STRATEGIES FOR MARKET ENTRY: Fast Moving Consumer Goods Companies in Emerging Markets ppt

A a r h u s S c h o o l o f
B u s i n e s s 2 0 0 9

Mark Sorgenfrey
Lasse Munch
M.Sc. Strategy, Organisation and
Leadership
Academic advisor:
Mai Skjøtt Linneberg



STRATEGIES FOR
MARKET ENTRY:
Fast Moving
Consumer Goods
Companies in
Emerging Markets
I

Abstract
Multinational enterprises (MNEs) are increasing their presence in the lives of more and
more consumers as companies seek to expand and promote their products to a still
wider range of markets globally. As markets change and develop, so does the strategy
used to enter them, and companies must be able to choose the correct way to enter
markets in order to remain competitive.

This thesis takes a look at how MNEs in the FMCG industry enters new markets, more
specifically emerging markets. In order to gain an understanding of this we look at three
specific markets, namely Russia, India and China. We attempt to answer if the way
MNEs enter emerging markets is in keeping with what would be expected from the OLI
framework (Dunning 2000) as well as the work done by Buckley and Casson (1998).
Additionally we try to gain an understanding of why any discrepancies exist and
whether they can be explained by the nature of emerging markets as well as the
characteristics of the FMCG industry.
An ability to adapt and tailor specific strategies to individual markets gains more
importance, especially with regard to emerging markets, as the difficulties and obstacles
presented when entering these markets often proves both new and unique. In many
cases there are difficulties in underdeveloped markets, specifically concerning consumer
spending power and brand awareness, as well as logistics and infrastructural
inadequacies compared to western markets which serves to make the correct approach
to entering emerging markets of high importance. The methods first employed when
entering emerging markets are often unsuccessful and needs to be modified as market
knowledge is gathered and opportunities present themselves. In the three markets
analysed in the thesis to illustrate emerging markets, Carlsberg is used as an example of
a company present on all three markets. Examples of entry strategies followed by
Carlsberg in the three markets are analysed and the reasons for their success or failure
as well as the lessons learned are discussed in relation to the individual markets. In
importance, this thesis contributes to the understanding of how MNEs enter emerging
markets as well as to which challenges they face.

II

Contents
1 Introduction 1
2 Problem statement 2
3 Objectives and research method 2

3.1 Selection of cases for analysis 3
4 Market entry modes for FMCG firms 6
5 Reasons for conducting foreign direct investment 7
6 Internalization level and form of market entry 8
6.1 Transaction cost theory 8
6.2 The Resource Based View and internalization 10
6.2.1 The Resource Based View and mergers and acquisitions 12
6.3 The OLI framework 13
6.4 Model of foreign market entry 21
7 Fast moving consumer goods 24
7.1 Choice of the supplier side of the FMCG industry 26
8 Emerging markets 27
8.1 Circumventing infrastructure problems in emerging markets 29
9 Market analysis of the FMCG industry 30
9.1 Threat of new entrants 30
9.2 Rivalry among existing competitors 31
9.3 Bargaining power of suppliers 32
9.4 Bargaining power of buyers 32
9.5 Threat of substitute products 33
10 Carlsberg Breweries A/S 33
11 Markets 35
11.1 India 35
11.1.1 Infrastructure 37
11.1.2 Indian retail and the Indian consumer 40
11.1.3 Five forces analysis of the Indian FMCG industry 43
11.1.4 The Indian beer market 46
11.1.5 Carlsberg India 47
11.1.6 OLI framework 49
11.1.7 Discussion 55
11.2 China 56

11.2.1 Special economic zones and growth 56
III

11.2.2 Current state of the Chinese economy 57
11.2.3 Rural-urban wage gap 59
11.2.4 Infrastructure 60
11.2.5 Chinese business culture and the importance of guanxi 62
11.2.6 Chinese retail 63
11.2.7 Chinese consumers 64
11.2.8 Five forces analysis of the Chinese FMCG industry 66
11.2.9 OLI framework 68
11.2.10 Discussion for China 71
11.3 Russia 73
11.3.1 Market analysis for Russia 76
11.3.2 The Russian beer market 80
11.3.3 Carlsberg on the Russian market 82
11.3.4 OLI framework 83
12 Discussion and findings 87
13 Conclusion 95

Appendix
Appendix 1 FMCG retail markets and supplier industries

IV

Figures and tables
Table 3.1 GDP per capita and growth rate for emerging countries.
Table 4.1 Market entry modes
Table 11.1 Market segments in the Indian market
Table 11.2 Carlsberg India’s facilities

Table 11.3 Chinese urban and rural per capita income 2000-2008 (Chinese yuan)

