‘a comprehensive literature review on international market entry strategy, with a particular attention to research on international retail firms’
An assignment submitted in part fulfillment
of the requirements for module 6 (MK4S09) entitled “Developing Themes in Marketing”, taught by Professor Anne Marie Doherty, The Module Leader, Professor of Marketing at Glamorgan Business School and Director of the Centre for Research on Consumption, Markets and Culture
Glamorgan Business School, University of Glamorgan, Treforest, Pontypridd, Rhondda Cynon Taff
CF37 1DL, UK
Developing Themes in the International Retail Market Entry Strategy: A Review and Critique of the Field
Purpose – The purpose of this paper is to provide a comprehensive literature review on international market entry strategy since 2000, with a particular attention to research on international retail firms.
Design/methodology/approach – This paper takes the form of a critical literature review. An evaluative approach is applied to the literature, to critically appraise the gaps in research, from which a research agenda is proposed.
Findings – The research on how retailers internationalise remains important but sketchy.
Research limitations/implications – By its very nature, a review article is usually limited by the sum of articles that it can feasibly discuss.
Practical implications – Further research should be carried out intensively as well as extensively regarding how international market entry methods contribute to the internationalisation process of retailing.
Originality/value – By methodologically presenting a wide range of arguments on the international market entry strategy of retailing, this paper contributes to the attempts to bridge the gap in the understanding of how retailers move into international markets.
Keywords – Market entry methods, Internationalisation, retailing, International markets
Paper Type – critical literature review
International retailing has been a major trend of the last two decades (Alexander and Myers, 2000; Jackson and Sparks, 2005; Lorentz et al., 2006). International retailers have been depicted as the ones shaping and moving the world economy (Dicken, 2003,), stressing retail internationalisation’s primary role in the global economy, despite its high cost and risk (Myers and Alexander, 2007) and the fact that the credit crunch has slowed retail expansion and worsened the financial problems of retailers worldwide (Kearney, 2008). Although international retailing’s documented practice could be traceable at least as far back as 1850 (Godley and Fletcher, 2000), it was not until Hollander’s (1970) seminal work Multinational Retailing introduced the subject of retail internationalisation to academic attention that research on the subject has been significantly developed (Wigley et al., 2005). Research has by now addressed many aspects of international retailing. Examples include: the geographical map of the process (Evans and Mavondo, 2002; Rugman and Girod, 2003), the selection of market entry methods (Huang and Sternquist, 2007), specific retail sectors (e.g., food retailing – Wrigley, 2000a), motives behind retail internationalisation (Vida, 2000; Gripsrud and Benito, 2005), market orientation (Rogers et al., 2005; Elg, 2007), questions of control and risk (Doherty, 2000; Gielens and Dekimpe, 2001; Wigley and Moore, 2007), networking (Elg, 2000; Elg et al., 2008), the effect of image and brands (Burt and Carralera-Encinas, 2000; Burt and Sparks, 2002), learning processes (Palmer and Quinn, 2005; Jonsson and Elg, 2006)… etc. Furthermore, the first four aspects have been discerned as the key ones (Doherty, 2000; Jackson and Sparks, 2005; Wigley et al., 2005; Davies and Burt, 2007).
However, this body of literature has been disconnected, lacking in theoretical framework and conceptual underpinning (Evans et al., 2000). Moreover, Palmer and Quinn (2003) has described research in the subject area as shaped, for the most part, in descriptive explanations of the scope and scale of international activity, rather than any genuine comprehension of how the process really takes place, the internal firm procedures utilised and the nature of the retailing decision making. They have also lamented the fact that the role of, for instance, key stakeholders, such as financial institutions, in retail internationalisation has largely been neglected in research. Indeed, even the very definitions, often characterised by ill defined terminologies, of international retailing have been questioned (Wigley et al., 2005). All of these critiques show, inter alia, how essential it is for researchers to apply a critical lens from time to time to this body of literature and how wide the gap is in the current comprehension of how retailers move into international markets. The importance of the ‘howness’ of the issue could be easily grasped if Dawson and Mukoyama (2003) perception of international retailing as a process and not an entry event or a series of events is taken into consideration.
