EXPORT MARKETING–ACHIEVING SUCCESS IN A HARSH ENVIRONMENT) tend to use the same theoretical approaches in export channel choice as entry-mode scholars use in entry-mode choice. This tends to create some confusion among researchers because the exporting literature tends to be the only market entry and expansion literature where researchers separate the mode choice for the sales function of a firm from the mode choice of the production function of the firm. In fact, most entry-mode studies do not specify whether they are examining the entry for production, sales, or both functions of the firm. Hence, although the terminology is different (entry mode versus channel choice) the types of modes examined and the theories used in these two streams of research tend to coincide.

EXISTING RESEARCH

Firm and country characteristics. Most of the literature in entry-mode choice has been published since 1990. The growth in entry-mode (channel choice) scholarship since 1990 has provided researchers and managers with a better understanding of how firms choose between various entry-mode types. This research tends to use theories that focus attention on firm- or country-specific characteristics. For example, in Canabal and White’s (2008) review they note that of the 10 most widely used independent variables, 6 are firm-specific (including inter- national experience and firm size), and 4 are country-specific (including cultural distance and host-country risk).

Three main theoretical perspectives drive the study of entry-mode choice: transaction cost economics (TCE), institutional theory, and the

RBV (Brouthers and Hennart, 2007). TCE is the most widely applied theoretical perspective and captures both firm- and country-specific influences. TCE suggests that managers have limited cognitive abilities and hence are concerned with safeguarding their investments against issues arising from incomplete contracts and opportunism. This concern is amplified when the investment involves specific assets (a firm-specific attribute) as well as internal uncer- tainties (a firm-specific attribute) and external uncertainties (a country-specific attribute). These three characteristics of the transaction then influence the mode-choice decision.

Two recent meta-analyses of TCE entry- mode studies have found that asset specificity, internal uncertainties (also referred to as behav- ioral uncertainties), and external uncertainties (sometime referred to as host-country risk) all have a significant impact on entry-mode choice; providing strong support for the transaction cost perspective (Geyskens, Steenkamp, and Kumar, 2006; Zhao, Luo, and Suh, 2004). Further, these studies tend to show that foreign subsidiary performance is better when the mode used is predicted by transaction cost theory. This suggests that TCE can provide a good foundation for managers to develop a tool for determining the structure of new foreign subsidiary units that will result in greater success.

Furthermore, although TCE entry-mode choice models have been extensively tested on both service-based and product-based firms, normally, studies examine only product- or service-based firms, or include a dummy variable to ‘‘control’’ for this industry type. But these studies offer little insight into how decision-making and mode choice may differ between service providers that expand abroad and firms expanding to sell tangible products. There has been some progress in this area using TCE, but much more work is needed.

Probably, the most influential research study comparing service and manufacturing firm mode choice is the one by Erramilli and Rao (1993). They suggest that because services and manufac- tured products differ, transaction cost decision models of entry-mode choice need to be modified to take these differences into account. They go on to provide a theoretical extension to transaction

market entry and expansion 3

cost theory and test the revised theory empir- ically. Yet recently, Brouthers and Brouthers (2003) looked at the same issue and suggested that no adjustment to transaction cost theory was needed. They maintain that service- and product-based firms simply are influenced to a greater (lesser) extent by the basic transac- tion cost factors. They extend this work by suggesting the real difference between service- and product-based firms is associated with how risk and trust propensity influence mode choice and transaction-cost- based decisions.

In addition to transaction cost research, other studies have used an institutional theory perspec- tive focusing on country-specific factors that may influence the mode-choice decision (Brouthers and Hennart, 2007). Institutional theory suggests that each country is composed of a unique combination of normative, cognitive, and regu- lative factors that impact the way business is carried out and how managers, employees, and customers behave. One stream of research in this area suggests that the institutional environ- ment produces an isomorphic effect where firms simply replicate existing entry-mode structures to conform to industry or country standards. A second stream in this area suggests that the individual dimensions of the institutional envi- ronment (or the distance between home country and target country dimensions) have differing effects on mode choice; either creating opportu- nities for entry or restricting access to resources, customers, or distribution channels.

