Noticeable First Mover Advantages In Transitional Economies example essay topic

FIRST MOVER ADVANTAGES IN INVESTING IN TRANSITIONAL ECONOMIES: TWO TESTS FROM CHINA Yadong Luo, Ph. D University of Hawaii Mike W. Peng, Ph. D. University of Hawaii and The Chinese University of Hong Kong [ Address Correspondence To ] Prof. Yadong Luo College of Business Administration University of Hawaii 2404 Maile Way Honolulu, Hawaii 96822 Tel: (808) 956-7397; Fax: (808) 956-2774 Forthcoming, Thunderbird International Business Review (1998) June 1997 (Revision) [Acknowledgment] An earlier version of the paper was presented at the Academy of International Business (Pacific Rim Chapter) conference in Hawaii in June 1997. We thank Eric Harwit, Richard Mox on, Oded Shankar and Justin Tan for their helpful comments, and two anonymous reviewers for their sound advice. This research was supported in part by the College of Business Administration, the University Research Council, and the Center for International Business Education and Research, all from the University of Hawaii. FIRST MOVER ADVANTAGES IN INVESTING IN TRANSITIONAL ECONOMIES [Abstract] As China, Eastern Europe and the post-Soviet republics undertake economic transitions toward more market-based systems, foreign investors have been greatly interested in these countries. However, it is not clear whether an early mover strategy or a late mover strategy will result in better performance in these markets characterized by both potential opportunities and tremendous uncertainties and difficulties. This article uses the experience of foreign investors in China to shed light on this question.

Specifically, we conducted two separate tests comparing the performance of early entrants and late entrants drawing on samples from different time periods (early stage vs. late stage of local operations). The results show the existence of significant first mover advantages, and the risk-return tradeoff between the first mover and late mover strategies. Implications for both early movers and late movers from these two tests are discussed. As China, Eastern Europe and the post-Soviet republics undertake political and economic transitions toward more market-based systems since the 1980's, foreign investors have been increasingly interested in these countries (McCarthy, Puffer and Simmonds, 1993; Pearson, 1991; Sharma, 1995). Having been isolated from the rest of the world for several decades, these transitional economies are characterized by a great deal of potential opportunities and markets on one hand, and a tremendous amount of uncertainties and difficulties on the other hand. Facing such an environment, foreign investors have to confront this question: Whether they will be better off to become an early entrant in investing in these countries despite all the start-up difficulties, or to wait and see until the pioneers get "bloodied" and then enter, with the expectation of greater performance.

Each of these two investment strategies has merits as well as costs, thus leading to vigorous but inconclusive debates such as the one on "the Russian investment dilemma" (Kvint, 1994). Indeed, the timing of foreign direct investment (FDI) in these transitional economies is not only of academic interest but also of enormous practical implications. It will have a profound impact on the success and failure of FDI there. The FDI timing question ultimately boils down to the question of first mover advantage, namely whether first movers will be able to acquire and sustain competitive advantages in these new markets. While there is a large amount of research on first mover advantages in product market entry (Green, Barclay and Ryan's, 1995; Lambkin, 1988; Mitchell, 1989), there has been relatively little research on first mover advantages in international markets (Buckley and Casson, 1981; Mascarenhas, 1992). Even much less is known about the impact of entry timing in transitional economies such as Eastern Europe and the post-Soviet republics, given that they only opened their markets for FDI less than a decade ago.

Although FDI entry into transitional economies has received increased scholarly attention, the majority of the writings have emphasized entry mode and partner selection issues (Luo, 1996, 1997), and few scholars have rigorously investigated the timing of FDI, empirically or theoretically. Given the importance of the FDI timing decision and the paucity of research in this area, this article aims to investigate the linkage between FDI timing and firm performance in transitional economies. While foreign investors have been in transitional economies in Eastern Europe and the post-Soviet republics for a relatively short period of time, they have been in China for a much longer period since 1979. Therefore, their experience in China over the past two decades may help shed light on whether there are noticeable first mover advantages in transitional economies.

