targeting foreign markets, economics homework help

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After reviewing Murphy’s 2012 article attached about culture and the individual in the decision process to expand overseas, consider the following:

Think about a new business venture that you might choose to create. If you were to consider targeting foreign markets as goals of your new venture, what strategy might you choose to apply to do so? Why would you choose one strategy over the other (take into account what product or service you might sell and in which country you may do so)?

use in-text citations and list APA style (3)references to support your response.

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Page 43 AN INTEGRATION OF CULTURAL FRAMES OF REFERENCE WITH THE MARKET ENTRY DECISION Micah Murphy, Eastern Michigan University ABSTRACT: Most models predicting the foreign market entry decision focus on integration strategy. This paper analyzes the decision from the home country only. The actions expected of managers in their home country play a significant role in the entry mode decision and these expectations are generally ignored. Instead firm level Competitive Advantages and Efficiency gains are often hypothesized to determine entry mode decisions. Social exchange is conducted with behavioral as well as economic payoffs and the entry mode decision is not immune to these unseen payoffs. Drawing from several conceptual points of view this paper uses Institutional theory to conceptualize how national culture leads to a preferred frame of reference for the entry mode decision. Keywords: culture, frames of reference, decision-making, role theory, entry mode, conceptual. INTRODUCTION Current models of Foreign Direct Investment do not account for the influence cultural differences have on market entry mode decisions. Previous research has focused on which cultures provide the best fit for a favorable outcome.(Kogut and Singh 1988; Shimizu et al. 2004) The scope of this paper is limited to the role culture plays in determining the entry decision made by the home country manager. Drawing on cross cultural and institutional theory we attempt to identify the cognitive processes home country managers utilize and the influence of cultural roles, norms, and values on these processes. We also provide a set of propositions that apply the influence of culture to the decision model. A firm’s strategy cannot be separated from personal assumptions of a manager and each manager brings their own set of personal values and assumptions about alternatives. (Simon 1958) We propose to examine the cultural factors that influence a manager and thus a firm’s entry mode decisions. Researchers have linked strategy to top-level management characteristics including age, experience, education, background, locus of control, and risk taking. (Grimm and Smith 1991) We seek to extend this literature to include the impact of culture on manager’s decision making processes in regards to the market entry choice. Globalization and market positioning are taking place at an unprecedented speed, and in order to keep up many firms are moving quickly to expand operations into new foreign markets. Journal of International Business Research, Volume 11, Special Issue, Number 1, 2012 Page 44 Gaining access to larger markets and increasing capabilities has become an increasingly important topic. Firms are searching for the optimal strategy to gain competitive advantages in the global market. Despite the significance of the initial entry decision, little is known about the process leading to this decision. Based on the work of Williamson (1975, 2008) Most existing theoretical approaches rely on the assumption that the ability to control the foreign market subsidiary is the primary predictor of which markets a firm will enter and what entry mode they will use. Institutional theory has been used in several areas of marketing including marketing channels, systems, and supply chain management. (Grewal and Dharwadkar 2002; Iyer 1997; McFarland et al. 2008) According to Institutional Theory the actions of an organization are dependent upon a larger social and historical context which plays a significant role in determining what those actions will be. (Powell 1991) An organization may adopt a practice or process based upon institutional pressure. It is environmental uncertainty that prompts firms to conform to new and evolving business practices. In this way some risk is attenuated by this mimetic behavior. (March et al. 1976) Even when there does not appear to be an immediate financial incentive for adoption a firm may enhance their reputation and credibility by signaling their knowledge of current practices. (Scott 2000; Zucker 1977) Using institutional theory we intend to show how national culture leads influences entry mode decisions. There is a great deal of literature regarding entry mode decisions within the cross cultural management and strategy literature. Much of the literature considers the Resource Based View (RBV) and also the Institutional view of Transaction Cost Economics (TCE) as providing the framework an organization uses to make entry mode decisions. Both views have advantages for decision making, and both have