Emerging Markets: A Case Study on Foreign Market Entry in Bangladesh

Transcription

1 Emerging Markets: A Case Study on Foreign Market Entry in Bangladesh Authors: Md. Ashiqur Rahman, Marketing, Master Programme Feleke Desta Tantu Marketing, Master Programme Tutor: Prof. Mosad Zineldin Subject: Master Thesis, 4FE020 Level and semester: Master, Spring 2011

2 Acknowledgement This thesis is the final step of the Master Programme in Marketing at Linneaus University, Växjö, Sweden. It has been conducted in Spring During the journey of writing this thesis we have obtained a lot of new knowledge and experience about the subject under investigation as well as the process of putting together a scientific study. We would herein like to express our gratitude to all the people who has contributed to the successful finishing of this project. Our special thanks go to: our tutor, Prof. Mosad Zineldin, who has given us feedback and encouraged our work; our programme coordinator, Dr. Sarah Philipson, who has guided us through the process; the people, who carried out the physical interviews in Bangladesh; the 150 retailers, who participated in the study and gave us valuable information without which this study would not have been possible; our opponent group and persons who have assisted with support and made recommendations for improvements. We hope you enjoy reading! Växjö, May 29 th 2011 Md. Ashiqur Rahman Feleke Desta Tantu T mr222ck@student.lnu.se ft222af@student.lnu.se 2

3 Abstract Title: Emerging Markets A Case Study in Foreign Market Entry to Bangladesh Keywords: emerging market, entry strategy, market entry, factors behind entry choice, entry mode, entry node, entry timing Background: Internationalism and international marketing are hot topics among the strategy discussions of the companies and as a result companies continuously look for new, unreached sales potential to their products and services as well as better use of their resources. Purpose: To find the most efficient international market entry strategy for companies moving from developed/transition economy to an emerging market. Theoretical framework: The base for the start of internationalisation process is company s inner motives and resources. Motives and resources combined with the cultural distance, competition and general external environment of host country form potential companyspecific risks for the entry to foreign market. Potential customers in combination with company resources shows how big is the match between market demand and what company can offer and therefore determines the potential reward. Risks and reward are both input to the decision making process where the potential benefits and drawbacks are analysed against each other. The output of this decision making is the entry strategy. Methodology: Internet was mainly used to collect secondary data about company resources, cultural distance and external environment. Interviews with 150 retailers in Bangladesh were conducted to collect primary data about the competition and consumer behaviours in the hosiery market of Bangladesh. Then comparative analysis was made based on the model developed by the authors to reach to the decision. Conclusion: The most effective entry strategy for the entry to emerging markets is indirect exporting through an agent in case there is high location risk, moderately high competition risk, medium country risk and moderately low demand risk, the company has no surplus finances for big investments and no prior experience in doing business in an emerging market. 3

4 Table of content Acknowledgement 2 Abstract 3 Table of content 4 1. Introduction Background Problem discussion Purpose Delimitation and scope Theoretical review Market entry strategy Market entry modes Exporting Licensing Management contracting Joint venture FDI Acquisition FDI Greenfield FDI Use of different entry modes Factors influencing the decision of entry mode Company motives for entry to foreign market Company s internal resources Cultural distance Risks related entry to foreign market Industry situation / competition in the host market External environment Additional aspects for the entry to emerging markets Entry nodes Entry timing State-of-the-art Research questions 38 4

5 3. Methodology Research approach Data collection Sampling Interview methods Operationalisation Validity Reliability Empirical study Company background Product overview The host country overview The home country overview Information received from the interviews Analysis Company motives and resources Cultural distance Competition Potential customers External environment Entry strategy Conclusions Recommendations for further research 79 References 80 Literature and articles 80 Internet 84 Appendix 1 Interview questionnaire 85 Appendix 2 Additional results from the survey 90 5

6 1. Introduction In order to get an overview about the subject studied in the present thesis, an introductory background on the issue is provided describing the relevance of the topic. Subsequently, a problem discussion is elaborated and the overall purpose of the study stated. The chapter ends with the limitation of the subject Background Today s companies, whether they are small, medium-sized or multinational, are striving to make their products and services more global than ever. The internationalisation of firms is occurring at an ever increasing pace. In the past 20 years, firms have changed their orientation from domestic to international; they have shifted from multi-domestic marketing to global marketing (Malhotra et al., 2003:1). Internationalisation is the process of adapting exchange transaction modality to international markets (Malhotra et al., 2003:1). Amdam adds that internationalisation is also a process increasing commitment to foreign operations and to foreign markets in which they are already operating (Amdam, 2009:446). According to Albaum & Duerr a firm becomes increasingly internationalised as it becomes more involved in and committed to serving markets outside of its home country (2008:13). They define international marketing as the marketing of goods, services, and information across political boundaries, which could include anything from exporting one product to one other country in response to an order, to a major effort to market a number of products to many countries (Albaum & Duerr, 2008:14). Different authors emphasize on the variety of reasons why companies expand to foreign markets. Thomson et al (2005:174) mention four major motivations of the companies for going abroad: 1) gain access to new customers for realizing the potential of increased revenues, profits and long-term growth; 2) achieve lower costs and enhance the firm s competitiveness as often domestic sales volume is not large enough to fully capture manufacturing economies of scale or learning curve effects; 3) capitalize on its core competencies; 4) spread business risk across a wider market base so that the economic turbulences do not put the existence of the company at risk. Couturier & Sola (2010:45) add that companies wish to acquire resources that are more efficient than those obtainable in the home market of the firm (e.g. labour and natural resources). 6

7 Album & Duerr (2008:2) bring out some more reasons derived from the developments of the markets and global environment. They believe that the importance of international marketing is continuously growing due to: 1) research & development costs, which for many products cannot be recovered unless they are sold internationally; 2) increasing demand from consumers for alternative product/service selection; 3) countries desire to enjoy higher per-capita GDP growth rates and lower unemployment rates. The major external changes that force the rapid growth of international business are technological advances and greatly reduced costs in communications, the development of sophisticated and diverse software to support a wide variety of business functions, the further development of logistics and supply chain management, increasing rates of entrepreneurial innovation and technological change, changes in the location of some major economic activities, continuing lowering of barriers to trade and investment through multilateral agreements and increasing regional integration, the internationalisation of capital markets, an increase in all types of strategic alliances and the excess capacity existing in a wide range of industries in many countries (Albaum & Duerr, 2008:2). According to Couturier & Sola (2010) both niche players and mainstream corporations must develop globally in order to sustain. Similar idea is expressed by Albaum and Duerr (2008), who state that most companies are now selling to, buying from, competing against, and/or working with enterprises in other nations. They further argue that from consumers perspective, international sales and marketing provides an increasing range and selection of goods and services with lower price and better quality as well as economic health and growth for nations (Albaum & Duerr, 2008:2). We can sum up that we live in a global world, where customers expect the high variety of products/services to choose from and the market competition is continuously increasing due to endless environmental, social and technological advancements. These trends seem to be getting stronger, which keeps the internationalism and international marketing the hot topics among the strategy discussions of the companies. As a result companies continuously look for new, unreached sales potential to their products/services as well as better use of their resources Problem discussion When a company goes international, there are three questions that need to be answered: a) Who are we? b) Where do we want to go? c) How will we go there? (Thomson et al, 2005:3). 7

8 Who are we gives the idea of company s core competencies and values. Where do we want to go shows the (expansion) direction and ambitions, specifically the foreign markets where company wants to establish itself. How will we go there identifies the strategies and ways of entry. There are different options for entry ranging from licensing and franchising, through exporting (directly or through independent channels), to foreign direct investment (FDI) (joint ventures, acquisitions, mergers, and wholly owned new ventures) (Anderson & Gatignon 1986; Domke-Damonte 2000 in Rasheed 2005:42). However, additionally the company when going international must also see whether the market where they want to go have the potential to receive their product. Over the past two decades, globalization has profoundly affected the economies of both developed and developing countries. By increasing the flow of trade and foreign direct investment, trade liberalization policies have transformed and modernized the economies of emerging markets (Javalgi et al., 2010:209). Emerging economic regions have been playing a critical role in global economies. Since their market liberalization and privatization policies were formally set forth, these areas have attracted many foreign investors (United Nations Conference on Trade and Development [UNCTAD], 1997 in Isobe et al., 2000:468). Despite the complexity and instability faced, emerging markets have become increasingly attractive for doing business, inter alia due to the fact that growth rates in forthcoming years will be significantly higher than in mature markets (Cavusgil et al, 2002). According to Jansson (2007) the rapid growth of emerging country markets and their integration into the world economy creates double effects of strong global pull from growing demand and push from growing competition. Therefore, it may be concluded that it is or will be vital for companies operating in developed countries, to give more business attention to expand their market to developing countries. Competition comes about because business firms, in their search for a niche in the economic world, try to make the most of their uniqueness. The result, hopefully, is the establishment of differential advantage that can give the firm an edge over what others in the field are offering. It is this unending search for differential advantage that keeps competition dynamic (Albaum & Duerr, 2008:158). In addition Hoecklin (1995) in Albaum & Duerr (2008) argues that understanding and managing cultural differences can lead to innovative business practices and sustainable sources of competitive advantage. 8

9 According to Jasimuddin (1995) the study of host cultures is of primary importance to those in international business because cultural differences exert a pervasive influence on all business transactions. Cultural factors will continue to be important considerations for managers operating in foreign, and initially strange, environment is a competitive setting (Jasimuddin, 1995:62). Specialized marketing knowledge or access to information can distinguish an exporting firm from its competitors. A good and perhaps unique product, a strong sales force, an efficient marketing infrastructure, and good service technical support system, for example, may act as incentives for exporting because a company has built up competitive marketing advantages (Albaum & Duerr, 2008:79). When establishing business in an emerging market, understanding the external business environment is not the only critical component. The attractiveness of the targeted market segment in terms of profitability prospects is a major parameter for deciding on whether to enter the market. Analyzing and being aware of the forces driving competition in the targeted emerging market is a critical factor, since they provide opportunities and threats for growth and determine the attractiveness of the targeted market segment (Thompson & Martin, 2005). Market entry in developing countries will most likely mean being exposed to unfamiliar environments. The general business conditions might be very different from the home market and constitute higher levels of trade barriers and socio-cultural distance may be difficult to deal with (Petter, 2009:3). If a company lacks experiential knowledge in a volatile and unstable foreign market, accurate market segment evaluation is a challenging process. Nevertheless, being aware of the attractiveness of the targeted segment in an emerging market is a precondition for deciding on whether to enter the foreign market (Pehrsson, 2002). It can be understood, the topic of internationalisation is broad and could take hundreds of pages of discussion. Therefore the authors of this thesis have limited their area of interest to the entry strategies of emerging markets Purpose The purpose of this thesis is to find the most efficient international market entry strategy for companies moving from developed/transition economy to an emerging market. 9

10 1.4. Delimitation and scope Due to limited time and financial resources the authors limited the scope of the research as follows: Thesis focuses on the appropriate entry mode selection only; full scale analysis of (longterm) internationalisation process is not done. The emphasis is on the entry to emerging market, both in the theoretical chapter as well as in the rest of the paper. The development stage of home country market and its implications to the foreign market entry are not discussed. Therefore, in the context of this thesis, it is not considered relevant whether the home country market is developed or in transition phase. The theory part of this study is based on the literature that was available to the authors within the limited time. The authors acknowledge that this may be only the fraction of the literature that has been produced on the topic. Therefore the approach and framework developed in this thesis by no means claims to be unique in the field. The empirical part of this thesis is based on the case, where the company is an Estonian hosiery company and targeted market is Bangladesh. For simplification of the text and relying on the fact that Estonia as part of European Union and Euro zone, Estonia is referred to as developed market. The authors are aware that in the literature, Estonia is often said to be a transition economy. The data collection for empirical part was done being physically in Estonia. This has effects on the amount and possibly the depth of information. Finally, there was 8 weeks time to for writing this thesis (starting from preparation to finalising). The limited duration set tight deadlines to the work which has negative influence on the depth of the study. The theoretical part of the paper gives the overview of different aspects of the entry strategy (e.g. entry modes, nodes, timing) and the variety of considerations that influence the choice of the entry mode. In this part the dimensions of company, market and external environment as well as risks are covered. Wherever possible, the distinctions specifically applicable for emerging markets are discussed. The empirical part draws the overview of the case market and company based on the primary and secondary data collected. Finally the analysis of the empirical data is made based on the information provided in the theoretical chapter and the most suitable entry strategy for the companies entry to emerging markets is proposed. 10

11 2. Theoretical review In this part of the paper, the authors present theories about the practices of market entry strategy, market entry modes, internationalisation to an emerging market, risks associated with new market entry, timing of entry and finally, the research questions that we came up with based on the discussed theories Market entry strategy As different authors tend to define the internationalisation, marketing strategy and foreign market entry strategy slightly differently, it is relevant to specify the terms for the context of this paper. For the overall approach, the authors are using the definitions from Jansson (2007:135), who distinguishes two major strategic issues in the international business marketing: 1) the entry strategy and 2) the internationalisation strategy. Jansson (2007:135) sees the entry strategy as how firms get access to new customers in new geographic markets by marketing their products there, for example how the business marketing is initiated and built up in order to establish a strategic position in the local industry and how business marketing is done to maintain such a position. The internationalisation strategy for Jansson is how business marketing is increasingly globalised by the expansion of firm to growing number of countries (Jansson, 2007:135). Therefore we can conclude that internationalisation is a long term process and observes the development of the company in an international business context whereas entry strategy is the first stage or step in entering a new market. For the context of this paper, only the entry strategy (also referred to as market entry strategy) is further relevant. According to Jansson (2007: ) market entry strategy consists of four factors: entry mode (determines whether company shall export, establish a company of its own or cooperate through a joint venture), entry node (determines how shall company plug into the local network), entry process (determines how company shall build relationships in the local market) and entry role (determines what commercial role the company shall perform in the local network - seller, buyer and/or manufacturer). Janssons view is quite well aligned with the views of Albaum & Duerr (2008:275), who state that a market entry strategy consists of an entry mode and a marketing plan and it determines the degree of a company s control and its commitment in the target market. Some identify another aspect entry timing, which can be crucial while entering to emerging markets (Pan & Chi 1999 in Johanson & Tellis 2008). 11

12 Scholars have extensively analysed some aspects of entry strategies, especially ownership and control (Agarwal & Ramaswani 1992; Anderson & Gatignon 1986; Hill et al in Meyer & Nguyen, 2005:63), which are related to entry mode. Over the last decade a considerable attention has also been placed on the nature of business relationships, strategic alliances and networks (Zineldin 2007:366) and analyzing company performance within different entry modes (Zineldin 2007, Zineldin & Dodourava 2005). More recent studies have indicated that internationalisation strategies are associated with information asymmetries and substantial risks, especially when firms invest in emerging markets with relatively less developed legal and business environments (Filatotchev et al. 2007:558). The variety of theories has evolved trying to explain the motives and justification for the choice of entry strategy, mostly for entry modes. The most widespread out of those theories is transaction cost theory (Brouthers & Brouthers 2003; Hennart 1991; Zhao et al in Brouthers et al. 2008:936). Quite well known are also theories of international product life cycle, market imperfections, resource advantage, strategic behaviour, eclectic, internationalisation, real option and network theories (Malhotra et al 2003:8). Some of those theories focus on the external environment as the main deciding factor for the entry strategy, some focus on the internal resources, management views and risk tolerance of the companies, some put the main attention towards the market aspects. No specific model has been taken as the basis of this thesis; however, the authors have tried to capture the aspects from all of those theories that are most relevant for making the entry strategy choice for an emerging market Market entry modes The firm s performance in the host country to a great extent depends on its mode of market entry. The choice of market entry mode selected by a firm is one of the most crucial decisions a firm can undertake when it decides to internationalise (Choo & Mazzarol 2001:291). Choice of entry automatically constrains the firm s marketing and production strategy (Johanson & Tellis 2008:2). Root (1987) in Rasheed (2005:42) defines an entry mode as an institutional arrangement that makes possible the entry of firm s products, technology, human skills, management or other resources in to a foreign country. Later on Gatingnon & Anderson (1988) in Sharma & Erramilli (2004) refer to an entry mode as a governance structure that allows a firm to exercise control over its foreign operations. 12

13 As said before, the transaction cost economics is the primary theory to explain the choice of entry modes. Based on the concepts of bounded rationality and opportunism, transaction cost economics focuses on minimizing the costs created by uncertainties associated with protecting proprietary assets, investing in different markets, and monitoring partner behaviour (Hennart, 1988; Williamson, 1985 in Broutherset al., 2008:936). Erramilli et al (2002:225) add that a firm should choose an entry mode that can best transfer its re-sources or capabilities from the home country operations to the host country operations without eroding their value. According to Bhaumik & Gelb (2005:10), the choice of the entry mode would also depend on the rate of growth of the local industry. If an industry is fast growing, and therefore fast changing, it may be essential for companies to quickly have a stake in it, so as not to lose its first-mover advantage to other multinational companies or local firms. There are number of international market entry modes available for companies who wish to enter in to a new market. Entry modes vary in the degree of control the firm has over invested tangible and intangible resources, the transaction costs associated with that resource commitment (Anderson & Gatignon 1986; Domke-Damonte 2000 in Rasheed 2005:42), enforceability of legal rights and ease of knowledge transfer (Hennart, 1988, 1989; Williamson, 1991 in Broutherset al., 2008:937). Dunning proposed a comprehensive framework which stipulates that market entry modes are determined by three factors: ownership advantages of a firm, location advantages of a market and internalization advantages of integrating transactions within the firm (Dunning in Ohlin, 1977; Dunning, 1980 in Couturier & Sola, 2010:47). The entry modes can be non-equity based or equity based (foreign direct investments). The most common market entry modes described by the majority of the authors are exporting (indirect or direct), licensing, management contracting, joint venture, acquisition, Greenfield. The first three of them are non-equity based, the rest are different forms of foreign direct investments that means equity based entry modes. Following is the overview of the mentioned entry modes with some explanation about when it may be beneficial to use one or another Exporting Exporting is located domestically and is controlled administratively (Anderson & Gatignon 1986 in Rasheed 2005:43). It is the easiest way to meet needs of foreign market and it has minimal effect on the ordinary operations of the firm (Albaum & Duerr, 2008). According to 13

