Theme: Domestic & Global

ENTRY STRATEGY AND PERFORMENCE: AN EMPIRICAL STUDY OF FOREIGN COMPANIES ENTRIES IN CHINA
Work In Progress

Lily Lin Qiu

John Hall

Lindsay Turner

Victoria University of Technology

Address for all correspondence: Lily Qiu Department of Applied Economics Room 4c414 St Albans Victoria University of Technology PO Box 14428 MCMC Melbourne Vic. 8001 Australia Phone: 9365 2697 Fax: 9365 2596 E-mail: LilyQiu@vut.edu.au

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ENTRY STRATEGY AND PERFORMENCE: AN EMPIRICAL STUDY OF FOREIGN COMPANIES ENTRIES IN CHINA
Work In Progress

ABSTRACT Empirical evidence about entry into the international market place has been limited in the developed countries. There are few studies on the developing countries, especially on the Peoples Republic of China. The Chinese market has become highly attractive for international business in recent years. This study focuses on entry strategies and performance associated with firm characteristics in the context of the Chinese market environment. Data collection has been carried out through mail questionnaires in Australia and personal survey interviews in China. The respondents are managers of Australian and other foreign companies that have undertaken business with China.

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INTRODUCTION The importance of the Chinese market place can hardly be overemphasized with a large number of companies from Australia, the US, Japan, Western Europe, and other countries having entered into the Chinese market. It is now timely to more closely examine the different entry strategies used by foreign companies and their performance. This study identifies the Chinese market environment characteristics, analyses the relationship of entry barriers to entry strategies and market performance. The research attempts to answer the following questions: (1) how does entry strategy affect the performance of foreign companies in China, and to what degree? (2) What are the factors which refer to external factors (the Chinese market environment) and internal factors (firm and product characteristics) affecting the choice of entry strategy? To what extent do they affect the choice? (3) What choices of entry strategy have foreign companies made in entering into China?

ENTRY STRATEGIES AND PERFORMANCE, A BRIEF LITERATURE REVIEW The literature on entry strategy has been conducted on a number of dimensions. Early work on new ventures was conducted by Biggadik (1976). In his study, the relationship between industry structure and other factors (oligopoly structure, magnitude of investment, sources of advantage, positioning timing) and performance were hypothesised, but not extensively tested. The relationship between new business strategy and performance was examined by Sandberg (1986), Smith (1985), and Simon (1986). Smith (1985) empirically derived three marketing strategies and three classifications of environmental variables, and the research provides support for the need to examine the interrelationships between strategy and environment. Simons (1986) research included aspects of entry strategy and marketing mix (product, distribution, promotion and price). Green and Ryans (1990) were the first to look at an integrative entry strategy of a product into a market, and examined the component parts of an implementing entry strategy. Gatignon, Weitz and Bansal's (1990) study of product entry integrated several entry constructs to explain later performance. Their economic model showed two entry strategy components: competitive positioning (represented by product quality) and magnitude of investment in marketing (i.e., time spent detailing a product). More recently, the study of product entry by Green, Barclay and Ryans (1995), supported the inclusion of three entry dimensions (i.e., timing of entry, magnitude of investment, area of competitive emphasis) and performance. In the previous studies, most researchers focused on single strategy components (usually on entry order or entry mode). The link between multiple entry strategy

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components and performance needs further investigation. Moreover, there are few studies on the entry strategy and performance context, which include internal factors (firm characteristics and product characteristics), external factors (market environment), entry strategy decision, and performance. Furthermore, the most widely used measures of performance are market share and profitability. A composite measure or a combination of several measurements (market share, profitability, satisfaction, return on investment, return on sales) may present a better picture of export performance. Our conceptual framework of international market entry strategy deals with the previously highlighted issues, complements Green, Barclay and Ryans (1995) perspective; draws on Kwon and Konopas (1993) conceptualisation of international market mode; and is supported by the literature of Cavusgil and Zou (1994). Key components include performance, entry strategy, foreign market characteristics, firm characteristics and product characteristics. The hypotheses were formed on the basis of this conceptual framework.

RESEARCH DESIGN Sample International companies doing business with China were the target population. The companies were selected on the criterion of firms having had business links with China for at least 3 years, and the firms main objective being to increase profit, sales and market share. The samples were separately drawn from Australia and China. Australian Sample Firms were randomly selected from the publication Australian Exports, Kompass Australia (1997), produced by Australian Trade. This publication includes information on the companys name, products, names of export manager, marketing manager and director, export countries and overseas branch address. Chinese Sample The respondents of Australian and other foreign firms in China came from Australian Commercial Interests in China, produced by Austrade (Beijing office), and Foreign Companies Business in China edited by the Ministry of Foreign Trade and Economic Cooperation of China. Questionnaire Development The questionnaire development process involved several stages. Firstly, a thorough review of the literature on market barriers and international entry strategies. Most of the literature focused on entry into domestic markets (Karakaya and Stahl 1989;Green, Barclay and Rayans 1995; Szymanski, Troy and Bharadwaj 1995) and entry strategies for developed countries (Din 1990;

