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Ideas for Leaders #706

Re-Entering a Foreign Market: Part 1 - Operation Mode

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Key Concept

When multinational companies re-enter a foreign market, the key strategic decision is choosing whether to change the operation mode (e.g. distribution partnership, joint ventures, fully owned operations) from their previous experience in the market. A new study finds that the motives of their original decision to exit the market has a great impact on whether they choose the same operation mode or escalate (e.g. from distribution to manufacturing) or de-escalate (e.g. from fully owned operations to joint ventures) their commitment.

Idea Summary

In 2009, French retailer Carrefour exited the Algerian market after finding its joint venture with a local partner to be unprofitable. Six years later, Carrefour re-entered the market with a different joint venture partner. In 2012, South Africa’s SAB Miller Plc. exited the Brazilian market, abandoning its distribution partnership. Three years later, it re-entered the market, but this time deciding to engage in local production. In 2008, French retailer Galeries Lafayette left the Chinese market after unsuccessfully trying to run its own stores. Fifteen years later, Galeries Lafayette re-entered the Chinese market, but this time with a joint venture.

Once a multinational company decides to re-enter a foreign market, the key decision is whether to change operation mode — to escalate or de-escalate its level of commitment from its previous attempt, for example, or, instead, to use the same operation mode. This decision is vital: it is often irreversible, and it has a significant impact on the company’s operations in the market. Carrefour decided to re-enter the market with the operation mode as its earlier attempt — that is, through a joint venture. SAB Miller, in contrast, decided to escalate its commitment, moving from distribution with a partner to manufacturing. Finally, Galeries Lafayette de-escalated its commitment from running its own stores to a joint venture.

A new study, based on an analysis of more than 1,000 foreign market re-entry events between 1980 and 2016, examines which factors impact a multinational company’s decision on operation mode when re-entering a market. 

The results of the study revealed the following:

  • Many companies chose to re-enter the foreign market with the same level of commitment as their first attempts.
  • There was no indication that learning accumulated in the foreign market during the first attempt had an impact on the re-entry commitment level decision.
  • On the other hand, institutional changes in the host market during the time between the two market experiences — that is, from the time of the first exit to the time of the re-entry — can make a significant difference. For example, during this ‘time-out’ period, a country’s economic system could shift from a centrally planned economy to a more market-based economy. In view of this favourable change, a company is more likely to escalate its commitment when it re-enters the market. (The researchers did not find, however, that unfavourable changes necessarily led to de-escalation upon re-entry.)
  • The motive for originally exiting the market can have a major impact on re-entry commitment decisions. If the company exited the market for poor performance, they are more likely to return to the market at the same level of commitment, rather than try to escalate their commitment. However, if the poor performance was due to a poor choice of commitment level, as opposed to other causes such as poor market conditions, the company will more likely escalate their commitment if they decide to re-enter the market.
  • Strategic motives for originally exiting the market — that is, reasons not related to the market but rather related to the company’s strategic decisions, such as focusing on the domestic market — will not impact commitment level upon re-entry.

Business Application

The phrase ‘learning experience’ may not mean what many leaders might assume when talking about re-entering a foreign market. One might expect that multinational companies acquire knowledge during the first period in which they are in the market, and then apply that learning when making decisions about how they will re-enter the market.

However, because conditions in foreign markets can change during the “time-out” period between the first exit and a later re-entry into the market, it’s possible that any learning acquired while originally operating in the market has become obsolete. 

Thus, based on the results of this study, companies making the decision to re-enter a foreign market should base their strategic level-of-commitment decision less on the learning acquired while they were originally active in the market, and more on the reason for their exit — as well as on any significant institutional changes in the market during the period they were absent.

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Authors

Institutions

Source

Idea conceived

  • November 2017

Idea posted

  • May 2018

DOI number

10.13007/706

Subject

Real Time Analytics