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Msc. International Business and Management (Msc. IB&M)

Master Thesis

August 22, 2012

Internationalization Strategies of MNEs in Transitioning Markets:

“Entry- and Marketing Strategies for the Medical Device Industry in Eastern

Europe” -

A review and extension

Supervisor: Drs. A. Visscher Co-assessor: Drs. H.A. Ritsema

Jesse Damstra s1454978

Jan Pieter Heijestraat 119-D3 1054 MD Amsterdam

The Netherlands

jessedamstra@hotmail.com

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Abstract

This research identifies the entry strategies and the effectiveness of these strategies of international medical device manufacturers (MDMs) use when entering the medical device markets of Central- and Eastern Europe (CEE). Next to marketing and product management strategies related to the medical device industry in CEE are investigated. A major finding is that entry strategies depend on several factors; uncertainty of the host market, institutional transitions, host market attractiveness and previous international experience of MDMs. Furthermore this research found that to be successful in the medical device industry global marketing standardization is not effective. Especially product adaptation is needed to address the CEE medical device market effectively. This includes offering fully localized products and charge competitive prices. This might involve developing special products addressing local demand. In the end those MDMs that best manage the factors influencing entry mode decision, and that adapt their marketing and brand management to local conditions, will be most successful in the medical device industry in CEE.

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Table of Contents

Abstract ... - 2 -

Table of Contents ... - 3 -

1.) Introduction ... - 5 -

“What entry- and marketing strategies do Medical Device Manufacturers (MDMs) use in Central- and Eastern Europe and how effective are these?” ... - 12 -

2.) Theoretical Framework ... - 12 -

2.1) Entry Mode Strategies ... - 13 -

2.2) Factors influencing Entry Mode Strategies ... - 13 -

2.2.1) Uncertainty of the Host Market ... - 13 -

2.2.2) Institutional Transition, Transaction Cost Theory and Real Options ... - 14 -

2.2.3) Host-Market Attractiveness ... - 16 -

2.2.4) International Experience ... - 18 -

2.3) The role of international Marketing ... - 19 -

Product management ... - 20 -

Pricing Strategies ... - 21 -

Decision Making Unit (DMU) Management ... - 22 -

2.4) Conceptual Model ... - 23 -

3.) Methodology ... - 23 -

3.1 Research Design... - 23 -

3.1.1) Qualitative research and Triangulation ... - 24 -

3.1.2) Scope ... - 24 -

3.2 Data Collection ... - 24 -

3.3 Analysis ... - 25 -

4.) Case study: Analysis of CEE and the medical device market ... - 25 -

3.1 Central- and Eastern Europe ... - 26 -

3.1.1) Factors influencing Entry Strategies in Central- and Eastern Europe ... - 26 -

3.1.2) Marketing in Central- and Eastern Europe ... - 31 -

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3.2.1) General introduction to the Medical Device Market in CEE ... - 33 -

3.2.2) Marketing and Sales of Medical Devices in CEE ... - 37 -

3.2.3) Factors influencing strategies of MDMs in CEE ... - 42 -

3.2.4) Entry strategies of MDMs in CEE ... - 47 -

5.) Discussion ... - 47 - 5.1) Discussion ... - 48 - 5.2) Contributions ... - 53 - 6.) Conclusion ... - 54 - 6.1) Conclusions ... - 54 - 6.2) Practical implications ... - 56 -

7.) Limitations and recommendations for future research ... - 57 -

References... - 58 -

Academic Articles and Business Literature ... - 58 -

Electronic information ... - 64 -

8.) Appendix ... - 65 -

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1.) Introduction

Entry strategies have been an interesting topic within academic research for decades (Rasmussen and Madsen, 2002). In the internationalization of Multination Enterprises (MNEs) there are four main streams of theoretical strategies which are the Uppsala model (Johanson and Wiedersheim-Paul, 1975), the Eclectic Paradigm (Dunning, 1988), the Born Global (Rennie, 1993) and the Investment Development Path (Dunning, 1981). Most of these theories focus on western MNEs entering the world with different strategies. However, when these models and theories where built some parts of the world where not yet open to trade, such as Central and Eastern Europe (CEE). Furthermore, these theories are more applicable to MNEs active in the consumer business where marketing and product penetration play a larger role than in the B2B environment. Now that CEE is catching up with the Western World and is increasing its participation in global trade it is interesting to see what opportunities arise here and how MNEs take advantage of this. Part of this “catching up” with Western Europe is improvement in healthcare. This creates new opportunities for medical device manufacturers (MDMs). However, CEE is a very segmented market consisting of 17 countries with all different cultures and languages. This makes it challenging to successfully enter these markets and decide on what entry strategies to use. Furthermore marketing has gone through heavy changes as well, and marketing between the consumer goods market and the B2B market is significantly different. In short, a lot is and has been changed in CEE influencing strategic behavior of MNEs entering these markets, and thus also for international medical device manufacturers (MDMs).

