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50 Journal of International Marketing
Foreign Market Entry Timing Revisited: Trade-Off Between Market Share Performance and Firm Survival Janet Y. Murray, Min Ju, and Gerald Yong Gao
ABSTRACT This study revisits the impact of entry timing on the performance of foreign-invested firms. The authors posit that bal- ancing between market share performance and firm survival is critical for foreign firms to capitalize on early-mover advantages. Using a longitudinal data set of 25,513 foreign firms operating in China, the authors find that early entrants enjoy higher market shares but suffer from lower survival rates than late entrants. In addition, foreign firms’ entry mode and investment size affect their market shares and survival. The results also provide supporting evidence of the inter- action effects among entry timing, entry mode, and investment size on foreign firms’ market shares and survival.
Keywords: foreign direct investment, entry timing, entry mode, market share, survival
E ntry timing in penetrating foreign markets repre- sents an important concept in international mar- keting literature. Many conceptual and empirical
studies have focused on the notion of entry timing by investigating the relationship between entry timing and firm performance (e.g., Lee et al. 2000; Li 1995; Lilien and Yoon 1990; Mitchell 1991; Parry and Bass 1990; Robinson 1988; Suarez and Lanzolla 2007; Varadara- jan, Yadav, and Shankar 2008). However, most of these studies have focused on entry timing in the context of domestic markets (Carpenter and Nakamoto 1989; Lieberman and Montgomery 1988, 1998). It was not until the mid-1990s that studies began applying the principles of entry timing and early movers to inter- national markets, suggesting that the timing of entry is a critical strategic decision for firms making investments in foreign markets (Delios and Makino 2003; Pan, Li, and Tse 1999; Papyrina 2007; Rivoli and Salorio 1996; Wang, Chen, and Xie 2010).
Early entrants enjoy various advantages (e.g., higher market shares), but they also suffer from survival disad- vantages in international markets, encountering greater risks and higher uncertainties than late entrants (Delios and Makino 2003; Frynas, Mellahi, and Pigman 2006; Wang, Chen, and Xie 2010). For example, on entering the Chinese market in 1979 after the implementation of the open-door policy, Coca-Cola was one of the first international consumer companies to capitalize on the market opportunities. Since then, Coca-Cola has become committed to the Chinese market by investing more than US$5 billion there (Coca-Cola 2011). It has quickly dominated the soft drinks market, holding a leading position, and has become a major household name in China. Whirlpool, one of the early entrants to the Chinese home appliance industry, began investing in China in 1994 to manufacture washing machines, microwave ovens, refrigerators, and air conditioners. However, because of its poor performance resulting from high industry uncertainty, Whirlpool withdrew its investment from the joint ventures with Beijing Snowflake Electric Appliance and Shenzhen Raybo Company (Pan, Yang, and Sethi 2005).Janet Y. Murray is E. Desmond Lee Professor for Developing Women
Leaders and Entrepreneurs in International Business and Professor of Marketing (e-mail: [email protected]), Min Ju is Visiting Assis- tant Professor of Marketing (e-mail: [email protected]), and Gerald Yong Gao is Associate Professor of Marketing (e-mail: [email protected]), Department of Marketing, University of Missouri– St. Louis.
Journal of International Marketing ©2012, American Marketing Association Vol. 20, No. 3, 2012, pp. 50–64 ISSN 1069-0031X (print) 1547-7215 (electronic)
Foreign Market Entry Timing Revisited 51
Thus, although formidable advantages remain for early entrants, so too does the likelihood of facing high uncer- tainty. In this sense, there is a trade-off between market share performance and firm survival for early entrants. This dilemma represents one of the most challenging managerial decisions in sustaining a firm’s competitive advantages in international markets (Boulding and Christen 2003). Yet little is known about how to bal- ance this essential trade-off between different perform- ance indicators (Min, Kalwani, and Robinson 2006; Wang, Chen, and Xie 2010). Despite researchers’ efforts in cautioning firms about the negative consequences of an imbalance between first-mover advantages and early- entrant survival disadvantages (Delios and Makino 2003; Papyrina 2007), suggestions on how to strike a balance between these two have been limited.
This study aims to fill these research gaps by examining whether early entrants in foreign markets achieve supe- rior performance to late entrants. We focus on the chal- lenges of balancing market share performance and firm survival and address two research issues in extant inter- national marketing literature. First, although in general previous studies have found strong and consistent sup- port for the positive effect of entry timing on firm per- formance (Delios and Makino 2003; Isobe, Makino, and Montgomery 2000; Pan, Li, and Tse 1999), the majority of this research focuses primarily on the per- formance indicator of market share (Lieberman and Montgomery 1998). However, market share perform- ance is usually measured at one point in time but is likely to fluctuate over time (Kerin, Varadarajan, and Peterson 1992). Therefore, researchers have called for reducing the dependency on market share effects by adopting other measures of performance (Cui and Lui 2005). Furthermore, most previous studies are cross- sectional in nature and therefore fail to examine firm survival despite its importance in measuring firm per- formance in international markets. The current study contributes to entry timing literature by examining early-entrant advantages and survival disadvantages in a foreign market from a longitudinal perspective. Specifi- cally, we examine both firms’ market shares and sur- vival. Early entrants enjoy higher market shares, but they also encounter greater risks of business failure. Thus, it is critical for early entrants to survive in foreign markets because doing so enables them to enjoy sus- tainable market performance from their willingness to take greater risks.