Thus, this paper seeks to comprehensively review and therefore critically evaluate the existing literature on international market entry strategy since the year 2000, with a particular attention to research on international retail firms. Different views will be presented in the critique process, highlighting main themes, emerging patterns and issues that are still to be addressed in the main (but neglected) two areas related to international retail market entry strategy; namely, where (Welsh et al., 2006) and (the more important, related yet ignored issue of) how (Doherty, 2008a) retailers internationalise.
Where retailers internationalise
The 1990s has witnessed an increased attention being redirected from developed markets, such as the US, the EU or the Japanese markets, to emerging markets, for reasons mainly related to geopolitical, economic and competitive conditions (Alexander and de Lira e Silva, 2002). For example, India emerges as a key market for international retailer expansion, reigning the most attractive emerging market destination for retail investment in 2005, 2006 and 2007 (Kearney, 2008), though still shielded from foreign competition by regulations that almost completely prevent direct investment by foreigners (Halepete et al., 2008). South East Asian countries, particularly China (Sternquist and Chen, 2006) and Korea (Suri et al., 2004) remain key destinations for international retailers. While the regulatory environment and, in
particular, the lack of intellectual property protection has been identified as a (slowing and sometimes even critical) barrier in Korea (Evans et al., 2008), investment in China has intensified after the retail market has been made completely open by the end of 2004, after a transitional period of 3 years (Lo et al., 2001), though knowledge and information about government–industry relations, the market segments, and retail history are for the most part missing in research (Liu, 2007). In addition, the fall of communism in the Eastern bloc countries has led to the continuous consideration of these markets from both research and practical perspectives (Alexander and Myers, 2000), with Russia attracting burgeoning international retail competition (Roberts, 2005). Beating out countries such as China and India, the Russian retail market has been described as the most attractive market in the world in 2003 and 2004 (Kearney, 2008). The Middle East and North Africa have also been proven as an attractive market for international retailer expansion, with some of the world’s fastest increasing populations and richest young consumers (Jones, 2003). Whereas retail internationalisation is increasing in Latin America, academic research is still comparatively sketchy (D’andrea et al., 2006).
However, emerging markets are not without risks. Amongst the main negative traits of these markets are weak political structures and lack of diversity in income resources (Young, 2001). In addition, retail expansion into new markets, specially emerging markets, demands a long-term commitment, a requirement which causes the financial institutions, in general, to be less supportive to international expansion under specific conditions, for example growth in emerging markets (Palmer and Quinn, 2003). Preventive regulations in some of these markets, despite attempts by investors to circumvent them and increasing governmental deregulations, remain a major obstacle as well (Halepete et al., 2008). Therefore, fruitful directions for further research concerning the developing geographical map of cross-border retail would include (a) the way in which the retail internationalisation structures in developed markets are influencing the rapidly emerging retail structures (e.g., Western European structures’ impact on the Eastern European ones – Alexander and Myers, 2007), (b) emerging markets’ retail sector, distribution infrastructure and income levels (e.g., Russia – Lorentz et al., 2006), and (c) the change in the geopolitical, economic, regulatory, infrastructural and competitive conditions (Huang and Sternquist, 2007) which is strikingly enabling emerging (and future ) markets such as Vietnam to top the list of the most attractive markets for international retailing in 2008 (Kearney, 2008).
How retailers internationalise
While the bulk of international retailing literature, by the late 1990s, has been more centred on where and why retailers move into international markets, there has been still a clear gap in the comprehension of how retailers internationalise; namely, what kind of entry modes they choose and how these types of entry methods help better understand the retail internationalisation process (Doherty, 2008a). Therefore, an examination of some common kinds of entry modes and the selection process of them is now necessary.
As far as the selection process of market entry methods is concerned, on the one hand, some authors have attempted to propose some holistic models of the market and market entry mode selection process which could be arguably employed in all business environments and most of the related business practice. Notable amongst those models is the one introduced by Koch (2001a), who maintains that this process is affected by a larger number of the external and internal environment circumstances (Koch, 2001b). On the other hand are those who have sought to describe the entry method strategy from a more specific perspective. For instance, Doherty (2000) concludes that UK international fashion retailers develop their entry mode strategy over time as a result of a combination of experiential, historical, opportunistic, financial, strategic and company-specific conditions. Another example by Huang and Sternquist (2007) has focused on how the institutional environments impact on retailers’ international expansion options.