The fall of the Iron Curtain

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was an integral part of the command economy. These policies led to structural under investments in the healthcare sector, explaining the big difference in quality of care between Western Europe and CEE. While healthcare was free for all citizens during communist times, the new social health insurance system came with a lot of problems (Rechel, 2009). The lack of financial development and available funds for healthcare result in long waiting cues for hospital and the quality of healthcare is low (Kornai 2001). Despite efforts to organize public healthcare insurances, most people in this region still rely on direct payments to ensure their healthcare needs, and in some countries in the CEE region direct payments rise up to 80% (Drechsler, 2007). This leads to higher rates of corruption and informal payments for healthcare since people requiring healthcare see no other way to secure qualitative care (Rangelova, 2006).

Insufficient Healthcare Systems

A huge debt burden, inefficient bureaucracy, increasing longevity and a rapidly aging population all render the current healthcare system in CEE unsustainable (Economic Outlook, Czech Republic 2006). As a consequence of the low attention to healthcare; the quality of healthcare provision dropped during the 1990s (Afford, 2003). Afford also provides us with a good example how terrible the conditions in some hospitals were; “In the operating theatre in the cancer hospital in Kiev, nurses had to weave between buckets catching water from a leaking roof to carry out their duties, while having to work with out-dated equipment and a lack of drugs”.

Better times ahead?

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spend on healthcare, and try to make basic levels of care available to all citizens. The European Union has an important role in this; putting member states in CEE under pressure to improve healthcare provision, and warning states that want to become members of the EU that they need to make sure that healthcare is at least at an acceptable level. However, with a large part of the population living in rural areas this is a challenge, and healthcare has not reached a sufficient level in all countries and regions. For example, Russia and Ukraine have the highest childhood and maternal mortality rates of Europe and the main problem seems to lie in the fact that only a small proportion of national GDP is spent on healthcare and medical services (The Economist Intelligence Unit, 1999). The CEE countries have difficulties in efficiently organizing the new social healthcare insurance systems. As was mentioned earlier, in most CEE countries health insurance was liberalized, however, in reality this seems not to be working so well in this region (Afford 2003, Cichon 1991, Fidler 2001 & Freeman 1998). As a result private healthcare systems for those who can afford it have been set-up (Zweifel, 2005). Next to the insurance problem, another issue is that hospitals are controlled on a local level, decentralized from the government; meaning that there is no general level of quality and standards in hospitals. This leads to regional inequality in terms of medical services offered, while healthcare is a special industry where the high quality of performance is vital (Afford, 2003). Due to this inequality between local regulations in terms of healthcare it is difficult for the central governments in this region to effectively invest the money received through health insurances and divide it through the different regions. As a result; low expenditures and thus slower developments within the healthcare sector. Another reason for the lack of success of the renewed health insurance system is that there are a lot of old and unemployed people in the CEE region, or people who work in rural economies, who fall outside the mandatory health insurances. Furthermore, there is a lack of competition on the insurance market and insurance companies are often small and can hardly survive; resulting in the fact that most of the insurance companies either have high deficits or are bankrupt already. Hospitals in the CEE region have a hard time surviving.

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many good doctors in CEE are migrating to Western countries for better working conditions and better salaries, the situation is getting even more peculiar since this decreases quality levels of healthcare. The shortage of competent doctors and health care workers is taking its toll on the general health of the public, which continue to complain of overcrowded hospitals and clinics. These hospitals and clinics are also inadequately equipped due to underfunding. Another reason for hospital indebtedness is currency devaluation, which has increased the cost of imports. This is a serious problem since all CEE countries rely heavily on the import of medical equipment, sometimes for more than 90% (e.g. Romania) (InMedica 2011). CEE hospitals are not able to meet demand, since due to the mandatory health insurance the average amount of hospital visits per person almost increased to 15 visits per year (Bruce 2006 , Pafko 2000). Overall due to the above there is a lot of pressure on healthcare funding.

Increasing expenditures on Healthcare

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Figure 1: Healthcare Expenditure in Eastern- and Western Europe (Authors creation, source: Worldbank)

Furthermore, the market for medical equipment is growing at an even more impressive rate (17% over 2005-2010, compared to only 5% for Western Europe) and more than doubled in size over 2005-2010 as you can see in figure 2.

