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.
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:
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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