often failed to consider the cultural dynamics of the entry mode choice. (Brouthers 2002; Buckley and Casson 1998; Keith D. Brouthers 2000; Zhao et al. 2004) Relying on a model of mostly rational decision making, the RBV view has assumed managers have the ability to identify the costs of ‘liability of foreignness’ as well as the benefits of a future synergy between home and host country(Chen and Chen 2003; Zaheer 2002). The TCE approach assumes individuals will sometimes exhibit opportunism or “self seeking with guile” and because of this managers must choose a strategy of control to mitigate this risk. (Williamson 1981) Both views do assume bounded rationality and that sometimes managers will satisfice or choose a course of action that is good enough (Simon 1955) In this paper we will begin with a brief review of RBV and TCE. Then we proceed by suggesting an alternative for understanding the initial decision making process of managers. We continue by applying cognitive decision theory to the RBV and TCE frameworks. Then we will look at the decisions managers face when deciding whether to pursue a strategy that includes globalization. Figure 1 gives a graphical overview of the model we propose to explain foreign market entry strategy. First the focus of this model is on the role of cognitive processes in decision making. We then examine the influence of national culture on these processes. A distinguishing feature of this model is that we do not assume rationality as a parameter. Instead Journal of International Business Research, Volume 11, Special Issue, Number 1, 2012 Page 45 we assume that managers have limited cognitive capabilities and limited access to relevant information. Since they have limited information and cognitive capabilities they will rely heavily on the role expectations of their home country. Managers’ perception of their role differs significantly across cultures. (Yaconi 2001) How they regard; the involvement of colleagues in decision making, threats to their authority, and issues of the scope of their control are all institutionalized behaviors. (Whitley 1994) There is agreement among the social science disciplines that a manager’s position will determine their behavior more than their own personal characteristics.(Yaconi 2001) The paper follows the following model. We propose that the entry mode decision is more internalized than previously considered. Consistent with previous research we predict that national culture leads to managerial role expectations. We suggest that these role expectations lead to a decision frame that is largely homogenous within cultures. This homogenous decision frame promotes similar decisions by managers within the same country regardless of the performance of the decisions. While firm specific factors and the competitive environment do come into play, the focus of this paper is on the significance of the solid lines represented in the top row of this model. Essentially we suggest that the Macro environment leads directly to the micro environment and eventually plays a significant role in the decision frames that individual manager’s use when choosing and entry mode. Figure I: Model of Home Country Culture and Entry Mode Decision Journal of International Business Research, Volume 11, Special Issue, Number 1, 2012 Page 46 VIEWS OF THE FIRM In 1776 Adam Smith explained the benefits of the division and specialization of labor and their contribution to productivity and economies of scale. Although he wasn’t necessarily focused on the origins of the corporation he did say, “Whoever offers to another a bargain of any kind, proposes to do this. Give that which I want and you shall have this which you want, is the meaning of every such offer; and it is this manner that we obtain from one another the far greater part of those good offices that we stand in need of.” (Smith 1776) In this context if you and I are going to trade; we would each need to be in possession of what the other party would like. If you do not have or will not negotiate for exactly what I’m after and neither does anyone else; the result is what TCE literature has called market failure. If I have resources that you desire it may be worth your while to find a way to “make or buy” what I’m after. (Coase 1937) All companies need to consider how to best use their limited resources with the goal of gaining the highest return on those resources. How to invest in the development of new products, how to efficiently manufacture, and market your product are the common questions every business must ask. In management and marketing theory there are currently several views on how these decisions are made, two of the dominant views are ; Transaction Cost Economics (TCE) and the Resource Based View (RBV). The two views both deal with the nature of firm boundaries or whether or not a firm should make or buy. TCE frames decisions as seeking efficiency gains while RBV bases decisions on obtaining competitive advantage even if some efficiency may be sacrificed. Essentially both assume a great deal of rationality with the goal of maximizing profits. In both views firms consist of a bundle of transactions and deciding which transaction to move outside the firm and which to leave internal is determined