14 Rasheed (2005:41) a study results indicate that firms will have a higher rate of international revenue growth using no-equity-based (exporting) foreign market entry modes in growing domestic environments. According to Albaum & Duerr (2008) as well as to Kotler & Keller (2006) exporting is classified into two categories: a) direct exporting (every responsibility is performed by the company itself) and indirect exporting (responsibilities are done through other intermediaries). Huei-Ting & Eisingerich (2010) categorize firms engaged in gradual internationalisation in to two types: regional exporter/importer and global exporter/importer. The former relates to emerging market firms that gradually deepen their commitment and investment as they gain more market knowledge and experience and begin by exporting to, and importing from, geographically close markets. The latter refers to firms from emerging markets that initially limit their investments and engagement in foreign markets but export/import on a global rather than merely regional level (Huei-Ting & Eisingerich, 2010:116). Advantages of export from macroeconomic point of view are that it boosts employment and allows national economies to build up their reserves by means of foreign transactions (Reid, 1983 in Claver et al. 2007:3). Advantages of exporting mode from company perspective are that it requires low investment, has low risk/return alternative (Agarwal & Ramaswami, 1992:3) and allows a firm to achieve competitive advantage, increase productive capacity or improve its financial position (Reid, 1983 in Claver et al. 2007:3). It also allows the company to maintain the complete control over production and reach customers quickly. From negative side, even though exporting provides a firm with operational control, it lacks in providing marketing control that may be important for market seeking firms (Agarwal & Ramaswami, 1992:3). On top of that, research has found that exporting can have negative effect on financial performance (Lu & Beamish (2001) in Rasheed, 2005:43). That can be caused by high transportation costs, tariffs and quotas. Exporting is the most appropriate choice for entry mode if there are low entry barriers, home location has cost advantage and product customization is not crucial. 14

15 Licensing Licensing is the provision of the companies (licensor s) manufacturing, processing, trademark or name, patents, etc to the licensee with payment (Albaum & Duerr, 2008). It can be the process of transferring technology from one company to the other or from home country to the host country (Mottner& Johnson, 2000:185). According to Claver et al. licenses and franchises are the most important of the main contractual agreements (Claver et al. 2007:4). Technology plays major role for firms to practice licensing. According to Ferreira and Ferreira (2008:321) technological difference is important reason for cost differences between firms, which may encourage them to share their technological information through licensing. Advantages of licensing include low initial investment, avoidance of trade barriers, access to local knowledge and easier possibility to respond to customer needs. Major drawbacks of licensing are the lack of control over the operations and difficulty in transferring tacit knowledge. In addition licensing has a potential of creating a competitor. Licensing is the most appropriate when the company has well codified knowledge, there is strong property rights regime and host country location advantage Management contracting Management contracting exists when a local investor in a foreign market provides the capital for an enterprise, while a company from outside provides the necessary know-how to manage the company (Albaum & Duerr, 2008). Advantages of management contracting for an outside firm is that it offers a low risk way into a foreign market, allows a company to manage, and in many ways to control (in a functional sense), another company without equity control or legal responsibility, quick return, establishes clarity in administration and decision making. It provides the company with access to local management skills and helps them avoid buying unwanted assets. On the other side, the disadvantage of management contracting is the need for complex contract and expensive legal document, which must differ for each case (Albaum & Duerr, 2008:383). It has been argued that choosing the management contract is appropriate when the manager has a reputation to protect (e.g. hotels or consulting companies) and when performance-based contract provides no bad incentives. 15

16 Joint venture FDI Joint venture exists when a company joins another non-national company for common interest (Albaum & Duerr, 2008). According to Albaum & Duerr (2008) the main feature of joint venture is that ownership and control are shared. In long run, this approach is more profitable than any other approach. In the literature, joint venture is the topic about which different scholars make different conclusions and recommendations. On one hand, it is said that entry into a country in the form of a joint venture reduces the company s transaction cost of doing business (Bhaumik & Gelb 2005:9). In addition, cooperative ventures have the advantage of lower capital investment risk, lower risk of return due to faster entry and lower political risk (Contractor & Lorange 1988 in Rasheed, 2005:45). Kim & Hwang (1992, p.35 in Brouthers & Brouters, 2003:1184) suggest that joint venture modes of entry provides the firm with a method to decrease the exposure of fixed assets to the potential hazards of environmental uncertainty. An agreement of joint venture is considered the smartest move when the chosen entry market is significantly different from that of the enterprise s domestic culture (Hennart & Park, 1993 in Couturier & Sola, 2010:48). Because of this, Beamish (1985, 1993) in Isobe et al (2000:469) even argues that equity joint venture has been a dominant and often a "forced" entry mode in most emerging regions. Several scholars (e.g. Aulakh & Kotabe, 1997; Erramilli & Rao, 1993; Gatignon & Anderson, 1988; Kim & Hwang, 1992) argue that joint ventures provide firms with greater flexibility, which is needed when environmental uncertainty is high in order to speed up adaptation (Brouthers & Brouters,2003:1183). On the contrary, Williamson (1991) in Brouthers & Brouters (2003) discusses that joint venture will be used less often in high environmental uncertainty markets because adaptations cannot be made quickly due to the need for consent between parties. Beamish (1985) in Mayrhofer (2004:74) identifies important differences in the characteristics of joint ventures between developed and developing countries. The statistics provided show that joint ventures established between firms in developed countries are equally owned more often than joint ventures between firms in developed and developing countries. Beamish considers that the observed differences are mainly due to the characteristics of the external environment in developed and developing countries. Sinha (2001) goes even further claiming that multinational companies typically use the joint ventures as vehicles toward gaining 16

17 knowledge about the business environment in the developing economy and once they have absorbed this knowledge, they usually initiate their own business operations by opting out of the joint venture (Sinha, 2001 in Bhaumik & Gelb, 2005:7). According to the empirical study of Javorik & Saggi (2010), efficient foreign investors are less likely to choose joint ventures and more likely to enter directly. On the other hand several scholars (Kock & Guillen, 2001; Lane & Beamish, 1990; Osborn & Hagedoorn, 1997 in Kim et al, 2004:15) argue that strategic alliances are an important entry mode in an emerging market. Through alliances, western companies can share risk and resources, gain knowledge and obtain access to markets (Kock & Guillen, 2001 in Kim et al., 2004:15). In conclusion it may be said that joint ventures are appropriate to be used if specific conditions apply: (1) the project depends on contributions from two or more partners; (2) the markets for the contributions from the parents are subject to market failure, i.e. transaction costs are high; and (3) it is not feasible to internalize the whole operation with one partner taking over the other(s) (Buckley & Casson, 1976, 1998; Hennart,1988 in Meyer & Nguyen, 2005:74) Acquisition FDI Acquisition is defined as having a majority of interest in another company (e.g. acquisition of a business unit) by stock purchase or exchange (Couturier & Sola 2010). Acquisition facilitates quick entry and immediate access to local resources (Meyer & Estrin, 2001:575). Firms establishing themselves abroad for the first time often choose to do so via acquisition. This path reduces uncertainty (Dubin 1976; Brouthers & Brouthers 2003; Halliburton, Hünerberg & Töpfer 1993 in Couturier & Sola, 2010:47) as acquisition provides the access to target market knowledge as well as control over foreign operations and own technology. From drawbacks side, acquisition may bring along the difficulty in absorbing acquired assets. Also, this option is not feasible in case local market for corporate control is underdeveloped. From an external viewpoint, acquisition is an attractive option when a firm wishes to enter an oligopolistic, static or declining market. If investment cost is very high, acquisition becomes unattractive too and no entry will be an optimal choice but in larger markets acquisition is relatively more favourable (Muller, T., 2007:93). According to the report of Caves & Mehra 17

18 (1986) for entry into the US, and Zejan (1990) for Swedish multinational enterprises, acquisition entry is favoured in rapidly growing or very slow-growing markets (Yung, 2006) Greenfield FDI Couturier & Sola (2010) define Greenfield as investment in a commercial office, manufacturing plant, distribution facility or other physical structure in a country where no corporate facilities previously existed. It is a direct investment normally entailing 100% ownership and therefore full control. Greenfield uses the resources of the investor and combines them with local assets, giving the investor more discretion over the organization of the new venture, but generally permitting only a gradual establishment (Meyer & Nguyen, 2005:75). A Greenfield entry would be more likely if the multinational company has prior operating experience in the host country or in similar developing countries or emerging markets (Barbosa et al in Bhaumik & Gelb, 2005:9). It is also more likely if the cultural distance between the multinational s home country and the host country of operations is minor (Yip 1982 in Bhaumik & Gelb, 2005,:9) According to Meyer & Estrin (2001:575) Greenfield project gives the investor the opportunity to create an entirely new organization specified to its own requirements, but implies a gradual market entry. Larger and more established multinationals are far more likely to choose a Greenfield investment (Dubin, 1976; Brouthers & Brouthers, 2003; Halliburton et al in Couturier & Sola, 2010:47). Greenfield strategy is far more appealing when there is rapid expansion in a market (Knickerbocker, 1973 in Couturier & Sola, 2010:48). The drawbacks are that Greenfield requires knowledge of foreign management and has very high investment cost (Muller, 2007:93), therefore it implies high risk and needs high commitment to succeed. Greenfield strategy can be very appealing when there is lack of proper acquisition target in the foreign marker, there is in-house foreign market expertise and embedded competitive advantage. 18

19 Use of different entry modes Agarwal & Ramaswami (1992) in Choo & Mazzarol (2001:293) in their examination of the effect of interrelationships among ownership advantages, location advantages and internalization advantages have found the following: Larger and more multinational firms prefer sole venture (e.g. acquisition, Greenfield) and joint venture modes to the other market entry modes in low market potential countries. Smaller and less multinational firms prefer no entry or joint venture mode in high potential markets to reduce costs and risks. Firms having higher ability to develop differentiated products prefer to choose investment modes to exporting in countries that are perceived as having high contractual risks. Firms prefer the exporting mode in markets that have high potential but are perceived to have high investment risk. During the past several decades, there has been a significant change in the attitudes of many countries toward inflows of foreign direct investment (FDI). From being viewed as exploiters, foreign investors are now welcomed as a source of new technologies, know-how, better management, and marketing techniques (Javorcik & Saggi, 2010:415). Developing country governments are especially interested in the technology and know-how transfer that results from FDI. To be able to assess the potential magnitude of such benefits, it is important to understand preferences of different types of investors with respect to the entry mode (Javorcik & Saggi, 2010:428). In addition to technology transfers, Konopielko in Kumar & Waheed (2007:178) highlights the benefits of FDI for less developed countries as conferred to domestic employment growth, formation of human capital, government revenue growth, and direct expenditure. By the end of the twentieth century, foreign direct investment had effectively replaced trade as a driver of economic growth in less developed and emerging economies. In 2002, there were an estimated 65,000 multinational corporations with about 850,000 worldwide affiliates employing about 54 million employees, a rise of 141 percent over the 1990 employment figure for MNCs (UNCTAD 2002). In 2004, FDI increased by 41% in developing countries and reached an all-time high of $268 billion. Asia in particular took in nearly one in four FDI dollars, which is quite an improvement from one in ten in 2000 (Kumar & Waheed, 2007:178). Therefore, we can say that FDI plays as a source of financial resource for developing countries and emerging markets. 19

20 From companies perspective acquisitions and FDIs are expensive and cumbersome; however, the aging of the population and changes in regulations have placed many closely held companies on the sales block, providing foreign companies access to safe vehicles for entry and expansion (Kumar & Waheed, 2007:180). Foreign licensing is foreign located and is controlled contractually; and FDI is foreign located and is controlled administratively. Transaction costs theory views each choice of entry mode as an individual transaction that involves a trade-off between control and resource commitment (Anderson & Gatignon 1986 in Rasheed 2005:43). FDI is a more competitive way than exporting for operating in international markets because the value of FDI was greater at later stages (Lu & Beamish,2001 in Rasheed 2005:43). An interesting fact is that over the last decade there has been the change in the nature of business relationships, particularly the shift from adversarial to more strategic alliance relationships (Zineldin & Dodourova 2005:460). This allows suggest that licensing, management contract, joint venture and other cooperative forms of entry have become more prevailing. Compared to go-it-alone strategies strategic alliances have a long list of motives (Zineldin & Dodourova 2005:462): a) financial benefits related to cost reduction and profit generation (e.g. joint investment, reduced inventory, stable supply prices), b) technological benefits that facilitate supply process (e.g. sharing technology, joint new product development), c) managerial benefits including interdependence, supply base reduction and loyalty, d) strategic benefits related to competitive positioning of the supply process (e.g. future direction, achieving core competency, stronger market base and identity). However, forming a successful alliance is not an easy task to do as the barriers like clash of cultures, lack of coordination, differences in operating procedures and attitudes, lack of clear goals, objectives and trust etc must be overcome. (Zineldin & Dodourova 2005: ) 2.3. Factors influencing the decision of entry mode While an industry may hold the promise of high growth, entry and expansion cannot be successfully executed without a competitive position within the industry. Therefore entry mode selection is very important, even critical strategic decision (Agarwal & Ramaswami 1992:2). The list of the factors that influence the choice of entry mode is long. According to the results of theoretical and empirical study by Yung (2006), FDI mode choice strategy is influenced by three determinants: resources owned by the investor, resources specific to the host firm, and 20

21 risk derived from the international market. Zineldin & Dodourova (2005) showed in their empirical study that the choice between strategic alliance and go-it-alone strategies depends on the motives for entering to the foreign market. Claver et al. (2007) argue that the decision to enter a foreign market should be based on balancing the risks and rewards derived from this action. However, the evidence suggests that it is also determined by resource availability and the need for control and choice of entry strategy also depends on the firm's surplus resources (Claver et al 2007:2). Keillor et al (2001) argue that market/firm characteristics and government policy/market imperfections have a significant relationship to entry strategy and they are factors influencing choice of market entry mode. Kumar & Waheed (2007) concluded in their study that strategic considerations for foreign market entry and expansion should take a thorough account not only of the firms immediate operating needs but also of the competitive environment in the dimensions of management, finance and macroeconomics. In the following pages, the authors discuss more thoroughly the most important factors for the choice of entry mode Company motives for entry to foreign market As discussed already in the introductory part of this paper, there is the variety of motives for the entry to foreign markets. Zineldin & Dodourova (2005) in their empirical study about Swedish auto-manufacturers entry to Russia looked more into how these motives influence the actual entry mode choice. They concluded that sharing research and development and vision, common goals and new skills development as well as achieving stronger market position and identity are the main motives when deciding to go for an alliance, while taking advantage of emerging market opportunities seems to be more important to the manufacturers when following go-it-alone strategy. The motives like increased customer service, reduced different costs, increased market share and profits were equally important in case of alliance and go-italone strategies. They also found that a joint venture alliance may be more likely to be formed by partners that have common goals and objectives and that joint venture alliance has a better chance to succeed if the partners initially focus on financial objectives and at later stage on strategic and managerial objectives. 21

22 Malhotra et al (2003:20) based on the analysis of various theoretical frameworks make three conclusions related to the choice of entry based on company s motives. These were: The greater the significance of global synergy to the firm, the greater the probability is that wholly owned FDI as a market entry strategy will occur at the maturity phase or early standardization phase; The greater the significance of global strategic motivations to the firm, the greater the probability is that wholly owned FDI as a market entry strategy will occur at the maturity phase or early standardization phase. The greater the significance of global concentration to the firm, the greater the probability is that wholly owned FDI as a market entry strategy will occur at the maturity phase or early standardization phase. When we look at the choice of international entry mode of firms from the perspectives of transaction cost economics and real option theory, transaction cost economics focuses only on cost minimization and does not consider opportunity costs associated with timing of entry, omitting the impact of competitors action, fails to acknowledge the potential for future growth generated by making investments when uncertainty is high (Leiblein 2003; Li 2007; Sanchez 2003; Zajacand Olsen, 1993 in Brouthers et al. 2008:936). On the other hand, real option theory tries to address the short comings of transaction cost economics by focusing on cost minimization and value creation as well as on the opportunity costs (the uncertainties) associated with not making an investment (Buckley & Tse 1996; Buckley et al. 2002; Dixit & Pindyck 1994; Kogut 1991 in Brouthers et al. 2008:.937). In the existing literature, the entry mode decisions are often isolated from the sequence of decisions. Entry mode decisions analysed in the context of transaction cost theory (Sarkar & Cavusgil 1996; Rindfleisch & Heide 1997; Meyer 2001; Nakos & Brouthers 2002; Herrmann & Datta 2002; Meyer 2004 and Zhao & Decker 2006) suggest that multinational enterprises select entry mode through the minimization of the transaction costs associated with each form of entry. North notes that firms try to minimize total cost, not just transaction costs (North 1987, 1990, North & Wallis 1994) in the choice of entry modes. While Kos (2010) believes that cost minimization is critical in entry mode selection but it does not fully explain entry mode choice (Kos, 2010:320). 22