Figure 2: The size of the Medical Device Market (Authors creation, source: Espicom; world medical factbook)

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Western Europe. We notice a fall in GDP in Western Europe and increase of GDP in CEE. However, the absolute gap is, also here, huge, as you can see in figure 2. However, also Eastern Europe has shown to be affected by the economic crisis and in 2009 GDP levels where down as well.

Figure 3: GDP in Eastern- and Western Europe (Authors creation, source: Worldbank)

So far we see that over the last 2 decades a lot has happened in the health sector in CEE. A lot of these countries have already joined the European Union and there are plans to make the other countries members as well (Waters, 2008). The reforms within the healthcare sector have moved all of these countries from centrally-planned health systems to “varying degrees of private-sector involvement in healthcare financing and coverage, in the context of social health Insurance systems” (Waters, 2008, p.478). The increase of healthcare financing due to the health insurances is huge. Slovenia, for example, has seen a fivefold increase in healthcare spending since 1990, and Lithuania and Romania have threefold their expenditures (Waters, 2008).

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this will help to bring the quality of healthcare to a next level (The Economist Intelligence Unit, 2009). This is supported by the strong growth rates in healthcare expenditure, medical equipment market and GDP levels in CEE. Therefore the market for medical devices in CEE will become different, and especially more attractive for MDMs.

We can draw from the introduction that the healthcare and medical equipment market in Eastern Europe has gone through a lot of change. Expenditures on healthcare are increasing and so is the size of the medical equipment market. However, the CEE market is complex and challenging. Compared to growth regions such as Brazil, Russia, India and China (BRICs), Eastern Europe is an extremely segmented market consisting of 17 countries on a relative small geographic space. A wide range of different cultures, regulations, nationalities and languages makes it difficult to define a unique successful strategy to penetrate all these markets. Furthermore, the medical device market is a complex business, of which the decision making unit (DMU) is a good example since there is no single buyer of medical equipment. In some cases the physician makes buying decisions, but sometimes hospital administrators. Therefore, in each and every sale another target customer is being faced. As a result; marketing and sales are completely different in the medical device industry compared to the market for consumer products, and especially DMU management seems to be very important. Due to the large number of countries in CEE and the different stages of transition they are in, market demand is dissimilar across the region and medical device manufacturers are not always able to meet local and regional market demand. In short, MDMs entering Eastern Europe have a lot of difficulties and challenges in creating successful entry- and marketing strategies for these markets due to the high level of segmentation in the region. The large number of different nationalities makes CEE challenges but more important the differences among the countries in terms of development are important to notice. This requires a high level of adaptation, something in which not all companies are very successful at.

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research to entry- and marketing strategies for MDMs in emerging markets. In this research we try to overcome this gap by applying theories to a transitional- and developing market; CEE. We will investigate what strategies are actually being used, and based on a comparison between theory and reality we will define proposition for what strategies are most effective in the medical device market in CEE. This will help to close the gap of entry mode choice and marketing strategies of MDMs in emerging markets, and especially in CEE. Overall, the above leads to the following research question:

“What entry- and marketing strategies do Medical Device Manufacturers (MDMs) use in Central- and Eastern Europe and how effective are these?”

In the next section, the theoretical framework, we will take a closer look to what academic- and business literature found regarding entry- and penetration strategies in general. Afterwards, in the analysis we dive deeper into the case study of the medical device industry in CEE and have a look at entry- and marketing strategies in this context. In the discussion we will compare theory to reality. This will help to identify propositions for entry- and penetration strategies for MDMs active in CEE which will be empirically supported.

2.) Theoretical Framework

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- 13 - 2.1) Entry Mode Strategies

Entering a foreign market can have several reasons such as expanding your sales and customer bases (client seeking and following), cheap local resources (resource seeking), R & D, starting production facilities and marketing and sales purposes. For this research the only focus is on sales and marketing. Therefore when speaking about entry modes and strategies we are referring to MNEs that are planning or are starting local sales- and marketing organizations in a foreign market. This research will therefore not dive deeper into local manufacturing, R & D, etc. We only focus on expanding sales and customers by entering other countries.