Second, we provide potential strategies for firms to achieve a better balance between different performance
indicators. The essence of the first-mover advantage– early-entrant survival disadvantage dilemma is whether early entrants can successfully deal with high levels of uncertainties. The key to the dilemma might be early market entrants’ strategic choices that can enhance their survival. In this study, we focus on entry mode and investment size as two such strategic choices that can potentially enhance firm survival. In other words, we investigate the impact of entry mode and investment size on firms’ performance, and we further examine whether the effect of entry timing on performance is contingent on foreign firms’ entry mode choices and their initial investment size.
We test our hypotheses using a sample of 25,513 foreign firms that have made foreign direct investments (FDIs) in China. As the world’s fastest-growing consumer mar- ket, China has begun attracting enormous FDI inflows. China began allowing foreign firms to enter the country in 1979, which provides a starting point for measuring entry timing of foreign firms. In the past decade, the inflow of FDI into China has increased from US$45 bil- lion in 1997 to US$92.4 billion in 2008 (United Nations Conference on Trade and Development 2009). Thus, the Chinese market provides an excellent research context to address our research questions. We trace the perform- ance and survival of foreign firms operating in multiple product sectors over a five-year period (1998–2002). The empirical results provide supportive evidence for our predictions.
THEORETICAL FOUNDATION First-Mover Advantage Theory
The concept of first-mover advantages has attracted much attention in the marketing literature. Lieberman and Montgomery (1988, p. 41) define first-mover advan- tages as “the ability of pioneering firms to earn positive economic profits.” They contend that first-mover advan- tages arise from three primary sources: technological leadership, preemption of assets, and the creation of buyer switching costs. Specifically, first movers can gain advantages through the learning curve effect and succeed in the patent or research-and-development race. They are also able to gain advantages by preempting rivals in acquiring scarce assets and geographic locations and creating buyer switching costs. Moreover, researchers have argued that first movers often enjoy a higher level of consumer preferences (Carpenter and Nakamoto 1989, 1994; Magnusson, Westjohn, and Boggs 2009). Therefore, early market entry provides a firm with the
52 Journal of International Marketing
opportunity to gain a larger market share (Mitchell 1991; Robinson, Fornell, and Sullivan 1992). Neverthe- less, these advantages may not be sufficient for first movers to keep a strong position as the market evolves, because they could be overtaken by late movers as a result of high levels of uncertainties, free-rider effects, imitation, and shifts in technology (Lieberman and Montgomery 1988).
Furthermore, empirical evidence related to first-mover advantages mainly comes from the context of domestic markets. In foreign markets, risks and uncertainties are much higher than those in the home market. The uncer- tainties stem not only from the general costs of doing business overseas but also from different cultural and institutional settings (Zaheer 1995). Therefore, the sources and mechanisms of early-mover advantages may differ in the context of international markets. On the one hand, although a foreign firm is an early entrant to a host market, the market may already be occupied by local competitors, reducing the magnitude of early- entrant advantages and increasing the value of the “wait-and-see” option. On the other hand, local govern- ments often treat early foreign entrants more favorably to attract more FDIs, which in turn amplifies early- entrant advantages.
In recent years, researchers have integrated FDI and first-mover advantages by examining whether first- mover advantages can apply to the international market context (e.g., Delios and Makino 2003; Gao and Pan 2010; Isobe, Makino, and Montgomery 2000; Luo 1998; Pan, Li, and Tse 1999). For example, Cui and Lui (2005) examine the trade-off between market share and profitability and conclude that early entrants have a larger market share while late entrants have a marginal advantage in profitability. Using a sample of 6955 for- eign entries of 703 Japanese firms, Delios and Makino (2003) find that early entrants have a larger investment size while late entrants have greater chances of survival. Magnusson, Westjohn, and Boggs’s (2009) findings sup- port a significant relationship between early entry and greater market shares for 379 subsidiaries of multi- national advertising agencies in developing markets. In general, all these studies have found support for the positive effect of entry timing on market share as an indicator of firm performance. Nevertheless, with the exception of Mitchell’s (1991) work, no study has specifically examined the trade-off between market share and firm survival, though research suggests that firms’ ability to survive is contingent on the timing of market entry (Gaur and Lu 2007; Golder and Tellis
1993; Wang, Chen, and Xie 2010). Focusing on the U.S. diagnostic imaging industry, Mitchell (1991) tests the dual-clock entry order effects on performance and finds entry timing trade-offs between market share and sur- vival. Moreover, rather than examining the trade-off between different performance indicators, Mitchell, Shaver, and Yeung (1994) investigate the impact of for- eign market share on firms’ survival rates. They find a nonmonotonic relationship between the success of inter- national market entry and the foreign presence in an industry at the time of entry and conclude that foreign entrants survive longer in product markets with a mod- erate number of foreign players. However, whether the similar pattern between market share and survival can be generalized to international market contexts remains unknown. Thus, it is imperative to examine both mar- ket share performance and firm survival as the perform- ance outcomes of early international market entry.
Strategic Choice Perspective
Past studies have suggested that the relationship between entry timing and performance is more complex than previously theorized, arguing that the entry timing– performance relationship may be contingent on other fac- tors (Cui and Lui 2005; De Castro and Chrisman 1995; Kerin, Varadarajan, and Peterson 1992; Szymanski, Troy, and Bharadwaj 1995). Theorists advocating the strategic choice perspective reject the purely deterministic view of the behavior of organizations promoted by industrial organization economists (Hitt and Tyler 1991) and argue that a firm’s strategic choice plays an important role in determining its success or failure in the marketplace (Child 1972, 1997). The most critical choices are those that aim “to ‘match’ firm strategies with changing envi- ronmental conditions in order to maintain or improve competitive positions” (Reger, Duhaime, and Stimpert 1992, p. 190). The strategic choice perspective stresses that managerial actions, such as selecting the structures and resource allocations, can affect firm performance (Child, Chung, and Davies 2003). Furthermore, in ana- lyzing firm strategy (e.g., entry timing), Child (1972, p. 10) states that researchers “must recognize the exercise of choice by organizational decision makers. The bounda- ries between an organization and its environment are defined in large degree by the kinds of relationships which its decision makers choose to enter.”
