Featuring
Professor Salomon's current research centers on the management and economics of international expansion. He studies how and why firms enter foreign markets, how firms manage the crossborder technology transfer process, and how international expansion impacts firm performance.
What factors should firms consider before
expanding into foreign markets? How can
firms benefit most from their experience
and from the experiences of other firms?
Prof. Rob Solomon of the NYU Stern School
of Business and author of Learning from
Exporting: New Perspectives, New Insights
(2007) explores these questions.
Asian markets have continued to grow rapidly, and many
companies are interested in entering the market. Over the
last ten years, advanced economies grew at an average
of 2.5%, whereas developing Asia grew at 7.7% during
the same period. Large multinationals, equipped with
strategic plans, capital and resources, were the first ones
to enter the unexplored and uncertain markets of developing
Asia. But as the markets in the advanced economies
become saturated, even mid-size companies from the US
and the EU are trying to expand into Asian markets.
Realising the benefits of growth, Asian economies are
focusing on lowering transaction costs to attract Western
firms. The middle class population in these countries is
growing fast as well, generating demand and creating
market space for all kinds of companies, goods and
services. Products and services are becoming universal innature, even though each market is unique and needs
some degree of customization. All the above factors are
making it feasible for even mid to small-size companies to
expand into Asian markets. Even though operational
challenges persist in Asia, the markets have proved that
they are going to be a major global growth driver.
Overseas expansion has always been a challenge for any
kind of company, big or small. To add to that, Asia is riddled
with its own challenges. China, India, Japan, Korea, South
East Asia and the Middle East - all these markets are quite
different from each other, with each consisting of several
different markets. Information is lacking and research is
unreliable. Consequently, focusing in on the best market
for a particular product may become a long exercise in
itself. Important considerations such as the legal environment,
government, security, social stability, and political conditions
are difficult to quantify. A 2007 AmCham Shangai China
Business Survey showed that major perennial challenges
such as inconsistent regulatory interpretation, lack of
transparency, and bureaucracy and intellectual property
rights (IPR) infringements have scarcely changed in the
last 3 years. Still, despite these challenges, the AmCham
survey also revealed that 65% of the American companies
were operating profitably in China and 90% saw an increase
in revenues in 2007 as compared to 2006.
While making profits has been the main objective of
companies going overseas, other benefits such as risk
management through market diversification, and experience
and learning from new markets are figuring more often in
companies' growth strategies. There is evidence that
companies experience a positive impact on home markets
and an increased pace of innovation when they go overseas.
Two thirds of the surveyed American
companies in China are operating profitably
and 90% saw an increase in revenues in 2007.
page 1
Effective Export Strategies: Key Success Factors
MANAGEMENT
BRIEFING
www.woodward-fellows.org
EXPORTING SERIES: VOL. 1 DECEMBER 2007
Featuring
Robert Salomon joined the faculty
of New York University's Stern
School of Business in September
2005. A graduate of NYU Stern's doctoral program,
he was on the faculty of the Marshall School of
Business, University of Southern California prior
to returning to New York University.
Professor Salomon's current research centers on
the management and economics of international
expansion. He studies how and why firms enter
foreign markets, how firms manage the crossborder
technology transfer process, and how
international expansion impacts firm performance.
www.woodward-fellows.org page 2
Woodward Fellows recently spoke to Professor Robert
Salomon of New York University's Stern School of Business
about the challenges in overseas expansion and the benefits
a company can look for by venturing into new regions.
Supporting Overseas Expansion
Salomon stated that most companies enter overseas markets
because firms see opportunities to reduce operating costs
or increase demand. Salomon, however, warns that firms
should carefully consider the additional costs of foreign
expansion. In his opinion, many firms overestimate the
opportunities and underestimate the costs that exist in
foreign markets. One example he points to is China - many
firms view China's massive population and growing middle
class as an assured expansion opportunity. What they do
not realize is that the Chinese market is a complex,fragmented market with significant political, institutional,
and environmental barriers. As a result, companies that
expand into China must be strong in the domestic market
so they can absorb the additional entry costs associated
with these barriers. "There are certain additional costs
that you have to absorb to enter these foreign markets,"
Salomon said. "You have to be able to expand abroad
from a position of strength."