1

1 Introduction
This text is the final chapter of our education at the Aarhus School of Business,
University of Aarhus. As M.Sc. students within strategy, organization and leadership,
we have spent a considerable amount of time for the past two years learning about and
working with the concept of strategy. The vast majority of this time has been focused on
strategy regarding the choice of which product markets to be in as well as how to
develop these markets – not concerning which geographical markets would be worth
while pursuing and how best to enter these markets. As we find the geographical aspect
just as interesting as the product market aspect however, we decided to spend our final
semester delving into the topic of market entry strategies.
That market entry strategies should be the main topic of our thesis was not our first
thought though as we discussed the first ideas for the thesis in the autumn of 2008. We
settled relatively quickly on the idea of involving the major Danish brewer, Carlsberg,
in the thesis however. Carlsberg had at that time only just completed the joint
acquisition of Scottish & Newcastle together with Dutch rival Heineken in the biggest
foreign acquisition by a Danish firm ever made. This deal reinforced Carlsberg‟s
position among the leading global brewers and increased their activities in high growth
foreign markets as well as their dependence on these. This made Carlsberg a highly
interesting case for analysis in our perspective. Based on our desire to delve into the
topic of market entry strategies as well as our interest in Carlsberg, the idea for the
thesis thus became to evaluate the options available to Carlsberg and similar
multinational enterprises when entering high growth foreign markets as well as the
actual entry strategies pursued by Carlsberg in such markets. The thesis draws
information and data from academic articles and books, corporate websites, and news
reports as well as governmental and other publicly available statistics. Additionally, we
attended Carlsberg‟s annual general meeting in Copenhagen in March of 2009.

In importance, this thesis contributes to the understanding of the challenges faced by
MNEs in emerging markets. Additionally, it adds to the knowledge on how MNEs enter
emerging markets and on the conceivable reasons behind choosing the respective modes
of entry in different emerging markets. This is relevant due to the increasing
globalization of markets as especially western MNEs look to emerging markets for
growth as they face stagnant growth in their core markets in the west.
2

2 Problem statement
A great deal has been written about strategies for market entry and we will present some
of the more important contributions in this thesis in order to offer the reader an
overview of relevant theories. When it comes to entry strategies in emerging markets
the amount of literature is limited however and is often confined to investigating single
economies. This study will therefore contain a comprehensive analysis of a small
number of emerging markets in order to offer a better indication of the challenges firms
face when entering emerging markets in general.
The objective of the thesis will be to make a contribution to the understanding of the
challenges and problems associated with entering emerging markets, and why these
strategies are implemented and carried out in the way they are. The main focus will be
on the differences between what are to be expected based on theoretical approaches and
what is actually observed. In order to shed light on this subject, the thesis will analyze
three cases covering Carlsberg‟s strategy on the Russian, Chinese and Indian markets
respectively. The main question which this thesis will seek to answer is the following:
Can the choice of market entry strategies for FMCG producers in emerging markets be
explained through the OLI framework (Dunning 2000)?
Secondary question:
If differences between actual and expected market entry strategies exist, how are these
explained by the special characteristics of emerging markets and/or the FMCG
industry?
3 Objectives and research method

The primary objective of this thesis is thus to determine whether firms within the
FMCG industry follow the theories on market entry in emerging markets. That is, can
the market entries of FMCG firms in emerging markets be explained through the
theories presented in this thesis; transaction cost theory (Coase 1937, Williamson 1975;
1985), the resource based view (Wernerfelt 1984, Peteraf 1993), the eclectic paradigm
(Dunning 2000) as well as the model on foreign market entry developed by Buckley &
Casson (1998). Providing this is not the case, the secondary objective of the thesis is to
determine whether FMCG firms follow a different pattern in market entries compared to
non-FMCG firms due to the characteristics of their particular industry or alternatively;
3

can the differences be explained based on the differences between established and
emerging markets. In order to answer these questions, we have chosen to analyse a total
of three cases of market entry by the Danish multinational FMCG firm, Carlsberg A/S.
3.1 Selection of cases for analysis
When the numbers of emergent markets are so large and diverse the question becomes
what markets are worth taking a closer look at in order to define the problems and
challenges facing FMCG manufacturers and to test their adherence to the theories on
market entry. In this thesis we have taken the approach of looking at the three largest
emerging economies, namely Russia, China and India, who amongst them represents a
significant percentage of the world population as well as the world market. We believe
that these countries will provide an interesting view of emerging markets. In our view
their size make them more interesting than smaller markets which has less influence on
the world, since these three countries could very well be the engines that drive the
economy of tomorrow. Additionally, the three markets shows themselves to be
interesting in the context that they, despite their large size, shows significant differences
in their market structure as well as the challenges entrants and domestic companies face.
This means, that these markets will give a fairly representative picture of the numerous
challenges faced by the companies operating in emerging markets.
In addition to the above mentioned reasons for our case selection, we have further

justification for our choices. Looking at the cases in a more scientific view, we consider
the Russian, Chinese and Indian markets to be diverse cases with regard to wealth
(Gerring 2007 p. 97), which is evident by the differences in GDP per capita in the three
countries. As can be seen from table 3.1 below, the Russian GDP per capita was
estimated at $15,800 in 2008, the Chinese $6,000 and the Indian $2,800 (CIA 2009).
Russia is thus among the wealthiest third on FTSE‟s list of emerging countries (FTSE
2009) and given the market‟s size and Carlsberg heavy involvement in the country, it is
as a result a logical case to include in our analysis. At the same time, Russia has shown
considerable growth in recent years and is part of the upper third of the emerging
countries in terms of growth.
China is on the other hand part of the lowest third of emerging countries when it comes
to GDP per capita. China is however likely to advance on the list in the coming years as
it has the highest GDP growth rate of all the emerging countries, and has sustained this
4

growth rate for a number for years. For this reason, we consider it fair to use China as
our median case, also because Turkey is the only market among the middle third where
Carlsberg is active and we do not consider Turkey particularly interesting compared to
China. This is primarily due to its more limited size, GDP growth and market potential
compared to China.
As stated, our final case is the Indian market. India is like Russia and China among the
upper third of the emerging countries in terms of growth, but it is however also the one
with the second lowest GDP per capita, only slightly superior to Pakistan. These facts
combined with a population in excess of 1.1 billion people and a very low consumption
of beer makes India an intriguing case for analysis.
Table 3.1 GDP per capita and growth rate for emerging countries.
Rank
Country
GDP per capita
Country

