Profitability and speed of foreign market entry.

VerfasserPowell, K. Skylar

Abstract This research explores the relationship between firm profitability and actual speed of foreign market entry. Results suggest that profitability has an inverted U-shaped relationship with actual speed of foreign market entry, in the context of large US corporate law firms entering China. This result supports the idea that firms with both the need and resources to expand into foreign markets rapidly will do so, while laggards will lack either the resources or need to enter markets. Results also suggest that previously established offices in culturally similar markets, larger firm size, firm infancy, and prior international experience hasten market entry. Alternatively, limited organizational slack and concentrated practices delay market entry. Unexpectedly, prior entry of competitors appears to represent a deterrent to rapid entry. Additionally, while regulatory reforms on foreign law firms in China allowed for wider geographic access, they also increased operating restrictions, slowing entry speeds. Finally, results suggest that intense home-market competitive intensity may divert or decrease resource commitments to rapid foreign expansion.

Keywords Market entry timing * Profitability * China * Service firms * Law firms

1 Introduction

This article focuses on firm profitability as a factor related to speed of foreign market entry. Research suggests that early entrants may enjoy first-mover advantages in foreign markets (Lieberman and Montgomery 1988). Yet research has also tended to focus on the consequences of order of entry into foreign markets (Hsu and Chen 2009; Luo 1995; Mascarenhas 1992a, b), without fully considering the antecedents to speed of entry (Gaba et al. 2002; Mascarenhas 1992b). It is important to explore the antecedents to speed of entry, and profitability in particular, for several reasons.

To begin with, differences in speeds of entry may indicate the potential for lead times enjoyed by early entrants. Categorizations of early- versus late-entrants, as used in past research (Lieberman and Montgomery 1988; Mascarenhas 1992a), do not necessarily indicate that early entrants have time to capitalize on first-mover advantages. Second, with early- versus late-entrant categorizations firms may be grouped together as early entrants, even with differences in entry timing among firms in the same group (Gaba et al. 2002). Third, the dominant factor discussed in research on order of foreign market entry is a firm's position relative to its home-market competitors, in terms of resources that lead to profitability (Ito and Pucik 1993; Mascarenhas 1986; Porter 1985). As a result, considering the relationship between profitability and actual speed of foreign market entry will advance our understanding of the antecedents to market entry timing, and complement existing research on consequences of entry timing.

In order to further explore the relationship between profitability and actual speed of foreign market entry, this analysis is divided into several sections. First, a background and hypothesis section will offer a discussion of selected and relevant literature on order and speed of market entry, and will present the single hypothesis in this study. Second, a methodology section will describe the sample and empirical context along with operational definitions used and modeling procedures. Next, the empirical results of this analysis will be presented. And finally, a brief conclusion and discussion section will highlight implications for research and practice, and identify limitations and areas for further research.

2 Background and Hypothesis

Distinctions between more- or less-dominant firms have been related to international strategy in a number of contexts. The advantages enjoyed by more-dominant firms may include more competitive products or services, cost advantages, valuable relationships with customers and suppliers, and reputation advantages, among other organizational resources which result in greater levels of profitability (Ito and Pucik 1993). A recurring idea within this research is that less-dominant firms must seek ways to counter the competitive advantages of more-dominant firms while simultaneously avoiding all-out retaliation (Mascarenhas 1986, Porter 1985). In particular, the advantages enjoyed by more-dominant firms would make it difficult for less-dominant firms to weather retaliation in head-to-head domestic competition (Mascarenhas 1986; Ito and Pucik 1993). However, the advantages of more-dominant domestic players may be less potent in foreign markets, assuming that both dominant and less-dominant firms can provide high-quality competitive products or services (Ito 1997). As a result, a number of authors have offered that, for less-dominant firms, internationalization may be a means to counter the competitive advantages of dominant firms while simultaneously avoiding all-out retaliation in the domestic competitive arena (e.g., Mascarenhas 1986; Hennart and Park 1994).

The implication of this idea is that less-dominant firms may pursue international strategies more actively. However, among the less-dominant firms, the least dominant and profitable firms may lack the organizational slack and resources required to pursue international strategies to overcome the competitive advantages of more-dominant competitors (Hennart and Park 1994; Ito 1997). As a result, the most-dominant firms and the very least-dominant firms, which lack organizational resources, may be less likely to pursue international strategies. Mascarenhas (1986) found support for this idea in the international strategies of multiple firms. Similarly, Hennart and Park (1994) found support for this idea in the context of Japanese firms setting up manufacturing operations within the US, and Ito (1997) identified the same relationship in the context of export ratios of Japanese firms.

In some industries, dominant firms may be able to use their resources to overcome the barriers that encourage foreign direct investment (FDI) on the part of less-dominant firms. Specifically, maintaining operations in a foreign market may allow firms to reduce costs associated with arms-length transactions (Boddewyn et al. 1986; Casson 1982). However, if a firms resources provide advantages that reduce the impact of costs associated with serving the market from a distance, there may be less need for locating operations in the market. For example, for professional service firms, maintaining an office in a foreign market signals the ability to serve clients in that market and may serve as a mechanism for overcoming client uncertainty (Kotha et al. 2001). However, more profitable dominant competitors may be able to use their existing client relationships, reputations, and other resources to overcome any client uncertainty (Podolny 1993, 2005) without opening an office in a foreign market.

So far, we have considered two arguments for how more- versus less-dominant distinctions may relate to international strategies. The first argument suggests that the distinction between more-dominant firms and less-dominant firms is related to decisions on whether or not to pursue international strategies, and the second argument suggests that this distinction is related to decisions on how to pursue international strategies. In both cases, for less-dominant firms, the benefits of early entry into markets may be particularly attractive, and can be related to the first-mover advantage perspective (Lieberman and Montgomery 1988). Early entry may allow firms to build market-specific reputations, signal market understanding and commitment, and create switching costs for clients. The importance of quick entry for less-dominant firms is highlighted by past research which has offered that firms with less-exceptional, and less-monopolistic, ownership advantages may suffer if they delay entry into a market (Casson 1987; Rivoli and Salorio 1996). For example, in service industries, clients face a learning curve in integrating with service firms (Bowen 1986) and after building experience with the routines and procedures of a service firm, the prospect of shifting to another firm and relearning routines and procedures can represent a significant switching cost (Beatty et al. 1996; Jones et al. 2002; Zeithaml et al. 1996). Hence, less-dominant firms may see more advantages to swift market entry, because it may allow them to decrease...

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