23 Company s internal resources Choice of entry mode is affected by firms resources (Jansson & Sandberg 2008:67). As compared to small firms, large firms tend to have greater levels of economic and managerial resources for investments in the host market of entry. This view is supported by the transaction cost view, which concludes that high control in entry strategies entails high resource commitment. Wholly owned subsidiaries and joint ventures are high-cost entry modes because of the level of resource commitment needed to set up operations (Pan & Chi 1999 in Johanson & Tellis, 2008:2). Each company is unique and this uniqueness stems from the resources it possesses, their compability with one another and/or the way they are deployed (Sharma & Erramilli 2004:7). Examples of such resources include all assets and capabilities, such as distinctive competencies, technology, corporate culture, customer loyalty, brand name, machinery, processes and procedures, market orientation and relational and intellectual assets (Hunt & Morgan 1995, Reed & DeFillippi 1990, Srivastava, Shervani & Fahey 1998 in Sharma, Erramilli 2004:7). The value of the a resource is defined in terms of its contribution to firm s competitive advantage (Madhok 1997 in Sharma & Erramilli 2004:9). The greater this contribution, the greater the value. When firm enters a foreign market, it typically relies on its existing resources to compete in that market because it is generally more effective and/or efficient to transfer them to the foreign market than develop new ones from scratch (Hu 1995, Madhok 1997, Kogut & Zander 1993 in Sharma & Erramilli 2004:9). The challenge for entry modes is to transfer the firm s resources from the home country to the host country without affecting their ability to generate the desired competitive advantage (Sharma & Erramilli 2004:9). If the key advantages are easily transferable, the firm is able to choose the foreign production mode; if essential advantages are difficult or costly to transfer, the firm will be confined to the exporting mode (Hu, 1995 in Sharma & Erramilli 2004:10). Similar idea is expressed by Malhotra et al (2003), who propose that the more tacit or higher the value of firm-specific know-how, the greater the probability is that wholly owned FDI as a market entry strategy will occur during the new product or maturity phase. 23

24 The following table summarizes the resource based view to the choice of entry mode: PRODUCTION ACTIVITIES Firms likelihood of establishing comparative advantage in the host country Firms ability to transfer advantage generating resources to host country partners MARKETING ACTIVITIES Firms likelihood of establishing competitive advantage in the host country Low N/A Low N/A Low N/A High High Low N/A High Low High High High High High High High Low High Low High High High Low High Low Firms ability to transfer advantage generating resources to host country partners Favored entry mode (by the resource based framework) Do not enter; Indirect exporting Direct exporting via host country intermediation Direct exporting via company owned channels Contractual mode (Licensing, franchising) Production Joint Venture Marketing Joint Venture Wholly Owned Subsidiary Table 1: Entry mode choices according to resource based view (Sharma&Erramilli 2004:11) Cultural distance Culture is usually defined as shared values and meanings of the members of a society. It affects not only the underlying behaviour of customers in a market but also the execution and implementation of marketing and management strategies. Thus, cultural distance has a direct impact on the effectiveness of the entry (Kogut & Singh 1988 in Johanson & Tellis, 2008:4). According to Choo & Mazzarol (2001) cultural differences are one of the most influential factors of SME s entry choice. When a firm invests in foreign markets, it must face both national and corporate culture, whether it invests through other organizations or not (Barkema et al., 1996 in Yung, 2006:205). Hence, cultural differences between home and host market may affect how a firm operates in the international market (Hofstede, 1980 in Yung, 2006:205). Such cultural differences may be one of the most important decision-making determinants for the firm's foreign entry mode 24

25 choice (Barkema et al.; Kogut & Singh, 1988 in Yung, 2006:205). Cultural distances between the home and the host country has different impacts on different entry mode types. For example, high post-acquisition costs from international acquisition result not only from different national cultures between home and host market but also from the interactions between two organizational cultures (Kogut & Singh, 1988 in Yung, 2006: 205). Thus the acquired firm is often troubled by "double-layered acculturation" problems resulting from cultural distance between the acquirer and the acquired firm (Barkema et al., 1996 in Yung, 2006:205). Hence, in order to reduce the risks of cultural distance between home and host market, the investor is more likely to enter through Greenfield (Barkema & Vermeulen, 1998; Caves & Mehra, 1986; Kogut & Singh; Wu in Yung, 2006:205). Kogut & Singh (1988) in Muller (2007:94) found that with greater cultural distance Greenfield investment or joint ventures are more likely than acquisition Risks related entry to foreign market Generally speaking, a company opting to internationalise can select a market entry mode ranging from very little risk and low capital expenditure (e.g. exporting) to relatively high risk and high capital investment (e.g. manufacturing abroad) (Johanson & Vahlne 1977; Norvell, Andrus & Gogumalla 1995). Meanwhile, two firms may perceive the same risk in a country but choose different strategies because of each firm s different tolerances of risk (Shama 1995 in Choo & Mazzarol, 2001:298). During the process of moving from home country to foreign market, firms face different types of risks/barriers and each type of risks/barriers should be managed carefully. Malhotra et al. (2003) discusses market variables during the entrance of an emerging market from country, location, demand, and competition risks perspective: Country risk refers primarily to the stability of the political, social, and economic conditions. Firms tend to avoid or to limit their resource commitment in areas of high country risk. Exporting and contractual agreements offer low resource commitment options in markets that have high country risk. However, contractual agreements are increasingly used in countries marked by high risk of intellectual property violation (as part of country-risk analysis) in which the legislation and enforcement standards are weak (Kotabe, Sahay & Aulukh 1996 in Malhotra et al, 2003:16). 25

26 Location risk is the perceived difference between home and host environments in terms of culture, business, and economic practices. (Malhotra et al, 2003:18). Demand risk is the risk taken by the firm because demand for its products or services may fail to reach the desired level. When demand uncertainty is high or the expected demand is low, firms favour entry modes that involve low resource commitment, e.g. exporting. Interesting is that although contractual agreements such as franchising are a low-resource-commitment option, studies indicate that a high demand potential is the key to their success (Alon & McKee 1999; Contractor & Kundu 1998 in Malhotra et al, 2003:18). Competitive risk is the number and size of competitors and the aggressiveness of their marketing efforts (Malhotra et al, 2003:19). When the intensity and competitive differential is high, firms tend to avoid internalization. Exporting may be firms' preferred option. Strategic alliances offer a promising alternative to exporting as they enhance knowledge and build competitiveness (Madhok 1997, Sengupta & Perry 1997, Das & Teng 2000 in Malhotra et al, 2003:19). On the basis of the preceding discussion, Malhotra et al (2003) make several conclusions (however, not empirically validated) about which types of entry modes companies would most probably prefer for the certain product phase in case of the high level of certain risk. The conclusions are the following: High degree of risk Product phase The most probable entry mode Country risk Early standardization Exporting Country risk Late standardization Contractual Agreement Location risk Early standardization Exporting Location risk Late standardization Contractual Agreement or Joint venture Demand risk Early standardization Exporting Competition risk Early standardization Exporting Competition risk Late standardization Strategic alliance Table 2: compiled by the authors based on Maholtra et al (2003:19) Root (1987) in Rasheed (2005:44) describes foreign transactional risks from the perspective of the host country s political and economic stability and the host country s policies and regulations related to transnational business activities. Risk factors related to foreign transactions include general stability risk, ownership/control risk, operating risk, and 26

27 transfer risk. General stability risk refers to management s uncertainty about the future viability of the host country s political system (Root 1987). Ownership/control risk is defined as management s uncertainty about host government actions affecting the entrant s ownership position. Operations risk refers to the possibility of sanctions that could constrain an investor s operations in the host country. Transfer risk is defined as limitations on the entrant s ability to transfer capital out of the host country (Root 1987 in Rasheed, 2005:44). There are additional risks for doing business in emerging markets. These include an inadequate marketing infrastructure, such as poorly developed distribution systems; limited communication channels; lack of regulatory discipline and frequent changes in regulation; a high level of product diversion; various market failures; and political and economic instability (Arnold & Quelch 1998, Garten 1997, Khanna & Palepu 1997, 2000 in Kim et al.,2004:15). However, according to some authors, entering to developing markets can also have some additional benefits. For example Huei-Ting & Eisingerich (2010:116) argue that markets to developing countries are generally less expensive and less risky to enter due to lower competition than in markets that are already developed and geographically farther away. Host countries with greater probability of restrictive policies impede foreign investment and encourage non-equity modes. On the other hand, firms with a proprietary product or technology have a greater amount of leverage in countries characterized by high investment risk and consequently may choose higher control modes (Agarwal & Ramaswami, 1992 in Rasheed, 2005:45). Doing business in foreign countries is deemed to be substantially more risky than remaining in the domestic market (Ghoshal, 1987, Vernon, 1985 in Brouthers et al 2000:183). Miller (1992) suggests that companies should consider evaluating several dimensions of international environmental uncertainty in an effort to allow the firm to optimize its returns for the risk assumed (Brouthers et al 2000:183). Agarwal & Ramaswami (1992:3) state that, with respect to international markets, a firm is expected to choose the entry mode that offers the highest risk-adjusted return on investment (Brouthers et al, 2000:183). Each firm needs to define its risk tolerance, which is the basis factor for the firm to make entry mode decisions (Kos, 2010:322). When company has low risk tolerance, then in case the excessive return is higher than risk, company chooses joint venture or strategic alliance. When company has high risk tolerance, then in case the excessive return is higher than risk, company 27

28 chooses wholly owned enterprise. In both cases, when the returns are smaller than risk, company chooses not to enter (Kos, 2010:322). The following chart illustrates the firms entry mode decision based on its risk tolerance level: Figure 1 An explanatory model for the decision to enter emerging markets: A shareholder perspective (Kos, 2010:323) Industry situation / competition in the host market Competition is often defined too narrowly, not taking into account forces except from today s direct competitors (Porter, 2008). In order to formulate market entry strategies, understanding and coping with different forces influencing the level of competition is essential. Porter (2008) argued that the profitability of an industry is determined by five forces. Except from rivalry between existing competitors, industry attractiveness is additionally influenced by the four following forces, illustrated in figure 3: customers and suppliers in the vertical dimension, potential market entrants and substitute products in the horizontal dimension. Whether the forces are intense or benign, determines the extent to which a company earns returns on investment (Thompson et al. 2005). 28

29 Figure 2 Five forces that shape industry competition (Porter, 2008) Rivalry among existing competitors describes how strong the competitive pressures stemming from the efforts of rivals are to gain better market positions, higher sales and market shares and competitive advantages. Price discounting, innovation, service improvements and advertising campaigns are major forms through which existing competitors in an industry compete against each other. High rivalry among competitors leads to low attractiveness and profitability of an industry. The degree of rivalry depends on the intensity with which companies compete and on the base on which they compete. The intensity of competition is high, if there is a high number of competitors which are equal in size and power, industry growth is low, exit barriers are high, competitors are highly committed to the industry and seek industry leadership, and firms have different business models or different goals (Thompson et al. 2005). The bargaining power of suppliers describes how strong competitive pressures are stemming from supplier bargaining power and seller-supplier collaboration. Through charging higher prices, and limiting quality or services, powerful suppliers can capture more value for themselves. Usually, companies depend on a wide range of inputs from different groups of 29

30 suppliers. A supplier group is powerful, if it is more concentrated than the industry it sells to, the supplier group does not depend heavily on the industry for its revenues, industry participants face switching costs when changing suppliers, suppliers offer products which are differentiated, there are no substitutes for what the supplier group provides, and the supplier group can credibly threaten to integrate forward into the industry. These factors can increase the power of supplier groups, which negatively influences the level of attractiveness and profitability of an industry (Thompson et al. 2005). The bargaining power of customers describes how strong the competitive pressures are from buyer bargaining power and seller-buyer collaboration. Powerful customers can play industry participants off against each other, at the expense of industry profitability. Powerful customers are able to capture more value by demanding lower prices, higher quality and more services. Customers have a high negotiating power if: there are few customers, the industry s products are standardized or undifferentiated, customers face switching costs in changing vendors or customers can integrate backward into the industry. A customer is price sensitive if: the product it purchases accounts for a significant share of its cost structure or procurement budget, the customer earns low profits or is under pressure to lower purchasing costs (Thompson et al. 2005). Threat of entry expresses how strong competitive pressures are associated with the entry threat from new rivals. If new companies enter an industry, they aim to gain market shares which puts pressure on costs, prices and the rate of investment necessary to compete in the industry. There are seven major sources for entry barriers, which have the potential to prevent companies from entering an industry and therefore contribute to high industry profitability: supply-side economies of scale, demand-side benefits of scale, high switching costs of customers, high capital requirements, incumbency advantages independent of size, unequal access to distribution channels, and restrictive government policy. Additionally, a company s decision to enter or stay out of an industry is influenced by the anticipated reaction of incumbents (Thompson et al. 2005). The threat of substitutes describes how strong the competitive pressures are coming from the attempts of companies outside the industry to win buyers over to their products. Substitute products are present for any product, but they are likely to be overlooked in a competitive analysis, since they can be very different from the industry s product. A substitute product is characterized by having the same or a similar function as an industry s product by a different 30

31 means. The higher the threat of substitutes, the lower is the profitability of the industry. The threat of a substitute is high if the customer s costs of switching to the substitute are low, and if the price performance trade-off to the industry s product is attractive (Thompson et al. 2005) External environment Jansson (2007) argue that business environments in emerging country markets might be different from Western markets due to differences among institutions. Large emerging markets are regarded to be uncertain and complex. Therefore, the business environment is regarded to be relationship-oriented and institution-building, which results in the characteristic of being a network society. By using the institutional network approach, the description and analysis of these uncertain and complex business environments can be enhanced. The institutional network approach aims to reduce the risk of doing business in an emerging market by making environmental factors more transparent and predictable before entering the foreign market (Jansson, 2007). According to Jansson s (2007) basic institutions model, the company s internal and external environment can be divided into three layers of description for the rules prevailing for the institutions in the respective layers, which are embedded into each other. Institutions are characterized by predictability and standardized behaviour. Uncertainty can be reduced by anticipating recurring behaviour. Furthermore, institutions are described to be stable which results in established patterns of behaviour (Jansson, 2007). The central layer contains micro institutions, e.g. the multinational company, which is surrounded by institutions impacting on it. These institutions can be divided into two layers. Firstly, the meso institutions level is represented by the organizational fields. Meso institutions such as the government, the financial market, the product and service market and the labour market have a direct impact on the multinational company but are also characterized by influencing the societal institutions. Secondly, the societal institutions contain macro institutions, influencing the multinational company in one direction, from the sector via the organizational fields towards the multinational company. This layer contains the country culture, the educational and training system, the political system, the legal system, professional and interest associations, business moral, the religion and family/clan (Jansson, 2007). 31

32 The institutional network approach is visualized in figure 3 by the basic institutions model, illustrating the constellation of the three layers and the institutions which they contain. Country Culture SOCIETAL INSTITUTIONS Educational / Training System ORGANIZATIONAL FIELDS Family/Clan Product / Service Market Political System Religion Financial Market BUSINESS NETWORK Government Labour Market Legal System Business Moral Professional and Interest Associations Figure 3 The basics institutions model (Jansson, 2007) Additional aspects for the entry to emerging markets Emerging economic regions are generally characterized by relatively high market growth rates, short histories of economic liberalization, and a lack of established institutional systems that support domestic business activities (Isobe et al. 2000:471). Emerging markets exhibit high growth potential and present a mixture of opportunities and risks for western companies (Cavusgil 1997; Garten 1997; Kock & Guillen 2001 in Kim et al. 2004:15). Kim et al. (2004) argue that emerging markets attract not only in cheap raw materials but also in the potential to generate revenue and also they are not only suppliers but also buyers of goods and services. Smallness is usually considered a disadvantage in internationalisation, as small and medium enterprises often lack resources necessary to enter foreign markets. Compared to large enterprises small and medium enterprises are less competitive. For instance they may not be able to capture business opportunities due to inferior products, shortages of finance and limited administration capacity (Jansson 2007, Mayer & Skak 2002 in Jansson & Sandberg 2008:66). 32

33 However, Johanson & Tellis (2008) have come up with the following findings in their study regarding entry into an emerging market: Smaller firms tend to be more successful than larger firms in entering emerging markets. Entry strategies that involve high levels of control (e.g., wholly owned subsidiaries) are more successful than those that involve low levels of control (e.g., licensing). Earlier entrants enjoy greater success than later entrants. Foreign investors entering emerging markets have to take strategic decisions on where and how to set up operations (Meyer & Nguyen, 2005:63). According to the internationalisation process theory firms tend to invest and expand in countries with a short psychic distance to the home country (Amdam, 2009:445). The psychic distance between two countries depends on differences in their languages, education, business practices, culture and industrial development. The uncertainty related to foreign markets and the impact of psychic distance can be reduced by means of interaction and integration with the market environment (Johansonet al., 1977 in Reiljan, 2003:10).On the other hand Sim & Ali (2001) argue that firms originating from countries at different levels of economic development seem to exhibit differences in internationalisation (Sim & Ali, 2001:58). Journal of accountancy (2001) has enlisted three steps a company should take before entering the international emerging market: 1) conduct preliminary market research, 2) plan the market entry and 3) arrange for distribution. According to Lord & Ranft (2000) in Pedersen & Petersen (2004), the acquisition of local-market knowledge is critical for successful planning and implementation of entry to an emerging market. Madhok (1998) in Kos (2010:321) found that the organizational capability is a key determinant of firm boundaries of multinational enterprises entering emerging markets. Maximizing risk adjusted reward is the key aspect of investing in an emerging market (Ollson, 2002 in Kos, 2010:321). A major challenge for foreign investors in emerging economies is the rapid change of institutions. In transition economies, reforms initially concern primarily formal institutions at the central level (World Bank, 1996 in Meyer & Nguyen, 2005:69). According to the theoretical and empirical study result, Chung & Neamish (2005:58) suggest that foreign firms can proactively pursue opportunities in emerging economies, but with calculated risk-taking strategies. And further, they propose that firms can take the form of joint venture, minority joint venture or manufacturing operations in emerging economies. 33