GDP growth rate
1
Taiwan
$31.900
China
9,8%
2
Czech Republic
$26.100
Peru
9,2%
3
South Korea
$26.000
Argentina
7,1%
4
Hungary
$19.800
Egypt
6,9%
5
Poland
$17.300
India
6,6%
6
Russia
$15.800
Indonesia

6,1%
7
Malaysia
$15.300
Russia
6,0%
8
Chile
$14.900
Morocco
5,9%
9
Mexico
$14.200
Pakistan
5,8%
10
Argentina
$14.200
Brazil
5,2%
11
Turkey
$12.000
Malaysia
5,1%
12
Brazil
$10.100
Poland

4,8%
13
South Africa
$10.000
Philippines
4,6%
14
Colombia
$8.900
Chile
4,0%
15
Thailand
$8.500
Czech Republic
3,9%
16
Peru
$8.400
Thailand
3,6%
17
China
$6.000
Colombia
3,5%
18
Egypt
$5.400
South Africa

2,8%
19
Morocco
$4.000
South Korea
2,5%
20
Indonesia
$3.900
Taiwan
1,9%
21
Philippines
$3.300
Turkey
1,5%
22
India
$2.800
Mexico
1,4%
23
Pakistan
$2.600
Hungary
-1,5%
Countries in italic type are Advanced Emerging Countries
Source: CIA 2009 and www.ftse.com

5

When using the diverse case selection method, the chosen cases should in combination
be somewhat representative of the population due to the selection of high, low and
median value cases. It is should therefore also be fair to say that diverse case selection is
often more representative than other forms of case selection as it encompasses a greater
range of variation (Gerring 2007 p. 101). This requires however, that GDP per capita
values are fairly evenly distributed between high and low values. When this is the case,
it should be representative of the population to pick one low, one median and one high.
If the majority of the population had a low GDP per capita however, that is if there were
more “low” than “high” cases, it would perhaps be more representative to add an
additional low score case (Gerring 2007 p. 101). Since the GDP per capita values seems
to be somewhat evenly distributed between the high and low values in the population of
emerging countries, it should be fair to select one high, one median, and one low case.

6

4 Market entry modes for FMCG firms
Root (1994) and Buckley & Casson (1998) have identified 15 and 20 different modes of
market entry respectively. These can however be categorized in the five main classes in
table 4.1, which are ordered in accordance with increasing control of the entrant
(Johnson 2007) and in general also with increasing commitment and investment.
Table 4.1 Market entry modes
Export
The perhaps simplest form of market entry is to export products from the
domestic market to a company or individual in the foreign market who
then sells the products on. In addition to being a simple form of market
entry it does not require any particular investment either and it is highly
flexible. On the other hand, the exporting firm has very limited (if any)
control over functions such as marketing and distribution in the target

market(s).

Licensing
and
franchising

Licensing and franchising agreements permit an incumbent to produce and
sell the foreign firm‟s product(s) in the markets agreed upon. The
agreement thus allows the incumbent to use the foreign firm‟s proprietary
technology and/or knowledge. The incumbent then pays the foreign
company compensation for the right to do so, which could for instance be
through a fixed annual fee or as payment per unit sold. In licensing and
franchising agreements, the vast majority of the necessary investment lies
with the incumbent.
Strategic
alliance
In a strategic alliance a foreign and an incumbent firm agree to collaborate
in the foreign market in order to reach specific goals while remaining
independent organizations – there are no equity investments. A strategic
alliance is often aimed at attaining synergies through combined effort and
can additionally involve knowledge and technology transfer as well as
shared expense and risk. As opposed to joint ventures, which are described
below, strategic alliances require limited upfront investment.
Joint
venture
In a joint venture, a foreign firm and an incumbent in a target market agree
to share activities in the target market. This collaboration can for instance
take place through a subsidiary owned equally by both parties. Such an
agreement would in most cases involve a substantial investment from the
foreign firm although not as much as an acquisition or green field venture.

At the same time, a joint venture can benefit from knowledge and
technology of both parties.
Wholly
owned
subsidiary
A wholly owned subsidiary can either be obtained in a foreign market by
acquiring an entire firm or part of a firm in the target market or it can be
started as a green field venture; that is building production and/or
distribution facilities from scratch in the target market. Since all costs
associated with this sort of entry mode lies upon the entrant, this is
naturally the one which requires the largest upfront investment. In case of
a green field investment, the entrant cannot rely on an incumbent‟s
knowledge on the foreign market. A major advantage to a wholly owned
subsidiary is that the entrant will retain full control of the venture.
Increasing control as well as commitment and investment
7

