The threat the new entrants in global markets encounter

Abstract

This paper proposes a study on the threat the new entrants in global markets encounter mainly about the trouble arising from cross-cultural differences. This proposal investigates some of the applicable background work on the topic and sets some of the aims, objectives and research methodology that help for the better understanding of the topic. The main emphasis in this research is focus on the cross-cultural threats most businesses face during their plans to enter into the international markets. The expanding of business operations into external markets is very important in this competitive world. But this expansion into international markets is associated with high degree of risk. This research considers two countries Europe, Middle East and North America and the mode of internationalization are the Export business.

Background:

Business who enter new markets face many problems and this threats faced by new entrants is faced from many years. This is extensively considered in the literature but unlike nuances from this topic can be analysed. If there is risk connected to the reality that a business enters a new international market, huge levels of uncertainty could be associated when business go into new markets in different countries, this due to the existence of cultural aspects may weaken the achievement of the new business.

In a situation in which Globalisation plays a most important role in home economies, the focus of going into new international markets is an additional and more pertinent. Apart from this in some of the industries the national market is not sufficient to cover up every aspect of the production of the business, and consequently, there is a need for such business to enter into new markets, for example, find the financial support for growth and development. Thus, the entry in international markets in this perspective may not be a choice but relatively it is an obligation.

Business decisions are extremely surrounded in a sociological framework where culture plays an important role. To that degree, the significant threat of entering international markets can be differences in the culture that may weaken the progression of entering the new market of the achievement of the international project.

For every business to decision of entering into a new international market requires huge resources, more often than not there are resources that require to be assigned to the decision of global entry, and that managers need to execute to the procedure of entry. But large investments into the new ventures in international markets does not in reality give success to the firm, the crucial lies only if the business enters the new markets before its competitors as these cultural aspects of the new markets can hinder performance in the beginning and to understand the culture, manage peoples preferences and to be successful requires a long-term process (Mascarenhas 1998). Moreover, the study also demonstrates that new entrants typically require placing smaller amount of capital in the procedure of entering the new market, and consequently this plan can be pursued by business with few resources if they are initial entrants.

There are quite a lot of patterns that business can choose when entering in new trade places, and the pattern or the procedure the business adopt during entry may describes the success of the decision. In addition to this the pattern of entry also has an significant impact on the consequence of the new project.

“This framework identifies three underlying constructs that influence the entry mode decision. These constructs are linked to considerations that have been previously discussed in the literature. It is argued that a business’s choice of entry mode depends on the strategic relationship the business envisages between operations in different countries. A particular entry decision cannot be viewed in isolation. It must be considered in relation to the overall strategic posture of the business. Further, the paper argues that different variables often suggest different entry modes, and that resolving these differences involves accepting trade-offs.” Hill et al. (2006: p. 117)

Different types of entry refer to the procedure the business decides to enter the market. There are different types of expanding its business globally like Export its good to the new markets international also is a form of international business, these Exports may be Direct or Indirect, business can even start its global business through Contracts like licensing and franchising; and Foreign Direct Investment this includes funding of business in other countries either as a whole or a part of the business (Armstrong and Sweeney 1994).

There is also a significant feature that the business needs when going globally, learning. The importance of organizational learning for a company’s survival and effective performance has been emphasized in the literature (Barkema and Vermeulen, 1998; Barlett and Ghoshal, 1987a, 1987b; Hitt, Hoskisson and Ireland, 1994; Huber, 1991). According to Zahra et al. (2000) “New ventures competing in international markets, for instance, draw from multiple knowledge bases in their different business operations and learn new skills that augment current capabilities.” This viewpoint serves to emphasize the reality that later the primary experiences in terms of new ventures in international markets, helps gives the business an opportunity to learn, and with the help of this knowledge which the business gains in the process of learning can help them to be confident and which in turn helps them to reduce the level of risk associated with international business. Yet, a key problem the new entrants face is the distance of culture among the countries. “Within each of the ‘management disciplines’ there is a Significant literature which assumes that each nation has a distinctive, influential, and describable ‘culture’ it ‘shapes everything'” (Hickson and Pugh, 1995: 90)

