Discuss the costs involved in entering different markets. How can these costs be managed and reduced?

Question

What will be an ideal response?

Answer 1

In choosing an entry mode, costs play an important role. The geographic distance makes physical distribution more difficult. Firms have to deal with multiple environments, such as public policy, traditions of trade, barriers to trade, and competitive forces. Firm specific difficulties that the internationalizing companies face in new environments stem from the liability of expansion which increases operational and scale costs, liability of newness in the presence of competition and liability of foreignness in a new institutional setting with new customers (Cuerva-Cazurra, 2007).

Firms engaged in global marketing have to deal with multiple currencies and exchange-rate variations; and transactions in various currencies entail administrative costs and difficulties.

Firms engaged in international marketing are often in conflict with their home governments, because they take employment opportunities and other resources out of the country. These firms are also often in conflict with host governments with regard to remittance of their profits back to their home countries or head offices, ownership of local facilities, and competition with local firms.

Cross-cultural interaction also creates challenges for international businessmen. Differences in language, business customs and ethics, lifestyles and values, and other cultural dimensions often cause uncertainty and a psychic distance (Conway and Swift, 2000). This type of distance is related to how we perceive a certain market and is different from physical distance. For example, for a US firm, in psychic distance terms, the United Kingdom is a closer market than Brazil or even Mexico.

Liability of foreignness (LoF) is generally defined as the extra cost incurred by the international firm in the host economy. Such costs may arise due to distance, unfamiliarity with the environment, market, know-how and the institutions of the host country(Zaheer, 1995). LoF encapsulates costs of learning about new cultures, as well as costs related to operating an international firm and functioning within a different institutional framework (Contractor, 2007). In a different country, firms are faced with different customers who are not necessarily knowledgeable about the firm’s products and whose consumption needs are already met by existing firms in the domestic market. Moreover, the firms do not have relations with members of the value chain such as suppliers, agents or distributors. Foreign entrants face costs in acquiring knowledge about network members, and do not enjoy the advantages of long-term relations that the locals enjoy and may incur costs in organizing their activities efficiently (Cuervo-Cazurra and Genc, 2008).

In deciding on an entry strategy and assessing their options, firms then need to consider the liability of foreignness and additional costs that will be incurred due to their unfamiliarity with the country. In minimizing the costs of liability of foreignness, multinationals need to assess their strengths and their weaknesses (Enderwick, 2007). For instance, if a multinational needs to transfer their business structures to gain a competitive edge, they may opt for a wholly owned structure. Through this structure, the company can install their practices and transfer and protect know-how as they have control over the new establishment. On the other hand, if cultural distances are high and difficulties arise from unfamiliarity with members of the value chain, multinationals may prefer a joint venture entry mode through which local know-how regarding the customer and the business landscape can be obtained from the partner. Effective strategic alliances formed with the right partners can compensate for this gap, providing access to diverse information and providing opportunities for learning which help the firm overcome its liability of newness (Li, 2007). As a result, alliances can be used to overcome the liability of foreignness (Wu and Pangarkar, 2006), and provide access to the new market’s resources (Bausch et al., 2007). High cultural distances can also be minimized through local partners, as the partner can help reduce the cultural distance and enable the company’s acceptance by the host economy consumers.