5 Reasons for conducting foreign direct investment
In general, doing business in a company‟s domestic market, or in markets
geographically and culturally close to this market, should be much simpler than
expanding globally. If a company do wish to sell to distant foreign markets, it should
likewise be simpler to export products rather than engage in FDI and setting up
subsidiaries with production facilities abroad – especially since this incurs costs of
communicating the company‟s technology (Buckley et al 1998). However, businesses
seem to increase their international focus year by year, which can be driven by a number
of different reasons according to Robock and Simmonds (1989 p. 310). The following
six points are focused on reasons for conducting foreign direct investment (FDI).
The search for new markets. Expanding internationally through FDI will often be
caused by companies seeking to increase turnover and, hopefully, profits by entering
new markets. Entering new and distant markets is often not feasible through export due

to factors such as logistical costs and import taxes as well as lack of knowledge on local
consumer demands.
The search for new resources. These resources
1
could be unskilled labour, agricultural
products or natural resources such as minerals (Dunning, 2000 p. 164). FDI is in this
case not necessarily conducted in order to reach new customers but instead aimed at
servicing current customers (Hitt et al 2005 p. 468).
Production-efficiency seeking. Where economies of scale are present, it makes sense
to increase the customer base internationally and thus increase production volumes, as
this will lead to lower average costs for products which will increase the company‟s
competiveness (Ghoshal 1987 p. 434). This is especially the case when it is feasible to
concentrate production at a few international locations, preferably where production and
logistics costs are lowest, which can then supply nearby markets.
Technology seeking. Larger firms often buy smaller firms in order to acquire new
technologies, a common occurrence in the medical and biotech industries for instance.
In this way the acquiring firm can take advantage of the often more entrepreneurial and
innovative culture in smaller firms which often lead to development of superior

1
By a resource is meant anything which could be thought of as a strength or weakness of a given firm.
Examples of resources are: brand names, in-house knowledge of technology, employment of skilled
personnel, trade contacts, machinery, efficient procedures, capital, etc. (Wernerfelt, 1984 p. 172).
8

technologies. According to Ghoshal (1987), doing business in a global market may also
in itself aid development of diverse capabilities as companies are subjected to a
multitude of stimuli by operating in different environments. This should, ceteris paribus,
provide multinationals with greater opportunities for organizational learning.
The search for lower risk. Companies may seek to lower their risks by diversifying

into additional markets through FDI and thus lowering their dependence on the business
cycles of single markets (Hitt et al 2005 p. 468). For this reason, MNEs generally
diversify their FDI investments geographically so as “not to put all their eggs in one
basket” (Rugman 1979). Other risks which could be lowered by FDI are policy risks
from unfavourable national legislation, competitive risks from lack of knowledge on
competitor‟s actions and resource risks such as dependence on a single source of an
important raw material for production (Ghoshal 1987 p. 430).
Countering the competition. Companies can also engage in FDI as a reaction to
competitor moves, for instance as part of a tit for tat strategy (Frank 2003 pp. 461-462).
An example could be, that company X enters an important market of a competitor and
the competitor could then choose to retaliate by entering one of company X‟s important
markets making both parties worse off. This should then deter X from engaging in such
actions again.
6 Internalization level and form of market entry
As discussed in the previous section, a company wishing to sell their products abroad
can either engage in FDI or choose to license the right to sell the products to a third
party when they do not find it advantageous to export. The first question then becomes
whether the company should produce and sell the product itself on the foreign market or
if it should sell a license. Then, if the company estimates that FDI would be the best
solution, then which form of FDI should be used? Some of the theoretical attempts to
answer these questions will be covered in the following sections.
6.1 Transaction cost theory
One of the theories, which seek to answer why transactions are handled within a firm
instead of between independent parties in the market, is transaction cost theory. The
theory was introduced by Ronald H. Coase in his 1937 paper The Nature of the Firm
(Coase 1937). Though the theory is more than 70 years old, the concept of transaction
9

costs is still highly relevant today and is used within the field of industrial organization
where Coase‟s theories have been elaborated on.

To put it simply, transaction cost theory states that a company will grow if the internal
transaction costs are lower than the external transactions costs. For this to make sense, it
is necessary to define what is meant by transactions costs. Coase‟s 1937 paper mentions
three overall types of costs related to external transactions:
- Costs associated with information gathering when searching for prices on external
offerings, e.g. components or services.
- Costs related to negotiating contracts between the firm and external providers in
order to specify terms and conditions.
- Some taxes and quotas, which have been established by governments for
transactions in the market, may not apply to transactions within firms.
As mentioned, Coase and others have elaborated on Coase‟s original paper and have
specified additional forms of transaction costs. First and foremost, even the most
comprehensive contract cannot cover every possible contingency (Williamson, 1975;
1985). This means that after a contract has been settled on after a highly meticulous, and
thus costly, negotiating process there will still be many issues that the parties can
disagree on later on. A contract may be excellent when times are good and both parties
are in a solid financial state but in times of economic difficulty, one or both parties may
attempt to attain a bigger slice of the pie by reinterpreting the contract. Even if it was
possible to make the perfect contract the amount of work involved with completing it
would most likely entail that it would not be cost effective to do so.
The fact that contracts must always be considered incomplete and thus unable to cover
every eventuality means, among other things, that both parties to the agreement must
monitor whether the other party is acting in accordance with it. Furthermore, if one or
both parties fail to comply with the terms and conditions of the agreement, and thus
behaves opportunistically, they may need litigation to settle the dispute. Both
monitoring a contract and settling disagreements in court can bring about considerable
costs. If the parties do not have a relationship built on trust, the uncertainty of future
costs may make it impossible to ever get to an agreement at all and it will thus be
necessary to internalize what would otherwise be done by the other party – or find
another, less suitable, supplier if at all possible. The fact that Williamson attributes