34 2.4. Entry nodes Firms entering emerging markets face several barriers according to Meyer (2001) in Jansson & Sandberg (2008:67). These barriers include lack of information, unclear regulations and corruption. In order to overcome those barriers, the relationships in the host country are needed as through them the adequate information and know-how about the new external environment is built. In terms of research in this area, scholars have found that relationships are the core of the internationalisation process and according to network approach to internationalisation, entries into local market networks take place through establishing relationships (Axelsson & Johansson 1992, ford 2002, Hakansson 1982, Hakansson & Snehota 1995, Hammarkvist et al 1982, Jansson 1994, 2007, Johanson & Vahlne 2003, Majkkgard & Sharma 1998 in Jansson & Sandberg 2008:67). Establishment points in foreign market networks are defined as entry nodes. There are various routes into these networks, or nodes by which a firm can enter a network. Entries through trade either take place directly with customers or indirectly through intermediaries. Direct relationships, dyads, can be established between buyer and seller in the respective countries. Indirect relationships, triads, involve an outside party or other type of entry node, usually an intermediary such as an agent, dealer or distributor (Jansson & Sandberg 2008:68). One factor influencing the entry node is the structure of the local market network if it has loose or tight coupling (Jansson & Sandberg 2008:68). For instance structural changes and economic reforms in the transitional markets can lead industrial networks to become less tightly structured (which have happened in CEE, for example). With old regulations moved, companies are now free to decide by themselves on new business partners and business relationships. In transition economies, relationships tend to move from being fragmented to being integrated relations. (Hallen & Johanson 2004 in Jansson & Sandberg 2008:68). The empirical study conducted by Jansson & Sandberg (2008) about the internationalisation of small and medium sized companies in the Baltic Sea region concluded that third-party relationships (the entry node triad) are vital for SMEs. The relationship with the agent provides the seller with the linkage to the market: to obtain information on the market and to manage the communication with customers in the foreign language, and with parties belonging to another business culture. The point of attention, however, is that the indirect relationships could cut-off the seller from its customers as large social and cultural distances tend to prevent sellers from 34

35 being involved in the market and build up network experiential knowledge and institutional knowledge. The learning of the seller is especially low when the relationship with the agent is weak. In addition, due to high uncertainty in emerging markets, low cost and flexible entry nodes tend to be chosen which means that firms develop less own experience. To overcome this lack of opportunity for local knowledge development, the best alternative seems to be taking over the customer relationships by setting up a subsidiary, thereby changing the entry node to dyad. This would be helpful to overcome poor experiential organizational learning by the exporter (Jansson & Sandberg 2008:7-74) 2.5. Entry timing In addition to the entry mode and node, the role of market entry timing is critical in emerging markets (Pan & Chi 1999 in Johanson & Tellis 2008:4). On the one hand, early entry has many advantages. First, the early entrant can lock up access to key resources, such as distribution channels and suppliers. Second, early entrants have the opportunity to set the pattern of consumer preference (Carpenter & Nakamoto 1989; Mitchell 1999 in Johanson & Tellis 2008:4) which may disadvantage later entrants. Third, early entrants can benefit from being the first to exploit governmental concessions and incentives, which governments often offer to attract such entrants (Pan & Chi 1999 Johanson & Tellis 2008:4). Fourth, early entrants can time their entry to exploit the strategic window of an expanding market and observe and learn market attributes for a longer period. On the other hand, Golder & Tellis (1993) in Johanson & Tellis (2008:4) found that pioneers are often not the long-term winners in a market. First, firms that rush in first may not be aware of the pitfalls of the newly opened emerging market. Second, returns to the early entrants might be too low compared with their investments, especially because infrastructure is not yet fully developed. Third, latter entrants have a flatter learning curve because they can learn from the early entrants errors (Fujikawa & Quelch 1998 in Johanson & Tellis, 2008:4). These three factors may be responsible for the failure of many early entrants in some markets (Arnold 2004 in Johanson & Tellis 2008:4). 35

36 2.6. State of the art In this thesis, our major aim is to conduct a study on choosing an entry strategy for an emerging market. So far, we have developed an understanding about what an emerging market entry strategy is and reached to the conclusion that it consists of an entry mode, entry node and entry timing. We have also discussed quite thoroughly what the different aspects of consideration are when taking the decisions about entry strategy (that means entry mode, node and timing). Whenever the entry strategy is discussed (no matter in the context of developed or emerging markets, multinational corporations or small and medium sized enterprises), the topic of entry modes is covered. Other aspects of the entry strategy are less cited in the literature. The theories of entry modes have been presented, validated and accepted for example by Root (1987), Agarwal & Ramaswami (1992), Sharma & Erramilli (2004), Rasheed (2005), Meyer & Nguyen (2005), Bhaumik & Gelb (2005), Jansson (2007), Muller (2007), Albaum & Duerr (2008), Ferreira & Ferreira (2008), Brouthers et al (2008), Huei-Ting & Eisingerich (2010), Couturier & Sola (2010). The focus of different scholars when researching on this topic can be slightly different, but in general, there is common understanding about which kind of entry modes exist and what their benefits/drawbacks are. Therefore we can conclude that the theories about entry modes are dominating. Another widely discussed topic related to entry to foreign markets is risks; especially from the perspective of which kinds of risks are there to be considered by the entrants of foreign markets (Johanson & Vahlne 1977, Root 1987, Choo & Mazzarol 2001, Malhotra 2003, Kim et al 2004, Rasheed 2005). Fewer researchers turn their focus on how exactly the existence of different risks influences the entry strategy (Malhotra et al 2003). When discussing the driving factors behind the choice of an entry mode, scholars are scattered among different approaches. Transaction cost theory is one of the most referred and studied theories in this field (Sarkar & Cavusgil 1996; Rindfleisch & Heide 1997; Meyer 2001; Nakos & Brouthers 2002, Herrmann & Datta 2002, Meyer 2004, Bhaumik & Gelb 2005, Rasheed 2005, Zhao & Decker 2006, Brouthers et al. 2008), therefore it can also be considered as dominating theory. Less discussed, even though theoretically and empirically validated are the resource based view (Sharma & Erramilli 2004) and network approach (Johanson & Vahlne 2003, Jansson 2007, Jansson & Sandberg 2008). Therefore it can be concluded that these are 36

37 the emerging theories in the field. There are also few scholars who have analysed different market entry theories in comparison with each other and proposed the list of conclusions for entry mode choice (Malhotra et al 2003). These comparative studies however tend not to be yet empirically validated. In the context of emerging markets, it seems that scholars generally agree that transaction cost theory is not enough to explain the entry to emerging markets and there is need for new theories (Kim et al 2004, Pedersen & Petersen 2004, Chung & Beamish 2005, Jansson 2007, Johanson & Tellis 2008, Kos 2010). However, the dominating theory for the entry mode decision to emerging market could not be identified. Even though the authors of this thesis feel that the network approach (Jansson 2007, Jansson & Sandberg 2008) is becoming more important and also the risk-reward based model (Kos 2010) at least partially explains the rationale behind these decisions. While investigating the topic, the authors of this thesis noticed that even though the internationalisation is considered very important and widely studied by the high number of scholars there is limited amount of broad frameworks explaining how the decision making process for entry strategy choice takes place. Accordingly, it can be considered as the gap of this research field. The authors would like to propose a model which could fill this gap (Figure 4). COMPANY MOTIVES COMPANY RESOURCES Competition Cultural distance RISK REWARD Customers Ext. environment ENTRY STRATEGY Entry mode Entry node Entry timing Figure 4: Model for making the entry strategy decision (created by the authors). 37

38 The model tries to consolidate the variety of theories that are especially relevant in the context of the entry to emerging markets and address the link between different points of considerations and the choice of entry. The base for the internationalisation process is company s inner motives and resources. Motives describe the reasons and (long-term) objectives for entering to the foreign market. Resources include all types of resources be it finance, assets, technology, product, know-how, people, management style or any other, which help the company create value and achieve competitive advantage. Cultural distance refers to how different the values, norms and overall social set-up between home and host country are. Competition describes the rivalry in the industry under the interest of the company and external environment is formed by the rest of the societal institutions (religion, political and legal system, business moral etc), government, financial and labour market which affect the operations of any company operating on the host market. Motives and resources combined with the cultural distance, competition and general external environment of host country form potential company-specific risks for the entry to foreign market. Customers are the main source of potential success for the company. By customers we mean the consumption habits and wishes of the customers, which in combination with company motives and resources shows how big is the match between market demand and what company can offer and therefore determines the potential reward. Risks and reward are both input to the decision making process, where the potential benefits and drawbacks are analysed against each other. The output of this decision making is the entry strategy. Described decision making framework has been developed keeping in mind the entry to the emerging markets; however its usage may not be limited to emerging markets only Research questions What is the most effective entry strategy for a company who wishes to enter to an emerging market? Can the model developed by the authors give good guidance for making the choices of entry? 38

39 3. Methodology The methodology chapter outlines the research approach of the study. Different sources of data are described as well as the methods for data collection and the quality of the research is discussed Research approach In order to answer the research questions, the authors decided to use the case study approach. The authors have chosen the Estonian company SUVA as the case company and Bangladesh as the target market. The main reason for choosing the case study approach is that the theoretical framework which has been developed by the authors can be used as a tool for an organization s decision making process about the strategic choice for the foreign market entry. This will give us the answer to the first research question. Through a single case we will also test the application of the model, which will give us the answer to the second research question. The main reason for choosing SUVA as the organization under investigation was the authors personal experience with the hosiery products of SUVA, namely silver socks (also known as X-static), and strong belief that it has export potential. There was no specific reason for choosing Estonia as the home country; however it does give an extra value to investigate the internationalisation possibilities of a company that is originated from what generally is considered to be a transition rather than developed economy. Based on the fact that Estonia is part of EU and Euro system, Estonia will from now on in this work be referred to as developed country. The rationale for choosing Bangladesh as the host country was the following: a) it is an emerging market, b) SUVA is not yet present there, c) one of the authors is originated from Bangladesh, which eliminates the language and cultural barriers for conducting the research; d) the support network exists in Bangladesh, which made it possible to collect the reasonable amount of data within limited time. As the model which serves as the basis for our research has several different variables, we have decided that the combined approach is the most reasonable choice for the research method. That means that both qualitative and quantitative data was collected from several sources and both qualitative and quantitative analyses were performed in order to answer the research questions. 39

40 3.2. Data collection For the purpose of the study multiple data sources were used and both primary and secondary data was collected. The main source of secondary data was internet. For company information the company web-page and the local (Estonian) newspaper articles were used. For assessing the cultural distance between Estonia and Bangladesh, external environment of Bangladesh and partially the competition/industry situation in the host country, internet was used namely web-pages of investment boards, governments, tourist information and business portals etc. Primary data was collected for getting the relevant customer-related and competition-related information this was the key part of the empirical study as the customer and competition information reveals the most vital conditions for market entry to Bangladesh. One of the important limitations of the data is that it was not possible to get close access to the company and source the inside information, which is not available publicly. This concerns for example information about company motives, know-how, management styles and risktolerance of the leaders of the organization. The initial plan was to get another part of the primary data directly from the company. But due to time limitations and the need to prioritize the activities of conducting this study, it was not possible. Therefore in the end only the public data about the company was used. In addition, few assumptions were made about the motives of the company: Assumption 1: SUVA is interested in entering to Bangladesh market Assumption 2: The product line under consideration for entry to Bangladesh is silver socks (X-static) only. Assumption 3: There are no legal or other similar limitations (e.g. franchise contracts etc) which would prevent SUVA from taking silver-socks to foreign market. The primary data was collected in the form of structured interviews with retailers with the output of written questionnaires. The retailers were chosen as the source for several reasons: Retailers are the link between the consumers and the suppliers, which gives them a unique position to provide data about both sides. The limited time of the study forced us to minimize the data sources. Questionnaire for retailers proved to be quite efficient for collecting information about competition in the hosiery market as well as the customer demands. Retailers are easily accessible and not hard to convince for the participation in the study. 40

41 The combination of interviews and questionnaires was used in order to benefit from the advantages of both methods and avoid the drawbacks of a single method. The advantages of a questionnaire (especially if many closed ended questions are used) include: a) they can be administered to the large group of individuals; b) they are less time consuming to administer. The advantages of the interviews include: a) if the question is not understood by the interviewee, there is a possibility to explain it further and still get the right answer, b) once the interview has started it will most probably come to an end as well; the rate of incomplete questionnaires is small. We were not able to avoid one of the drawbacks of questionnaires, which is that data entry can be time consuming. The authors also considered collecting primary data directly from the potential customers. However, this approach was discarded as on one hand it is not easy to identify and find potential customers as well as to make them interested in contributing to a market study and on the other hand, we faced the time pressure. The following table gives the overview of the necessary information for our research, the data sources and collection methods. Information needed Data source Data collection method Company motives - Assumptions Company resources Internet Individual investigation Cultural distance Internet Individual investigation External environment Internet Individual investigation Competition in the industry Internet Individual investigation Retailers Structured interviews Customers Retailers Structured interviews Table 3: Data sources and collection methods used in the empirical study 3.3. Sampling For the collection of primary data the sample of 180 retailers were chosen from Dhaka city (capital of Bangladesh). Dhaka city was chosen as the research area because it has the highest concentration of people with a potential need and possibility to afford hosiery products. Keeping in mind that silver socks are not a low-end product, especially in the context of Bangladesh, first the overall list of the established well-known outlets (e.g. street-side sellers were not included) was created totalling in about shops. It is difficult to state the exact number as all the information is not available online and had to be collected in different 41

42 ways personal contacts, business unions, newspapers, phone-books, internet etc. From the total list a random choice of about 180 outlets (60-70% of coverage) was made considering that all the 5 areas of Dhaka would be equally covered. As the concentration of the shops is different in different areas, the final number of contacted outlets was also different in different areas. To ensure the quality of data, the shop owners, outlet managers or in bigger outlets marketing/product managers were targeted as interviewees Interview methods First the questionnaire was developed. Then we carried out couple of test interviews over the Skype/phone in order to check whether the questions are understandable to interviewees and whether the expected answers are coming. Then the small number of revisions was made and the questionnaire was translated into Bengali language. As the most efficient way of gathering data is face-to-face interviews, but both of the authors were in Europe, we decided to utilize the local network from Bangladesh to get the interviews done. In total 5 people were thoroughly briefed over the Skype and sent to the outlets for interviews. All the interviews took place in the outlets either with the shop owner, manager or sales executive. The interviews were structured according to the questionnaire and during the discussion the questionnaire was filled in by the interviewer. Using this method was important in order to ensure the comparability of the answers and get similar results despite the fact that multiple interviewees were used. Both open and closed-end questions were asked. One interview lasted minutes. As some of the outlets refused to cooperate, answered partially or were not accessible, the end result was 150 finalized interviews, which is approximately 50-60% of the total market coverage and representative enough to make the conclusions for our study. Below is the table (table 4) with the final results of the interviews. Area name Nr of targeted outlets Nr of finalized interviews % of total finalized interviews Hit ratio Palton-Gulistan % 84% Dhanmondi-Mirpur % 81% Gulshan % 85% Uttara % 89% Malibag-Mouchak % 83% % 83% Table 4: Finished interviews by area 42

43 3.5. Operationalisation The interview questionnaire had 25 questions (see Appendix 1). We realize that this is a long questionnaire, but necessary for us as the relevant areas we needed to cover were broad as well. To make it easier for the answerers, ensure the comparability of the responses and use the time as efficiently as possible, most of the questions were in the form of multiple choice or required single straightforward answer. In the following paragraphs the rationale behind the questions is explained. The full questionnaire can be seen in the appendix 1. The questionnaire started with the introductory message explaining the objective of the research and motivating the respondents to participate in the study. This section was put down in written on two purposes: a) to constantly remind the objective of the study to the interviewers and ensure that they didn t forget the polite introduction when they established the contact with the retailer; b) to have a back-up option of leaving the questionnaire behind and not conduct an interview in case some of the retailers wished it. However, the latter option was not used. The introduction was followed by the general questions about the retailer and the answering person (name, area, address of the shop, name, phone number and the designation of the contact person) in case something needed to be clarified later, to be able to do data analysis based on different areas and evaluate the reliability of the data (e.g. most probably the owner or manager knows gives more accurate answers than floor sales-person). The first seven questions were asked with the objective to get the broad level overview of the competition in the hosiery market. The first question (How many companies socks are sold in your store?) gives the idea of how many players there are in the market. Keeping in mind that the needs for clothing (including socks) are different for men, women and children and the companies often specialize, the answers were expected in three different categories accordingly. On the same reason whenever applicable, the answers for several other questions were asked to be provided separately for men, women and children. The second question (How many of those companies/sock providers are international?) indicates the amount of international players and shows how fierce is the import of socks to Bangladeshi market. The third question (How many of those socks are branded?) shows the awareness and importance of the branding in the market. The next question (What are these brands?) specifies the brand names as well as gives the indication of the most well known brands, because we could expect 43