Our study focuses on the contingent reasoning of orga- nizational strategic choices, two forms of which—entry mode and investment size—are potentially the most fun- damental strategic factors in international marketing
Foreign Market Entry Timing Revisited 53
(Cui and Lui 2005; Pan, Li, and Tse 1999). The decision to market to a foreign country by adopting different entry modes carries significant strategic importance due to the inherent benefits and risks of each foreign establishment and entry mode (Brouthers and Brouthers 2000; Dikova and Van Witteloostuijn 2007; Woodcock, Beamish, and Makino 1994). Moreover, investment size represents a good indication of firms’ strategic resources in foreign markets and greatly affects firms’ abilities to augment the advantages associated with early entry and risk reduction (Cui and Lui 2005; Luo 1997). Therefore, given the dis- tinctive advantages and disadvantages associated with modes of entry and different sizes of foreign investment, it is critical to investigate their moderating effects on the relationship between entry timing and performance.
HYPOTHESES DEVELOPMENT Entry Timing
In general, early entrants to a foreign market have competitive advantages over late entrants. First, early entrants can preempt key natural and human resources in the host market (Lieberman and Montgomery 1988). In turn, these resources provide early entrants with a lead in developing capabilities and competitive advantages. Pre- emptive factors also build entry barriers for late entrants and prevent them from gaining access to markets, suppli- ers, and customers (Delios and Makino 2003). In addi- tion, early entrants have more options on selecting geo- graphic locations, suppliers, and business partners (Lilien and Yoon 1990). Moreover, early entrants usually benefit from incentives provided by local governments in terms of taxes, land, and energy supplies. Second, when expanding into a new foreign market, it is important for foreign firms to learn and accumulate knowledge about the host market to overcome the liability of foreignness (Zaheer 1995). Foreign firms are usually unfamiliar with the host market conditions, and customized products require a considerable amount of local market knowledge (Dikova and Van Witteloostuijn 2007). To successfully introduce products or services in a new market, firms need to develop local market knowledge so that they can meet the requirements and preferences of local customers (Cantwell, Glac, and Harding 2004). Early entrants enjoy the advantage of having more time to learn and acquire local knowledge than late entrants (Li 1995; Pan, Li, and Tse 1999). Third, previous studies suggest that customers have a high level of preferences for and loyalty to early market entrants (Carpenter and Nakamoto 1989). Thus, early entrants gain first-mover advantages from high cus- tomer switching costs and better consumption experi-
ences (De Castro and Chrisman 1995). These arguments suggest that first-mover advantages exist for foreign mar- ket entry, resulting in better market positions for early entrants.
Empirically, previous studies have provided supporting evidence for the positive effect of entry timing on per- formance indicators, such as sales growth, profitability, market share, and establishment of a competitive position in host markets (e.g., Cui and Lui 2005; Delios and Makino 2003; Luo 1998; Luo and Peng 1998; Pan, Li, and Tse 1999). For example, Luo (1998) finds that early entrants to a foreign market outperform late entrants in local market expansion, as measured by sales growth. Pan, Li, and Tse (1999) find that early entrants achieve higher market shares and profitability. Delios and Makino (2003) conclude that the earlier the market entry, the greater is a firm’s subsidiary size relative to that of its competitors. Therefore, we hypothesize the following:
H1a: Early entrants to a foreign market have higher market shares than late entrants.
Consistent with the growing emphasis that managers must consider multiple criteria when evaluating the long-term potential of their businesses (Eccles 1991), we complement a firm’s market share performance with its survival in examining the entry timing–performance relationship. We also acknowledge that “survival per se is not necessarily a sign of good performance because shareholders, employees, and the general economy sometimes benefit if a business shuts down” (Mitchell Shaver, and Yeung 1994, p. 557). However, firm sur- vival is widely recognized as an important indicator of business performance because exit from a foreign mar- ket usually indicates a failure of management’s original goal for the business, though firm exit might also be due to strategic reasons (e.g., seeking new opportunities in other markets) (Bane and Neubauer 1981).
Although early entrants to a foreign market enjoy first- mover advantages, they also face substantial costs and uncertainties. Uncertainties in a foreign market are greatest in the early stage of foreign market expansion (Luo 1998). First, foreign entrants are unfamiliar with local markets in terms of market demand and market structure. Therefore, it is important for foreign firms to learn local market knowledge and use it in conjunction with their resources to develop competitive advantages (Cantwell, Glac, and Harding 2004; Nerkar and Roberts 2004). However, local market knowledge is usually location specific and not readily accessible to
54 Journal of International Marketing
foreign firms, and successful knowledge acquisition depends on firms’ familiarity with the host market’s spe- cific structure (Chang 1995). Early entrants might not even survive during the long-term process of knowledge accumulation. In contrast, late entry involves less uncer- tainty about the marketplace because early entrants’ experience can offer market information to late entrants (Delios and Makino 2003; Gao et al. 2008).
