First mover advantages in investing in transitional economies

Abstract

AbstractAs China, Eastern Europe, and the post‐Soviet republics undertake economic transitions toward more market‐based systems, foreign investors have been greatly interested in these countries. However, it is not clear whether an early mover strategy or a late mover strategy will result in better performance in these markets characterized by both potential opportunities and tremendous uncertainties and difficulties. This article uses the experience of foreign investors in China to shed light on this question. Specifically, we conducted two separate tests comparing the performance of early entrants and late entrants drawing on samples from different time periods (early stage versus late stage of local operations). The results show the existence of significant first mover advantages, and the risk‐return tradeoff between the first mover and late mover strategies. Implications for both early movers and late movers from these two tests are discussed. © 1998 John Wiley & Sons, Inc.