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Katsikeas, Piercy and Ioannidis 1995; Okoroafo 1997), with little literature on developing countries, especially China. Secondly, research questions were formulated including the market barrier variables, major entry modes in China, and performance variables. The market environment items were measured on a five- point likert scale (1) very not important to (5) very important. The entry mode questions were focused upon exporting, joint venture, contracting and wholly-owned direct investment, and asked the respondent to select the most significant one. The performance items were focused on satisfaction, profit and sales, with both objective and subjective approaches to the test of performance. Thirdly, the initial questionnaire was reviewed by ten managers of international companies and academics who have expertise in international business research, to assess the content and measurement scales. From their feed back, revisions were made to the items. Fourthly, the questionnaire was translated into Chinese by a native Chinese who was studying international business research in an Australian university. The questionnaire was then back-translated by a professional translator. The back-translation was compared with the original version to check the equivalence of the meanings of the items after the translation. Except for several minor differences in linguistics, no major changes in meaning of the items was found. Finally, pre-testing of the questionnaire was conducted by sending the questionnaire to twenty managers in Australia and in China. The result of this pre-testing showed that there were only minor changes required. The respondents understood clearly and filled out the questions properly. Data Collection Data collection involved a mail survey in Australia from October to December 1997, and a personal survey interview in China from December 1997 to March 1998. The mail survey in Australia was appropriate, for a developed country with a good postal system with relatively low cost, and high literacy levels. The mail survey package consisted of the questionnaire itself, a cover letter, and pre-paid return envelope. Each survey instrument was addressed to an export manager, a marketing manager or a director. The recipient was instructed to pass it on to the person in the company who was responsible for business in China if he or she was uncomfortable in completing the questionnaire. Some questionnaires were returned by the post office as undeliverable, companies no longer existed or not found, and some questionnaires were returned by the companies because they were no longer conducting business with China. There were 102 completed questionnaires, with a response rate of 28 percent in Australia. The method of collecting data in China was slightly different to that of Australia. A mail survey was not appropriate in China, because managers in China were hesitant about providing information through the mail, partly from a lack of exposure to questionnaires and partly from a fear of official investigation. The basic reason for using the personal survey interview was because of the suspicious nature of respondents in developing countries, who are often unwilling to participate in a study where they receive no personal benefit (Huang 1996). The

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personal interview has advantages: more completion of questionnaires, less item non-response, high participation rates, opportunity for feed back, and probing length (Zikmund 1994). In the interview, the respondent and the interviewer meet face to face, the interviewer administering the questionnaire can explain and clarify difficult questions (Melhotra 1996). However costs and time are extensive for conducting personal interviews in China. Nevertheless, despite the high cost, personal interviews may be the only reliable method of obtaining completed questionnaires in China. The letter and the questionnaires were in both English and Chinese because most of the foreign firms in China employed Chinese staff working in the positions of marketing manager, general director and chief representative. Cavusigil and Das (1997) suggested, that questionnaires in the local language encourage a response. The questionnaire package included a cover letter and a questionnaire, like the mail package, even though the interview was face to face. To deal with the wide geographic coverage of respondents and the relatively large data size, a team of field workers was employed. The use of locals in field work in a foreign country has been found to be desirable. These local interviewers can create an appropriate atmosphere for the interview, and are more aware of personal concerns (Malhotra et al 1996). The appointment of local researchers to interview the companies was justifiable in terms of not only cost and time efficiency, but more importantly, to act as a conduit between the researcher and the respondents. Training field workers was critical to the quality of data collected, and their training included the program about the requirements of questionnaire administration and techniques of dealing with an interview. Only people with experience in interview surveying were selected. Training and supervision involved quality control and sampling control. Quality control of field workers was done to see if the field procedures were being properly implemented. The researcher contacted each field worker at least once a week, and discussed any problems detected. Sampling control was done to ensure that the field workers were strictly following the sampling plan rather than selecting a sample based on convenience or accessibility. The final result produced 235 useful questionnaires from foreign companies in Beijing, Shanghai, Guangzhou, Tianjin, Yantai, Fuzhou and Hong Kong. In total, 337 useful questionnaires were collected in Australia (102) and China (235).

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ANALYSIS A strategy and performance model was built to test the hypotheses. The operating model was based on a structural equation model. Exploratory factor analysis generated the loading matrix . A path analysis, with maximum likelihood method was conducted to test the relationship of marketing strategy and performance of the venture. The results will be presented at the conference.

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Kwon, Y.C. and Konopa L.J. (1993), Impact of Host Country Market Characteristics on the Choice of Foreign Market Entry Mode, International Marketing Review, 10(2) 60-76. Malhotra, N.K.(1996), Marketing Research: An Applied Orientation , Prentice Hall, Inc. Englewood Cliff, New Jersey. Malhotra, N. K., Agarwal, J., & Peterson, M. (1996), Methodological Issues in Cross-Cultural Marketing Research: A State of the Art Review, 1-48. Okoroafo, S. C. (1997), Strategic and Performance Issues Associated with Mode of Entry Substitution Patterns: A Comparison of Canadian and US Manufacturing Firms, International Marketing Review, Vol. 14, No1, 20-38. Sandberg, W. R. (1986), New Venture Performance: The Role of Strategy and Industry Structure, Lexington Books, Lexington, MA. Simon, H. (1986), Market Entry in Japan: Barriers, Problems and Strategies, International Journal of Research in Marketing, 3 (2), 105-116. Smith, D. K. (1985), Timing of Entry/Performance Relationships: An Exploratory Innovation, doctoral dissertation, Faculty of the Graduate School, University of Minnesota. Szymanski, D.M., Troy L.C. and Bharadwaj, S.G.(1995), Order of Entry and Business Performance: An Empirical Synthesis and Reexamination, Journal of Marketing, 59(October),17-33. Zikmund, W.G. (1994), Business Research Methods. (4th ed.) Fort Worth: The Dryden Press.

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