Originally conceptualized as national cultural distance and country risk, entry-mode studies tend to provide growing guidance on how the institutional environment impacts mode choice. The only meta-analysis in this area explores national cultural distance research (Tihanyi, Griffith, and Russell, 2005). This study finds that cultural distance does not tend to have a direct effect on mode choice but that it only has an impact on entry-mode choice for firms coming from high risk propensity countries (like the USA and the UK). This suggests that the cultural component of the institutional envi- ronment may have different effects for firms from different home countries entering different host countries. Other aspects of the institutional environment such as host-country risk and legal restrictions have also been examined, but as

yet no meta-analysis exists (see Brouthers and Hennart, 2007 for a summary of these studies). In general, research using institutional theory has provided managers with an understanding of how home- and host-country institutional factors influence the choice of entry mode and the success of foreign subsidiary units.

The third most widely used theoretical perspective, the RBV, focuses on firm-specific factors and generally suggests that firms are a collection of resources and capabilities (knowl- edge and processes) that can be combined in different ways to create a competitive advantage. This advantage can be used to help the firm enter foreign markets and overcome the liability of foreignness. Compared to both transaction cost and institutional-theory-based research, far fewer studies have examined entry-mode choice using the RBV because of the difficulty in defining and measuring resources, many of which, like tacit knowledge, are intangible (Brouthers and Hennart, 2007).

One of the more frequently explored resources that has been examined is experience. Scholars like Anderson and Coughlan (1987) and Delios and Henisz (2000) have noted that different types of experience may provide different bene- fits to the firm that can have an important impact on entry-mode choice (either in combi- nation with transaction cost factors as noted by Anderson and Coughlan (1987) or moder- ated by the institutional environment as noted by Delios and Henisz (2000)). Some studies taking an RBV perspective tend to look at how foreign entry, and hence mode choice, can be used to exploit existing resources in new foreign markets while other research exam- ines how the mode choices of firms can be used to help them scout for new resources to enhance the firm’s existing stock. Research using this perspective has highlighted the impor- tance of linking the type of resource advantage and motive for foreign expansion (exploitation of existing resource-based advantages or explo- ration for new resource-based advantages) with an appropriate subsidiary structure (Brouthers and Hennart, 2007).

In addition to studies using a single theoret- ical perspective, scholars often develop studies that combine multiple theories. For example, Brouthers, Brouthers, and Werner (2008a)

4 market entry and expansion

combine the RBV and institutional theory to examine their joint impact on mode choice. They find that resource-based advantages do not always have the same value in foreign markets as in the home market. Therefore, firms may need to vary their mode choice to get the most value out of existing resource-based advantages when entering foreign markets. Brouthers (2002) among others (Brouthers and Hennart (2007)) explore the mutual effects of TCE and institutional theory. They find that institutional theory helps extend TCE by clarifying additional external uncertainties that firms may face when entering new foreign markets. As Brouthers (2002) indicates, by considering both transaction cost characteristics as well as institutional factors, firms may make more informed mode-choice decisions that result in better performing foreign subsidiary units. Many other studies have combined aspects of two or more theoretical perspectives to examine the international entry-mode choices of firms. The one thing these studies all have in common is that they concentrate on theories that focus on firm- and country-specific aspects of the mode-choice decision (see Brouthers and Hennart (2007) for more details).

In sum, despite the growth in studies exami- ning mode (channel) choice, most have used theoretical perspectives that focus on country- and firm-specific aspects of the decision. Although very helpful to managers, this rese- arch is limited because it means that we still have little understanding of how issues like marketing strategy or managerial biases influence the mode-choice decision.

POTENTIAL FOR FUTURE RESEARCH

There are now almost 200 studies providing theoretical and/or empirical examination of the issue of firm expansion and mode choice. Recently researchers have been questioning the need for further research in this area. Yet despite the growth in research there is still much to be learned. We now discuss two areas of research that have the potential to make a significant contribution to improving international performance through a better understanding of the method of entry-mode choice.

Marketing strategy. Marketing strategy deals with a wide range of decisions that can influ- ence the performance of the firm (see GLOBAL MARKETING STRATEGY; GLOBAL MAR- KETING STRATEGY: PERSPECTIVES AND APPROACHES). Yet, when examining inter- national expansion, researchers tend to ignore the marketing strategy implications of mode choice. Some research does address strategy issues. For example, Bradley and Gannon (2000) look at how market concentration versus diversification strategies impact mode choice while Sanchez-Peinado, Pla-Barber, and Hebert (2007) examine the impact of global versus multidomestic strategy, follow-the-leader stra- tegies, and market-seeking strategies on mode choice. In these and related papers, researchers have found mixed support; strategies appear to provide an important impact on mode choice but the way that impact is felt is not entirely clear (Brouthers and Hennart, 2007).