A very important aspect of the process of internationalization is the distance between certain cultures. This issue is very central to the international Business literature, as it can be conbusinessed by Sousa and Bradley (2006: p. 49)

Cultural distance and psychic distance are two factors that are widely used in the international business literature. A large number of studies use both concepts interchangeably with no clear distinction between them. The authors propose a new model to assess cultural distance and psychic distance separately. Through the use of survey data of more than 300 managers, this article shows that both concepts are conceptually different and that psychic distance is determined by cultural distance and the individual values of the managers.

Hofstede is a pioneer in explaining the cultural distances among the countries with his work “cultural consequences” in 1984. He worked on the employees of IBM in different countries and identified four cultural dimensions, even though the scope of his research is limited as there no IBM offices in some countries, but his work is widely accepted in the study of national cultural differences among countries . The existence of cultural problems can be to some extent eliminated by adopting a evolutionary process by business during the process of entry into international markets. Hashai and Almor (2004: p. 465) demonstrate this gradual process of entering the market that can be used as an argument in favour of the actual difficulties in entering international markets, since three levels of entry are referred.

Results show […] the following internationalization sequence over time: (1) exports are employed initially in order to serve customers in psychically close international markets; (2) subsequently, greenfield marketing subsidiaries are established in these markets; (3) finally, businesss engage in mergers and acquisitions, create subsidiaries that incorporate several value-adding activities and penetrate psychically distant international markets.

Hofstede (1989), states that the main risk in internationalization is: signifying that in spite of the existence of a few cultural gaps, which may not be very troublesome or are even opposite, differences among two cultures in terms of uncertainty avoidance can turn into a possible foundation of problems for business who are looking for international markets due to the linked gap in acceptance of the level of risk, formalization, and the approximating.

This viewpoint is very significant, and it can be linked with the resource- based viewpoint. In order to spend in global markets, business requires also investing in their information and adjustment to the host countries culture. However, as a consequence of the internationalisation process, business are expected to obtain awareness regarding global sites, organizational features and other country specific information (Barkema et al., 1996) as there should be more open to communication with fresh cultures.

Ultimately, as an instance of threats of entry into international markets, there are five factors which are identified with the export of goods among the countries.

From the analysis of the prior experiential literature, five common export threats have been identified. The prior among them are the non-exporting business tends to recognize obstacles in a different way from export trade. They put additional importance on factors inhibiting the commencement of export actions, while exporting trade stress operational, practical and market associated troubles. Next, the character, as well as the level complexity of export impediments varies not only among export stages, but also between businesses at the equal stage of export growth process. Next, the outside environmental aspects widespread in every nation mainly control perceived export problems. Next, industry-specific aspects are often accountable for variations in the supposed level of export threats across industry. Lastly, the level of the industry frequently determines the characteristics and pressure on export threats, with minor business feeling their inhibiting impact more powerfully. Smith et al. (2006: p. 54-55)

Aims

The main aim of this piece of research is to find out the processes which national business adapt while entering into new international markets and to calculate the degree of which cross-cultural characteristics of the host country can contribute to the decision making. Therefore, in this research it will be required to find a connection between the cultural distance of the two countries and the power of their global business. In other expression, one can aim to study whether: “are the firms more expected to invest in nations that are culturally closer?”

As a result, the intention of this research is to estimate the degree to which the cultural distance plays an significant part on the choice of participating in the economy of a certain country. To that extent, this research is evaluating, finally, if the cultural closeness of certain countries is a feature of magnetism by business for a venture. In order to find out the part of cultural closeness, one will calculate the cultural threats business encounter in going into global markets. The centre of this research is businesses who are the first time entrants into the new international markets. For that motive the problem of cultural distance is understood so closely. This is also based that business going into new markets with a little experience in global ventures are less affected by the risk when entering into a new global market. The basic theory in this research is that cultural distance plays a significant role for the first time entrants when compared to other business.