10

opportunistic behaviour solely to human nature has been criticised by Ghoshal and
Moran (1996). However, the fact that humans and organizations have a tendency to
behave opportunistically can hardly be disputed, especially in the current economic
climate. As an example, the majority of larger Danish firms are currently renegotiating
contracts with their suppliers in order to lower prices and achieve better terms (Bjerrum
2009).
To summarise, transaction cost theory states that if internal transaction costs are lower
than the above mentioned costs associated with transactions in the open market, then the
transaction should be handled internally. This is however only valid if other factors do
not change this recommendation – for instance it the company prefers the often higher
level of flexibility of using the market.
While transaction cost theory is highly relevant when deciding between using the
market and producing internally in a company, its focus is primarily on make or buy
decisions within markets. However, when the question is whether a company should
export to a foreign market or set up production there, a number of other factors need to
be considered and decided on. A later segment in this thesis will cover J. H. Dunning‟s
OLI framework (2000) which includes factors relevant to this decision. Before getting
to this, the next segment will turn to the resource based view and its views on
internalization.
6.2 The Resource Based View and internalization
While transaction cost theory mainly focuses on external circumstances and the
quantifiable, the resources based view is concerned with the firm‟s internal factors and
the more intangible subject of resources, also called firm-specific factors. In some of the
more classical writings on the resource based view, focus is mostly on the competitive
advantage of firms and thus not specifically with theory on market entry (Wernerfelt
1984; Peteraf 1993). However, the resource based view offers some interesting insights
with regard to the latter. For this reason, scholars have applied the resource based view
on subjects like the timing of market entry in recent years (see for instance Geng et al

2005; Frawley et al 2006). This thesis will use some of the resource based view‟s
insights on the choice between using the market and internalizing transactions; that is,
as an alternative view to transaction cost theory which we have covered above.
Moreover, transaction cost theory ignores the medium and long term strategic
11

considerations with regard to sustaining and expanding the firm‟s competitive
advantage. This is on the other hand central to the resource based view as it explains the
possession of competitive advantage from the control of superior resources.
Additionally, it highlights the importance of building competitive advantage and
suggests possible routes to this by acquiring new superior resources (Wernerfelt 1984).
Transaction cost theory is on the other hand focused on short term considerations and
profitability.
According to Wernerfelt (1984), a firm can use the possession of one or a number of
resources as a barrier, shielding its superior profits from entrants as well as from other
incumbents as long as these behave rationally. This shield comes from the fact that new
acquirers of a resource can be adversely affected, when it comes to costs and/or
revenues, by the fact that another company is already in possession of a resource. Given
this, the company already in possession of the resource thus has a competitive
advantage and a potential for superior profits. Wernerfelt has termed this a resource
position barrier as it is somewhat analogous to Porter‟s (1980) barriers to entry,
although Porter‟s entry barriers in product markets only protects against possible
entrants – not against other incumbents. Having satisfied and loyal customers could be
an example of a resource position barrier against entrants and incumbents, as it is a lot
easier to maintain such a position than it is to attract otherwise loyal customers from a
competitor.
A resource position barrier can of course be based on a number of different resources
besides having loyal customers. As mentioned above, the resource however needs to be
able to offer a competitive advantage, which means that the following four requirements
need to be met (Peteraf 1993):

1) There has to be heterogeneity in the resource bundles and capabilities underlying
production among firms. With heterogeneity, superior resources exists which results
in the potential of earning rents.
2) There has to be an imperfect market for the resource, as well as for substitutable
resources, so that such resources cannot readily be acquired by other firms. That is,
there has to be ex post limits to competition. Ex post limits to competition results in
rents being preserved as they cannot be competed away in the short term.
12

3) Before the resource is acquired by the firm, there has to be limited competition for
that resource, that is, there has to be ex ante limits to competition. This prevents the
costs of acquiring the resource from offsetting the rents.
4) Finally, there has to be imperfect mobility in the market for the resource meaning
that the resource has to be more valuable in the firm where it is currently in use than
it would be elsewhere. Imperfect mobility is often caused by the fact that
transferring the resource to another firm will incur costs. This ensures that the rents
are sustained within the firm.
A wide range of things can be considered a resource. Many of these are also able to
comply with the above mentioned requirements for a resource to offer a potential
competitive advantage. Besides the example of customer loyalty stated above, such
examples include managerial skills, technological leads, and access to raw materials as
well as production capacity and experience (Wernerfelt 1984 pp. 173-174). We will
expand on some of these examples in later chapters of this thesis, including a few with
relation to our chosen cases.
All of this relates to market entry decisions because it is too short-sighted to only look
at the short term optimization of transaction cost theory. When entering a new market
and having to choose between the different modes of entry, it is important for the long
term success and profitability of the firm to consider the impact on the firms future
resource position. It may be that the alternative with the lowest cost is to license a firm
in the target market to produce and distribute the product. This short-term optimization

