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Ideas for Leaders #707

Re-Entering a Foreign Market: Part 2 - Speed

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Key Concept

Prior experience impacts the speed with which multi-national enterprises re-enter foreign markets they previously exited — although as time passes, the environmental context of the market becomes more important.

Idea Summary

Many multi-national enterprises (MNEs) will re-enter a foreign market that they had previously decided to leave. A new study, based on an analysis of more than 1,000 foreign market re-entry events between 1980 and 2016, explores the factors that push some MNEs to re-enter a previously exited market within a short period of time — two years, for example — while others wait much longer. 

The researchers focused on the experiences of the MNE related to the host market and found in their analysis that re-entry speed was impacted by:

Length of experience: Contrary to earlier studies related to learning from experience, companies who initially operated for longer periods of time in the foreign market before their exit were less likely to quickly re-enter the market. One possible explanation: they need time to distil the lessons learned. In addition, and importantly, length of experience or experiential knowledge alone does not necessarily make firms more competitive internationally; thus firms may re-enter foreign markets without having a lot of experience. In other words, companies do not need to have been in the market for a long time to go back. In fact, less time spent in the market may signify less trauma associated with the original experience and may lead to earlier re-entries. 

Depth of experience: Depth of experience relates to the level of commitment in the host market — for example, owning your own stores represents a deeper level of commitment than participating in a distribution partnership. The study showed that the deeper the original experience, the longer companies waited before re-entering the market. One reason is that with a greater depth of experience, companies had better understanding of the complexities of the market. The costs of the original exit would also be higher for these companies than for companies with less commitment in the market; as a result, they would be wary before risking such costs again.

Nature of Experience: The nature of the experience refers to whether a company exited voluntarily (for example, because it was unsatisfied with the performance of its activities in the market), or involuntarily due to externlesal circumstances outside of its control (for example, new regulations that prohibit foreign investment in certain sectors). Companies that exited voluntarily would re-enter the market more quickly because they can learn from the previous poor performance and return to the market with a new, more effective strategy. On the other hand, companies are very wary of returning to a market that they were previously required to exit involuntarily.

Despite the influence of these three types of experiences, the researchers also found that the quality of the foreign market’s institutions, such as local governments, can play an important role of the timing of a market re-entry. Institutional quality ensures that the political, social and economic environment of the market is favourable and positive. In their analysis, the researchers that the longer a firm was absent from the market, the more importance they placed on institutional quality.

Business Application

Re-entering a foreign market from which a company previously exited is a major strategic and financial decision. One of the key implications of this research is that 
the experience accumulated during the initial market experience may by disregarded and even forgotten over time. The longer a company waits to re-enter, the less opportunity to leverage prior knowledge and experience. Thus, for example, if the reasons for the initial exit lead to the development of new strategies, companies will benefit from returning earlier rather than later to the market. 

In addition, the longer firms are out of the market, the more important the quality of host market institutions becomes in their decision to return — regardless of past experience.

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Authors

Institutions

Source

Idea conceived

  • November 2017

Idea posted

  • May 2018

DOI number

10.13007/707

Subject

Real Time Analytics