Second, early entrants encounter the highest level of institutional uncertainties. Host markets’ institutions provide the central influential forces of the larger envi- ronment in constraining the optimality of a firm’s actions (Dikova and Van Witteloostuijn 2007). When most developing countries open up their markets for FDI, they are likely to be in the process of replacing the old institutional regimes with market economy mecha- nisms, which require a wide array of far-reaching insti- tutional reforms (Dikova and Van Witteloostuijn 2007; Pan, Li, and Tse 1999). The underdeveloped and fast- transition institutional environments in these markets likely affect the survival of early entrants and create par- ticular challenges for firms operating there (Peng 2003; Shenkar 2006). Therefore, some firms may take a wait- and-see approach and defer their investments until the environments become more favorable (Rivoli and Salo- rio 1996). In doing so, late entrants face fewer uncer- tainties and risks and reduce the possibility of failure by obtaining more market information and learning from the experience of early entrants.
Third, early entrants to a foreign market develop strate- gies depending on the state of the environment at the time of entry. Because external environments change over time, firms’ initial strategies may become less suita- ble for the changing environment. Meanwhile, firms’ routines may create rigidities that hinder them from adapting to the changes in the external environments (Hannan and Freeman 1989). Prior research has argued that incumbent inertia inhibits early entrants’ ability to respond to environmental changes, thus reducing the magnitude of their advantages (Liberman and Mont- gomery 1988). Therefore, we hypothesize the following:
H1b: Early entrants to a foreign market have lower survival rates than late entrants.
Entry Mode
In expanding into foreign markets, firms can choose among a variety of entry modes. In this study, we focus on three major types of entry modes: contractual joint
ventures, equity joint ventures, and wholly owned sub- sidiaries. Equity joint ventures and wholly owned sub- sidiaries are considered equity entry modes (Kumar and Subramaniam 1997). Contractual joint ventures are one type of nonequity mode in which local and foreign firms make contractual partnerships (Tallman and Shenkar 1994). From a cost- and control-based rationale, we posit that wholly owned subsidiaries have higher market shares and survival rates than equity joint ventures and that contractual joint ventures have the lowest market shares and survival rates for the following reasons: First, to set up wholly owned subsidiaries, foreign firms tend to rely on existing capabilities in their home market and simply copy and transfer what they have done success- fully to other overseas markets (Hahn and Shaver 2005). Thus, they incur lower new resource-based costs. Compared with joint ventures, the operational costs associated with wholly owned subsidiaries are also likely to be less substantial because foreign investors can avoid problems from divergent strategic viewpoints, dissimilar management philosophies, incompatible administrative routines, and different corporate and national cultures (Papyrina 2007). Furthermore, foreign firms can avoid costs of finding an appropriate partner (Nitsch, Beamish, and Makino 1996). Thus, wholly owned subsidiaries have a greater chance of surviving and a better opportu- nity to invest in developing market power.
Second, in wholly owned subsidiaries, foreign firms have complete control over their foreign operations. With full responsibility and managerial control, foreign firms are more likely to extend their competitive and proprietary assets to the host market (Brouthers 2002; Davidson and McFetridge 1984). Full ownership mode also enables firms to reap high potential profits, while joint ventures may allow firms to obtain only a fraction of such profits. The importance of control and direct management has become increasingly salient in fierce market competition, as wholly owned subsidiaries have more managerial efficiency than joint ventures. There- fore, foreign firms are more committed to their wholly owned operations in a foreign market. With fewer inter- nal conflicts and greater managerial efficiency, foreign investors have less reservation to invest in the host mar- ket and are more likely to penetrate the host market quickly and gain market share aggressively.
We expect contractual joint ventures to have the lowest market shares and survival rates among the three types of entry modes. As a nonequity mode, contractual joint ventures have low control and do not require high resource commitment (Anderson and Gatignon 1986).
Foreign Market Entry Timing Revisited 55
Because it is often difficult and costly for foreign firms to maintain contractual partnerships, contractual joint ventures generally entail the highest coordination costs. The hazards resulting from organizational differences, such as divergent strategic viewpoints, dissimilar man- agement philosophies, incompatible administrative rou- tines, and different corporate and national cultures, divert managerial attention away from other important market activities and decrease managerial efficiency. Furthermore, according to the transaction cost perspec- tive, these hazards cannot be reliably safeguarded with contracts because of bounded rationality (Papyrina 2007). Therefore, we hypothesize the following:
H2a: Wholly owned subsidiaries have higher mar- ket shares than equity joint ventures, fol- lowed by contractual joint ventures.
H2b: Wholly owned subsidiaries have higher sur- vival rates than equity joint ventures, fol- lowed by contractual joint ventures.
Investment Size
When entering a foreign market, firms must decide on the level of resources (e.g., cash, human resources, trans- fer of technology and other types of assets) to commit to the new market (Cui and Lui 2005; Magnusson, West- john, and Boggs 2009). Firm size is considered a useful and manageable approximation of firm resources. Larger investment size typically indicates a larger firm size and higher asset power. Large firms have control of more resources and are better able to overcome risks to achieve superior performance (Cohen and Klepper 1996). In the marketing literature, firm size is a com- monly analyzed business variable that has an impact on a firm’s survival and performance.
In the context of foreign market entry, foreign firms need to learn about the local environment to overcome the liability of foreignness and compete with local firms (Dikova and Van Witteloostuijn 2007; Zaheer 1995). In addition, substantial investment is necessary for early entrants to benefit from the first-mover advantages because they must integrate these advantages with firm resources to generate competitive advantages (Cui and Lui 2005; Isobe, Makino, and Montgomery 2000; Luo 1998). Furthermore, the amount of initial investment cre- ates the foundation to build capabilities and coalitions in the new market; thus, it acts as a buffer between the organization and internal changes or external contingen- cies. Large firms are in a better position to deal with high
risks and uncertainties in the host market (Magnusson, Westjohn, and Boggs 2009). In addition, large firms also have stronger bargaining power to negotiate with the host country government for better concessions and incen- tives. Therefore, we expect that foreign-invested firms with a large investment size can stay in business longer and achieve better market share performance. Thus:
H3a: Foreign firms with a large investment size have higher market shares.