may however restrict the firm from developing new favourable resource positions thus
decreasing the firm‟s competitive advantage later on. For instance, licensing instead of
internalizing the activities in foreign markets could mean that the firm would not benefit
from the organizational learning and innovation which can be achieved by being present
in foreign markets as the organization is subjected to societal and managerial
differences (Ghoshal 1987). This duality between optimizing in the short and the long
term is also what Tallman is talking about in Hitt et al (2001 p. 475-480) when he
discusses capability leverage and capability building strategies and the multinational
firm.
6.2.1 The Resource Based View and mergers and acquisitions
While not referring directly to market entries, Wernerfelt (1984 p. 175) offer some
interesting thoughts on the subject of mergers and acquisitions, which are highly
13

relevant to market entry decisions. One of his points is for instance, that when a firm
acquires another firm, it can be likened to buying a bundle of resources. The market for
these bundles of resources is highly imperfect as there are few buyers and targets and a
low degree of transparency due to the heterogeneity of firms. It can be extremely
difficult to assess the value of a possible acquisition, especially since such an
assessment must often be done discretely so as not to alert competitors or the
organization of interest. At the same time, the value of an acquisition is dependent on
the acquiring firm and whether synergies can be achieved or not (Wernerfelt 1984).
Additionally, when a MNE plans to expand in current markets or enter new ones, the
resource-based acquisition strategies are either to get more of the resources the firm
already has or alternatively to get access to resources which complements the ones it
already has (Wernerfelt 1984 p. 175). These reasons for acquisitions corresponds well
with the resource seeking, technology seeking and production-efficiency seeking
reasons to conduct FDI stated by Robock and Simmonds (1989 p. 310).
6.3 The OLI framework
The OLI framework, or eclectic paradigm, has been developed by John H. Dunning and

dates back to 1958 but it has been revised continuously through the years (Dunning,
2000 p. 168). OLI is an abbreviation for ownership, location and internalization, which
are the three sub-paradigms in the framework. The OLI framework combines a number
of theories such as transactions cost theory and the resource based view of the firm and
in this way serves “as an envelope for complementary theories of MNE activity”
(Dunning 2000 p. 183). The framework describes the three above mentioned factors
which are relevant for companies engaged in international expansion. We will give
further details about these sub-paradigms below.
The ownership sub-paradigm is about the ownership of unique resources, skills or
capabilities which can lead to a sustainable competitive advantage (Tallman in Hitt et al
2001). If a company is to expand from its home market into foreign markets
successfully, it must of course have some advantage, something to offer, which is not
available in the foreign markets already – it must have a unique and sustainable
competitive advantage (Dunning 2000 p. 164). This corresponds with the resource
based view discussed in the previous segment. These advantages can of course take
many forms but can in general be grouped into three segments (Dunning 2000 p. 168):
14

- Possessing and exploiting monopoly power.
- Having scarce, unique and sustainable resources and capabilities, based on the
superior technical efficiency of a particular firm relative to its competitors.
- Having competent managers who are able to identify valuable resources and
capabilities throughout the world and who are likewise able to exploit these
resources and capabilities to the long term benefit of the firm in which they are
employed.
Firstly, companies in a monopoly position on a market are often able to use their
position as a barrier to entry to potential competitors. This advantage could for instance
consist of economies of scale for the monopolist. I could also be the presence of cost
disadvantages for entrants independent of their size such as the possession of
proprietary technology by the monopolist (Porter 1980 p. 37). The advantage could

likewise be due to product differentiation by the monopolist, for instance when it comes
to superior brand power. According to Porter, brewers generally use a combination of
scale economics and superior brands to keep potential rivals out of their markets: “To
create high fences around their businesses, brewers couple brand identification with
economies of scale in production, distribution and marketing” (Porter 1980 p. 37).
Possessing and exploiting monopoly power can thus be considered a competitive
advantage since it gives the monopolist a cost advantage relative to its competitors and
raises barriers to entry.
Secondly, a company is generally able to earn superior profits if it possesses scarce,
unique and sustainable resources and capabilities internally in the firm and are able to
apply these in the marketplace (Tallman and Fladmoe-Lindquist 2002). This is central
to the resource based view and is acknowledged by Dunning in the OLI framework.
However, it should be beneficial for the firm to persistently develop new resources and
capabilities, not just exploiting existing ones, in order to be competitive in the long
term. That is, striking a balance between exploiting existing resources and developing
new ones is important in order to achieve optimal growth (Wernerfelt 1984 p. 178).
Tallman and Fladmoe-Lindquist (2002 p. 118) expresses this by stating that: “the
multinational firm will sustain its competitive advantage only if it can continue to
develop new capabilities in the face of changing environments and evolving
competition”. But how does the possession of scarce, unique and sustainable resources
15

and capabilities result in superior profits? As mentioned previously in the segment on
the resource based view, when a firm is in possession of a resource, this resource can in
some cases act as a so-called resource position barrier (Wernerfelt, 1984). This means
that new acquirers of the resource can be adversely affected, when it comes to costs
and/or revenues, by the fact that another company is already in possession of this
resource. Given this, the company already in possession of the resource thus has a
competitive advantage and as a consequence superior profits.
Finally, besides being in a monopoly position or having scarce, unique and sustainable

