Venturing early or following late? Timing, patterns and success of market entry into Central and Eastern European countries.
| Verfasser | Ahlbrecht, Marius |
| Posten | RESEARCH ARTICLE - Abstract |
Abstract:
* The concept of the establishment chain has been subject to extensive research during the last decades and has received support as well as criticism. We test this concept for market entries in Central and Eastern European countries. We also evaluate both the impact of following this pattern and the impact of the timing of market entry on the performance in the foreign market.
* We test our hypotheses with empirical data collected in a survey among German manufacturing companies that have entered markets in Central and Eastern Europe. The data covers 524 cases of internationalization from 204 companies.
* We find that most companies start with low-intensity market entry modes and increase their commitment over time. Yet, only a small fraction actually follows the path of internationalization described by the establishment chain. It seems that this pattern is more relevant for companies entering these markets early and loses relevance as foreign competition in the foreign market increases. Levels of performance tend to be higher for companies entering CEE markets early in comparison to later entries. However, we do not discover any performance impact of market entry according to the establishment chain.
Keywords: Internationalization process--Establishment chain--Uppsala model Foreign market performance--Timing of entry. Central and Eastern Europe
Introduction
Foreign firms' market entries into Central and Eastern European (CEE) countries received a lot of attention since the opening of these markets at the beginning of the 1990s (Meyer and Gelbuda 2006). The transition from centrally planned systems to market economies opened up chances for Western firms. Yet, as the countries went through radical changes, business in these markets was also characterized by high risks and uncertainties (Luo and Peng 1998). Consequently, even those companies that had had some experience in CEE before 1990, were faced with uncertainty and had to rebuild their local knowledge (Meyer and Gelbuda 2006; Suutari and Riusala 2001). In the meantime, these conditions have changed for many CEE countries as they have become more stable and foreign firms have gathered experience concerning doing business there.
In IB research, the selection of foreign markets and the sequence of market entry modes were major topics for several decades. The Uppsala model of internationalization (Johanson and Vahlne 1977) received outstanding attention (Bjorkman and Eklund 1996; Coviello and Munro 1997). According to this model, firms enter a new market in an incremental manner along the so-called establishment chain, starting with less intensive market entry forms and then gradually moving on to more intensive modes.
Against this background, we want to clarify the relationship between a firm's pattern of foreign market entry, the timing of entry, and foreign market performance in the case of German manufacturing firms in CEE. Due to geographical proximity and economic significance German firms seem to be especially challenged concerning the opening up of former COMECON markets. Therefore, we would expect a relatively high share of German firms considering entry into these markets (e.g., compared to US or Japanese firms). We try to shed light on the discussion if incremental patterns have mainly been used by those companies entering these markets early after their opening, when risks were high and availability of information was low, or if the pattern can also be observed for companies entering at later stages. In addition, we analyse whether the establishment chain does have a normative dimension in the sense that companies following the described pattern exhibit superior foreign market performance compared to companies choosing different paths of internationalization. Moreover, we examine if (in the case of CEE transition economies) German firms entering these markets at an early stage perform better than later entrants.
The paper proceeds with a review of the literature concerning theories on the internationalization process of firms with a focus on research regarding the Uppsala model. Based on this we develop our research hypotheses and describe data collection and measurement of variables. In the next chapter we outline and discuss our empirical results. Finally, we summarize our conclusions, show up the limitations of our study and provide some managerial implications as well as avenues for further research.
Theoretical Background
Literature Review
Although the internationalization of companies evidently is a process phenomenon, a large part of the theoretical argumentation on this topic has to be characterized as static (Andersen 1997, p. 29, see Table 1). Approaches like the transaction cost theory (Williamson 1985) and the eclectic paradigm (Dunning 1980) explain entry mode decisions at a certain point in time (Andersen 1997). Nevertheless, some approaches consider the dynamic nature of internationalization processes. Concerning these dynamic models, above all the Uppsala model by Johanson and Vahlne (1977) has gained academic prominence. It is based on contributions of Cyert and March (1963), Aharoni (1966), and Penrose (1959) and explains internationalization on the basis of learning processes (Johanson and Wiedersheim-Paul 1975; Johanson and Vahlne 1977).