Thus, the goal of this article is to draw upon the lessons of foreign investors in China to help those interested in investing in transitional economies make their FDI timing decisions. Specifically, we conducted two separate tests comparing the performance of early entrants and late entrants drawing on samples from different time periods (early stage vs. late stage of operations). The results show the risk-return tradeoff between the first mover and late mover strategies in the initial operation period, and the increase in magnitude of first mover advantages over time. Although there are significant differences between China and other transitional economies, their common socialist legacy as well as the recent transitions link them together as "members of a broader, clearly identifiable class of social-political-economic systems" (Kurnai, 1992), thus allowing for certain generalizations among them (Nolan, 1995; Peng, 1997 a; Peng and Heath, 1996).

In the remainder of the paper, we will first conceptually highlight what is known about first mover advantages and disadvantages in the context of investing in transitional economies. Then the results of two tests are presented. Finally, implications of the findings are discussed. FIRST MOVER ADVANTAGES IN TRANSITIONAL ECONOMIES Timing of market entry in general and FDI entry in transitional economies in particular is critical to the success of international expansion.

Arguments in favor of early entry suggest that the first mover firm benefits from a head start before follower firms enter the market in three primary ways, namely (1) technological leadership, (2) preemption of scarce assets, and (3) establishment of entry barriers for follower firms (Ker in, Varadarajan, and Peterson, 1992; Lieberman and Montgomery, 1988). Well-known examples of first movers enjoying competitive advantages in product markets include Xerox in photocopiers, Polaroid in instant photography, and Wal-Mart in discount retailing. During the initial period, the firm may gain advantage through sustainable leadership in product and process technology. It not only makes strategic investments in R&D expenditures that result in superior technology, but also rides down the "learning curve" in pursuit of scale and scope economies. It also has the opportunity to make preemptive investments in numerous areas, such as production facilities, distribution channels, and human resources.

If imitation is costly or occurs with a long lag, then preemptive investments during this early period can be leveraged into significant long-run benefits for the pioneering firm. In addition, lack of competition during the initial period may reduce the cost of acquiring resources, relative to the resource costs that will prevail after other firms have entered the market. Furthermore, market pioneers exploit first mover advantages by erecting and heightening entry barriers for followers such as buyer switching costs and minimum efficient scales (Porter, 1980; Robinson, 1988). For a given firm, a specific first mover opportunity may arise from unique product or process development by the firm, from the firm's ability to see an emergent market opportunity, or from the firm's strategic choice to be the first to explore an opportunity perceived by many (Anderson and Enters, 1994; Lilies and Yoon, 1990). Empirically, growing evidence based on the timing of product market entry suggests that surviving market pioneers maintain higher market shares than late entrants; in other words, order of entry in general explains a great deal of market share variance (Mascarenhas, 1992). In the context of investing in transitional economies, there is a group of writers who strongly suggest that foreign investors seek to obtain first mover advantages.

They argue that "in the midst of hardship, the climate for foreign investment in Russia [and other transitional economies] has never been better" (Kvint, 1994: 62), and, consequently, multinational enterprises (Mines) should invest early and move fast. When entering transitional economies, early movers are expected to be able to more easily exercise technological leadership, have more preemptive investment opportunities than in home markets, and be able to erect higher entry barriers for followers. As a result, due to first mover advantages, a non-dominant firm in the home market may be able to establish dominant positions in these countries, especially in those industries that are in an embryonic or growing stage in the local environment, or in those industries encouraged by the host government to invest (Luo, 1995). Of course, it will be misconceiving to assume that transitional economies could provide opportunities for every early entrant at any time. However, in transitional economies, the effect of the "window of opportunity" during a given period in a specific region or industry may be particularly strong. As a result, only a limited number of foreign investment projects may be allowed in a particular industry at any given time.

For instance, throughout the 1980's, the Chinese government only approved the establishment of three FDI projects involving automobile joint ventures, thus handing the three first movers, AMC / Chrysler, Volkswagen and Peugeot, substantial advantages while closing the door for other late entrants (Harwit, 1995; Mann, 1989).