H3b: Foreign firms with a large investment size have higher survival rates.
Interaction Effects
Drawing on the contingency theory, several researchers have called for studies to address the issue of endoge - neity, in that firms’ decisions regarding foreign market entry are relative rather than absolute or random (Papyrina 2007; Shaver 1998). Our study responds to this call by examining the interactive effects among entry timing, entry mode, and investment size on firms’ market shares and survival rates. Because the relation- ship between entry timing and firms’ performance is more complex than a simple entry order effect, firms’ strategic choices (i.e., entry modes and investment size) may exert a moderating effect on the entry timing– performance relationship. In practice, firms often address the issues of entry timing and entry mode simultaneously because these could have a joint effect on firm performance (Papyrina 2007). In addition, early entry itself is insufficient for sustaining first- mover advantages, and the effect of early entry is not uniform across different investment sizes (Cui and Lui 2005; Isobe, Makino, and Montgomery 2000; Luo 1998). Therefore, we further examine whether inter- active effects exist among entry timing, entry mode, and investment size and whether firms’ strategic choices can help them strike a better balance between market share performance and firm survival.
Market pioneering only provides opportunities to gain competitive advantages; therefore, firms must possess cer- tain expertise and resources to exploit these opportunities (Kerin, Varadarajan, and Peterson 1992). In deciding on which entry mode to adopt in penetrating foreign markets, firms must evaluate factors such as the levels of resources, control, and risks. As we mentioned previously, contrac- tual joint ventures are a nonequity entry mode in which local and foreign firms make contractual partnerships (Tallman and Shenkar 1994). In addition, they are usually
56 Journal of International Marketing
difficult and costly for foreign firms to maintain. In gen- eral, foreign firms adopting contractual joint ventures do not commit high levels of resources. In contrast, wholly owned subsidiaries have many advantages in areas such as high managerial control, minimal conflicts of interests, and avoidance of partner opportunism (Cui and Lui 2005; Papyrina 2007). Therefore, early entrants with contractual joint ventures in a foreign market are less likely than equity joint ventures to fully exploit and realize first- mover advantages, whereas wholly owned subsidiaries are in a better position to realize first-mover advantages than equity joint ventures.
A similar rationale applies to the interactive effect between entry timing and investment size. Foreign firms with a large investment size are more likely to take pre- emptive moves to gain local markets, customers, and other scarce resources (Lieberman and Montgomery 1998). If early entrants are unwilling to commit sub- stantial resources in the host market and enter on a small scale, the first-mover advantages realized will be correspondingly lower. Therefore, we expect that early entrants with large initial investments are more capable of exploiting and realizing first-mover advantages than small-scale early entrants. Thus:
H4a: Entry mode has a positive moderating effect on the entry timing–market share relation- ship, with early entrants as wholly owned subsidiaries having the highest market shares, followed by equity joint ventures and then contractual joint ventures.
H4b: Entry mode has a positive moderating effect on the entry timing–survival rate relation- ship, with early entrants as wholly owned subsidiaries having the highest survival rates, followed by equity joint ventures and then contractual joint ventures.
H5a: Investment size has a positive moderating effect on the entry timing–market share relationship.
H5b: Investment size has a positive moderating effect on the entry timing–survival rate relationship.
METHODOLOGY Data
The database comes from the Chinese industrial census from 1998 to 2002, conducted by the State Statistical
Bureau of China. The census data are accurate and reliable archival data (Tan and Peng 2003), and they consist of all manufacturing firms, including both local and foreign firms, except for extremely small busi- nesses. The total number of firms in the database from 1998 to 2002 is 165,118, 162,033, 162,885, 166,362, and 176,514, respectively. The database contains the following information for each firm: geographic loca- tion, industry code, firm type, scale, age, number of employees, and accounting information (e.g., assets, sales). Furthermore, the firms in the database account for more than 90% of the total industrial output in China, as compared with the figures from the China Statistical Yearbook. Thus, we were able to obtain an accurate measure of an individual firm’s market share from the database. In 1979, China began allowing for- eign firms to enter the country for investment purposes. Thus, this particular year provides us with an accurate starting point to observe the timing of foreign entries into China. According to the Chinese Industry Code (CIC), there are 610 manufacturing product sectors in China; by 2002, foreign firms had entered 545 product sectors.
Dependent Variables
Survival Rates. We measured survival for each firm by an interval equal to the number of years between 1998 and the year that a firm was delisted from the census data. In our database, the minimum interval is one year, and the maximum is four years. To compute the dura- tion measure, we searched the database to find the first year the firm did not appear in the census. If an exit was not clear during the period of study, we coded the inter- val as right censored.
In the database, each firm is identified by a unique code, which allowed us to track the firm over time. We tracked foreign-invested firms in the 1998 census data set during a five-year (1998–2002) period. To further ensure the accuracy of firm exits in our database, we tested the models by deleting exiting firms with high industry performance and obtained robust results. Our final sample consists of 25,513 firms, 10,175 (42%) of which exited during the five-year period. We treated the remaining 14,798 (58%) firms as right-censored cases.
Market Share. We measured market share as the per- centage of a foreign firm’s sales to total sales in China in a four-digit CIC product sector, including all foreign and local firms. We computed the average market share a firm attained during the five-year study period. If a firm
Foreign Market Entry Timing Revisited 57
exited during the period, we measured the average mar- ket share for years of operation.