in a way that maximizes profits. In TCE the costs of transactions is minimized by considering the effects of opportunism, bounded rationality, and asset specificity and in the RBV efficiency is produced by maximizing or creating value that might not exist within the market thereby maximizing the firm’s competitive advantage. (Barney 1991) At first glance the two views appear to offer excellent models for determining an entry mode strategy. Resource Based View According to the RBV of the firm, managers evaluate decisions based on the firm’s ability to identify and develop resources that are; Valuable relative to competitors, Inimitable or difficult to duplicate and Non-substitutable. The firm’s decisions will be determined by the measures required to protect and acquire these resources. A company’s goal is Sustained Competitive Advantage or maximizing and maintaining the value of current capabilities. The RBV theory explains foreign market entry as a process intended to gain access to the research and knowledge of other organizations in order to Journal of International Business Research, Volume 11, Special Issue, Number 1, 2012 Page 47 produce competitive advantage. (Barney et al. 2001) This approach relies heavily on the ability of a decision maker to calculate some probability of success. Transaction Cost Economics In TCE market failure is the result of the existence of bounded rationality, opportunism, and asset specificity. According to Williamson (1985 p.30) When these conditions are present together they often result in the formation of the firm or governance structure. According to TCE the formation of a firm allows exchanges with fewer transactions, reduced uncertainty, and reduced opportunism. These conditions bring about asset specificity which arises when assets become customized to the user,(Anderson and Schmittlein 1984) or when redeploying the assets for another purpose does not produce the same value, bounded rationality the idea that it is impossible to have perfect and complete information at any given time, (Simon 1955) and opportunism which is defined as “self interest seeking with guile,” (Williamson 1975) have been empirically observed and analyzed in several research disciplines using several different methodologies. (Richman and Macher 2006) The most prominent of the conditions for integration is the presence of asset specificity. (Anderson and Schmittlein 1984) Williamson’s outline of TCE views governance choice on a continuum from market to hierarchy. Although it is viewed as a continuum most research makes predictions based on a discreet choice between market and vertical integration. (Geyskens et al. 2006a) Uncertainty, opportunism, frequency, and asset specificity all lead to market failure. (Geyskens et al. 2006b)Asset specificity refers to the ability of an asset to be redeployed without loss of value. Opportunism refers to the assumption that at least some people will act with “self interest and guile” (Williamson 1981) Furthermore, uncertainty concerning outcomes and the potential for opportunistic behavior increases as the number of firms willing to provide the required service or product decreases. For TCE new market entry is done to increase efficiency and the entry mode chosen depends on the level of opportunism. A possible benefit of increasing the number of new entrants in an industry or country would be to produce a situation with many rivals; limiting the ability to behave opportunistically. Decision Frames Theories based on rational choice have been used to explore and understand a variety of issues involving human behavior, be it in economics, psychology, sociology, political science, philosophy or history. These theories have been used to describe situations, explain mistakes, and make predictions. Rational expectations theory is the basis for most decision models including RBV and TCE. The theory allows for random errors but not systematic errors. Misspecification of cultural values, norms and roles in any decision model would be a systematic error. Journal of International Business Research, Volume 11, Special Issue, Number 1, 2012 Page 48 Most prior research in the business literature focuses on the expected utility model of decision making. However, March and Simon wrote that “Most human decision making, whether individual or organizational, is concerned with the discovery and selection of satisfactory alternatives; only in exceptional cases is it concerned with the discovery and selection of optimal alternatives.” (Simon 1958)In a review of how managers perceive risk March and Shapira (1987) found that most executives do not consider probabilities of success. Even when it would be possible for them to use conscious decision making strategies they often see themselves as risk takers. “Risk taking fits into social definitions of managerial roles.”