As for the market entry methods, both early attempts to describe the internationalisation process and early attempts to internationalise retail firms have indicated that market entry methods have essentially been a product of strategic development experience in the home market and domestic operations, with an orientation to a single international market entry method, though this mono-cultural approach to market entry has changed primarily because of the commercial experience (Alexander and Doherty, 2004). The main modes international retailers can employ to move into international markets are: organic growth (also known as internal expansion, this is new store development within the existing one or an integrated organisation framework); flagship stores (company owned, large in scale and impressively imposing to showcase the brand); joint ventures (between a firm in the host country and an international entrant or between two firms that enter into a joint venture agreement in order to move into the host market); merger and acquisition (the acquisition of control over a firm in the host market); concessions (a shop within a shop, usually a department store, in the international market); exporting/wholesaling (selling of product to an international market without the establishment of a retail presence in the market); franchising (a business arrangement between a franchisor and an international franchisee, using, inter alia, the franchisor’s retail format and brands); and internet sales (Alexander and Doherty, 2009). Each one of these will be discussed shortly.
Retailers are usually in favour of organic growth in psychologically proximate markets (Alexander and Doherty, 2004). Analysing the international expansion of IKEA and Toys R Us, Laulajainen (2001) contends that standardised and centralised operations prefer organic growth, especially when the market is sufficient to warrant the effort, control is easy because of geographical or cultural closeness, and risk is not deemed excessive. Organic growth reflects long-term commitment and, when supported by a variety of formats (such as an appropriate acquisition), helps the firm get bigger, become a more forceful competitor, and achieve adequate profit levels (DSN Retailing Today, 2001). The president of Wal-Mart International, a subsidiary of Wal-Mart, which is ranked as the largest retailer in the world (Deloitte, 2007), have said that “we have very aggressive organic growth plans at Wal-Mart international” [italics added] (Menzer, 2005, cited in Felgner, 2005). Also, the chairman of the French conglomerate company Pinault-Printemps-Redoute have stated that the firm would concentrate on organic growth (Pinault, 2005, cited in Murphy, 2005). Moreover, attempting to explain why year-over-year sales growth for the top 10 retailers on Ernest & Young’s list of the 100 Largest Retailers in the World Ranked by Sales was 10%, compared with 14.8% for the remaining 90 retailers, McIntosh et al. (2005) opine that smaller retailers are better at identifying and executing growth strategies, which usually involve some combination of organic growth, acquisitions and innovation.
However, a number of retail operations have failed to acquire international status through the organic growth methods that characterised early development in international markets and their domestic development (Quinn and Alexander, 2002). Also, organic growth is considered to be a financially intensive entry mode (Alexander and Doherty, 2004). Furthermore, in most markets of Western Europe, the launching of a new retail space is tightly regulated (Wrigley and Lowe, 2002). This constitutes a serious hinder to entry into these markets by means of organic growth (Wrigley, 2002) and suggests that future research should be directed to when and where organic growth should be sought, as well as how to circumvent regulations when they prevent or hinder organic growth when it is feasible and desirable.
For many years the practice of market entry via flagship stores have far outpaced the academic study (which is still sketchy) of the phenomenon (Hutchinson et al., 2006). Ideally located within the best shopping streets, such as Fifth Avenue in New York, Rue Saint Honaire in Paris, and Bond Street in London, these flagship stores have evolved as an essential element of the marketing communications strategy (Moore et al., 2000). Flagship stores are typically characterised by the following traits: they are company owned, they bear only a sole brand of product, and they operate with the aim of building brand image rather than only to gain profit for the company (Kozinets et al., 2002). Webb (2002) has also added: wider range of products, larger format stores, high levels of brand experience and in-store service and architectural “iconicism” displayed by a high investment in interiors, building and fittings. When it comes to building brand image, the luxury flagship store has a considerable role to play (Moore and Birtwistle, 2004). This partly explains why the flagship store has been focused in both research and practice on the luxury fashion sector and to a lesser extent on the luxury furniture market (Doyle, 2002).
