Intuitively, experience reduces the chance of failure. An experienced manager will make fewer mistakes than the inexperienced manager. The same logic can be applied to international business activity: companies experienced in foreign markets are going to fail less frequently than companies without foreign experience.
New research shows, however, that this assumption is too simple. Previous experience in a foreign market helps if the company returns to that market. It also helps if the company ventures into a different foreign market, but only, the research shows, as long as the situational context between the new market and the previously experienced market is similar. If the context is dissimilar, it is actually better to have no experience in foreign countries than irrelevant experience; previous irrelevant experience becomes harmful.
Susan Perkins, a professor at Northwestern University’s Kellogg School of Management, and a visiting professor at MIT’s Sloan School of Management, sought to empirically measure the role of prior international experience in the success or failure of a firm’s subsequent international activities. She based her research on data from the investment activity of 96 foreign-owned firms in the Brazilian telecom industry between 1997 and 2004. The parent companies of these firms came from 18 home countries.
Using a variety of methodologies, Perkins was able to determine the similarities and differences between the regulatory environments of a number of different countries. This was required so that she could identify compare the prior foreign environment experienced by the firms in her research with the environment they were facing in Brazil. The choice of the telecommunications industry was helpful because of its codified regulatory environment.
Based on the research, Perkins confirmed the following hypotheses and conclusions:
Multinational firms with prior experience in institutional environments similar to the target country’s environment are more likely to succeed. In other words, if a firm experienced with an institutional environment that was similar to Brazil’s is more likely to succeed than a firm with a foreign experience that was dissimilar to Brazil’s institutional environment.
The learning penalty from dissimilar experience was disproportionate to the learning advantage from similar experience. Perkins’ research illustrated that the likelihood to fail after experiencing a dissimilar environment was much higher than the likelihood to succeed from experience in a similar environment.
The breadth of experience within a target country will have a positive effect on the chances for the firm’s survival in that market. Based on her research, Perkins determined that “industry regulation is a function of six institutional dimensions.” These six regulatory dimensions include: regulatory competitive market structure (e.g., pricing); regulatory standards; regulatory political competition and regulatory governance structure (both related to the political power of regulators); and regulatory stability (the effectiveness of the regulatory agencies). The more experience across the various dimensions, the greater the knowledge base for a company to draw on for future foreign investments.
The greatest chance for success comes from depth (repetition) of experience. The more often the firm has repeated the experience in a certain institutional dimension, the more likely the chance for success. Depth can involve one country or several countries with a similar context. One firm, for example, has competence centers in its various subsidiaries staffed by personnel with extensive experience in their environments — people, as one executive explained, “who have already passed through this experience three, four, five times before.”
There are both positive and negative lessons to draw from Perkins’ research:
Do not apply irrelevant experience to a new situation or context. The classic example of this mistake is the U.S. executive who wants to do things “the way we do it at home.” Perkins gives the example of a major U.S. telecom firm whose revenue projects were 25 percent less than expected because it assumed the regulatory market in Brazil was similar to the regulatory situation in the U.S. Applying irrelevant experience is worse than having no experience at all.
Be aware of the ‘experienced’ international manager who will overestimate future performance. Experience is invaluable as long as it is in a context that is relevant to the new situation. The biggest mistakes that managers make is overestimating performance outcomes and inflating expectations because they assume that their knowledge from another foreign experience can be plugged into the new host country. When they fail, they assume the cause was outside market factors — and had nothing to do with their own misguided decisions.
Strategically combine elements of the knowledge pool created by the breadth and depth of your experience to fit the situation in new markets. You have developed routines — for example, political strategies to mitigate political hazards — to deal with the institutional environments in several countries. Combine these “experience-based capabilities” to address the particular situation of a new institutional environment. For example, if the regulatory environments in Brazil and Turkey are similar to the environment in India, parse the prior experiences with the various dimensions (political, market structure, regulatory stability, etc.) of the first two countries and combine the capabilities that best apply to the situation in India.