Post-entry operation of foreign firms in a host country: the role of mutual forbearance and organisational learning in their product segment entry choices

Abstract

International business scholars who are interested in how foreign firms enter and operate in a host market have predominantly focused on the decisions managers make at the time of entry. Consequently, as Hennart and Slangen (2015) have pointed out, we know relatively little about foreign firms’ post-entry operation. Moreover, the few studies that have examined the post-entry operation of foreign subsidiaries in a host market have focused mostly on changes in governance mode (Chang & Rosenzweig 2001; Driffield, Mickiewicz & Tethemouri 2016; Puck, Holtbrügge & Mohr 2009). Changes of product scope in the host country—which is a function of the subsidiary’s choice of which product segments in the host country to enter or stay out of—has received comparatively sparse attention (except for Chang 1995; Mitchell, Shaver & Yeung 1994). In this study, I examined the product segment entry decisions of foreign automobile assemblers in the United States in a bid to better understand their post-entry dynamics in their product scope. First, I took a historical approach and examined Honda Motor and BMW’s initial entry and product scope dynamics in the United States auto market. Next, I conducted a quantitative study to understand the potential drivers of foreign firms’ segment choices during their post-entry into a host market. Specifically, I developed predictions from mutual forbearance and organisational learning perspectives, and tested them using data on product segment entries by foreign automobile assemblers in the United States between 1987 and 2015. Results show that foreign firms take into account both their rivals’ reaction function and their own operating experience in a product segment when they make segment choice decisions. Specifically, a foreign firm’s probability of entering a product segment has a curvilinear relationship with its multi-segment contact level with rivals in that segment and a positive relationship with its own prior experience in that segment. Further, the curvilinear relationship between segment entry likelihood and multi-segment contact is strengthened as a foreign firm’s prior segment experience increases. This study makes three theoretical contributions. First, it adds to international business scholars’ knowledge of foreign firms’ post-entry operation, particularly their segment choice dynamics. Second, it discusses two time orientations, namely, future and past’s role in foreign firms’ segment choice decision-making. Third, my focus on product segment choice aligns the foreign market entry literature with the real business environment. Indeed, after their initial entry into a host market, foreign firms will face competition at the product segment level; yet, to date, overwhelming attention has been given to geographical market choice.