44 that most or the retailers would not enlist all the possible brands in their shop, but would limit it to up to five (we could later see that this assumption was quite right, the highest number of brand names mentioned was 5). The fifth question (What is the price range for the socks in your store?) gives the overview of the price level of the market. This allows us to compare whether the price of SUVA products is competitive at all. Sixth and seventh questions (What are the prices of three highest/lowest priced socks in your store? Mention price and brand name) specifies the answers received from fifth question. Questions 9 and 10 were also related to the competition in the market, they specifically targeted the topic of new market entrants (How many new sock companies have been added to your partner list during last 1 year? How many of those companies/sock providers are international?). We took one year as the period when you can consider the company still new in the market; on the other hand we also thought that this would be short period enough to expect accurate answers. The second broad topic in the questionnaire was customer preferences and demand. Like competition topic, this was also divided into different subtopics. The first subsection of questions under this topic, namely questions 11, 12 and 13 (Which kind/solid colours/special features of socks are sold in your store?) have two objectives: a) they show what type of socks are currently available in the market (supply side); b) however, the answers also reflect the demand of the customers because the retailers would not sell the products that would not get bought. These three questions were provided with multiple answers and the retailers could choose the unlimited number of options. This allows us compare the results more easily. Secondly, questions 8 (Name the producers of the most popular socks that are bought from your store/company?), 15 (Describe the most popular sock product in your shop.) and 19 (In your opinion, what are the most important factors customers consider while buying socks) help to identify the current preferences of the consumers. Thirdly, questions 14 (In your opinion, for which occasions people buy socks from your store?) and 16 (Who is the customer who mostly buys socks from your store?) characterize the customer who buys socks. These questions combined with relevant answers from the price and type questions would give us the target customer of SUVA. Questions 17 (How many pairs of socks do you sell weekly?) and 18 (The demand of socks during the last 1 year has increased/decreased/remained the same?) give us straightforward answers about the overall demand of socks and help us to identify whether it is lucrative market at all. Finally, in order to get the indication about the potential demand of 44

45 silver socks, questions 20 and 25 were asked. We do realize that it would be more efficient to evaluate potential demand if we had a chance to ask directly from potential customers. The reasons why we did not have this chance were explained before. Last section of the questions (questions 21, 22, 23, 24) was related to the supplier-retailer relations, which on one hand help us see the relevant business practices (Where do you buy the sock for your shop? What is the policy for buying the stock of socks for your shop? In case you buy on credit, how often do you pay?) and on the other hand give us indication what is the commission charge of the retailers (What is the average profit margin (per pair) you are looking for while selling socks?). The overview of the topics covered by the questionnaire is indicated in the table 5. Questions during the interview (and in the questionnaire) did not follow the exact order of the topics as we saw them and as described above. We rather tried to set up the questionnaire in a way that was the most logical to answer from the retailers perspective. Topic/subtopic Questions Competition in the hosiery market Number of competitors 1, 3 Type (local/foreign) of competitors 2, 4 Brand importance 3, 4 Price level 5, 6, 7 New market entrants 9, 10 Product availability 11, 12, 13 Customers of the hosiery market Current demand 11, 12, 13, 17, 18 Potential future demand 20, 25 Customer preferences 8, 15, 19 Customer profile 14, 16 Supplier-seller relations 21, 22, 23, 24 Table 5: Coding for interview questions Validity To get high validity of a research it is important to have the right research design based on the purpose, get a sample which reflects the entire population and to operationalize the theoretical framework to be correctly understood in the empirical investigation. 45

46 The validity for our research is acceptable. We managed to measure what we premeditated to and our interview method was well connected to the theory. Our sample size was 50-60% of the entire population relevant to our study and therefore it is representative enough to measure what we intends to measure. We believe that in generic terms, the data we have collected can be considered valid for the purpose of our study. A thorough operationalisation was made and the clear understating of why certain questions were asked during the interview or why certain data was looked up from the internet contributes to the high level of validity. A simple random sample approach was used to increase the possibility that the sample reflects the entire population. However, the validity of this research could be improved by using different data source for identifying the potential demand. For example customers instead of retailers could have been interviewed. There is also room for imporvement in operationalisation, which is shown by the fact that by rewording some of the questions, more specific answers could have been possible Reliability We believe that the reliability of our thesis can be considered high and other researchers would get similar results when conducting a similar study. This is proved by the fact that even though several interviewers were used, no major difficulties were faced during conducting the interviews. In addition the straightforward set-up of the questions, out of which several were with multiple choices or where the single answer was expected, helped to reduce the interviewer s influence to the answers. For the data collected from the internet about other input aspects of our model, the reliability can be considered moderately high. The reasons are: a) statistical data is always made up based on the things happened in the past and may therefore be slightly behind the time; b) we have no assurance about how often the information is updated on the webpages, which were used to fulfil the purpose of this study; c) emerging markets like Bangladesh are generally in rapid change. 46

47 4. Empirical study In this chapter the information gathered from primary and secondary sources is presented. The chapter is divided into several sections. It starts with the overview of the company and product. Then host and home countries are described. The biggest part of the chapter is devoted to the results from the interviews with the retailers Company background SUVA AS is based on 100% private Estonian capital and is the oldest hosiery manufacturer in Estonia, with more than 80 years of experience in the field. There are 180 employees working at SUVA and total area is m 2. As for the equipment, there are more than 450 knitting machines (Nagata, Bentley, Matec, Fantasia, Wera, Sangiacomo), over 100 finishing and packing machines (Takatori, Tricoset, Rosso, Mauserlock, Heliot, Colourmat etc.). SUVA has its own dye-house and laboratories. (SUVA, 2010) SUVA product range includes different jersey products for men, women and children, mainly socks, tights and knee-socks, but also shirts. The quality of products is in accordance with European standards. SUVA currently produces about 3 million pairs of socks annually and sells half of their production in Nordic countries and the rest of Europe. (SUVA, 2010) Product overview The product line that we find attractive for Bangladeshi market is called Silver Socks. The composition of these new socks of SUVA includes silver fibre X-Static, what makes socks healthy and nice to wear. The silver thread is combined with high quality cotton that assures high comfort standards during the sport practice with elevated energy consumption and heat excretion. Thanks to the combination of silver thread and cotton a triple protection shield against foot odour is assured, which makes those socks a) antibacterial (the hot ions released by the silver fibre lead a direct attack against fungi and bacteria breathing that are the main cause of bromidrosis), b) antistatic and c) thermo regulative (prevent the typical yet uncomfortable swelling due to a long working hours and flight discomfort). (SUVA, 2010). Silver is known by its healing and purifying powers, which is why for decades it has been widely used in drinking water filters as well as swimming pool filtration systems. Now it is also possible to use silver in hosiery manufacturing. Starting from the year 1987 X-Static is the 47

48 best antimicrobial solution on the market, yet it is a fibre system that is uniquely suited to meet several additional market demands (SUVA, 2010): Antimicrobial: eliminates odour-causing bacteria and athlete s foot fungus. All natural: safe and non-toxic, containing no chemicals or pesticides. Heat transfer: cooler in the summer, warmer in the winter. Anti-static. Therapeutic: with its conductive properties (silver is the most conductive metal), the fiber system has many health benefits. Compared to other antimicrobial products, X-Static has several distinct performance advantages (SUVA, 2010): Speed: X-Static eliminates 99,9% of bacteria in less than one hour of exposure. (Most antimicrobial products test over 48 hours and still do not reach this level of effectiveness.) Catalysts: the hotter and wetter is the environment, the more effective X-Static becomes. This is perfect, because bacteria are more prevalent in these environments. Safe & natural: X-Static is made with pure silver, a naturally occurring element. There are no chemicals and there is no fear of toxicity for the consumer. Silver is one of the safest and most being substances to mammals. Permanent: X-Static is not a surface treatment. Silver is irreversibly bound to a polymer so it becomes a physical part of the fiber. In fact, X-Static has been tested for more than 250 washes with virtually no reduction in antimicrobial performance. X-Static has been researched and tested by leading institutions around the world and is widely accepted in the medical community. The X-Static brand is growing rapidly in the world-wide consumer marketplace and X-Static products have won prestigious awards for outstanding performance and function. (SUVA, 2010) The host country overview Asia is an eclectic collection of different languages, cultures and, subsequently, business practices. Fifteen countries in Asia are either in a less developed or underdeveloped group (Kumar & Waheed, 2007, p.181). Bangladesh, which is situated in Southern Asia, bordering the Bay of Bengal, between Burma and India, is among one of those less developed countries in Asia with the population of 158,570,535 as of July This makes the country the seventh most populous country in the world and the population growth rate is 1.56 %. 48

49 Most Bangladeshis (about 83%) are Muslims, but Hindus constitute a sizable (16%) minority (Central Intelligence Agency, 2011). Ethnically Bangladeshis consist of 98% of Bengali, the rest are tribal groups and non-bengali Muslims. The official language is Bengali. It is the first language of more than 98 percent of the population. It is written in its own script, derived from that of Sanskrit. Many people in Bangladesh also speak English and Urdu. The climate of Bangladesh is tropical; mild winter (October to March); hot, humid summer (March to June) and humid, warm rainy monsoon (June to October). (Kwintessential, 2009). Urbanisation is proceeding rapidly, and it is estimated that only 30% of the population entering the labour force in the future will be absorbed into agriculture, although many will likely find other kinds of work in rural areas. The areas around Dhaka (13 mln people) and Comilla are the most densely settled. The Sundarbans, an area of coastal tropical jungle in the southwest and last wild home of the Bengal tiger, and the Chittagong Hill Tracts on the south-eastern border, are the least densely populated (U.S. Department of State, 2011). Economic policies aimed at encouraging private enterprise and investment, denationalizing public industries, reinstating budgetary discipline, and liberalizing the import regime have been accelerated (U.S. Department of State, 2011). Bangladesh has experienced steady economic growth at a rate of approximately five percent annually during the past decade. Manufacturing of ready-made garments provides employment for over 2 million people, many of them women and generates nearly 75 percent of the export earnings of the country. Chart 1: Bangladesh export by major products ( ). Source: Board of Investment,

50 The discovery of substantial reserves of natural gas in Bangladesh could significantly boost the country's economy and the people's well-being (USAID/Bangladesh, 2011). The country s annual GDP growth rate (FY 2008) is 6.2 % and total imports (FY 2008) USD 21.6 Billion including capital goods, food grains, petroleum, textiles, chemicals, vegetable oils. Growth rate over previous fiscal year: 25.95%. The country s economy and GDP is predicted to grow near 6% over the next 5 Years (U.S. Department of State, 2011). Bangladesh is a hierarchical society. People are respected because of their age and position. This is valid both in family and in businesses, the majority of which are family owned/run. Bangladeshis are quite indirect communicators. They tend to communicate in long, rich and contextualized sentences which only make sense when properly understood in relation to body language. Their communication styles may be seen as rude and the information provided inadequate for someone from the culture with direct communication. (Kwintessential, 2009). Communication is formal and follows a hierarchical structure. Deference to the most senior person in the group is expected. This is especially true when dealing with government officials. The need to avoid a loss of face is also reflected in communication styles. Rather than say no or disappoint people Bangladeshis will phrase sentiments in such as way that it is up to people to read between the lines to understand what is being implied. Silence is often used as a communication tool. (Kwintessential, 2009) The home country overview Estonia is situated in Eastern Europe, bordering the Baltic Sea and Gulf of Finland, between Latvia and Russia. It has the population of 1,341,664 (July 2004), which makes it one of the smallest countries in Europe and in the world. Ethnically there are about 65% of Estonians and 28% of Russians living in Estonia. The rest of the population consists of Ukrainians, Belarusians, Finns and other nationalities. The most widespread religion is Lutheran, but Orthodox, Catholic and Jewish is also represented. However, religion is not playing a major role in the society or in people lives; therefore about 65% of the population is considered to be not religious at all. (Kwintessential, 2009). The official language is Estonian, which belongs to Finno-Ugric language group. As the country is small, the foreign languages are spoken widely, especially English, Russian, German, less French and Spanish. Older businesspeople are generally only fluent in Estonian 50

51 or Russian. The climate is maritime with wet, moderate winters and cool summers. (Kwintessential, 2009). Estonia is a hierarchical society. Age, experience and position earn respect. Due to seniority titles are very important when addressing people. Estonians on the whole are quiet and reserved. They tend to speak softly and do not like to draw attention to themselves. Being rational, calm and not going to emotional extremes are all qualities that respected. Once the relationship warms up the communication style becomes a lot less stiff. (Kwintessential, 2009). Estonians mean what they say and do what they say they will do. They expect foreign businesspeople to keep their word. They are generally polite and courteous speakers, but pragmatic and reserved, especially in the early stages of developing a business relationship. Although they are direct communicators, Estonians temper their directness in order to protect the feelings of all concerned. They are slow to pay compliments and may become suspicious of compliments offered too readily and without sufficient reason. Passive silence is very much part of the communication style. (Kwintessential, 2009) Information received from the interviews All of the interviewed shops sell socks. 99% of them sell socks for men, 41% sell socks for women and 44% sell socks for children. 30% of all the shops sell socks for all three groups: men, women and children. 45% of the shops sell only men s socks. Looking at the area-wise data, it may be concluded that generally outlets in the areas with smaller concentration of the shops are less specialized (that means they sell socks for all customer groups). Table 6 gives an overview of the answers to question 1. Number of shops in the area selling those socks % of shops in the area selling those socks Area name Total shops Men Women Child Men Women Child Palton-Gulistan % 32% 25% Dhanmondi-Mirpur % 32% 50% Gulshan % 64% 50% Uttara % 44% 50% Malibag-Mouchak % 78% 100% TOTAL % 41% 44% Table 6: Results for question 1: How many companies socks are sold in your store? 51

52 The highest number of companies represented in one outlet was 20 for men s socks (one retailer declared that they sell men s socks from 20 different companies), 10 for women s socks and 10 for children socks. However, the question does not allow saying whether companies for men, women and children are all different or not. If we take the assumption that most of the companies are not specialized only to one target group, we can say that maximum 20 companies socks are sold in the same store. 36 outlets (24%) sell socks from one company only. If we leave those companies aside, then on average a retailer is selling men s socks from 5,3 companies, women s socks from 4,3 companies and children s socks from 4,0 companies. Out of all the interviewed companies 125 (83%) sell international products out of which majority (if not all) are branded. As the overall amount of branded socks is far higher than international socks, we may conclude that the local companies are also paying attention to branding their production. Availability of international products is different in different areas, which probably depends on the profile of inhabitants in the area. (For example we know from our experience that Uttara is fairly new area in Dhaka where mostly wealthy people live. It may influence the product choice in Uttara.). Table 7 gives a overview of all the areas. Number of shops in the area selling those socks % of shops in the area selling those socks* Area name Total shops Int.-l. Brands men Brands women Brands child Int-l. Brands Men Brands Women Brands Child Uttara % 100% 100% 100% Palton-Gulistan % 100% 100% 100% Dhanmondi-Mirpur % 100% 88% 84% Gulshan % 100% 86% 91% Malibag-Mouchak % 100% 86% 100% TOTAL % 100% 92% 92% Table 7: Results for question 2 and 3: How many of those companies/sock providers are international? How many of those socks are branded? *For branded products only those shops are considered who sell men s, women s or children s socks respectively. The highest number of brands represented in one outlet was 15 for men s socks, 10 for women s socks and 10 for children socks. There are 102 retailers (68%) who claim that they sell only branded socks, out of them 34 retailers are those who are specialized on selling the products of only one company. 52

53 In total 108 brand names were mentioned. Out of them 86 was mentioned for men s socks, 50 for women s socks and 47 for children s socks. 22 brand names were mentioned in all three categories (men, women and children). The following table shows ten most popular brand names in each of the categories with the number and the percentage of the shops who mentioned it. (For the calculation of the percentage only those shops who actually sell respective category were counted). The full list of the brands can be seen from the appendix. Men Women Children Brand Nr of shops Percentage of shops Brand Nr of shops Percentage of shops Brand Nr of shops Percentage of shops Nike 65 44,5% Nike 10 17,9% Bata 7 12,7% Adidas 59 40,4% Adidas 9 16,1% Zara 7 11,3% Puma 37 25,3% Bata 9 16,1% Adidas 6 9,7% Zara 18 12,3% Zara 5 8,9% China 6 9,7% Levis 17 11,6% China 4 7,1% Nike 6 9,7% Reebok 17 11,6% Massi Clair 4 7,1% Apex 5 8,1% Bata 12 8,2% Swan 4 7,1% Swan 4 6,5% Guccy 12 8,2% Levis 3 5,4% B.First 3 4,8% Crocodile 11 7,5% Perag 3 5,4% Perag 3 4,8% Swan 8 5,5% Puma 3 5,4% Puma 3 4,8% Table 8. Results for question 4: What are these brands? The price of the socks shows quite big variety (see chart 1 below). Firstly, men s socks are generally more expensive than women s and children s socks the ratio of higher and lower priced socks is much higher in case of men s socks. This can be clearly seen visually from chart 1. The children s socks are the cheapest, which is rather expected result. The majority of the men s socks cost more than 110 taka. The average price range for women s socks is taka, for children s socks taka. Chart 2. Results for question 5: What is the price range for the socks in your store? 53