Estimating Opportunities
According to Salomon, the difficulty of estimating
opportunities is largely due to a lack of quantifiable
measures regarding social, political, religious, economic,
or technological factors. "It is much easier to estimate
demand where we know what a country's population is,
we know what their disposable income looks like, and we
know what GDP per capita looks like," he said. "Howerver,
China is a collectivistic country and United States is
an individualistic country. How do I factor that into my
demand equation? How do we factor in that Country A is
a predominantly Catholic country and Country B is a
predominantly Muslim country?"
To manage these uncertainties, Salomon suggests that
firms expand in markets that are similar to its own, or in
markets they have already been successful in. For instance,
it is often easier for British companies to expand in America,or American companies into Canada. Or, if a company is
successful in Hong Kong, it might consider expanding into
Singapore. Companies can also look for markets where
similar companies have been successful or companies
from similar industries have been successful. "If the past
says that all American firms do just fine in China on average,
then maybe China is not a bad place to enter," Salomon
said. "Look at other folks in your industry. Have other folks
in your industry had success there?"
Taking the Time to Learn
In addition to identifying similar markets, firms must give themselves time to learn once they expand. They must start with small investments, test the market, and then make changes to their products and services till they get it right. The learning from the market during this initial period is important and cannot be rushed. Firms also need to understand that investing more money may not help. "No matter how much money you try to throw at theproblem, it is not going to make it any easier because it just takes time for firms to learn," said Salomon. "You are going to learn to ride a bicycle at the pace that you are going to learn to ride a bicycle - no amount of money you spend on a different kind of bicycle is necessarily going to help you to learn it any faster. [Overseas expansion] is something like that."
Because learning is essential to successful expansion, companies should try to maintain as much consistency in personnel as possible. Thus, personnel who executed the first expansion should be used to execute following expansions because they learned firsthand what worked well and what did not.
The Importance of Governance
Finally, firms seeking to expand in foreign markets need to set up governance structures that will facilitate communication and the transfer of knowledge. Do the personnel in the foreign offices know how to benchmark competitors? Do they have an understanding of what's going on in the home base and have an understanding of what is going on in the foreign markets? Furthermore, if they see something in the foreign markets that could help the domestic operation, is there a structure in place that would enable them to pass along the information in a relevant and timely manner? "Governance is really, really important," said Salomon. "How you set up these operations, how you structure the operations, and how you structure the reporting relationships among the operations."
Conclusion
The dramatic growth of Asian markets over the past ten years has made it possible for small to mid-size companies to expand into the region. Indeed, many firms are. Still, successfully expanding into Asian markets is not guaranteed. Significant challenges, such as unreliable information, poor infrastructure, inconsistent regulatory interpretation, and bureaucratic roadblocks, can derail a company's expansion efforts.
Because of these challenges, firms should consider the costs of foreign expansion, deciding to expand only if they are currently strong in domestic markets. If they decide to expand, they should do so in markets that are similar to markets they have been successful in. Firms must also give themselves time to learn once they expand - the learning from the market during this initial period is important and cannot be rushed. Finally, firms seeking to expand in foreign markets need to set up effective, consistent governance structures that will facilitate communication and the transfer of knowledge.
Bibliography
The American Chamber of Commerce in Shanghai. 2007. "2006 Member Survey Results." http://www.amcham-shanghai.org/
Salomon, Robert. 2007. Learning from Exporting: New Insights, New Perspectives. Edward Northampton, MA: Elgar Publishing, Inc.
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Launched by Woodward Partners in 2007, Woodward Fellows is a non profit research foundation based in the United States. Woodward Fellows probes strategic management issues in Asia Pacific to better understand the challenges firms face in the region, explore the application of research to these challenges, and contribute to the research field through partnership with leading institutions. In doing so, Fellows seeks to build bridges between scholarship and practice.
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