Week 4: KC

Question 1

TIMING

The Uppsala model describes the longitudinal process of internationalization in two ways:

Answer 1

Timing is an important factor to consider when describing how firms internationalize. Many theories do not explicitly consider it.

Internationalization timing depends on operations in other countries that are part of the MNE portfolio.

The Uppsala model describes the longitudinal process of internationalization in two ways:
o Sequence of countries that are entered by MNEs
o Sequence in modes of operation (how they are entered)

Sequences are much informed by:
- psychic distance:
(perceived distance between home and host country) and thus captures the uncertainty of managers due to lack of knowledge on markets.

• When psychic distance is low:
  managers are more familiar with the ins- and outs of the foreign market

Question 2

MNEs and Internationalization

Answer 2

• The easier it is for managers to make sense of a foreign environment, the more quickly their firm can internationalize.
• MNEs should be understood as a network of country locations in which they operate. Single entries into specific countries should not be considered but trying to understand how internationalization in one part of the portfolio relates to operations of a firm elsewhere.
• Internationalization timing depends on operations in other countries that are part of the MNE portfolio.
• Internationalization tends to be sequential, gradually moving from one country to the other.
  = MNEs are ready to move on when they fully understand the environment, when they have successfully completed the establishment chain.

Question 3

Differences between full-fledged and inexperienced MNEs:

Answer 3

1. Inexperienced firms need more time to understand foreign markets and more time to overcome psychic distance problems.
   - This may come down to learning, MNEs learn from foreign entries and may draw on their experiences at the time of the next entry.
2. Experience
   - allows companies to repeat something they have successfully done in the past (earlier entries) may also help to find opportunities abroad.
   - Some firms may feel time is not right for expansion into a country,
   - experienced firms may recognize a unique chance others may not be able to see.

• International experience may also help with swapping. MNEs with large country portfolios may more readily swap parts of their portfolios with other firms, which allows them to access new market more quickly.

Question 4

Uppsala model: Casillas & Moreno-Menendez (2014)

Answer 4

Diversity and Depth of accumulated international activities determine the speed of the internationalization process:

o Diversity
= promotes long-term learning; firms can draw on richer experiences
when learning only takes place over time.

o Depth =

• may accelerate internationalization process in the short-term
• but restrains the potential for development in the long term.

Some firms internationalize fast regardless of previous experiences.

Question 5

What allows rapid international expansion?

Answer 5

o Little localization needed
– little adjustment to products is required, (such as language adjustments or different features.)
- A relatively universal appeal.

o Global competition
– if a company does not grow, it will be outcompeted.
- Besides, lack of competition matters, as global entry is facilitated when there are no competitors that offer the same product or service.

Question 6

First-Mover Advantages =

SKIP

Answer 6

First-Mover Advantages
= The firm’s ability to be better off than its competitors because of being first in the market in a new product category or a new country.

Different types of first-mover advantages:

1. Durable first-mover advantages:
   - effect on a firm’s market share or profitability over a long period of time
2. Short-lived first-mover advantages

Even though no advantages last forever, firms such as Coca-Cola tend to dominate their product categories for many years.

Question 7

Lieberman & Montgomery (1988)

Most important first-mover advantages (4x) :

Answer 7

Lieberman & Montgomery (1988)

1. Learning curve benefits – first mover has more time to go through the learning curve.
   o This enables them to have more experience, adapt production to the local requirements (gain knowledge of local environment) and to refine the country specific market techniques (competitiveness).
   o Can also derive from technological leadership. Enables the first mover to have more time to climb the learning and experience curve to increase production and to improve production process and efficiency before the others.
2. Preemption (Cherry Picking advantage) – company may be able to block the
   access for competitors to key limited resources
   o Preemption of input factors, such as human resources and mineral deposits
   o Preemption of logistics in geographic and product characteristics space (e.g. shelf space)
   o Preemptive investments in plant and equipment and therefore being able to gain a lead in achieving scale.
3. First movers can build entry barriers
   o Switching costs: Late entrants must invest extra resources to attract customers away from the first-mover firm. Invest in contractual costs, supplier-specific learning, and adaptation by the buyer.
   o Buyer choice under uncertainty: Buyers can decide to stick to the first brand they encounter that performs the job satisfactorily (risk aversion)
4. Relationship building
   o build exclusive relationships with key local stakeholders, such as local governments or suppliers. The more time the first mover has alone in the host country, the more time it has to strengthen the link between local stakeholders.
   o Makes it more difficult to access local networks for competitors or to start
   similar relations from scratch, as time and common experience are key determinants of such successful links.