Despite numerous changes and adjustments to their theory (Johanson and Vahlne 1990, 2003, 2006, 2009, 2011), the central assumption of the Uppsala model has not changed since Johanson and Vahlne's original contribution (1977), i.e., that firms acquire knowledge about foreign markets over time, and then gradually expand their international activities according to the accumulation of foreign market knowledge.
This process of international expansion can be decomposed in two dimensions representing the key strategic decisions concerning a firm's internationalization (Andersen 1997)--the selection of target markets and the choice of entry modes. According to the psychic distance chain firms prefer familiar and psychically close markets before venturing into psychically more distant countries. The second pattern is the establishment chain, consisting of a typical sequence of entry modes into a specific foreign market, in detail: No regular exports--regular exports, carried out by independent sales representatives or agents--sales subsidiary--production subsidiary. Each step increases the firm's commitment to that specific market and promotes the acquisition of experiential knowledge, which in turn leads to further commitment in this foreign market (Johanson and Vahlne 1977).
The main critique regarding the establishment chain is that the suggested pattern of market entry modes is too deterministic (Andersen 1997; Bell 1995; Camuffo et al. 2007; Reid 1983). Some scholars argue that the model does not explain de-internationalization and leapfrogging (Benito and Welch 1997), does not include cooperative modes of market entry (Andersen 1997), seems to be less viable for explaining the rapid internationalization of born global companies (Aspelund and Moen 2005) or does not consider simultaneous combinations of modes used by a firm in the same market (Benito et al. 2011; Hashai et al. 2010). This criticism was partly addressed in later versions. While the original model is directed to a single firm, Johanson and Vahlne (1990, 2003, 2006, 201 I) shifted to a network view of the firm later. Furthermore, specific conditions have been proposed, that explain 'leapfrogging' certain stages, introducing a less deterministic view.
Foreign market commitment and accumulating foreign market knowledge through learning were of central importance in the original model and are still important in contemporary adaptations (Johanson and Vahlne 2006). Therefore, the establishment chain of the original model cannot be considered to be theoretically discarded. The contemporaneous model appears to be less deterministic concerning the exact sequence of market entry modes, but still states that companies collect experience over time and gradually increase their (foreign) market commitment. The basic assumptions of the theoretical framework of the establishment chain are summarized in Table 1 and contrasted to other important internationalization theories.
Hypotheses
Incremental patterns of foreign market entry were confirmed empirically in numerous studies for companies from various industries (Burgel and Murray 2000; Gemser et al. 2004; Ninan and Puck 2010; Rhee and Cheng 2002). However, there are also studies that did not support the Uppsala pattern of internationalization (Bjorkman and Eklund 1996; Demirbag et al. 2010; Millington and Bayliss 1990). Instead of incremental internationalization paths, these researchers noted that many companies used high commitment market
entry modes such as FDI from the very beginning of their entry into new markets. As a reaction to controversial empirical findings, proponents of the Uppsala model have been considering to save the theory by limiting its explanatory scope to certain conditions. Johanson and Vahlne (1990) argued that the patterns of foreign market entry predicted by the Uppsala model might not correspond with empirical findings if (at least) one of the following conditions is fulfilled:
* The firm is in charge of a large amount of free resources
* Foreign market conditions are stable and homogenous
* The firm has experience from markets with similar conditions.
Also, the model has a different explanatory power depending on certain firm-specific and Sindustry-specific conditions (Johanson and Mattsson 1988; Vahine and Nordstrom 1993, see also Table 1). Although constructing slightly different frameworks, the basic message of these approaches converges: The Uppsala model has the highest degree of explanatory power for firms with a low degree of internationalization operating in industries with a low degree of internationalization.
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