Independent Variables
Entry Timing. We measured entry timing as the timing of a firm’s investment in a product sector in China, as compared with other foreign competitors. First, we coded the dummy variable “early entrants” as 1 if a foreign firm was among the first firms to enter a four- digit CIC product sector in the same calendar year and 0 if otherwise. We identified 759 (2.9%) foreign firms as early entrants in our sample. Second, we measured the continuous measure “lag time” by late entrants’ delay in the years after the early entrants entered a spe- cific product sector.
Entry Mode. The database categorizes foreign-invested firms into three groups: contractual joint ventures, equity joint ventures, and wholly owned subsidiaries. We used contractual joint ventures as the baseline in our analysis. Our sample comprised 2826 contractual joint ventures, 14,929 equity joint ventures, and 7748 wholly owned subsidiaries.
Investment Size. We measured investment size as the initial investment a foreign firm made when it estab- lished its subsidiaries in China. We used the logarithm transformation.
Control Variables
We controlled for the following variables that might have an impact on the performance of foreign-invested firms. We measured industry concentration with the Herfindahl index and industry growth with investment growth rate (based on a two-digit CIC code) as a proxy. We obtained these data from the China Statistical Yearbook. These two measures were five-year averages for the 1998–2002 period. We coded firm location as 1 if a firm was located in national municipalities or Eastern provinces and 0 if otherwise. Table 1 reports the basic statistics and the cor- relation matrix of the variables in the study.
Models
We employed multiple linear regression to examine mar- ket share performance. We investigated possible multi- collinearity in the models before conducting regression analyses. We found that the variance inflation factor val- ues were well below the cutoff threshold of 10, which indi- cates that there is no serious problem of multicollinearity in our models (Hair et al. 1998; Neter, Wasserman, and Kutner 1996). Model 1 tests the main effects of the inde- pendent variables on market shares as the measure of per- formance. Model 2 confirms the results of Model 1 by using “lag time” as another indicator of entry timing. Model 3 tests both the main and the interaction effects on market shares. Table 2 reports the results.
Table 1. Descriptive Statistics and Correlations
1 2 3 4 5 6 7 8 9
1. Early entrants 1.00
2. Lag time –.42* 1.00
3. Equity joint ventures .07* –.13* 1.00
4. Wholly owned subsidiaries –.07* .14* –.78* 1.00
5. Investment size .04* –.11* .05* –.04* 1.00
6. Industry concentration .19* –.31* .05* –.03* .06* 1.00
7. Industry growth –.05* .17* –.12* .12* –.20* –.09* 1.00
8. Firm location –.03* .03* –.19* .16* –.06* –.04* .14* 1.00
9. Market share .18* –.20* .01 .02* .24* .38* –.01 .02* 1.00
M .03 10.08 .59 .30 9.23 .02 .27 .84 .01
SD .17 4.23 .49 .46 1.56 .04 .18 .37 .02
*p < .01 (two-tailed test).
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For foreign firms’ survival, we employed an accelerated event-time model in our study (Allison 1995). The accel- erated event-time model incorporates censored cases into the estimation of the survival function. It assumes that the values of the dependent variable are distributed according to an underlying parametric distribution and that the distribution accelerates or decelerates through the influence of a set of covariates. The Weibull distribu- tion was specified. We also tested other parametric dis- tributions, including exponential distribution, and obtained consistent results. Model 4 tests the main effects of the independent variables on firm survival. Model 5 confirms the results of Model 4 by using “lag time” as another indicator of entry timing. Finally, Model 6 tests both the main and the interaction effects on firm survival. Table 3 reports the results.
RESULTS
Table 2 contains the estimates of the factors that influ- ence foreign firms’ average market shares. We report a set of models of the accelerated event-time estimation in Table 3. The coefficient estimates represent the effects of the covariates on the survival of foreign firms. There- fore, significantly positive coefficients indicate that the survival of firms increases as the value of a covariate increases.
In H1a and H1b, we propose that early entrants to a for- eign market have higher market shares and lower sur- vival rates than late entrants. The findings show that the variable early entrants is negatively related to firm sur- vival (p < .01) but positively related to market shares
Table 2. Multiple Regression Estimates of Entry Timing, Entry Mode, and Investment Size on Market Shares
Dependent Variable: Market Shares
Model 1 Model 2 Model 3
Independent Variables
Intercept –2.933* (.083) –2.483* (.089) –2.898* (.082)
Early entrants 1.243* (.066) — 1.422* (.076)
Lag time — –.037* (.003) —
Equity joint ventures (EJVs) .051 (.036) .053 (.036) .050 (.036)
Wholly owned subsidiaries (WOSs) .181* (.038) .196* (.038) .148* (.038)
Investment size .282* (.007) .278* (.007) .281* (.007)
Interaction Effects
Early entrants × investment size — — .880* (.039)
Early entrants × EJVs — — –.226 (.213)
Early entrants × WOSs — — 2.391* (.271)
Control Variables
Industry concentration .180* (.003) .176* (.003) .177* (.003)
Industry growth .007* (.001) .007* (.001) .007* (.001)
Firm location .178* (.030) .167* (.031) .175* (.030)
Model Indexes
Number of observations 25,089 25,082 25,089
F-value 939.33* 900.29* 739.08*
Adjusted R2 .21 .20 .23
R2 change — — .02*
*p < .001. Notes: Numbers in parentheses are standard errors.
Foreign Market Entry Timing Revisited 59
(p < .01). In addition, lag time has a positive effect on firm survival (p < .01) but a negative effect on market shares (p < .01). The results suggest that early entrants achieve higher market shares than late entrants in a for- eign market, but they also bear greater exiting risks. Therefore, H1a and H1b are supported. To further explore the trade-off between market share performance and survival of early entrants, we report the average market shares of foreign firms in Table 4. For early entrants, exiting and surviving firms have an average market share of 2.3% and 2.7%, respectively. For late entrants, exiting and surviving firms have an average market share of .3% and .6%, respectively. Although the market share performance of some early entrants is
significantly better than some late entrants (2.3% > .6%; p < .001), their performance is still insufficient to support and sustain their operations in facing early entry uncertainties and risks.