Question 8

First mover disadvantages:

Answer 8

Disadvantages arise in industries or countries that have fast-changing technology or customer needs

First movers, becoming incumbents in the industry, may not be able to respond to the change with the optimal strategy

Reasons for this:

1. Firm may be locked-in to a specific set of fixed assets due to high initial investment difficult to
2. Firm may be reluctant to cannibalize existing product lines
3. Firm may become organizationally inflexible and resistant to change

Late mover advantages =
In specific industries or countries, companies that adopt a wait and see strategy may be more successful than the first movers, as they can enjoy the so-called late mover advantages.

Question 9

late mover advantages.

Answer 9

late mover advantages =
In specific industries or countries, companies that adopt a wait and see strategy may be more successful than the first movers, as they can enjoy the so-called late mover advantages.

• Free riding: =
Waiting enables late comers to benefit from investments already done by the first movers in the same market
o Late comers enter market with no or low (sunk) investment costs

• Resolution of uncertainty =
Late movers experience decreased investment risks, copying the strategies of the first movers and learning from their mistakes.

Question 10

Key determinants of the failure or success of a company when entering a foreign market:

SKIP

Answer 10

= Context and Conditions

Sometimes waiting is a better option, as it allows to observe how the industry is evolving, reducing the uncertainty related to early entrance.

Firms should carefully consider under which conditions first mover advantages can materialize:
• External conditions – institutional environment, competition, technological shifts
• Internal conditions – firm’s resources

Question 11

Two most important dimensions when assessing the likelihood of leveraging a first mover advantage in a certain foreign country:

SKIP

Answer 11

1. Pace of technological evolution
   o Incremental improvements – computer processors
   o Disruptive change - digital
2. Pace of market evolutions (pace of market penetration)
   o The greater a new product or category departure from the existing product or category, the more uncertain the pace of the markets’ growth and its eventual shape will be.

Question 12

Firms’ opportunity to be a first mover only materializes if there is a fit between:

SKIP

Answer 12

Firms’ opportunity to be a first mover only materializes if there is a fit between:
o skills and resources necessary to capitalize on such opportunity and
o the ones possessed by the firm

Question 13

FIRST MOVER ADVANTAGES (Suarez & Lanzolla, 2005)

Pace of the Market Evolution

Framework of interaction between external conditions and organizational resources and their impact on first-mover advantages

4 market conditions resulting from matching the pace of technological evolution and the pace of market evolution….. =

Answer 13

Calm Waters:

• Pace of market evolution: SLOW
• Pace of tech evolution: SLOW
• Example; scotch tape

the Technology Leads:
- Pace of market evolution: SLOW
- Pace of tech evolution: FAST
Example; digital cameras

The Market Leads
- Pace of market evolution: FAST
- Pace of tech evolution: SLOW
Example; sewing machines

Rough Waters
- Pace of market evolution: FAST
- Pace of tech evolution: FAST
Example; personal computers

Question 14

How to obtain first-mover advantages in an industry with…

Slow Technological Evolution:

…. focus on:

Answer 14

 Slow technological evolution:

marketing skills and brand - are key resources

Question 15

How to obtain first-mover advantages in an industry with..

