FOM Fachhochschule für Oekonomie & Management Essen

The optimization of market entry strategies focused on market entry barriers in China

Elisabeth Bilewicz

Table of Contents

1. Introduction ... 1

1.1. Executive Summary ... 1
1.2. Scope of work ... 3

2. Problem definition and Research methods ... 4

2.1. Definition of Problem ... 4
2.2. Reasoning and Motivation ... 5
2.3. Research methods ... 6
2.3.1. Primary Research ... 8
2.3.2. Secondary Research ... 9
2.3.3. Methods used in Thesis ... 10

3. Theories ... 11

3.1. Relevant theories for market entry strategies ... 11
3.1.1. Export ... 12
3.1.1.1. Indirect Export ... 13
3.1.1.2. Direct Export ... 14
3.1.2. Licensing ... 15
3.1.3. International Franchising ... 17
3.1.4. Joint Ventures ... 18
3.1.5. Overseas branches and factories ... 19
3.1.6. Subsidiaries ... 20
3.2. Selected theory for market entry strategy ... 21
3.2.1. Definition of joint ventures ... 22
3.2.2. Types of joint ventures ... 22
3.2.2.1. Equity joint ventures ... 23
3.2.2.2. Contractual joint ventures ... 23
3.2.2.3. X-joint ventures and Y-joint ventures ... 24
3.2.3. Critical comment on joint ventures ... 24
3.3. Relevant theories for market entry barriers ... 26
3.3.1. Porters Industry Analysis ... 27
3.3.2. The SWOT analysis ... 29
3.3.3. Hofstedes cultural value dimensions ... 30
3.4. Selected theory elements for market entry barriers ... 32
3.4.1. Elements of SWOT analysis ... 32
3.4.1.1. Weaknesses ... 33
3.4.1.2. Threats according to Porter ... 34
3.4.1.3. Use of SWOT analysis ... 36
3.4.1.4. Critical comment on SWOT analysis ... 36
3.4.2. Elements of Hofstedes cultural value dimensions ... 37
3.4.2.1. Power Distance ... 37
3.4.2.2. Uncertainty Avoidance ... 38
3.4.2.3. Individualism versus Collectivism ... 39
3.4.2.4. Long term-orientation versus short-term orientation ... 40
3.4.2.5. Critical view on Hofstedes cultural value dimensions ... 41

4. Case ... 42

4.1. Economic area China: a framework ... 42
4.1.1. Geographical Factors ... 42
4.1.2. Social Factors ... 42
4.1.2.1. Population ... 42
4.1.2.2. Education ... 43
4.1.2.3. Cultural and religious structure ... 44
4.1.3. Legal factors ... 44
4.1.3.1. Political Circumstances ... 44
4.1.3.2. Economic System ... 45
4.1.4. Description of the Chinese market ... 46
4.1.4.1. Market Development ... 46
4.1.4.2. Purchasing Power ... 48
4.1.4.3. Trends of the energy market ... 48
4.2. Application of Relevant Theory elements onto Case ... 49
4.2.1. Definition ... 49
4.2.2. Joint Ventures in China as market entry strategy ... 49
4.2.3. Elements of SWOT analysis ... 50
4.2.3.1. Weaknesses ... 51
4.2.3.2. Threats according to Porter ... 51
4.2.4. Elements of Hofstedes cultural value dimensions ... 54
4.2.4.1. Power Distance ... 54
4.2.4.2. Uncertainty Avoidance ... 55
4.2.4.3. Individualism versus Collectivism ... 56
4.2.4.4. Long-term orientation versus short-term orientation ... 57

5. Conclusion, Outlook and critical Comment ... 58

5.1. Conclusion ... 58
5.2. Outlook ... 59
5.3. Critical Comment ... 60

Bibliography ... VII

Literature ... VII
Internet ... XV
Others ... XIX

1. Introduction

Which possibilities does a company have to go abroad?
What kinds of barriers have to be taken into consideration when entering foreign markets?
These are major questions that affect enterprises when they plan the expansion of their business into a foreign environment.
This present paper is concerned with market entry barriers that have an impact on the chosen market entry strategy of a company. It wants to help sensitizing for potential problems that can occur when entering a foreign market and show which barriers have to be heeded even if the chosen market offers respectable growth as the chosen Chinese economy does.1
From this examination of potential market barriers it is the objective of this thesis to help identifying improvements for market entry strategies and thereby increase the likelihood of a successful venture.