In H2a and H2b, we propose that wholly owned sub- sidiaries have higher market shares and survival rates than equity joint ventures, followed by contractual joint ven- tures having the lowest market shares and survival rates. The results show that wholly owned subsidiaries have higher market shares and survival rates than contractual joint ventures (p < .01). However, we find that equity joint ventures are not significantly different from contrac- tual joint ventures in their market share performance and
Table 3. Accelerated Event-Time Estimates of Entry Timing, Entry Mode, and Investment Size on Firm Survival
Dependent Variable: Market Shares
Model 1 Model 2 Model 3
Independent Variables
Intercept .245** (.047) .134** (.051) .248** (.047)
Early entrants –.155** (.036) — –.150** (.043)
Lag time — .009** (.002) —
Equity joint ventures (EJVs) .010 (.020) .010 (.020) .009 (.020)
Wholly owned subsidiaries (WOSs) .184** (.022) .178** (.022) .177** (.023)
Investment size .151** (.004) .153** (.004) .151** (.004)
Interaction Effects
Early entrants × investment size — — .014 (.024)
Early entrants × EJVs — — .205* (.105)
Early entrants × WOSs — — .225 (.148)
Control Variables
Industry concentration .018 (.172) .199 (.181) .008 (.173)
Industry growth –.037 (.035) –.054 (.036) –.039 (.035)
Firm location .143** (.017) .145** (.017) .143** (.017)
Scale parameter .645 (.006) .645 (.006) .645 (.006)
Weibull shape parameter 1.550 (.014) 1.550 (.014) 1.550 (.014)
Model Indexes
Number of observations 25,094 25,087 25,094
Number of exits 10,382 10,377 10,382
Log-likelihood –23,424.78 –23,408.62 –23,422.75
*p < .05. **p < .001. Notes: Numbers in parentheses are standard errors.
60 Journal of International Marketing
survival rates. Therefore, H2a and H2b are only partially supported. The data do not support the performance difference between equity and contractual joint ven- tures. A plausible explanation is that both equity and contractual joint ventures represent a partnership between a foreign and a Chinese local firm, but in dif- ferent forms (Pan, Li, and Tse 1999). Both types of joint ventures entail high cooperation costs with a low level of managerial control (Cui and Lui 2005). Therefore, the difference between equity and contractual joint ven- tures is less profound.
In H3a and H3b, we predict that foreign firms with large initial investments have higher market shares and sur- vival rates. The results in Tables 2 and 3 show that investment size has a positive impact on firms’ market shares (p < .01) and survival rates (p < .01). The results suggest that foreign firms with a large investment size achieve higher market shares and survive longer in a for- eign market. Therefore, H3a and H3b are supported.
In H4a and H4b, we propose that entry mode has a posi- tive moderating effect on both the entry timing–market share relationship and the entry timing–survival rela- tionship, with early entrants as wholly owned sub- sidiaries having the highest market shares, followed by equity joint ventures and then contractual joint ven- tures. For market share performance, the interaction term of entry timing with equity joint ventures is non- significant, and the interaction term of entry timing with wholly owned subsidiaries is positively related to a firm’s market share (p < .01). Therefore, H4a is partially supported. For firm survival, the interaction term of entry timing with equity joint ventures is positively related to a firm’s survival, though the effect is only mar- ginally significant (p < .10). The effect of the interaction term of entry timing with wholly owned subsidiaries is also positive, though nonsignificant (p < .13). Therefore, H4b is only weakly partially supported.
H5a and H5b pertain to the interactive effects of entry timing and investment size. We anticipate that invest- ment size has a positive moderating effect on both the entry timing–market share and the entry timing–survival relationships. We find that the interaction term of entry timing with investment size has a significant and posi- tive impact on a firm’s market share performance (p < .01). However, the interaction term has a nonsignificant effect on a firm’s survival. Therefore, H5a, but not H5b, is supported.
DISCUSSION Contributions
Firms face several critical decisions when considering market expansion, including entry timing, entry mode, and investment size (Delios and Makino 2003; Papyrina 2007; Stalk and Hout 1990; Vesey 1991). In this study, we examine the effects of these important variables on market share performance and survival rate of foreign- invested firms. Using a longitudinal database of manu- facturing firms in China, we investigate 25,513 foreign firms in 610 product sectors. The detailed four-digit CIC offers specific industry classifications, enhancing prod- uct sector comparability and better reflecting economic phenomena in the fast-growing emerging economy of China.
Specifically, our study provides three contributions to the literature. First, our study contributes to extant research on entry timing strategies by directly examining the trade-off between market share performance and firm survival for early entrants. Entry timing may yield differ- ential effects on various measures of firm performance; therefore, it is critical to employ multiple performance measures (Mitchell 1991). Our findings reveal that simi- lar patterns exist in the context of international markets. We examine the impact of entry timing on both market share performance and survival of foreign firms. The results suggest that though early entrants achieve higher market shares than late entrants, they also suffer from lower survival rates. This finding is consistent with first- mover advantages literature and echoes previous studies of early-entrant advantages in international markets. We also find that early entrants are more likely to withdraw from the foreign market than late entrants. This is because early-entrant advantages may diminish as the market evolves (Delios and Makino 2003; Wang, Chen, and Xie 2010). Therefore, early entrants to a foreign market face a trade-off between their survival chances and market share performance. In summary, early
Table 4. Market Share Performance of Early and Late Entrants
Entry Timing Firm Survival Average Market Share
Early entrants Exiting firms 2.3%
Surviving firms 2.7%
Late entrants Exiting firms .3%
Surviving firms .6%
Foreign Market Entry Timing Revisited 61
entrants gain first-mover advantages but also face sur- vival disadvantages in a foreign market. The results in Table 4 show that though the market shares of existing early entrants are significantly higher than those of late entrants, their performance is still not sufficient to main- tain their operations. Accordingly, it is critical for early entrants to capture a high enough market share to sur- vive in foreign markets because surviving entrants also achieve high market performance (through their willing- ness to take risks).
