Entry mode dynamics 1: foreign distributors

Abstract

This chapter examines Arnold's idea that, when selling in foreign markets, MNEs should maintain relationships with local distributors over the long term even after establishing their own local network to handle major clients. In theory, local distributors provide knowledge about the local market, knowledge of local regulations and business practices, existing major customers at low cost, and the ability to hire appropriate staff and develop relationships with potential new customers. Selecting and managing distributors is difficult, though, and Arnold provides a list of seven best practices. These ideas will be examined and then criticized using the framework presented in Chapter 1. Significance In an important HBR article, David Arnold studied the role of external actors, specifically foreign distributors, in international strategy. Arnold focused on the evolving role of local distributors when MNEs first establish themselves in new markets and then try to grow these markets. He observes that many MNEs initially establish relationships with local distributors in order to reduce costs and minimize risks. In other words, the local distributor's complementary capabilities (e.g., knowledge of local regulations and business practices, ability to hire appropriate staff and relationships with potential customers) substitute for developing new, location-bound FSAs required to access the host country market, in cases where market success is highly uncertain. Unfortunately, however, after enjoying some early market penetration, sales often flatten and may even start declining.