Story originally published by USC News in June 27, 2008.
By Evelyn Jacobson
A USC Marshall School of Business study is the first to show that companies entering markets in China and India do better when they are smaller in size, enter less open markets and retain control as a wholly-owned subsidiary rather than giving control to a local entity by licensing or in a joint venture.
The study carried out by Gerard J. Tellis, professor of marketing at USC Marshall, and Joseph Johnson, a Marshall alumnus and assistant professor of marketing at the University of Miami, used longitudinal data to look at 192 different companies that had entered China and India as the markets started to deregulate.
In addition, the study found that earlier entry and entry into China were more successful than late entry and entry into India, respectively. The study is published in the June issue of the Journal of Marketing.
“A lot of companies entered as joint ventures because they thought that local firms would help them gain a foothold in the market. However, in a joint venture, local firms pull in many different directions or they tie down the entrant so it cannot follow its own direction,” said Tellis, who is also director of the center for Global Innovation and holder of the Neely Chair of American Enterprise at USC. “For example, Proctor & Gamble failed in India when it went in as a joint venture but succeeded in China as a wholly-owned subsidiary.”
Setting up shop in China and India has become critical to the survival and success of many firms, especially as forecasters predict that China will be the leading economy of the world by 2050, with the U.S. and India following behind. “China and India are the fastest growing, most popular markets for foreign entrants in the world,” Tellis said. “Our study helps market entrants know what to do to best succeed.”
In that vein, Tellis said, small size should not deter new entrants. In India, large auto makers such as GM, the largest auto maker in sales, and Toyota, the largest in market capital, have struggled, while smaller rivals like Hyundai have been quite successful.
Tellis and Johnson’s study also found that as China and India liberalized and deregulated, opening their markets and creating easier entry, it became harder for companies to succeed as competition increased. The study showed that Pepsi, which entered India closer to its liberalization in 1991, enjoyed greater success over Coca-Cola, which delayed its entry into India.
“Firms should not only consider the growth of emerging markets but also the success rates of prior entrants,” said Tellis, noting that a surprising finding was that entrants were less successful in India than in China. “We think it’s probably because of the immense diversity of India, greater native competition and inferior infrastructure relative to China.”
The study, which compiled objective data from hundreds of newspaper and magazine articles, among other sources, also showed that success is higher with companies that came from countries with a similar culture and economic climate, or those who bridged the cultural and economic gap, rather than jumping into distant markets.
For example, Charoen Pokphand Group, the South East Asian agri-business conglomerate from Thailand, is more successful in neighboring China than Seagram, the agri-based firm that came from distant North America.
Part of the reason is the challenge of understanding tastes in the foreign market: Kellogg’s initially failed to market cold breakfast cereal in India because of the strong Indian taste for hot breakfast foods.
“There are always firms entering these markets, and you don’t jump into it without knowing what factors help and what factors hurt. Companies have to be more careful,” Tellis said.