Second, and more importantly, regarding the trade-off between high market shares and low survival rate of early entrants, we offer potential strategies that firms can adopt to better balance different performance indi- cators. The key to the first-mover advantage– early-entrant survival disadvantage dilemma lies in cer- tain strategic choices that can help early market entrants maintain higher market shares. In this study, we focus on entry mode and investment size as two such strategic choices that firms can use to deal with the trade-off between market share performance and sur- vival. The results show that the interaction terms of entry timing with equity joint ventures and entry timing with wholly owned subsidiaries are positively related to a firm’s survival. For market share performance, the interaction term of entry timing with wholly owned subsidiaries is positively related to a firm’s market share. In other words, early entrants with a wholly owned subsidiary entry mode have higher market shares and survival rates than early entrants with equity and contractual joint ventures. Thus, it is critical for foreign firms to evaluate the distinctive advantages gained from different modes of entry. Early entrants can enjoy superior performance by choosing an appro- priate entry mode that helps reduce the substantial risks encountered. Investment size is another strategic choice that firms can select to enhance performance in inter- national contexts. We find that the interaction term of entry timing with investment size has a significant impact on a firm’s market share performance. There- fore, early entrants with large initial investments are more capable of exploiting and realizing first-mover advantages to improve their market share performance. In other words, if early entrants are willing to commit substantial resources to their target markets, they will be rewarded with higher market share.
Third, the strategic choice perspective suggests that managerial choices affect organizational design out- comes and firm performance (Priem and Harrison 1994). Scholars have voiced concerns that strategic
choices examined in empirical studies are often defined by the outcomes achieved (Drazin and Sandelands 1992), such that these choices “are generally inferred from tangible organizational outcomes rather than directly measured” (Preim and Harrison 1994, p. 321). We contribute theoretically to the entry timing and strategic choice literature by examining and measuring two strategic choices (i.e., entry mode and investment size) and further evaluating how these choices affect the entry timing–performance outcome.
Managerial Implications
Our study provides important managerial implications for foreign market entry. First, we draw marketing man- agers’ attention to the performance paradox (Ostroff and Schmitt 1993) that achieving a desirable outcome in one performance aspect may have a negative effect on another aspect. Our study is the first to provide guidance on how managers can achieve the duality of high market share performance and survival. Early foreign market entry is a double-edged sword for marketing practition- ers: Although it provides early entrants with a high mar- ket share, it also imposes high survival risks and uncer- tainties. To be successful in foreign markets, managers need to gain a deeper understanding of the overall impact of foreign entry timing as well as other important strate- gic choices. Our findings advocate a risk-taking approach for early entrants. Indeed, early market entrants face dis- advantages of higher uncertainties than late entrants (Delios and Makino 2003; Frynas, Mellahi, and Pigman 2006; Wang, Chen, and Xie 2010). Although firms can select a wait-and-see option, it is important for them to understand that though, on average, early entrants have a higher failure rate than late entrants, opportunities do exist for them to enjoy early entry benefits, and they can amplify such advantages by speeding up their sequential entry pace (Gao and Pan 2010). Instead of hedging their risks, our findings suggest that firms should take full con- trol of their operations (by adopting the mode of wholly owned subsidiaries) and commit more resources (by mak- ing a large initial investment) so that they can overcome the risks and uncertainties.
Second, we argue that in developing marketing strategies, managers should treat environmental conditions as the ultimate determinants of organizational characteristics and exercise their strategic choice in achieving desirable outcomes (Child 1997). Managers should be cognizant that their strategic choice “extends to the environment within which the organization is operating, to the stan- dards of performance against which the pressure of
62 Journal of International Marketing
economic constraints has to be evaluated, and to the design of the organization’s structure itself” (Child 1972, p. 2). Thus, market entry strategies need to be aligned not only with resource commitment but also with appropri- ate governance forms to achieve multiple performance outcomes. After all, only surviving early entrants can enjoy sustainable market share performance. Therefore, our study highlights the important trade-off between market share and survival for foreign early market entrants and the significant moderating effects of strategic choices on the first-mover advantage–early-entrant sur- vival disadvantage dilemma and on the entry timing– performance relationship.
Limitations
Our study has several limitations that also provide impe- tus for further research on foreign entry timing. First, the study is based on archival data, and as a result, we could not examine the motivation of FDI. Foreign firms may enter a host market for different purposes, ranging from resource seeking to local market seeking. The motivation of foreign firms should have a significant impact on whether and how they can capitalize on early-entrant advantages. The data limitation also prevented us from capturing other important variables, such as firm innova- tiveness. Second, our study focuses on FDI in a single host country (i.e., China). Further research could extend the study scope by examining whether the findings can be generalized to other host countries. Finally, with respect to firm survival, we could not differentiate exit types. Exits, such as firm closure and capital divestiture, are not always an indicator of failure of foreign subsidiaries. Additional studies could incorporate different types of exits and examine whether early and late entrants exhibit different exit patterns.
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