Emphasis thus far has been on the main idea around which the body of literature regarding flagship stores is evolving; that is, the significance of the flagship store as a brand consolidation managing tool which acts to control and establish a context and experience for the wider image of the brand (Doyle et al., 2008). However, establishing a flagship store brings with it side benefits such as increased sales through other distribution channels (Kozinets et al., 2002). Therefore, it is these attendant advantages which future research should enlarge its circle to include besides brand-related issues. It might also be useful to explore some of the disadvantages (and how to overcome them if possible) of the flagship stores, such as their prohibitive costs, which can be readily inferred from their very characteristics which have been counted earlier.
Joint ventures have continuously attracted more research over the last few decades (Reus and Ritchie, 2004). The major bulk of literature on the topic has focused on partner recognition and choice (Nielsen, 2003); the context and motives resulting in joint venture (Glaister, 2004); reformation and instability (Gill and Butler, 2003); performance and administration (Choi and Beamish, 2004), and learning processes (Inkpen, 2000). The literature has identified many different types of motives to explain the decision for undertaking international joint venture expansion, which have been examined mainly through distinct theoretical perspectives, such as the transaction cost economics and the resource based view (Owens and Palmer, 2008). Nevertheless, research has not covered this particular entry method sufficiently (Palmer, 2006). There still exists a significant gap in knowledge, especially on the management and operationalisation context of joint ventures in the post-formation era (Chadee, 2002; Owens and Quinn, 2007).
The main aim of the governments of emerging markets (e.g., China, where in fact joint venture retail enterprises are the only approved form of foreign direct investment in the retail sector – Wong and Yu, 2002) favouring joint ventures is to gain foreign capital and investment and to improve main strategic economic sectors while at the same time maintaining domestic control over those economic sectors (Acquaah, 2009). On the other hand, firms operating in emerging economies enter into joint ventures by selecting partners who can offer them intangible and financial assets, managerial and technical capabilities, and the ability to provide quality products (Hitt et al., 2000). Many other benefits can often be reaped from international retail joint ventures. These include: greater ease of governmental consent (Wang, 2003), offering significant value-creating potential (Owens and Quinn, 2007), cost reduction (Owens and Palmer, 2008), and decrease of risk (Wrigley, 2000b). Yet joint ventures still involve high financial risk (Evans et al. 2000). Also, studies have shown that management of joint ventures is very hard, leading to high levels of instability (Demirbag and Mirza, 2000; Nakamura, 2005). In fact, dissatisfaction in many joint ventures has often led to failure and the termination of the joint venture agreement (Burt et al., 2003). Various reasons have been proposed to explain that dissatisfaction, such as management disagreement over control; asymmetry over strategy; inability to adapt successfully to the host market context; low-quality performance, and resource restrictions (Bianchi and Arnold, 2004; Palmer, 2006). Therefore, future research should further explore critical factors contributing to the success and failure of joint ventures.
Mergers and acquisitions
During the 1990s, retail markets across the globe have began to be characterised by acquisition and merger-driven consolidation, constituting thereby a fertile soil for conglomeration where mergers and acquisitions are becoming very popular as a means of expansion (Wrigley, 2002). An essential factor influencing this consolidation has been the recent and increasing usage of merger and acquisition, which has on a global scale increased from the mid-1990s to the turn of the century, particularly within sectors such as grocery retail, where mergers and acquisitions activity has increased over 20-fold demonstrating the magnitude of the experienced development (Lorentz et al., 2006).
Maximising size has been one of the most influential reasons behind conducting mergers and acquisitions in the retail sector (Lorentz et al., 2006). The fast expansion of Wal-Mart has led its competitors to consider consolidation in order to be able to compete (Wrigley, 2002). Moreover, bigger purchasing power is one of the most important advantages of mergers and acquisitions in retailing (Dragun and Howard, 2003). Furthermore, an essential advantage of international growth via mergers and acquisitions, particularly in developed markets, is the fact that the launching of a new retail space is tightly regulated, for example, in many European economies; therefore, agreements are usually led by the desire to obtain an already-established site, space, and real estate (Burt and Limmack, 2003). Yet even in developing markets, such as Latin America, the reshaping of the retail sector has mainly been led by mergers and acquisitions (Lorentz et al., 2006).