Other marketing strategy issues have not found their way into entry-mode research despite their importance to the firm. For example, variations in product/service mix may have an influence on mode choice (see MARKETING MIX; MANAGING THE GLOBAL PRODUCT PORTFOLIO). Specific entry-mode types may enhance (detract from) the marketing effort in new foreign markets simply because of the product/service mix being offered. Normally firms do not use the same product/service mix in each foreign market as they use at home. These differences may call for different skills and knowledge, which may impact the mode-choice decision because different modes of entry provide firms with varying degrees of access to skills and knowledge.

Further, the marketing strategy of using standardized or adapted products/services in foreign markets may also influence mode choice (see STANDARDIZATION/ADAPTATION OF INTERNATIONAL MARKETING STRATEGY). Standardization, for example, may require few country-specific adjustments to the production process but extensive knowledge and skills in marketing the product/service to the final customer, hence influencing the mode choice for the production operation differently from the sales function. Likewise, adaptation of products/services may require extensive

market entry and expansion 5

country-specific production knowledge but might build on existing marketing skills. These differences may have a significant influence on mode choice and the effectiveness of the foreign operation.

Market orientation is now recognized as critically important in domestic markets, yet there is little understanding about the best way to extend this orientation to foreign markets (see MARKET ORIENTATION). A firm whose competitive advantage relies on its market orientation may need to think carefully about how to be successful in foreign markets. For example, is it more effective to use wholly owned subsidiaries and keep control of foreign operations when market orientation is important or does sharing ownership through joint ventures or license agreements help firms more effectively service foreign customers?

Branding strategy is also not considered in the mode-choice decision, yet brands are often one of the most powerful marketing tools a firm may possess (see BRAND STRATEGY; GLOBAL BRANDING: THREE KEYS FOR GLOBAL BRAND SUCCESS). Brands and brand strategy may significantly impact mode choice because brands may be better protected through some modes than through others. In addition, some mode types may make it easier for firms to obtain additional brands or expand brands to related products/services. Hence brand strategy may be another important determinant of the mode-choice decision.

As we have briefly outlined above, marketing strategy issues form an important and integral part of a firms success, yet there is little under- standing about the impact of marketing strategies on foreign market entry-mode decisions or how mode structure influences a firm’s ability to effectively implement their chosen strategy.

Top management team. As we know from decision-making research the characteristics of the decision maker or decision-making team play a critically important part in determining what choices are made (Wubben and Wangenheim, 2008). However, in the entry-mode literature managerial influences are seldom included. There are a few recent papers that have started to look at the decision-making process using real-options theory (Brouthers, Brouthers,

and Werner, 2008b) and others that have examined manager characteristics (Brouthers and Hennart, 2007). But much more work needs to be done in this area.

For example, network theory has recently been used to help explain why managers make certain decisions (Rindfleisch and Moorman, 2001). Networks are the groups of individuals, both personal and professional, with whom the manager interacts, exchanges information, and shares resources. Researchers need to examine network connections, inside and outside the firm, to gain an understanding of how network rela- tionships may influence the mode-choice deci- sion. For example, do some networks discourage the use of specific entry-mode types or do some networks enhance the opportunity to use other mode types?

Organizational culture may also have a signifi- cant influence on the foreign market entry-mode choice decision. Firms may have cultural-based beliefs and values that eliminate certain mode choices from consideration or that influence the type of information that managers consider rele- vant to the mode-choice decision. Organizational cultural values can have an important impact on the decision-making process and outcome (Deshpande and Webster, 1989), yet entry-mode scholars have tended to ignore the impact of organizational culture in studies of entry-mode choice.

Furthermore, because foreign market expan- sion decisions are made at different levels of the firm, depending often on firm size, it is impor- tant that we obtain market entry decision data from the correct respondents. Studies looking at the impact of top managers in very large organi- zations, for example, may not be examining the right level of analysis. It is often the case in larger firms that SBU managers or product managers make these important expansion decisions. At present both marketing executives and middle managers have been conspicuously absent from entry-mode research. Obtaining data from these sources may be difficult but the value added could greatly increase our knowledge of how these decisions are really made.

As researchers in other areas have noted, managerial biases can have an important impact on the decisions they make. Those interested in foreign market expansion can help us gain

6 market entry and expansion

a better understanding of entry-mode choice by exploring the impact of factors that create biases in managerial decisions hence prohibiting managers from making the best entry structure decisions.