resources and capabilities, a company wishing to expand internationally can also rely on
competent managers to identify and exploit resources and capabilities internationally.
According to Hamel and Prahalad (1994 p. 78), “To get to the future first, top
management must either see opportunities not seen by other top teams or must be able
to exploit opportunities, by virtue of preemptive and consistent capability-building, that
other companies can't”. Research has also shown that top managers really do have
significant influence on the performance of firms (Priem et al in Hitt et al 2005 p. 497).
Managers are thus in itself a resource that companies can “own” and benefit from in
international expansion and they can of course be considered unique since no two
people are alike. However, skilled managers can hardly give a sustainable competitive
advantage since they can be employed by another company and even by a competitor.
Peteraf (1993 p. 187) exemplifies this by stating that “a brilliant, Nobel prize winning
scientist may be a unique resource, but unless he has firm-specific ties, his perfect
mobility makes him an unlikely source of sustainable advantage”.
It is however not enough for a company to have a unique and sustainable competitive
advantage for FDI to be attractive, it must also be preferable to invest directly in the
foreign market instead of simply just exporting or employing the advantage solely in the
home market. This is the subject of the next section.
The location attractiveness sub-paradigm states that the foreign market must in some
way favour local production to export from the company‟s home market or other
markets where the company is present with production facilities. Many factors influence
whether local production is preferable to exporting. Examples of these factors could be
lower labour costs, more favourable legislation, high transportation costs, governmental
trade barriers, superior production processes or consumers preferring products with a
16

local image (Hitt et al 2005 p. 472). The following will expand on the above mentioned
factors.
Low labour costs. In recent years, the transfer of jobs from high wage western
countries to low wage regions such as Asia and Eastern Europe have attracted

considerable attention – as well as some anger and hostility from western workers. This
has especially been the case when production is outsourced to low wage countries only
for the products to be imported back to the home market. As mentioned above there are
however other factors which influences the attractiveness of different locations. For
instance, many less developed countries are more lenient than western nations when it
comes to legislation on environmental protection as well as worker safety. This leniency
can in some businesses lead to significant cost savings through outsourcing although the
overall effect on profits is somewhat unsure given the potentially adverse effect on
company reputation.
Superior production processes. Low labour costs is however not the only reason why
companies move production abroad. In some cases other countries or regions have
capabilities which offer superior production processes compared to other locations. This
could for instance be due to a workforce which is particularly skilled within a certain
field – such as it has been the case for Germany within engineering. Other examples
could be superior skills within wind turbine development and manufacture in Denmark
or within manufacture of electronics in South East Asia.
Governmental trade barriers. Besides their influence on issues such as worker safety
and environmental protection through legislation, governments also play their part in
determining the attractiveness of different locations via governmental trade barriers.
Among other things, governmental trade barriers include import tariffs, licenses and
quotas as well as subsidies to local producers. In some countries it may not even be
possible to sell imported goods as they require at least part of the final product to be of
local origin, the so-called local content requirements (LCRs). LCRs are often used by
governments in less developed countries in order to protect local intermediate product
companies from foreign competition (Belderbos et al 2002).
Ceteris paribus, when a country impose trade barriers on importers in one way or the
other, it becomes more attractive to produce locally instead of exporting to this country
thus raising the location attractiveness of the market.
17

Preference for local products. Another factor which can make it more attractive to
produce in a given market is the fact that products with a local image are often favoured
by consumers. Firms, industry organizations and even governments sometimes attempt
to increase this form of loyalty by calling upon consumers to buy domestic products
through campaigns, often in order to support the local economy.
Besides the patriotic reason for preferring local products, when consumers have
consumed a certain product for a long time – perhaps their entire adult life – it is often
very difficult to convince them to switch to an alternative product. A good example of
this is in fact the beer industry where consumers have often preferred to buy from the
local brewery. In China for instance, there is generally a high level of patriotism when it
comes to beer drinking (Heracleous 2001 p. 43). Combined with other factors, the
preference for local beers have made it highly difficult for the majority of the global
players in the beer industry to gain a foothold in China based on non-local brands
(Heracleous 2001 p. 37). Another example could be the Danish market for fresh dairy
products where there is a strong preference for Danish products among consumers with
only limited competition from mostly German products which has been introduced in
recent years.
Due to the preference for products manufactured locally, it can often be beneficial for
MNEs to acquire or join forces with local producers. In this way, the companies can
combine their respective competences and in this way improve the competitiveness of
both. An example of this could in this case be the strong local brands of the incumbents
in conjunction with the superior manufacturing and marketing skills of the MNE.
Transportation costs. Last but not least, transportation costs are a major factor when
determining whether it is beneficial to produce locally as opposed to exporting to a
given market. In a short term perspective, one should choose to export if the combined
costs of producing the goods and transporting them to the foreign destination are lower
than the costs of producing them locally. Otherwise it would be beneficial to set up
production locally in some way.
There are a number of different costs related to shipping products across large distances
and these are not just related to the price of shipping a container from for instance Asia

to Europe. These other costs include all sorts of handling costs, spoilage during
18

transport as well as inventory carrying costs
2
which also include carrying costs during
the eight weeks of shipping from Asia to Europe. Besides these costs, exporters are also
vulnerable to changing demands of consumers due to their long supply lines as demand
may change before the products reach their target customers. These changes in demand
can make it necessary to lower sales prices in order to sell products or can make it
impossible to sell them altogether. Customer service can also suffer from long supply
lines – especially since companies try to minimize inventories as much as possible due
to the above mentioned inventory carrying costs. With long supply lines, average
inventory needs to be larger than with short supply lines due to the higher need for
safety stock
3
, if the inventory service level
4
is to be maintained. In case some part of the
long supply line minimizes safety stock excessively, perhaps to avoid perishable
products going beyond their sell by date, this is likely to lead to occasional stock outs
here as well as further down the supply line. Products will thus periodically become
unavailable to retailers and final consumers leading to lower perceived customer service
and loss of sales. With other things equal, shorter supply lines can minimize the
problem of stock outs considerably.
Finally, some products are more or less perishable and have a sell by or freshness date.
If the products have been transported from the other side of the planet, they have a
relatively limited time left on the shelves near the final consumer when they eventually
get there before they have to be discarded. An example of this could be beer as beer
often has a sell by date or in some cases a freshness date, which indicates the date of