In order to believe in this objective, a viewpoint on the resources that are necessary to enter a global venture will be the base for the explanations sought after. The main hypothesis is that, venturing into new markets where there is a high degree of cultural distance embodies high degree of risk and, consequently, huge investments is required to understand and bridge a gap between these cultural distance among countries.

Research Methods:

Data

As the main focus of the research is to find out the relation between the cultural differences among nations and course of internationalisation of the company, different sources of statistics and information will be used. In order to know the relation we need to under the cultural differences among the countries, as this will enable the research with better understand of the concept. To get this information, Hofstede (1984) work is used to get the information on cultural distance. The model developed by Hofstede (2001) provides a set of variables that permit the relationship of cultures with respect to various business approaches. The study of cultural consequences of Hofstede is performed using data gathered from IBM workforce in different countries around the world. In spite of being a good method for understanding the cultural distance among countries, the model itself has some draw backs, as the staff of IBM are not only influenced by the national cultural but also are influenced by the organizational culture and hence this study may not reveal the pure information on the national culture, as the employees are also inclined by IBM policies and procedures. But however the framework depicts the cultural difference among the countries in five dimensions:

They are

The first among them is the power distance: this depicts the distance between individual of different ranks.

The next is Individualism this reflects the extent to which an individual relies on a group or collective approach to issues, or the extent to which the individuals takes individuals initiative to solve problems.

Uncertainty avoidance, which reflects on people’s attitudes on ambiguity in a society or country.

The third is Masculinity, the gender differences, in more masculinity, results in assertiveness, competitiveness and need to achieve results; low masculinity suggests co-operation and more caring approaches.

Lastly, the fifth dimension which is the result of the work of Hofstede, with the Chinese cultural connection group (1987) which resulted in another dimension called the Long term orientation, more Asian culture prefer long term bond and oppose short term contracts.

The subsequent resource of information is associated with the exports. Information will be collected from the World Trade Organization (2008) and contain data about the selected countries for the research, North America,

Middle East and Europe.

Ultimately, the information required is different sources of information about the flows of foreign direct investment among each pair of groups of countries. The data for this dataset will be gathered for each pair of countries in isolation and thus different sources will be used.

To understand the proximity of the relationship among the pair of countries can be understood from the information gathered about the cultural distance with the help of Hofstede framework. This understanding of the closeness of the culture will help to answer the question whether business are only ready to trade with those countries which are narrow in terms of cultural distance.

The methods used for analysing are:

In order to assess the level to which the aspect of cultural distance plays a significant part on the business decision on the new ventures with certain nation, can be analyzed with the help of analysis of the pair of countries from the selected parts of the world. This examination will integrate assess of the comparative distance of the two countries, and an evaluation of the relative influence of the exports and of Foreign Direct Investment in the total exports and Foreign Direct Investment of each country. The information will provide a chance to spotlight on the connection between the cultural distance and the actual international link of business in the two groups of countries, with numerical techniques. This examination will be complimented with relative details of the culture of the both the countries.

5. Expected Outcome

It is expected that countries with similarities in terms of culture verify higher levels of international trade, not only in terms of exports, but also in what regards to international trade. The theory on the resources applied in the participation of a new joint venture can also provide a contribution in this respect. Countries with higher similarities may embody a lower risk of investment and therefore, businesss will be seeking to invest firstly in countries in which they know what to expect. However, it is also certain that after having invested in a number of countries to which cultural similarities are found, a business may be seeking to expand to other countries, culturally more distant. This may be due to two reasons: the first one is related to the need of expansion, and once all countries to which cultural proximity is found already have the presence of the business; the second one is related to the international experience and the confidence of investment the business has gained in the countries it has invested previously, and is now ready to take a step further and to operate at a higher risk.