Nonetheless, mergers and acquisitions require high resource commitments and, therefore, subsequent risks (Osland et al., 2001). Difficulties related to post-acquisition integration are usually viewed as a main reason behind acquisition failure in the retail sector (Dragun and Howard, 2003). Integration can result in huge costs linked to, for instance, redeploying and the rebranding of reporting systems and store concepts (Burt and Limmack, 2003). By and large, knowledge sharing may not necessarily be as quick and smooth as expected (Hurt and Hurt, 2005) and, for example, integration efforts and expenditure can readily be miscalculated (Dragun and Howard, 2003). Thus, how to overcome all these difficulties can constitute a fruitful direction for further research on merger and acquisitions to follow.
Concessions have been identified as highly important for many retail sectors in many countries; department stores are the second most important channel of distribution for clothing in the UK behind specialist clothing retailers (Mintel, 2003). Their success can be traceable to their use of concessions of the high street chains within their store, making them a comfortable place to shop (Marciniak and Bruce, 2004). For example, in exploring why the British fashion brand Burberry’s newly adopted model has improved its business performance after a period of declining, Moore and Birtwistle (2004) maintain that department store concessions (of which there have been more than 50 in 2003) is a main retail format in the new model. They also argue that in light of the fact that department stores are the major distribution channel for premium priced fashion in key markets, such as Japan, Spain and Korea, these concessions offer Burberry the chance to stay relevant and connected to, in a cost-efficient manner, a relevant and wide customer base. They continue by saying that unlike the regular price retail stores, these concessions provide a modified version of the Burberry London/Thomas Burberry ranges while at the same time a feasible solution for the related costs and risks of running a large number of company-owned stores.
Nonetheless, concessions within department stores present retailers with specific challenges – especially when it comes to building a strong brand within a “cluttered” retail brand context and the similarities of architectural and point-of-sale between concessions (Davies and Ward, 2005). Nowhere has the importance of building a strong brand been more evident than in luxury fashion sector; consequently, the store exists less as a place for conducting transactions and more as a locus for brand communication in which stakeholders meet and transactions occur (Doyle et al., 2008). Therefore, future research should concentrate upon how international retailers can gain the advantages of concessions without at the same time compromising their brands.
Less controlled and expensive entry methods such as exporting/wholesaling directly to the foreign market are attractive modes, especially for small and medium enterprises, of moving into an overseas market (and measuring sales to know if establishing a physical presence is lucrative) with less financial commitment (Hutchinson et al., 2006). Exploring a number of case studies of small and medium enterprises retail internationalisation operating from the UK, Hutchinson et al. (2006) concludes that although a large percentage of the firms researched have launched at least one store outlet internationally, it appears that wholesaling, or selling products directly to international markets, is an attractive method readily employed by the majority of these firms in order to overcome any financial difficulties to foreign growth. The researchers have also urged both the firms under study to be fully aware of (and should the need arises adopt) government exporting programmes available for assisting international activity and the policy makers to adapt the general nature of exporting programs to suit the idiosyncratic needs of retailers.
However, wholesaling has been found in the luxury retail sector to be a profitable primary mode of international market entry with respect to market intelligence, a low-risk means of generating cash flow, and customer loyalty (Moore et al., 2000). Moreover, a research conducted on international franchising by the Danish fashion retailers Carli Gry and The InWear Group indicates how much a shift to franchising relies upon previous and continuing activities and operations not related to franchising, including foreign direct investment in upstream areas such as wholesaling (Petersen and Welch, 2000). Furthermore, companies are presumed to begin exporting by targeting “psychically close” markets to gain experience and confidence and then allocate greater resources and target markets more “psychically distant” (Hutchinson et al., 2006). Also, as shown by a study on Greek exporting small and medium enterprises, exporting should be accompanied by, for example, a systematic approach to selecting and targeting foreign markets to avoid under performance (Brouthers and Nakos, 2005). Thus, further research should aim at exploring how small, medium, and large different international retail firms can benefit differently from wholesaling/exporting.