CONCLUSIONS

Although foreign market entry-mode scholar- ship has seen strong growth in recent years, there are still many unanswered questions. Even some of the most widely explored issues need further work as answers are still elusive as to the best way to make the entry-mode decision. Marketing practitioners and researchers can make an impor- tant contribution to our knowledge of market entry and expansion by focusing on how impor- tant marketing strategy issues and managerial biases influence these decisions.

In this article, we reviewed past research and highlighted several areas where new research is needed and where current research has failed us. By focusing on newer issues like market orientation, brand strategy, and product mix, researchers can help bring greater realism to our decision-making models. In addition, by gath- ering information from the appropriate level of manager in the firm and considering how issues like network relationships and organizational culture influence managerial decisions, future research can improve decision-making models that will help firms make better decisions in the future.

Finally, there are still enormous challenges ahead for researchers to gain a greater under- standing of how market entry and expansion decisions are made. This expanded research can help facilitate better managerial practices and improve international performance for firms. Marketing scholars can have a substantial impact on this research by examining marketing issues and the influence of marketing managers in taking effective mode-choice decisions.

Bibliography

Anderson, E. and Coughlan, A.T. (1987) International market entry and expansion via independent or inte- grated channels of distribution. Journal of Marketing, 51, 71–82.

Bello, D.C. and Lohtia, R. (1995) Export channel design: the use of foreign distributors and agents. Journal of the Academy of Marketing Science, 23 (2), 83–93.

Bradley, F. and Gannon, M. (2000) Does the firm’s technology and marketing profile affect foreign market entry? Journal of International Marketing, 8 (4), 12–36.

Brouthers, K.D. (2002) Institutional, cultural and trans- action cost influences on entry mode choice and performance. Journal of International Business Studies, 33 (2), 203–221.

Brouthers, K.D. and Brouthers, L.E. (2003) Why service and manufacturing entry mode choices differ: the influence of transaction cost factors, risk and trust. Journal of Management Studies, 40 (5), 1179–1204.

Brouthers, K.D., Brouthers, L.E., and Werner, S. (2008a) Resource-based advantages in an international context. Journal of Management, 34 (2), 189–217.

Brouthers, K.D., Brouthers, L.E., and Werner, S. (2008b) Real options, international entry mode choice and performance. Journal of Management Studies, 45 (5), 936–960.

Brouthers, K.D. and Hennart, J.F. (2007) Boundaries of the firm: insights from international entry mode research. Journal of Management, 33, 395–425.

Canabal, A. and White, G.O. (2008) Entry mode research: past and future. International Business Review, 17, 267–284.

Delios, A. and Henisz, W.J. (2000) Japanese firms’ invest- ment strategies in emerging economies. Academy of Management Journal, 43 (3), 305–323.

Deshpande, R. and Webster, F.E. (1989) Organizational culture and marketing: defining the research agenda. Journal of Marketing, 53, 3–15.

Erramilli, M.K. and Rao, C.P. (1993) Service firms’ international entry-mode choice: a modi- fied transaction-cost analysis approach. Journal of Marketing, 57, 19–38.

Geyskens, I., Steenkamp, J.B.E.M., and Kumar, N. (2006) Make, buy or ally: a transaction cost theory meta-analysis. Academy of Management Journal, 49 (3), 519–543.

Rindfleisch, A. and Moorman, C. (2001) The acquisi- tion and utilization of information in new product alliances: a strength-of-ties perspective. Journal of Marketing, 65, 1–18.

Sanchez-Peinado, E., Pla-Barber, J., and Hebert, L. (2007) Strategic variables that influence entry mode choice in service firms. Journal of International Marketing, 15 (1), 67–91.

Tihanyi, L., Griffith, D., and Russell, C.J. (2005) The effect of cultural distance on entry mode choice, international diversification and MNE performance: a meta-analysis. Journal of International Business Studies, 36 (3), 270–283.

market entry and expansion 7

Wubben, M. and Wangenheim, F.V. (2008) Instant customer base analysis: managerial heuristics often ‘get it right’. Journal of Marketing, 72, 82–93.

Zhao, H., Luo, Y., and Suh, T. (2004) Transaction cost determinants and ownership-based entry mode

choice: a meta-analytical review. Journal of Interna- tional Business Studies, 35 (6), 524–544.