54 61 brand names where mentioned as an answer to the question about highest priced socks in the outlet. Almost same amount of brands was cited as the brands of lowest priced socks. Interestingly 31 brand names appeared both among the list of cheapest and the most expensive brands. This could be explained so that many of the shops were either single brand shops or that the quality (and therefore price) levels of different products within one brand are big. For example Adidas could make products with the price of 500 taka as well as with the price of 60 taka. The range of replies for highest prices was taka, while the range of replies for the lowest prices was taka, which shows that shops can be focused on certain standard or customer group (e.g. low-end or high-end shops). The highest price mentioned was 1000 taka (Nike) and the lowest price mentioned was 30 taka (for a local product). The (weighted) average price for expensive socks was 295 taka and for cheaper socks 130 taka. Among the most expensive socks Adidas and Nike were mentioned more than others followed by Zara, Bata and Apex. Among the cheapest socks Nike, Puma, Bata and Zara got the most votes. Comparing the price related answers to the answers for the most popular socks, it appears that the first 20 most popular brands are the same as the brands which are said to be most expensive (as well as the cheapest). That fact shows that a) high price does not decrease the popularity of the products and b) the small number of (international) brands are dominating the market (available in the highest number of outlets). These brands are: Adidas, Nike, Bata, Zara, Apex and Puma. Table 9 on the following page summarizes the replies to the questions 6, 7, 8 and the above discussion. These questions were: What are the prices of the highest priced socks in your store? (6); What is the price of the lowest priced socks in your store? (7); Name the producers of the most popular socks that are bought from your store (8). 19 retailers (13% of total) said that they have started partnering to new sock companies within last one year. Half of them started relation with one new partner, the rest with 3 or more. Out of those new partners majority were international. Only four retailers declared their new partners being locals. It is not possible to say whether different retailers have new relations with the same new companies or different ones. However, these figures at least allow us assume that there have not been many new entrants to the sock market in Bangladesh. 54

55 The most popular brands The most expensive brands The cheapest brands Brand Popularity Frequency Popularity % Max Min Frequency Max Min Frequency Adidas 27 18,0% Nike 19 12,7% Bata 11 7,3% Zara 8 5,3% Apex 6 4,0% Smart 4 2,7% China 4 2,7% Cat's eye 4 2,7% Puma 4 2,7% Sports 4 2,7% Payari Garden 4 2,7% Perag 3 2,0% Crocodile 3 2,0% GQ 3 2,0% Asaf 2 1,3% Jennys 2 1,3% Reebok 2 1,3% For man 2 1,3% Levis 2 1,3% Hush puppies 2 1,3% Table 9. Results for questions 6, 7, 8: expensive, cheap and popular socks. Type of socks Retailers % of total Basic ,3% Ankle high 67 44,7% Low cut 65 43,3% Fashion 62 41,3% Solid colour 60 40,0% Solid white 58 38,7% Sports 56 37,3% Knee high 36 24,0% Pattern 33 22,0% White with coloured heel/toe 17 11,3% White with coloured foot bottom 14 9,3% Medium 1 0,7% Table 10. Results for question 11: Which kinds of socks are sold in your store? 55

56 As shown in table 10, the most widespread are basic socks. These are available in 85% of all the shops % of the retailers sell ankle high, low cut, fashion and single coloured socks. Slightly fewer outlets sell sports socks and solid white socks, which probably for many means quite the same. Knee-high, patterned and socks with different heel/toe/bottom are less common. According to colours by far the most common are black socks, followed by plain white, which are sold in 99% and 79% of the outlets respectively. Less available are grey, blue, brown, beige and khaki; and the rest of the colours are quite rare. Table 11 gives the overview about the availability of socks by colours. Type of socks Retailers % of total Black ,3% Plain white ,7% Grey 60 40,0% Blue 52 34,7% Brown 43 28,7% Ivory/ Beige 37 24,7% Khaki 36 24,0% Navy 14 9,3% Red 14 9,3% Denim 10 6,7% Royal 5 3,3% Ash 3 2,0% Coffee 3 2,0% Chocolate 2 1,3% Off white 1 0,7% Table 11. Results for question 12: Which solid colours of socks are sold in your store? Special feature of socks Retailers % of total Extra cushioning ,0% Odour control 54 36,0% Dryness / moisture control 37 24,7% Blister control 24 16,0% Reinforced heel / toe 23 15,3% Grey/coloured heel / toe 19 12,7% Therapeutic / medical features 7 4,7% Arch support 5 3,3% 100% cotton 4 2,7% Long lasting 2 1,3% Short socks 1 0,7% Table 12. Results for question 13: Which socks with special features are sold in your store? 56

57 Surprisingly the most popular special feature of socks was said to be extra cushioning 84% of the retailers are selling these kinds of socks. One third of the outlets offer socks with odour control and 25% percent have socks which control dryness and moisture. Special features like blister control, reinforced heel/toe or grey/coloured heel/toe are less available, but not entirely unknown. The rest of the options were chosen by less than 5% of the outlets. Please see table 12 for details. We also asked the retailer s opinion about for what occasions customers actually buy socks. The most common answer was work. That means that office people are those who mostly need and buy socks. 77% of the retailers thought so. Closely following (63%) was the opinion that socks are part of the school or work uniform. This answer is surely in correlation with the previous one. Slightly less than half of the retailers thought that the socks are bought for casual use. 35% said that sports and exercising are the activities for which socks are used by customers. This is supported by one of the previous answers about the availability of sports socks, which was 37%. Quite a few retailers also mentioned special occasions as a reason to put on socks, however evening activities and home received much less opinions. Details are given in the table 13. Occasions for wearing socks Retailers % of total Work ,3% Part of Uniform (School/Work) 95 63,3% Casual / Everyday 72 48,0% Participant in sport / exercise 53 35,3% Special Occasion / Dress-Up 27 18,0% Evening Activity 10 6,7% At home 9 6,0% Table 13. Results for question 14: For what occasions people buy socks from your store? Based on the answers to question 15 we can say that the most popular socks in Bangladesh are free size, black, comfortable, internationally branded socks which are made of cotton and cost about 232 taka a pair. The second popular colour was white, size short, special feature international and material rubber, but it must be said that all of those were far behind the first answers. In table 14 the details are presented. For the price a graph 2 is added to illustrate how expensive socks are most often bought. This clearly shows that the most popular sock prices are 150 taka, 200 taka and 250 taka, which again indicates that the cheapest products are not bought the most often, rather customers are looking for the best price-quality ratio. As for the 57

58 brands, then answers repeated the results of question 8: the five most popular brands were Adidas (28 shops), Nike (17), Zara (11), Bata (9). Apex (6), Cat s Eye (4), Payari Garden (4), Puma (4) and Smart (4) were following. In total 54 brands were mentioned. Popular Colour Shops % Popular Special Feature Shops % Popular Size Shops % Popular Material Shops % Black % Comfortable 74 65% Free 94 63% Cotton % White 28 19% International 10 8,8% Short 27 18% Rubber 9 6,3% Grey 5 3% Cotton 9 7,9% Medium 22 15% Elastic 5 3,5% Brown 2 1,3% Elastic 6 5,3% Quarter 3 2,0% Silk 1 0,7% Chocolate 2 1,3% Long Lasting 3 2,6% Half short 2 1,3% Ash 2 1,3% Odour Control 3 2,6% Big 2 1,3% Red 1 0,7% Soft 3 2,6% Blue 1 0,7% Other* 6 5,3% Navy 1 0,7% * 100% quality, local product, export quality, moisture control, made of rubber (1=0,9% each) Table 14. Results for question 15: Describe the most popular sock product in your shop? Chart 3. Results for question 15: Describe the most popular sock product in your shop? (Price) According to retailer s opinion, mostly working men in the age of 20-40, can be single or married, buy the socks. This result is aligned with one of the previous answers which revealed that majority of the socks are bought for wearing at work. Table 15 shows all the responses. Gender Shops 20 or younger Age Marital Status Occupation Single Married With Kinds Working Studying Staying Home Man Women* Child * In case of women, there was one "don't know" answer in every section. Table 15. Results for question 16: Who is the customer who mostly buys socks from your shop? 58

59 The following two tables (16 and 17) present the weekly sales of socks. The total sales of all the interviewed retailers was pairs of socks weekly, out of which 70% is men s socks, 13,6% is women s socks and 16,4% is children s socks. Considering that with our study we covered approximately 50-60% of the targeted segment of socks market, we can conclude that the weekly demand of this market segment is approximately pairs. It makes 1,34 1,61 million pairs annually. Looking at the results by outlets, we can see that the majority of the shops are selling less than 70 pairs of socks weekly. This indicates that the majority of the outlets selling socks in Dhaka are not specialized only to hosiery products, but must also have the variety of other products (e.g. footwear, clothing etc). One retailer said that his average weekly sale for men s socks is 2500 pairs, which is clearly an exception. Leaving this exception out, our calculations show that the market average weekly sales for men s socks per outlet is 56,4. The same figure for women s socks is 33 and for children 34. In the calculation for women and children also the highest figure of weekly sale has been left out (in case of women 300 pairs, in case of children 500 pairs). Weekly sales of socks (in pairs) Men's Woman's Child's Total Total weekly sales Average per outlet 72,8 37,8 41,6 103,3 Average without maximum value 56, ,2 Table 16. Results for question 17: How many pairs of socks do you sell weekly? Number of outlets by pairs sold in week Pairs sold per week Men's Women's Child's > Table 17. Results for question 17: How many pairs of socks do you sell weekly? 51,3% (77) of the retailers think that the demand for socks has increased during the last 1 year, 36% (54 retailers) think that it has remained the same and only 12,7% (19 retailers) believe that the demand has decreased. 59

60 The retailers were asked to rate the variety of factors according to the possible importance for the customers in the scale of 1 to 5 where 1 meant not important at all and 5 meant very important. Overall all the factors were rated generally high. However, the results show that the retailers consider comfort to be the most important factor for customers when buying socks 91% of retailers rated comfort with 4 or 5. Closely following was longevity 84% of the retailers marked it with 4 or 5. Other important factors for customers are the foreign origin of the socks and material (both ranked on average slightly more than 4). It can be concluded that there is correlation between different factors. It seems that customers generally believe that socks with foreign origin are more comfortable and last longer. As discussed also earlier, price, even though important for people, is not consideration number one for the majority of the customers. Factors for consideration / importance How many times mentioned by the retailers Total Average importance Comfort ,57 Longevity ,38 Foreign ,09 Material / Texture ,02 Price ,83 Colour ,83 Performance / Special features ,59 Packaging ,58 Style ,44 Fashion ,4 New brands ,23 Local Table 18. Results for question 19: What are the most important factors customers consider when buying socks? When asked whether the retailers would like to get any specific product which they currently don t have (open ended question), 44 retailers (36%) answered yes. Amongst those 24% wanted socks that protect for smell or sweat, 20% wanted socks from good company. 14% of the retailers would have been happy with any new product and 12% said that they would like to get the socks for which there is demand. A few retailers were expressing their interest for the products with good price or for international sports brands. Also good colour, material, size and longevity were mentioned, but only for one shop for each of them. 62% of the outlets (76) did 60

61 not wish for any new product and 3 retailers did not have an opinion. In addition to the shops just mentioned, there were 29 outlets who were excluded from the analysis of this answer, because they are single brand shops and are therefore limited to the options within this brand only. 82% of the outlets use one type of source for their products (either international or local manufacturer, wholesaler or agent) and 15% use two different types of sources. It is the most common to buy products directly from international manufacturer 29% of the retailers do so. This is not so surprising considering how many international products and brands are available in the market. Approximately the same amount (20%) of retailers buys their products either from wholesaler or an agent. 15% of retailers buy their products directly from local manufacturer. 6% of the retailers use both wholesaler(s) and agent(s). However, the set-up of the question does not allow identifying how many different wholesalers or agents there are for the socks. 3 companies said that they are selling the products of their own company. Table 19 gives the specifics of the answers. Source of the socks Retailers Percentage International manufacturer 43 29% Wholesaler 30 20% Agent 28 19% Local manufacturer 22 15% Wholesaler and Agent 9 6% International manufacturer and Agent 9 6% Local manufacturer and Wholesaler 3 2% Company's own product 3 2% Don't know 2 1% International manufacturer and Wholesaler 1 1% Local manufacturer and Agent 0 0% % Table 19. Results for question 21: Where do you buy the socks for your shop? The most common payment method for the stock of socks is cash. Nearly 43% of the retailers (64 of them) said that they always buy the products of cash. Additional 25% are mostly buying on cash, but occasionally may also buy on credit. About 15% of the retailers are mostly buying on credit, occasionally on cash and only 6% are always buying on credit. 14 retailers (9,3%) said that they are following the policy of the provider. 61

62 Payment method for the stock Retailers Percentage We always buy on cash 64 42,7% We usually buy on cash, occasionally on credit 37 24,7% We usually buy on credit, occasionally on cash 22 14,7% Company own made this 14 9,3% We always buy on credit 9 6,0% Don't know 4 2,7% ,0% Table 20. Results for question 22: What is the policy of buying the stock of socks for your shop? 73 retailers answered to the question about the payment policy in case of credit payment. The most widespread frequency for credit payments is one week. 53% of the respondents chose that option. 15% of the retailers said that they follow monthly schedule and 12% mentioned that they pay according to the policies of the providers. 8 outlets (11%) said that they pay every two weeks and 6 (8%) said that they do it quarterly. When it comes to the profit margin of the socks, then the answers were unexpected. Table 21 gives the frequencies of all the answers. 62% of the retailers said that their profit margin is 20 taka or more which was the highest amongst the options we gave them. This shows that we were not able to predict the answers very well and did not set good ranges for the retailers to choose from. It also shows that the retailers income from the socks is not small. What exactly is the ratio between the product price and the profit margin cannot be said due to the problems with the question set-up. However, by comparing the profit margin with the price of the most popular products, it is possible to say that the margins by absolute amount get bigger as the product price increases (see Table 22 on the next page). Profit Margin Frequency Percentage 20 Tk or more 93 62,0% Tk 20 13,3% Tk 14 9,3% 5-10 Tk 10 6,7% Provider sets the margin 7 4,7% Don't know 5 3,3% 5 Tk or less 1 0,7% ,0% Table 21. Results for question 23: What is the average profit margin per pair you look for? 62

63 Average price for most popular socks Retailer's profit margin (per pair) Profit margin expressed in % 331 Tk Provider sets the margin 259 Tk 20 Tk or more app. 7,7 % 201 Tk Tk app. 7,5-10 % 156 Tk Tk app. 6,4-9,6 % 140 Tk 5-10 Tk app. 3,6-7,1 % 120 Tk 5 Tk or less app. 4,2 % Table 22. Results for question 23: What is the average profit margin per pair you look for? The last question was asked in order to indicatively measure whether there is a demand for the product similar to silver socks. The main features of silver socks were described (like antibacterial, antistatic, thermo and moisture regulating, suitable for diabetics, prevent from sweating and smelly feet) and then asked whether any customer has ever inquired about these kinds of socks. The results are presented in chart 3. Chart 4. Results for question 25: Has any customer ever asked for socks with features like? In the following chapter the secondary and primary data is put together and further synthesized, which will eventually lead to the conclusions and recommendations for SUVA for entering to the hosiery market in Bangladesh. 63

64 5. Analysis In this chapter the results of empirical information is analysed and compared to the theoretical framework that has been presented in the theory part of this thesis. The results of the empirical study will be interpreted and the model created by the authors for decision making of the entry strategy choice tested. There is widespread understanding that a company opting to internationalise can select a market entry mode ranging from very little risk and low capital expenditure (e.g. exporting) to relatively high risk and high capital investment (e.g. manufacturing abroad). This statement has been expressed for example by Johanson & Vahlne (1977) and Norvell et al (1995). According to the results of theoretical and empirical study by Yung (2006), FDI mode choice strategy is influenced by three determinants: resources owned by the investor, resources specific to the host firm, and risk derived from the international market. Zineldin & Dodourova (2005) showed in their empirical study that the choice between strategic alliance and go-it-alone strategies depends on the motives for entering to the foreign market. Claver et al. (2007) argue that the decision to enter a foreign market should be based on balancing the risks and rewards derived from this action. However, the evidence suggests that it is also determined by resource availability and the need for control and choice of entry strategy also depends on the firm's surplus resources (Claver et al 2007). Keillor et al (2001) argue that market/firm characteristics and government policy/market imperfections have a significant relationship to entry strategy and they are factors influencing choice of market entry mode. Kumar & Waheed (2007) concluded in their study that strategic considerations for foreign market entry and expansion should take a thorough account not only of the firms immediate operating needs but also of the competitive environment in the dimensions of management, finance and macroeconomics. All these aspects have been considered in the model which authors have created and will be on the following pages one by one compared to the results of empirical study Company motives and resources Johnson & Tellis (2008) have found that smaller firms tend to be more successful than larger firms in entering emerging markets. However, even more scholars (like Jansson 2007, Mayer & Skak 2002 in Jansson & Sandberg 2008) have stated that compared to large enterprises small and medium enterprises are less competitive and may not be able to capture business 64