The bulk of global growth for international retailers takes the shape of ownership of their own stores or franchising (Park and Sternquist, 2008). Despite the fact that the term franchising is used very broadly to describe various business activities (and sometimes is also used synonymously with the term licensing), the contemporary franchise format commonly in use is known as business format franchising. (Quinn and Alexander, 2002). In return for an initial one-off sum of money and a regular royalty fee (which is usually determined as a percentage of sales revenue), the franchising company, the franchisor, provides the franchisee with the right to make use of a complete business package, including, among other things, the franchisor’s intellectual property, selling the franchisor’s branded services or products, offering a proven method of support, operating, and advice on the launching of the franchisee’s business and continuous support to the franchisee (Quinn and Alexander, 2002). Franchising is the world’s fastest growing form of retailing and constitutes a significant part of total retail sales (Grewal and Levy, 2007).
In response to the increased use of franchising by international retailers and the inability of the general international franchising literature to keep apace with the peculiarities of franchising by retail firms, academic retail studies has abounded during the last decade, although only from the perspective of the international retail firm (Doherty, 2008b). It can be inferred from the body of work centred on international franchising that while franchising offers lower cost and quick methods by means of which firms can move into foreign markets, it also appears to be linked to a wide geographical spread and strong brands (Myers and Alexander, 2007). The literature of franchising has thus far emphasised motivations (Doherty, 2007); theoretical perspectives on the issue (Quinn and Doherty, 2000); and power, support and control (Moore et al., 2004). However, central parts of the process remain important but somewhat ignored by research. Examples include: how retail franchisors opt for international markets and franchise partners (Doherty, 2008b); franchisor– franchisee relationship (Doherty and Alexander, 2004); and factors influencing the choice of franchising (Doherty, 2007). It is these (and other) areas of neglected research to which further research should pay attention.
The appearance of the internet in the 1990s and its adoption in electronic commerce have caused a huge amount of interest to use it by international retailers (who have been at the forefront of this revolution) because of the myriad advantages of it – flexibility, easy access, ability to communicate large amounts of information, speed, easy maintenance, and cost efficiency – to mention only a few (Doherty and Ellis-Chadwick, 2006). International retailers perceive of e-commerce as a new tool which effectively serves to gain a competitive advantage (Amit and Zott, 2001). Specifically, its ability to ease two-way communication with consumers, offer information, promote services and products, support the E-ordering of products and services, and provide marketing intelligence, offers a very rich and facilitating new retail channel (Doherty and Ellis-Chadwick, 2003). In fact, the internet has been described as having the potential to crucially influence a firm’s strategic positioning (Porter, 2001).
Online shopping is now expected to be the fastest growing domain of internet usage (Forsythe and Shi, 2003). Nonetheless, according to Doherty and Ellis-Chadwick (2006), very few studies (with limitations) have reviewed the internet literature, let alone adopting a retail focus. After conducting their intensive and extensive study, they have identified three key perspectives in the internet retailing literature: consumer perspective, technological perspective, and retailer perspective. Yet, as they continue to argue, this literature is full of gaps, disparate, and done mainly from a conceptual viewpoint, suggesting that future research should be concerned with how wireless networks and mobile devices, such as PDAs or 3G mobile phones, will be integrated into the retailers’ extant online practices and internet infrastructures.
A concluding remark
It is important to wrap up with a word of caution regarding this critique of the extant literature of international retail market entry strategy. A review article, by its very nature, (a) has to be restricted in its ambitions: it is more disposed towards posing questions rather than answering them; and (b) is, as expected, limited by the sum of articles that it can feasibly discuss: in highlighting main developing themes (in the literature since 2000), it will most probably have missed some articles that might have added a fruitful dimension to the review (Doherty and Ellis-Chadwick, 2006). However, this critique has probably been able to critically review and evaluate key academic contributions to the field under discussion. Therefore, it is hoped that very few important papers will have been unaddressed, and that the main developing themes of current importance will have been discussed.
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Suggested further reading
Alexander, N. and Doherty, A. M. (2009), International Retailing, OxfordUniversity Press,