production or the recommended final date of consumption. The amount of time between
time of production and freshness/sell by date is mostly between four months for a
standard lager and 12 months for stronger brews (The Beverage Testing Institute). This
amount of time, the so-called shelf life, is however dependent on correct storage of the
products. If the products are not stored correctly the actual shelf life will be lower as
product quality will decrease at a faster pace in poor storage conditions.

2
Inventory carrying costs include the cost of money tied up in inventory, storage space, loss and
obsolescence, handling, administration, insurance etc. (Waters 2003 p. 257).
3
Safety stock/inventory is a reserve inventory held in addition to the expected needs in order to add a
margin of safety. (Waters 2003 p. 267).
4
The inventory service level is the probability that a demand is met directly from inventory thus avoiding
backorders. Having safety stocks increases the service level (Waters 2003 p. 268).
19

Since shipping a container by container vessel from for instance Italy to China takes at
least three weeks (Maersk Line 2009), and in most cases considerably longer, exporting
beer across such distances limits the shelf life at retail stores considerably. This will not
only decrease the average quality of the products sold to end consumers but will also
increase the number of products which are not sold before the sell by date. Lower
quality will first of all lead to lower customer satisfaction but also to more products
which has to be discarded as they go beyond their sell by dates. All in all, shipping
perishable products over long periods of time incurs considerable costs besides the cost
of the transport fee itself.
Finally, companies can also seek to attain strategic resources they are currently lacking
by investing in foreign countries. In this case, investment in foreign countries is
conducted in an attempt to enhance their knowledge and global competitiveness, not to

use current advantages in new markets to earn higher returns (Chen & Chen 1998 p.
446). The presence of companies in possession of complementary competences in a
given country or region can thus attract FDI as foreign companies seek to attain these
competences (Dunning 2000 p. 178).
The internalization sub-paradigm concerns whether entry into foreign markets is
preferable through some sort of inter-firm non-equity agreement such as licensing, by
engaging in FDI through investing in green field production facilities, or by purchasing
a company in the target market (Dunning 2000 p. 164). As described in the section on
transaction cost theory, this decision can be based on a somewhat simple assessment of
whether an arm‟s length market transaction incurs the lowest cost or whether
conducting the activity internally is the less costly alternative. That is whether activities
in a foreign market should be handled internally or should be performed by a partner in
the market. The cost of conducting transactions in the market is in most cases positively
correlated with the imperfections of the market (Dunning 2000 p. 179) as this will often
allow companies to charge higher prices. Examples of these imperfections could be
information asymmetries between the parties to an exchange as well as common
property resources, public goods and externalities (Lipsey in Dunning 1999 pp. 83-84).
The former is in this case the most relevant, as information asymmetries has a highly
significant influence on the costs of conducting transactions in the open market as
described earlier on in this thesis in the section on transaction cost theory. Information
20

asymmetries between buyer and seller leads to costs associated with gathering
information, negotiating deals, monitoring compliance to these deals as well as costs
due to litigation in order to settle disputes between the parties to an agreement. Since
the transactions are to be performed between a domestic and a foreign market,
information asymmetries are likely to be more prevalent and significant than between
parties in the same market. This is of course due to the fact that firms will in general
have less knowledge of foreign markets than they have of their domestic market which
is exacerbated by language and cultural differences. In addition to information

asymmetries as a reason for internalization, it may also, as mentioned earlier, be cost
effective to internalize functions when certain governmental taxes or quotas can be
avoided by doing so.
While a transaction cost based analysis of where the boundaries of the firm should be
drawn is valid, it does however ignore other reasons why firms may choose to
internalize functions in foreign markets aside from pure cost optimization (Dunning
2000 p. 180). As covered previously in this thesis, Robock and Simmonds (1989 p. 310)
state six reasons for conducting FDI: the search for new markets, resources, technology,
production-efficiency or lower risk as well as countering the actions of competitors.
Consequently, a firm entering a foreign market can choose to set up its own production
in the market even though it at first glance would be more cost-effective to allow a local
producer to produce the company‟s product(s) on license. This could for instance be
relevant if the firm needs qualified engineers and these are in limited supply
domestically. The company could then attempt to gratify two needs at the same time by
reaching a new market through FDI while also gaining better access to competent
engineers. In order to do so, the firm could seek to establish itself in an attractive
foreign market, which at the same time maintains a high-quality education system, as
this could secure a steady flow of potential candidates. The firm may be able to market
their products in this market at a lower cost through a local partner via a licensing
agreement than through internalizing the function. But since this would not enable them
to access well educated labour in the same way, the overall benefit of internalizing
could be larger than the benefit of an arm‟s length market transaction.
The eclectic paradigm has managed to remain the dominant paradigm within MNE
activity and market entry as a result of regular revisions and updates. It is however, due