1.1. Executive Summary

Globalization leads to new technological, economical, political and social dimensions and therefore to new challenges.2
Through inventions in the microelectronic and telecommunication sectors, exchange of information and the approach of new communication methods have become faster and cheaper.3 Politically, strong alliances such as the European Union advanced and have led to fallen state borders. This development has led to the opening of foreign markets and to new potentials for the economy.4
In business terms, we talk about globalization when companies “decide to take part in the emerging global economy”5 and enter foreign markets. This expansion changes the requirements of management, employees and strategies, as different frameworks are still present in different countries:6 the foreign legal structure has to be adopted on business partners and customers.
When going abroad, a company can choose between several types of market entries. These can be managed by trade, as affected in Export, Licensing and Franchising or by Foreign Direct Investment when forming joint ventures, overseas offices and subsidiaries in the host country.7
Entering business areas with divergent business cultures can be eased by choosing the market entry strategy of a joint venture with a local partner.8 This venture bears valuable market know-how, established distribution channels and networks. Nevertheless, problems can appear due to different goals and management comprehension of the foreign partner.

“(...) in China it is the right "Guanxi" that makes all the difference in ensuring that business will be successful.”9

As this statement outlines the business environment in China differs from the European business world.
In-depth preparation and awareness of all kinds of barriers in the foreign market are essential to support the success of exploring new markets. This paper uses SWOT analysis to assess the elements weaknesses and threats to understand the internal and external factors that constrain a successful appearance. Additionally, it uses Hofstedes cultural value dimensions to identify potential intercultural conflicts in international business.
As will be outlined in chapter 4, the rapidly growing market of the People’s Republic of China affords many appeals but also bears certain barriers that are faced by companies entering this market.
This paper will describe the optimization of a market entry in such a complex legal and cultural area by outlining the market entry barriers.

1.2. Scope of work

The introduction of this paper as well as the summary and the scope of work are drawn in the first chapter. Chapter 2 deals with the definition and relevance of the problem and outlines the research methods that are applied in this work.
The third chapter is composed of the theoretical background for the subsequent case. For this reason chapter 3.1 gives an overview of the relevant market entry strategies. Afterwards an analysis of the selected market entry strategy that is relevant for the case – the joint venture - is given in chapter 3.2. This analysis is subdivided in three areas: a definition (3.2.1), the explanation of different variations of this market strategy (3.2.2.) and finally a critical comment in chapter 3.2.3 which includes a comparison of its advantages and disadvantages.
In chapter 3.3 relevant theories for market entry barriers will be introduced. Porters Industry analysis will be described in chapter 3.3.1. Afterwards, the SWOTanalysis, its origin and elements will be explained generally in chapter 3.3.2 and Hofstedes cultural value dimensions will be outlined in chapter 3.3.3.
Out of these theories the selected elements for the case part will be illustrated in chapter 3.4. First, the SWOT analysis will be explained in detail in chapter 3.4.1. For this reason the selected market entry barrier elements will be outlined. Again this chapter is sectioned into three parts: a detailed definition of the SWOT elements weaknesses (3.4.1.1) and threats (3.4.1.2) is given, its use is clarified afterwards (3.4.1.3) and a critical comment is drawn finally (3.4.1.4).
The elements of Hofstedes cultural value dimension are analysed the same way as the theoretical elements of the market entry strategy and elements of the SWOT analysis. First, all selected dimensions will be defined. Chapter 3.4.2.1 is concerned with Power Distance, followed by the dimensions of Uncertainty avoidance (3.4.2.2) and Individualism versus Collectivism (3.4.2.3.). This definition will be closed with the last dimension: Long-Term orientation in chapter 3.4.2.4. In the following there will given be a critical comment on Hofstedes theory in chapter 3.4.2.5.
After the theoretical background is outlined in chapter 3, chapter 4 is concentrated on the case part and the application of the discussed theories and methodologies into a practical environment.
As the selected business environment is China there will be given a framework of this country and its economy in chapter 4.1 sectioned into geographical factors (4.1.1.), social factors (4.1.2), legal factors (4.1.3) and a description of the Chinese market (4.1.4).
Chapter 4.2 is concerned with the application of the selected theory elements onto the case. Therefore it will be given a definition in chapter 4.2.1 and the joint venture in China will be described afterwards. The examination of market entry barriers will be drawn in chapter 4.2.3 on the basis of the SWOT analysis and according to Hofstedes cultural value dimensions in chapter 4.2.4.
Finally, the present paper will be brought to an end in chapter 5 with a conclusion, outlook and critical comment.

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1 See Kaufmann et al. (2005), p. 17.
2 See Bergemann, Bergemann (2005), p. 8.
3 See Welge, Holtbrügge (2003), p. 25.
4 See Welge, Holtbrügge (2003), p. 26.
5 Globalization.com (2006), p. 1.
6 See Kumar, Graf (2000), p. 22.
7 See Kutschker, Schmid (2004), p. 823.
8 See Dülfer (2001), p.187.
9 Agribusiness.org (2006), p. 1.