65 opportunities due to inferior products, shortages of finance and limited administration capacity. The latter makes SMEs less risk-tolerant potential loss of an investment is a very serious threat to the existence of an entire company. SUVA AS is a small and medium sized company which sets certain limitations to its activities. We can assume that SUVA like many other SMEs is influenced by the lack of surplus finances, which would not allow them to go for big scale investments and also makes them less risktolerant. Sharma & Erramilli (2004) find that each company is unique and this uniqueness stems from the resources is possesses. Their definition of resources is quite wide including all assets and capabilities, such as distinctive competencies, technology, corporate culture, customer loyalty, brand name, machinery, processes and procedures, market orientation and relational and intellectual assets (Hunt & Morgan 1995, Reed & DeFillippi 1990, Srivastava, Shervani & Fahey 1998 in Sharma & Erramilli 2004). According to our understanding, the resources of SUVA include a very good product (silver socks), their production know-how and capacity and experience of selling their products in foreign markets, namely Northern Europe. These recourses give the advantage to SUVA on the following reasons. Silver socks are of high quality, have several special features and fit perfectly to hot and sticky climate as Bangladesh has. In fact, the product features even accelerate in warm climate. SUVA has developed good infrastructure (machinery park) and knowhow for the production of those socks. The company is already exporting (even though only to closer European countries), which gives them the basic knowledge of exporting and doing business in an international environment as well as shows the high standard of the product. From the perspective of which resources SUVA lacks, then they have no knowledge of operating in developing, emerging or Asian markets. This is definitely a disadvantage when considering starting business in Bangladesh. Sharma and Erramilli (2004) further specify how the resources affect the entry mode. Their conclusion is that if the key advantages are easily transferable, the firm is able to choose the foreign production mode; but if essential advantages are difficult or costly to transfer, the firm will be confined to the exporting mode. Looking this from SUVA s perspective we can say that the company s resource advantages are not so easily transferable. Firstly, moving the production from Estonia to Bangladesh is an expensive exercise and it is not really 65

66 recommended as the first step because SUVA doesn t have any connections to Bangladesh. Their knowledge of exporting to Northern Europe also does not give much extra benefits due to very different nature of the markets of Bangladesh and Northern Europe. Regarding the motives of foreign entry, Thomson et al (2005) mention four major reasons of the companies for going abroad: 1) gain access to new customers for realizing the potential of increased revenues, profits and long-term growth; 2) achieve lower costs and enhance the firm s competitiveness as often domestic sales volume is not large enough to fully capture manufacturing economies of scale or learning curve effects; 3) capitalize on its core competencies; 4) spread business risk across a wider market base so that the economic turbulences do not put the existence of the company at risk. Couturier & Sola (2010) add that companies wish to acquire resources that are more efficient than those obtainable in the home market of the firm (e.g. labour and natural resources). Comparing these with the situation of SUVA, we may say that SUVA s biggest motivations for entering to Bangladeshi market could be gaining access to new customers for realizing the potential of increased revenues, profits and long-term growth and spreading business risk across a wider market base. However, considering the global trend of garments manufacturing moving to less developed countries with lower labour cost, we believe that in long-term acquiring resources that are more efficient than those obtainable in Estonia will also become a motive of moving its business for SUVA Cultural distance According to Jasimuddin (1995) the study of host cultures is of primary importance to those in international business because cultural differences exert a pervasive influence on all business transactions. This is echoed by the number of other researchers (like Kogut & Singh 1988 in Johanson & Tellis 2008 and Choo & Mazzarol 2001), who say that culture affects not only the underlying behaviour of customers in a market but also the execution and implementation of marketing and management strategies, which makes cultural differences as one of the most influential factors of SME s entry choice. Culturally Bangladesh and Estonia are very different. So the norms, values, customs and business practices are very different as well. The most obvious difference is language. Without an interpreter it is impossible for an Estonian company to do business. The main reason is that most of the retailers would not be able to speak English well enough so it would be extremely challenging to establish good relations with them directly. This was also the reason for us to 66

67 translate our questionnaires and arrange the interviews with retailers in English. Secondly the communication channels as well as the entire concept of communication in Estonia and Bangladesh are very different. In Estonia a lot of business is done though internet, by or by phone. Written communication is very common. In Bangladesh, on one hand the infrastructure is not in the level, which would allow using similar model and on the other hand, close personal relations are with the utmost importance in Bangladesh. That means that most of the deals and communication between partners is done orally, less by phone, more directly face-to-face. Religion is another aspect which should be considered when doing business in Bangladesh. Religion plays an important role in the society of Bangladesh and influences significantly the values, norms and believes of people. This should be considered very carefully when communicating with locals, setting up business meetings and advertising campaigns etc. For people coming from religiously distant (especially distant from Islam) country like Estonia the entire concept of religion is quite unknown. Operating in an Islamic country for Estonians would be like swimming in unknown waters and therefore the local assistance would be necessary. Malhotra et al (2003) has defined location risk as the perceived difference between home and host environments in terms of culture, business, and economic practices. Based on the discussion above, we can conclude that location risk for entry to Bangladesh is high Competition Porter in Thompson et al (2005) explains that the profitability of an industry is determined by five forces: except from rivalry between existing competitors, industry attractiveness is additionally influenced by customers and suppliers in the vertical dimension, potential market entrants and substitute products in the horizontal dimension. The intensity of competition is high, if there is high number of competitors which are equal in size and power, industry growth is low, exit barriers are high, competitors are highly committed to the industry and seek industry leadership, and firms have different business models or different goals (Thompson et al. 2005). A supplier group is powerful, if it is more concentrated than the industry it sells to, the supplier group does not depend heavily on the industry for its revenues, industry participants face switching costs when changing suppliers, suppliers offer products which are differentiated, there are no substitutes for what the supplier group provides, and the 67

68 supplier group can credibly threaten to integrate forward into the industry. (Thompson et al. 2005). Customers have a high negotiating power if: there are few customers, the industry s products are standardized or undifferentiated, customers face switching costs in changing vendors or customers can integrate backward into the industry. (Thompson et al. 2005). There are seven major sources for entry barriers, which have the potential to prevent companies from entering an industry and therefore contribute to high industry profitability: supply-side economies of scale, demand-side benefits of scale, high switching costs of customers, high capital requirements, incumbency advantages independent of size, unequal access to distribution channels, and restrictive government policy. (Thompson et al. 2005). The threat of a substitute is high if the customer s costs of switching to the substitute are low, and if the price performance trade-off to the industry s product is attractive (Thompson et al. 2005). Based on the information received from the interviews with the retailers it may be concluded that the competition in the hosiery market in Bangladesh is moderately high. There are 20+ players with 108 brands competing in the market. The companies are different in size and power. The biggest competition risk comes from the fact that the market is dominated by small number of big international players (Adidas, Nike, Bata, Zara, Apex, Puma). These companies can afford to arrange large-scale advertisement campaigns, make regular discount offers to the customers and pay attention to constant product innovation. They are usually able to react fast and fiercely if they feel any competition pressure themselves. However, on positive note about big international companies on Bangladesh market, it may be said that these companies are mainly export oriented. Their main focus in Bangladesh is manufacturing for the rest of the world. Bangladesh is generally not their first market, which can mean that their reactions to new market entrants or increased competition may not be too strong. Interesting fact that came out from the interviews is that the market leaders of hosiery market are mostly international sports brand holders Adidas, Nike, Puma, Apex, which on one hand could mean that silver socks are not competing in their segment (as they are concentrated on making sportswear). On the other hand, the highest selling socks are black, cotton socks for wearing in the office, which makes us believe that market leaders even though generally perceived differently also seek for opportunities in other market segment (like working people). 68

69 It can be concluded from our study, that entry to hosiery market of Bangladesh is possible without major restrictions. Potential reactions from the competitors were already discussed. No high capital investments are needed in order to enter (unless it is a clear choice) the product as well as its production capacity already exists. The potential customer-base is available and demand for socks is increasing. There are many players in the market and customers have fairly low switching costs. Government is rather supporting the growth of foreign business in Bangladesh than restricting it. Our study showed that the sale of men s socks is clearly dominating over the sale of women s and children s socks. We believe that this is due to the effect of local culture and practices. The clothing style of (office) working men is similar to that in Europe and in the world men wear suit or if not entire suit, then at least suit trousers and shirts. Suit requires closed shoes, sandals are not accepted. Closed shoes require socks. This means that there are no good substitutes of socks when it comes to men as casual wear is not accepted in the office environment and silver socks fit to office environment perfectly! When it comes to women then the most common types of dress are saree and salwar kamez. For both of them generally open shoes are worn. And even though western clothing style (jeans, trousers, even skirts) is getting more popular, the widespread norm is that women can wear open shoes. This limits the need for wearing socks. In western world the closest substitute of socks in case of women is tights. However, doe to climate (they would simply be uncomfortable) and customs (costumes and short dresses/skirts are not worn), women never wear tights in Bangladesh. So we can conclude that when SUVA enters to Bangladeshi market, then silver tights should be left out of the product range. As for children, then many school uniforms require socks. However as kids play a lot we can assume that sport socks are more for them and we do not consider them very attractive market segment for silver socks. Malhotra et al (2003) define competitive risk as the number and size of competitors and the aggressiveness of their marketing efforts. When the intensity and competitive differential is high, firms tend to avoid internationalisation or prefer exporting. Strategic alliances offer a promising alternative to exporting as they enhance knowledge and build competitiveness (Madhok 1997, Sengupta & Perry 1997, Das & Teng 2000 in Malhotra et al, 2003:19). Based on the previous discussion we may conclude that competitive risk of Bangladeshi hosiery market is moderately high, therefore unless the company has an access to trustworthy partner, export seems to be the most preferred choice of entry. 69

70 5.4. Potential customers Based on our research we can say that there is potential demand for silver socks in Bangladesh and the market is quite attractive. There are several reasons for that, which could be summarized as following: Customers want to buy socks with special features; Features for which customers have shown interest (like odour-control, protection for sweat, comfort, longevity) are all the attributes of silver socks; The most wanted material for socks is cotton, which is exactly the material used for producing silver socks; Having an international brand automatically gives an advantage in the market as customers are very attracted to it; Comparing the price of the socks in Bangladesh to the price of silver socks in Estonia we can conclude that silver socks are a high-end product for Bangladeshi market costing about 450 taka a pair (the retail price of silver socks is slightly over 5 EUR in Estonia. 1 EUR = 90 BDT). However, the empirical data has shown that the price is not the factor number one which influences people s decision to buy other features, specially comfort and longevity, are the ones which are much more important. This allows suggesting that it would be possible to sell silver socks with similar price in Bangladesh (especially considering that even higher priced socks are available in the market). However for capturing larger market segment the price should be adjusted to around 300 BDT. But it has to be considered that lower price should not affect the main competitive features of the socks otherwise people would not buy them. Another observation that we did is that even though people ask for the special featured products, they are not so wide-spread yet. We believe that there is high potential to increase the demand in this segment and capture it. Moving fast would give the prime movers benefits for example being able to establish the brand. Malhotra et al (2003) define demand risk as the risk taken by the firm because demand for its products or services may fail to reach the desired level. When demand uncertainty is high or the expected demand is low, firms favour entry modes that involve low resource commitment, e.g. exporting. Based on the discussion in this sub-chapter we may conclude that demand risk for silver socks in Bangladesh is moderately low. It is possible to lower the risk by lowering the price of silver socks. 70

71 5.5. External environment Jansson (2007) argue that business environments in emerging country markets might be different from Western markets due to differences among institutions. Large emerging markets are regarded to be uncertain and complex. Therefore, the business environment is regarded to be relationship-oriented and institution-building, which results in the characteristic of being a network society. Cavusgil et al (2002) say that despite the complexity and instability faced, emerging markets have become increasingly attractive for doing business, inter alia due to the fact that growth rates in forthcoming years will be significantly higher than in mature markets. As mentioned in the theory chapter, during the past several decades, there has been a significant change in the attitudes of many countries toward inflows of foreign direct investment, which are now welcomed as a source of new technologies, know-how, better management, and marketing techniques (Javorcik & Saggi, 2010). Developing country governments are especially interested in the technology and know-how transfer that results from FDI. In addition, Konopielko in Kumar & Waheed (2007:178) highlights the benefits of FDI for less developed countries as conferred to domestic employment growth, formation of human capital, government revenue growth, and direct expenditure. These are all the reasons which make governments of the emerging economies (but not only!) develop supportive measures for the start and development of foreign businesses. The positive effects of the external environment in the context of entering to Bangladesh with silver socks include the following: The rate of economic growth is quite high (more than 6%), which allows to believe that people s purchasing power will increase as well; Increase in urbanisation allows believing that the amount of people who work from office is increasing as well; Even if relatively small segment of the market is captured it is already a significant revenue source for SUVA considering that SUVA is an SME who currently produces 3 million pairs of socks annually and Bangladesh is a country with 158,6 million people; The policies of Bangladeshi government are encouraging towards international businesses. Direct investments in the country are specially supported. 71

72 The negative effects from the environment for SUVA could be: Lack of regulatory discipline and potential changes in regulations especially after the elections (partially related to regulatory capacity, partially with political stability); Less developed or limited communication channels; Country risk by Malhotra et al (2003) refers primarily to the stability of the political, social, and economic conditions. Firms tend to avoid or to limit their resource commitment in areas of high country risk. (Malhotra et al 2003). We can conclude that the country risk of Bangladesh is medium Entry strategy The attractiveness of the targeted market segment in terms of profitability prospects is a major parameter for deciding on whether to enter the market (Thompson & Martin 2005). Based on the discussion above, we believe that SUVA should enter to Bangladesh. There is enough customer base as well as potential to create new market. The match between SUVA silver socks and customer needs is good: socks are widely worn by (office) working men, customers are attracted to international brand, the features of silver socks fit to the climate and are asked for, price does not have the primary role in purchase decision as long as the quality of the product is high. We believe that the most appropriate choice for entry mode for SUVA is exporting. Advantages of exporting mode from company perspective are that it requires low investment, has low risk/return alternative (Agarwal & Ramaswami, 1992) and allows a firm to achieve competitive advantage, increase productive capacity or improve its financial position (Reid, 1983 in Claver et al. 2007). It also allows the company to maintain the complete control over production and reach customers quickly. Exporting allows SUVA to enter without major investments, which is important for an SME, who does not have a lot of surplus finances. It would allow the company quite fast benefit from emerging market opportunities that Bangladesh offers. The company already has a well set-up production unit in Estonia, which can start producing for new market even today. As SUVA has no experience in doing business in emerging market or developing country, exporting would allow them to get the experience and learn from it, and therefore potentially prepare them for bigger moves in the future. 72

73 According to Albaum & Duerr (2008) as well as to Kotler & Keller (2006) exporting is classified into two categories: a) direct exporting (every responsibility is performed by the company itself) and indirect exporting (responsibilities are done through other intermediaries). According to Meyer (2001) in Jansson & Sandberg (2008) firms entering emerging markets face several barriers lack of information, unclear regulations and corruption. In order to overcome those barriers, the relationships in the host country are needed as through them the adequate information and know-how about the new external environment is built. Scholars have found that relationships are the core of the internationalisation process and according to network approach to internationalisation, entries into local market networks take place through establishing relationships (Axelsson & Johansson 1992, ford 2002, Hakansson 1982, Hakansson & Snehota 1995, Hammarkvist et al 1982, Jansson 1994, 2007, Johanson & Vahlne 2003, Majkkgard & Sharma 1998 in Jansson & Sandberg 2008:67). Lack of experience in working within culture and environment similar to Bangladesh are the main reasons why we recommend indirect exporting to SUVA. That means SUVA should use triad as an entry node establish relations in foreign market networks through third parties, for example an agent. Agency relationship would help the company to overcome the language and other communication barriers as well as get less affected by the corruption and unclear regulations; it would allow smoother entrance to distribution networks and establish the relations with the retailers. Good agency relationship would be the main source of information and learning for SUVA about how to do business in Bangladesh. Compared to distributor relationship, agency gives more management control and is thus more attractive. Exporting does have a disadvantage that it lacks marketing control (Agarwal & Ramaswami, 1992), but good marketing seems to be quite important to get a good grip on customers in Bangladesh. SUVA would need to establish the brand and educate customers about the benefits of silver thread, especially for creating a new strong customer segment (and we have seen that there is a potential). Good agency relationship would allow SUVA to influence the way the marketing is done more than in case of other third party. According to Bhaumik & Gelb (2005), if an industry is fast growing, and therefore fast changing, it may be essential for companies to quickly have a stake in it, so as not to lose its first-mover advantage to other multinational companies or local firms. Johnson and Tellis (2008) add about emerging markets, that earlier entrants enjoy greater success than later entrants. They bring out several reasons why an early entry is beneficial: a) can lock up 73

74 access to key resources, such as distribution channels and suppliers; b) have the opportunity to set the pattern of consumer preference; c) can benefit from being the first to exploit governmental concessions and incentives; d) can exploit the strategic window of an expanding market. On the other hand, Golder & Tellis (1993) in Johanson & Tellis (2008) found that pioneers are often not the long-term winners in a market, because they may not be aware of the pitfalls of the newly opened emerging market, their returns might be too low compared with their investments, especially because infrastructure is not yet fully developed and latter entrants have a flatter learning curve because they can learn from the early entrants errors. As for entry timing of SUVA to Bangladesh is concerned, then on one hand there are many players already on the market, so SUVA would have to compete against the existing players. The benefit of this is a possibility to learn from the competitors and therefore make less mistakes. However, when we look from the perspective of capturing the market segment for special featured socks, then we can conclude that the market is not yet developed. There are not many providers of special featured socks, not even from big players. We recommend that SUVA would take this focus when entering and then they would be able to capitalize on the prime movers advantages. In order to further justify the best entry strategy indirect exporting for SUVA, we will shortly point out some reasons why other strategies are not so suitable. From companies perspective acquisitions and foreign direct investments are expensive and cumbersome (Kumar & Waheed, 2007). This also includes wholly owned subsidiaries and joint ventures, which are high-cost entry modes because of the level of resource commitment needed to set up operations (Pan & Chi 1999 in Johanson & Tellis, 2008). This is also the main reason for SUVA to avoid these entry strategies similarly to most of SMEs SUVA does not have excessive finances as big multinationals would have. As said in the theory part of this thesis, Greenfield strategy can be very appealing when there is lack of proper acquisition target in the foreign marker, there is in-house foreign market expertise and embedded competitive advantage. However the drawbacks for SUVA are again high investment need and the lack of knowledge about Bangladesh market. 74