(p.1414) In addition in three separate case studies of decision making processes Alexander (Alexander 1979) found that shared beliefs in an organization tend to constrain the alternatives considered. He found that before any formal process of evaluation begins; the informal process selects the ‘best’ alternatives to consider. The possible alternatives are reduced before a problem is ever made salient. (p.397) Following March and Simon’s advice we will abandon a search for an optimal strategy for choosing a foreign entry mode. Instead we will focus on a description of the actual decision process without the assumption that the two are equivalent. Studies in strategic decision making have identified cognitive groups and found that they affect firm performance. In fact, Margaret Peteraf has proposed that a strong group identity will lead to suboptimal behavior. “Group members may prefer imitation over differentiation even if differentiation is the optimal strategy. “ Managers imitate other managers even if there is no apparent benefit. (Peteraf and Shanley 1997) This reasoning is in line with current decision making models that tell us that norms and values help individuals form cognitive heuristics. Choosing which cognitive shortcut to use is a function of your frame of reference which itself is determined by norms, values, and beliefs. The most common heuristic is to simply do what others do. However, many others are available and in use including; choose the last or first alternative, do the opposite of what didn’t work, a little tally of what others would do, or avoid the worst case. (Gigerenzer. and Todd. 1999) There are an abundance of real-world examples of individuals considering decision problems one at a time instead of adopting a broader frame. According to Kahneman broad and narrow frames often lead to different preferences. (Kahneman and Lovallo 1993; Kahneman and Tversky 1979; Kahneman 1999) The rational decision maker must consider more alternatives and adopt a broader frame of reference. National Culture In addition to the TCE and RBV decision frameworks are studies using institutional theory to examine culture, trust, and role expectations. (Gulati 1995; Hodgkinson et al. 1999) In role theory individuals are considered social actors each playing many parts in their homes, organizations, and countries. Expectations are developed by ‘averaging’ the actions of individuals in specific categories. These categories then become the expected behavior of Journal of International Business Research, Volume 11, Special Issue, Number 1, 2012 Page 49 specific roles. There is evidence that self perceived roles differ based on nationality and values. (Peterson et al. 1995; Smith. et al. 2008; Yaconi 2001) Roles come about formally as well as informally through normative expectations. (Scott 2000) These expectations are developed by interactions of actors with one another. In addition to this interaction, the assignment of roles is accomplished through the matching of capabilities and functions. These roles operate within an organization which is within a society. Individuals define the roles which combine to produce society itself. In situations with strongly established societal tradition it becomes difficult for an individual to define or even have much influence on their own role. The forces of tradition have the power to coerce. (Weber 1957) In this way actions are determined by society. Specific roles are assigned to social positions like manger. Everyday decisions may become the result of carrying out your role. “Commonly accepted social values serve as media of social transactions that extend the range of social processes beyond the limits of direct social processes.” (Blau 1954) These values set the value or “price” of the non-economic portion of exchange. “Influence of others is purchased at the price of allowing one’s self to be influenced by others.”(Homans 1961) Rather than focusing only on the economic payoffs; we should account for the behavioral payoffs as well. When we understand that there are normative standards and expectations of fair exchange and that these standards are determined by culture we may be able to link economic transactions to social exchange. Examining RBV and TCE we can see some convergence with sociological theory. In the RBV and TCE framework we see that the initiator must desire some resource, efficiency or behavior that another party is able to provide (capability). That’s as far as RBV and TCE can go. At this point calculating success becomes too difficult and heuristics take over. The initiating party’s frame of reference (culture) leads them to some conception of how the other party will respond. They generally believe that the other party will respond to a reasonable offer. By way of mutual agreement an exchange takes place. The conditions that resulted in a satisfactory exchange for both parties are remembered and repeated eventually resulting in predictable patterns of exchange. Order and expectations become established. Both TCE and RBV see decision making as primarily a calculative process and both views tend t ...
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School: Rice University



Foreign Market Entry




The new business venture under consideration is a cosmetic business. This cosmetic
business intends to enter and operate in Singapore beauty and cosmetic industry. The foreign
market entry strategy that the organization is considering is partnering. Partnering will
involve forming a sophisticated strategic alliance with a local business in Singapore operating
in the same in...

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