Economics Aug 5, 2013
The Risks and Rewards of Experience Abroad
Do past international investments help or hurt a company’s chances of succeeding in a new market?
Brazil, after decades of inflation, enacted a set of financial reforms in 1994 known as the Plano Real. Multinational corporations began coming to the country, lured by its newly stabilized economy and dollar-denominated currency. Susan Perkins, an assistant professor of management and organizations at the Kellogg School of Management, was working in São Paulo for a management consulting firm at the time. Company after company came to her firm for help—but often not with the problems she would have expected.
“A lot of the work that we were doing wasn#39;t based around companies’ business models,” Perkins remembers. “It was based around their inability to understand the institutional environment [in Brazil] and how the rules of regulation in their industry were changing.” Business they understood, that is, but how to do business in Brazil often proved mystifying. “There were pretty sad stories of multinational corporations who’d spent millions—and billions in some cases—in capital investments but were really suffering because they were having a tough time navigating through this variation in environment relative to their home country,” she explains.
Now with an academic rather than consulting interest in multinational corporations, Perkins wondered: What was it that caused many seemingly solid multinational companies to fail in a new market—and what allowed others to succeed?
Many Types of Experience
In a recent study, Perkins examined how companies’ previous international experience contributed to their success entering the Brazilian market. Earlier research has shown that having more overall international experience can help companies succeed in such situations. But what about different kinds of experience?
Perkins was particularly interested in what is known as institutional experience: knowledge about regulations, laws, and the political landscape—in other words, the rules of the game. “Regardless of a firm’s business strategy, they have to figure out how to navigate the complexities of institutions and how institutions are set up in a country,” Perkins says. (Here at the Kellogg School, she explains, this is called “nonmarket strategy.”)
“I argue it’s not really about count. It’s about the differences between markets, and whether multinational investment managers have accounted for these differences and adapted the strategic plans to fill the institutional gaps.”
Previous studies have had a tendency to collapse institutional experience with, say, skills-based experience (practice at doing what needs to be done—making car parts or widgets, for instance) and internationalization experience (practice entering foreign markets). “Experience has been something of a count model: I’ve been to Brazil seven times versus one; I’ve deployed those auto parts in eight markets versus three,” Perkins says. “I argue it’s not really about count. It’s about the differences between markets, and whether multinational investment managers have accounted for these differences and adapted the strategic plans to fill the institutional gaps.”
Perkins’ study focused on 96 foreign-owned firms entering the telecommunications industry in Brazil between 1997 and 2004. In a series of mathematical models, she mapped out how a variety of factors contributed to whether a firm succeeded or failed in the Brazilian market. In particular, she focused on three aspects of firms’ institutional experience: regulatory similarity, or how closely their past international investments shared Brazil’s institutional environment; the breadth of their experience, or the range of different institutional environments they had dealt with in the past; and the depth of their experience, or how much previous experience they had with the particular sorts of rules and regulations one encounters in Brazil.
The Good Is Good, But the Bad Is Worse
Perkins found that prior international institutional experience indeed helped companies succeed. But when she examined different types of institutional experience separately, that story changed: Firms with experience in institutional environments similar to Brazil’s fared better in Brazil, while those with experience in dissimilar environments actually fared worse. Moreover, irrelevant experience was a far bigger drawback than relevant experience was a benefit—firms with dissimilar experience were six times more likely to fail than firms with similar experience.
“There’s a six-fold magnitude difference between bringing the right type of regulatory knowledge and bringing the wrong type of experience. With the right type of experience, you’re going to do better on average, but if you bring the thinking from Indianapolis, Indiana, to São Paulo, it’s going to be a problem,” says Perkins.
This figure shows the hazard rates—or the rates of failure in the Brazilian market—for firms with prior similar and dissimilar institutional experiences.
Companies with a greater breadth or depth of experience operating in a country similar to Brazil were also more successful. In fact, depth was the single variable that best predicted how long a company would last in Brazil. This is likely because managers could draw upon rich past experiences with a particular institutional characteristic, Perkins says, and then tailor them to a new market. As one telecom executive told her, “Many of the [regulatory strategies] that we used in India are similar to things that we are doing in Turkey and similar to what we’re doing in Brazil—but, of course, always particularized to the country that we are in.”
What It Means for Managers
Many multinational companies do not take full advantage of the organizational knowledge they acquire as they go from country to country, Perkins says. Her study suggests that leveraging that knowledge—drawing on past experiences in a targeted, relevant way—is linked to a company’s success.
Understanding the role of institutional experience can also help companies predict which opportunities offer greater chances for success—even if they are not, at first glance, the obvious choices. Multinational corporations often think of markets in terms of numbers—the large size and many growth opportunities in China, for instance. “But even if China is a great opportunity because of the GDP growth, if everything your firm has done up until this point is not remotely related to China, there’s a really high likelihood that you’re going to fail at first attempt,” Perkins says. “There are some longer-term implications for multinationals in optimizing their internationalization strategy: After I’ve gone to Brazil, where do I go next, and next?” Her advice? Go to the country that leverages your prior experience best.
Perkins, Susan. Forthcoming. “When Does Prior Experience Pay? Institutional Experience and the Case of the Multinational Corporation.” Administrative Science Quarterly.