The International Market Selection Process of Multinational Enterprises Expanding to Transition Economy Markets

Abstract: The International Market Selection (IMS)process, where firms choose which new market(s) to expand to, is highly important as choosing the right market is paramount to the internationalizing firm’s success. There are benefits in understanding how firms evaluate and select new markets, both for firms with less international experience looking for guidance in their IMS process, as well as for external stakeholders with an interest in attracting companies to a certain market. Despite its importance, there is a lack of empirical research within the field of IMS research, in particular which selection criteria firms take into account in their decisions, thus becoming the focus of this paper –delimited to multinational enterprises in transition economies. The IMS process has been suggested to either follow a systematic approach, where the process is formalized and objective, or an unsystematic approach which allows for subjectivity to influence the decision. However, it is argued that elements from both approaches will be included in the IMS process for any given firm. As such, this study aims to explore how elements of respectively the systematic and unsystematic approach to IMS act as selection criteria in multinational enterprises’ choice of transition economy market. In order to circumvent the IMS research gap, literature on Foreign Direct Investment location theory, where the market itself is the unit of analysis rather than the firm, was instead studied in order to hypothesize which formal criteria impact the market decision. This was complemented with articles on the topic of psychic distance and firm network to cover the unsystematic approach to IMS. To test these hypotheses, multinational enterprises active in the region of focus were interviewed to collect primary data. The findings of this study provide strong support that firms move toward an increasingly formalized, systematic approach to IMS as their international experience increases. However, even larger firms with more formal processes do at times diverge from the sein order to make use of opportunities stemming from their network. In regards to the formal process, it is found that firms mostly focus on the pure economic aspects of the transition economy markets, rather than evaluating institutional factors closely. These institutional aspects instead appear to act as hygiene factors, required to reach some minimum level for international firms to consider the market in the first place. However, the institutional and economic aspects are believed to be interrelated. As such, when considering one, the other is also implicitly evaluated. Which specific elements that are evaluated in the IMS process is found to depend on several variables. First, the motive of the firm is one of the main determinants, with market-seeking firms looking at the market potential and competitive situation on the market, whereas resource-seeking firms instead are interested in the best trade-off between availability and cost of the resource in question. Secondly, whether or not the firm has a strong focus on import and/or export for its business, relevant for firms of both motives, also impact which criteria are evaluated more closely in the process. Lastly, additional, industry-specific elements may be added to the evaluation process to account for the specific circumstances of said industry. Mapping out these industry-specific factors is a suggested topic for further research, as is exploring what constitutes the minimum levels required by the firms with regards to institutional factors.