Fast Technological Evolution:

…. focus on:

Answer 15

 Fast technological evolution:

R&D competencies - are key to obtain first-mover advantages

Question 16

Non-Market Based Firm-Specific Advantages

Answer 16

Firms should also develop non-market-based FSAs,

non-market-based FSAs:
= can also be leveraged by the first mover to take advantage of the early entry in a foreign market.

• Firm political resources are a core asset for sustainable advantage of the firm

Question 17

Political resources =

Answer 17

Non-Market Based Firm-Specific Advantage

Political resources =
Any firms attributes, assets, human resources, or any other resources that allow the firm to use the political process to improve its efficiency and profitability.

Question 18

Two complementary mechanisms are at work to determine first mover advantages with respect to firm-specific political resources:

Answer 18

1 Resource dependency Theory =
Political resource enable the establishment of entry barriers through government intervention. Companies can guarantee the privileged access to exclusive government support that create entry barriers for late entering foreign competitors, that might be at a disadvantage to get access to those critical resources.  ‘lock-in’
- ACCESS TO EXCLUSIVE GOVERNMENT SUPPORT

2 Reciprocity Theory =
After being first in the market, the first entrant can reciprocate early entry by continued governmental support. Individuals and institutions return good for good. If a firm is first in a country and contributes to the local social context in business and shows an alignment of interests with the local government, it will be more likely to establish reciprocal relation with the government. They will be more inclined to support the firm’s business.
- ALIGNMENT OF INTERESTS

Question 19

When to increase commitment (after initial entry)?

MNEs can change their foreign operation mode in several ways in order to increase host- country commitment after initial entry.

Answer 19

MNEs can change their foreign operation mode in several ways in order to increase host- country commitment after initial entry.

 They differentiate between mode duplication (replicating existing operation mode in host country) and mode elevation (MNE establishes a new different mode of operation.

Mode Elevation:
 Deeper and broader international experience increase the likelihood of implementing a mode elevation rather than a mode duplication due to higher complexity of the former.

Mode Duplication:
 Less experienced firms are therefore more likely to duplicate former experience. They, for instance, enter a foreign country by opening a new store from the ground up and because of their lack of experience, they choose to set up further stores in the same way rather than
acquiring existing stores from competitors.

Question 20

Mode Duplication

can be observed in different ways:

Answer 20

Mode Duplication = replicating existing operation mode in host country

• Organic growth of MNEs
through greenfield investments, by setting up new stores, outlets, or other subsidiaries themselves.

• Acquisition spree
Some firms are specialized acquirers and when they initially enter a foreign country by means of an acquisition, it is likely that further expansion is also done in the same way.

• Alliance or Joint Venture portfolio
Adopted by more cautious firms. Seek out partners to work together in search of compatible resources which facilitates the initial entry but also subsequent expansion in a country.

Question 21

Mode Elevation

Answer 21

Mode Elevation = MNE establishes a new different mode of operation.

MNEs establishes a new different mode of operation in the same foreign country. They may have initially entered with a greenfield subsidiary, but also choose to perform acquisitions after. Alternatively, they can also make changes to their first mode of operation. Practice shows that this may be done several times over a relatively short time.

Question 22

When to decrease commitment in a country?

Answer 22

• Political situation – for instance when there is uncertainty. When the situation gets too bad, this could even lead to leaving the country.
• Resource release – resources are released to be reinvested elsewhere. This enables company to focus on other successful businesses
• Portfolio considerations – some regions may strategically be more important to the firm, which may explain their decreased commitment in a country even though they are performing well there.
• Profit considerations – MNEs are profit-seeking and are quick to move on when the financial situation takes a bad turn. They can decrease their commitment after entry, regardless of the amount and diversity of their international experience.

Question 23

Free riding =

Answer 23

Free riding: =
Waiting enables late comers to benefit from investments already done by the first movers in the same market
o Late comers enter market with no or low (sunk) investment costs

Question 24

Resolution of uncertainty =

Answer 24

Resolution of uncertainty =
Late movers experience decreased investment risks, copying the strategies of the first movers and learning from their mistakes.