75 Hennart and Park (1993) in Couturier & Sola (2010) claim that an agreement of joint venture is considered the smartest move when the chosen entry market is significantly different from that of the enterprise s domestic culture. This is also supported by Agarwal & Ramaswami (1992) in Choo & Mazzarol (2001:293), who have found that smaller and less multinational firms prefer no entry or joint venture mode in high potential markets to reduce costs and risks. As well as by Zinledin & Dodourova (2005), who has proved that during last decade there has been shift from go-it-alone strategies to strategic alliance relationships. Beamish (1985, 1993) in Isobe et al (2000:469) further argues that equity joint venture has been a dominant and often a "forced" entry mode in most emerging regions. It is definitely true that Estonia and Bangladesh are significantly different from each other, which would make joint venture and attractive option to consider (especially as it would come along with smaller resource cost), however the threat for SUVA is that due to no experience and prior connections to Bangladesh they may not be able to find good and trustworthy partner. It is smarter to make the first move through exporting, establish some relationships and then consider direct investments through joint venture or other modes. This finding can be supported by Zineldin & Dodourova (2005), who explain that forming a successful alliance is not an easy task to do as the barriers like clash of cultures, lack of coordination, differences in operating procedures and attitudes, lack of clear goals, objectives and trust etc must be overcome. The thesis was limited to finding the entry strategy for the initial entry of the foreign market. There was no scope for further discussing internationalisation stages with long-term effect. However, we would like to say that we see quite big potential for SUVA to move its manufacturing to Bangladesh in long-term perspective. It requires further research as well as insights into company s strategic plans, but based on current information we believe that wholly owned company (e.g. acquisition or Greenfield) would be the strategy for SUVA to follow in Bangladesh long-term. There are several reasons for that: Garments industrialisation has moved from Europe to Asia already. And Bangladesh has proved itself as a very efficient garments manufacturing country. Estonia has just (1 st of January 2011) entered to euro zone, which means that there will be high pressures for labour cost increase, which would mean for SUVA an increase in operating costs. Therefore they might be forced to think of moving their production to the location with cost-advantage. 75

76 Moreover, it would give the entire new dimension to the agency relationship the company would be much more interested in learning the ins and outs of business in Bangladesh if they have a strategic goal to move there in later phases of internationalisation. Lastly, it is relatively easy to move out of the agency relationship and establish direct contacts with the retailers. Retailers in Bangladesh are used to it already. 76

77 RESOURCES OF SUVA 80 years of know how and experience in producing hosiery products. Silver socks as product (antimicrobial, all natural, heat transfer, antistatic, therapeutic) Own machinery park with 450 knitting machines Export experience within Northern Europe Competition 20+ players 108 brand names Internat. products are widespread Small nr of internat. brands dominate the market they sell products for different customer groups in different price categories Few new entrants Silver sock features available in 25% of shops Ext. environment Population of 158 million Trend of urbanisation Religion: Islam Tropical climate Economic policies encourage private investment and import Good know how & capacity for garments production Cultural distance Indirect vs direct communication Religious vs non religious society Estonian vs Bengali Outgoing/emotional vs reserved/rational Restricted vs liberal dress code RISKS High location risk Moderately high competition risk Moderately low demand risk Medium country risk REWARD Good match between the product features and what companies want High potential demand Opportunity to build market and customer preferences Customers Annual demand of socks 1,34 1,61 million pairs Most popular socks: free size, black, comfortable, internationally branded, made of cotton, 232 BDT Most important features: comfort, longevity, foreign origin Average customer: working men, years old, married or single 70% of socks sold to men Prices does not (significantly) decrease the popularity of socks 50% of retailers claim that demand for socks has increased, 36% believe it is steady, 13% claim it has decreased 8% of shops sell mostly socks with price 450 BDT or more ENTRY STRATEGY Entry mode: Indirect exporting Entry node: Agency relationship (triad) Entry timing: Possibility to capture prime movers advantage Figure 5: Making the entry decision of SUVA to Bangladesh market (based on author s model) 77

78 6. Conclusions We can generalise from the case study that indirect exporting through an agent is the most efficient entry strategy for any emerging market in case there is high location risk, moderately high competition risk, medium country risk and moderately low demand risk, the company has no surplus finances for big investments and no prior experience in doing business in an emerging market. Therefore we can conclude that the research objective of this thesis got fulfilled and the first research question answered. The main concern is whether the assumptions that were made about the motives and resources of the case company are true in reality. However, the heaviest part of the analysis was on the competition and potential customers and less on the company side. We assess the market and customer information collected from retailers fairly reliable. So, in conclusion, we believe that considering the information we had, we made well reasoned and reliable choice for the entry strategy, which could also be applicable for the entry of other emerging markets in case the other conditions are similar. The second research question was whether the model developed by the authors can give good guidance for making the choices of entry. We believe it can. The model allowed us analyse the problem step by step and then bring different aspects into one picture. Based on the model it was easy to make the connections between many considerations and the choice of entry. We believe that the model could be used as a tool for making the entry decisions by the companies as well as give the guidance to researchers. 78

79 7. Recommendations for further research We do believe that it would be interesting and beneficial to make more comparative studies of the foreign entry of the companies from transition economies to emerging markets. There seems to be gap about this in the theoretical works that has been done so far as most of the works are concentrating on the movements from developed economy to emerging markets. On the other hand it would also be a good test to see whether the result of our model application for one case is aligned with the generic study. The model itself definitely suits well for a case analysis, however, the same framework could successfully be applied also to the study where several companies and their entry strategies are known and some other variable is to be found. For example the model could help to identify how different companies perceive risks under similar conditions. The model could also be used for making a comparative study of different foreign entry cases. 79

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85 Appendix 1 Interview questionnaire Dear Sir/Madam, The following is the market research for socks in Bangladeshi market conducted by Swedish university students for Master thesis. We believe that you as a retailer can give the best insight into the market of socks in Dhaka. We therefore kindly request you to help us by participating in this survey. It should take about minutes. Please be informed that the answers will be treated as confidential and the information will be used only in generalized format. We are looking forward to your response latest by May 14, With kind regards, Md. Ashiqur Rahman Feleke Desta Tantu QUESTIONNAIRE FOR RETAILERS Name of the retail shop: City: Dhaka Area: Address: Contact person: Contact number: Designation: 1. How many companies' socks are sold in your store? a) For men Nr of companies b) For women Nr of companies c) For children Nr of companies 2. How many of those companies/sock providers are international? 3. How many of those socks are branded? a) For men b) For women c) For children 85

86 4. What are these brands? (Write down the names of the brands.) a) For men b) For women c) For children 5. What is the price range for the socks in your store (choose all that apply)? a) For men Below 50 Tk Above 250 b) For women Below 50 Tk Above 250 c) For children Below 50 Tk Above What are the prices of three highest priced socks in your store? (Mention price & brand names). a) For men b) For women c) For children 7. What is the price of the lowest priced socks in your store? (Mention price & brand names). a) For men b) For women c) For children 8. Name the producers of the most popular socks that are bought from your store/company. 9. How many new sock companies have been added to your partner list during last 1 year? 10. How many of those companies/sock providers are international? 86

87 11. Which kinds of socks are sold in your s tore? (choose all that apply) a) Basic g) Solid white b) Sports h) White with coloured heel/toe c) Fashion i) White with coloured foot bottom d) Knee high j) Solid colour e) Ankle high k) Pattern f) Low Cut l) Other (please specify): 12. Which solid colours of socks are sol d in your store? (choose all that apply) a) Plane white g) Blue b) Ivory/Beige h) Black c) Red i) Grey d) Navy j) Khaki e) Denim k) Brown f) Royal l) Other (please specify):s 13. Which socks with special features a re sold in your store? (choose all that apply) a) Odour control f) Dryness/Moisture control b) Reinforced heel/toe g) Arch support c) Grey/coloured heel/toe h) Therapeutic/medical features (e.g. blood circulation) d) Extra cushioning i) Other (please specify): e) Blister control j) None 14. In your opin ion, for which occasions peop le buy socks from your store? (choose all that apply) a) Work e) Special occasion/dress up b) Casual/everyday f) Participate in sport/exercise c) At home g) Part of uniform (school or work) d) Evening activity h) Other (please specify): 15. Describe the most popular sock product in your shop? Colour: Size: Material: Brand: Price: 87

88 Special features: 16. Who is the customer who mostly buys so cks from your store? (choose o ne from each row) a) Man Woman Child b) 20 or younger More than 50 c) Single Married with kids d) Working Studying staying home 17. How many pair s of socks do you sell weekly? a) For men: b) For women: c) For children: 18. The demand of socks during the last 1 year has (choose one) a) Increased b) Decreased c) Remained the same 19. In your opinion, what are the most important factors customers consider while buying socks? ( Rank all the fac tors from 1 (not important at all) to 5 ( very important)). Longevity Comfort Price Material/texture Performance/special features Colour Style Fashion New brands Packaging Origin of the socks (e.g. foreign/local) Other (please specify):

89 20. Would you like to have some kind of socks in your store, which you currently don t have? If yes, please describe what type of sock you would like to have: 21. Whe re do you buy the socks for your shop? (choose all that apply) a) Directly from the local manufacturer b) Directly from the international manufacturer c) Wholesaler d) Agent e) Other (please specify): 22. What is the policy for buying the stock of socks for your shop? a) We always buy on credit b) We always buy on cash c) We usually buy on credit, occasionally on cash d) We usually buy on cash, occasionally on credit e) Other ( please specify): 23. In case you buy on credit, how often do you pay? a) Weekly b) Every two weeks c) Monthly d) Quarterly e) Annually f) Other (please specify): 24. What is the average profit margin (per pair) you a re looking for while selling socks? a) 5 Tk or less b) 5 10 Tk c) Tk d) Tk e) 20 Tk or more 25. Has any customer ever asked for socks with features like: antibacterial, antistatic, thermo and moisture regula ting, suitable for diabetics, prevent from sweating and smelly feet? a) yes, several b) yes, few c) none Thank you for your time and consideration. 89

90 Appendix 2 Additional results from the survey Target groups for socks Nr of shops % of shops Only Men 68 45,3% Men, Women, Children 45 30,0% Men, Women 15 10,0% Men, Children 20 13,3% Only Women 1 0,7% Only Children 1 0,7% Women, Children 0 0,0% TOTAL % Table 1. Results from question 1: How many companies socks are sold in your store? Area name Sold Man Sold Women Sold Child Sold Total Int.-l Int.-l percentage of total Dhanmondi-Mirpur ,0% Gulshan ,1% Malibag-Mouchak ,1% Palton-Gulistan ,1% Uttara ,5% TOTAL ,4% Average per shop 4,1 2,7 2,4 3,2 Average per shop without 1 5,1 4,3 4,0 4 % of branded socks in the market Table 2. Results from question 2: How many of those companies/sock providers are international? Area name Man Brand Woman Brand Child Brand Total Brand Brand percentage of total Dhanmondi-Mirpur ,3% Gulshan ,2% Malibag-Mouchak ,5% Palton-Gulistan ,2% Uttara ,2% TOTAL ,6% Average per shop 3,5 2,6 2,1 Average per shop without 1 4,3 3,6 3,3 % of branded socks in the market 84 % 88 % 77,4% Table 3. Results from question 3: How many of those socks are branded? 90

91 Brand Men Women Children Nr of shops Percentage of shops Brand Nr of shops Percentage of shops Brand Nr of shops Percentage of shops Nike 65 44,5% Nike 10 17,9% Bata 7 12,7% Adidas 59 40,4% Adidas 9 16,1% Zara 7 11,3% Puma 37 25,3% Bata 9 16,1% Adidas 6 9,7% Zara 18 12,3% Zara 5 8,9% China 6 9,7% Levis 17 11,6% China 4 7,1% Nike 6 9,7% Reebok 17 11,6% Massi Clair 4 7,1% Apex 5 8,1% Bata 12 8,2% Swan 4 7,1% Swan 4 6,5% Guccy 12 8,2% Levis 3 5,4% B.First 3 4,8% Crocodile 11 7,5% Perag 3 5,4% Perag 3 4,8% CR 8 5,5% Puma 3 5,4% Puma 3 4,8% Payari Garden 8 5,5% Smart 3 5,4% Comfort 2 3,2% Sports 8 5,5% Apex 2 3,6% For man 2 3,2% Swan 8 5,5% Comfort 2 3,6% Pegasas 2 3,2% For man 7 4,8% For man 2 3,6% Phara 2 3,2% GQ 7 4,8% Hamim 2 3,6% Shotorupa 2 3,2% Smart 7 4,8% Miss 2 3,6% Smart 2 3,2% China 6 4,1% Reebok 2 3,6% Ambassator 1 1,6% Hazazed 6 4,1% Sckich 2 3,6% Armani 1 1,6% D&G 5 3,4% Ambassator 1 1,8% Baby Light 1 1,6% Tomy 5 3,4% Aktel 1 1,8% Bubble Gumler 1 1,6% Apex 4 2,7% Bearigali 1 1,8% Depra 1 1,6% Cat's eye 4 2,7% Behademo 1 1,8% Dingyani 1 1,6% Ero 4 2,7% Cado 1 1,8% Fashon 1 1,6% Man's 4 2,7% Crocodile 1 1,8% Galodice 1 1,6% Polo 4 2,7% Diana 1 1,8% Gold 1 1,6% Jennys 3 2,1% Disel 1 1,8% Guccy 1 1,6% Perag 3 2,1% Fashon 1 1,8% Guku 1 1,6% Power 3 2,1% Girl's KHI 1 1,8% Hamim 1 1,6% Ambassator 2 1,4% Hush puppies 1 1,8% Hizball 1 1,6% Armani 2 1,4% Hongland 1 1,8% Hung 1 1,6% Asaf 2 1,4% Kangaroo 1 1,8% Jangsu 1 1,6% Badmi 2 1,4% Kika 1 1,8% Jennys 1 1,6% Cado 2 1,4% Jangsu 1 1,8% Kangaroo 1 1,6% Comfort 2 1,4% Jennys 1 1,8% Lakos 1 1,6% Consol 2 1,4% Ladies 1 1,8% Maril 1 1,6% Depra 2 1,4% Luna fashion 1 1,8% Meishaoyu 1 1,6% Fashon 2 1,4% Mans Club 1 1,8% Move 1 1,6% Hamim 2 1,4% Moon Star 1 1,8% National 1 1,6% Hongland 2 1,4% National 1 1,8% Payari Garden 1 1,6% 91

92 Hush puppies 2 1,4% Ouomes 1 1,8% Prira 1 1,6% Kangaroo 1 0,7% Polo 1 1,8% Raymond 1 1,6% B.First 1 0,7% Pegasas 1 1,8% Reebok 1 1,6% Bearigati 1 0,7% Phara 1 1,8% School Socks 1 1,6% Disel 1 0,7% Power 1 1,8% Soyam 1 1,6% Galodice 1 0,7% Sights 1 1,8% Spiderman 1 1,6% Guku 1 0,7% Soyam 1 1,8% Sujan 1 1,6% Kika 1 0,7% Stylish ,8% Thai socks 1 1,6% Mans Club 1 0,7% Shotorupa 1 1,8% Moon Star 1 0,7% Sujan 1 1,8% Pegasas 1 0,7% Tomy 1 1,8% Prira 1 0,7% Shotorupa 1 0,7% Sights 1 0,7% Sujan 1 0,7% The following brands are only for men: ASF 1 0,7% Heaven 1 0,7% Park Aveneue 1 0,7% Athlatic 1 0,7% John henry 1 0,7% Play boy 1 0,7% Belly 1 0,7% Ladies 1 0,7% Right life style 1 0,7% Ben's 1 0,7% Lakos 1 0,7% S D Dupon 1 0,7% Buy socks 1 0,7% Lear 1 0,7% Sprint 1 0,7% Classic 1 0,7% Londi 1 0,7% Super Cats 1 0,7% Coloun Plus 1 0,7% Luna fashion 1 0,7% Superlon 1 0,7% Cuffa 1 0,7% Maril 1 0,7% Timber Land 1 0,7% Dolce 1 0,7% Massi Clair 1 0,7% Try 1 0,7% Falcon 1 0,7% Parda 1 0,7% Unex 1 0,7% Havac 1 0,7% Table 4. Results from question 4: What are these brands? 92

93 Linnaeus University a firm focus on quality and competence On 1 January 2010 Växjö University and the University of Kalmar merged to form Linnaeus University. This new university is the product of a will to improve the quality, enhance the appeal and boost the development potential of teaching and research, at the same time as it plays a prominent role in working closely together with local society. Linnaeus University offers an attractive knowledge environment characterised by high quality and a competitive portfolio of skills. Linnaeus University is a modern, international university with the emphasis on the desire for knowledge, creative thinking and practical innovations. For us, the focus is on proximity to our students, but also on the world around us and the future ahead. Linnæus University SE Kalmar/SE Växjö Telephone