Having said that, we notice the fact that MNEs entering new markets must change and adapt their strategies has been widely acknowledged in business literature (Meyer, 2001). More and more research has been done on how entry strategies are adapted based on the situation in the host market (Peng, 2000). MNEs have several options when entering a foreign market. The main streams of entry modes are; Equity modes, such as wholly owned subsidiaries, Greenfield investments and acquisitions; and Non-Equity modes, such as exporting, licensing, franchising joint ventures, etc. The main differences between these entry modes lies in the required resources to enter the market and the level of control of the foreign operation (Ashan and Musteen, 2011; Anderson and Gatignon, 1987); equity modes need higher investments and more resources compared to non-equity modes. No surprise is that according to these theories the amount of control, the resources invested, and organizational learning is lowest in a non-equity mode, and highest in an equity mode. Previous research has figured that the influence of several factors on entry-mode decision are high such as environmental uncertainty in the host market, the stage of institutional transition a market is in, host market attractiveness and previous international experience of MNEs.

2.2) Factors influencing Entry Mode Strategies 2.2.1) Uncertainty of the Host Market

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Therefore identifying uncertainty and possibly managing this is very important in choosing the right strategies to enter- and penetrate a market successfully. There are several types of potential uncertainties in a market that need to be identified. In this section these different uncertainties are identified and explained.

2.2.2) Institutional Transition, Transaction Cost Theory and Real Options

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In this sense TCT is mainly concerned with the associated costs of integrating a new organization into your own one compared to the cost of using a local agency or partner in the target market. Previous research on TCT supports “the empirical findings of TCT studies that the cost of finding a partner in the host country, negotiating and monitoring these partners in host countries influence entry- and penetration choices” (Ahsan and Musteen, 2011). As a result, the higher these costs of finding, negotiating and monitoring (transaction costs) a partner in the host country are; the more willingly MNEs are to invest in equity entry modes. If these costs are low MNEs are more willingly to use non-equity entry modes. The transaction costs rise with higher opportunism and uncertainty in the host country. Furthermore if asset specificity is high, transaction cost will increase. Higher transaction cost will stimulate MNEs to use equity modes of entering a host market. The TCT has several limitations when using them with entry mode decisions. The main reason for this is that TCT ignores strategic flexibility (Brouthers and Hennart. 2008). “Through past investments firms may create firm-specific resources (strategic options) that allow them to redeploy assets as uncertainties change. In essence TCT focuses on the uncertainties a firm encounters when making an entry decision but does not account for the opportunity costs associated with not making the investment” (Brouthers and Hennart. 2008; p. 937).

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If we apply the theory above to the medical device market in CEE we can therefore expect that entry- modes and marketing strategies are closely related and influenced by the transitional stage a country or a region is in. As been mentioned before; more stable economies, in this case economies that have progressed furthest in transition, will attract more equity entry mode strategies. This leads to the following hypothesis:

Hypothesis 1: International MDMs prefer equity entry modes, when entering the medical device market in CEE, in those countries that have progressed furthest in institutional transition

2.2.3) Host-Market Attractiveness

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that MNEs tend to use equity modes for big growth markets, and non-equity modes for smaller markets. However, the role of institutions is a returning topic to choosing entry strategies. Agarwal and Ramaswami (1992) found that although a market can have high potential, but high institutional uncertainty, can still lead to a preference for non-equity modes (e.g. exporting) over equity modes. However, in general the business literature argues that the potential of the host market in terms of size and growth opportunities are in close relationship with entry-and penetration strategy decisions of MNEs entering these markets (Ahsan and Musteen, 2011). This brings us to the following hypothesis:

Hypothesis 2a: The higher the medical device market attractiveness of a country in CEE, the more likely international MDMs are to use equity entry modes to enter the country

However, it is still unclear at what moment a market is attractive enough to use an equity mode to enter the country. In literature it is suggested that an investment is worthwhile if the expectation is that you at least re-earn your initial investments. It is expected that this is no different in the medical device industry in CEE and therefore the following hypothesis will be tested:

Hypothesis 2b: International MDMs will only use equity entry modes in those markets that are of such size that they are confident to earn back their investments

The market attractiveness of a country depends mainly on two things; the size of the market and its growth potential. However, little research has investigated which of these two factors has more influence on entry-mode choice. The expectation is that the already existing market size has a bigger direct influence on strategy creation than the potential a market might have. Main reason for this suggested in literature is that the “market size already exists”, while a country still needs to prove that it can live up to its potential”. Therefore the existing market size is a less “risky” factor of influence compared to growth potential. The following hypothesis will be tested to support this argumentation:

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- 18 - 2.2.4) International Experience

A next factor that has wide support in terms of its influence on entry- and marketing strategies of MNEs is the amount of previous international experience they have. It is no surprise that previous experience has a positive relationship with equity entry modes. Barkema and Drogendijk (2007) argue that MNEs learn from previous experience and that they use this experience to transfer their knowledge and practices to new markets. This supports the general finding that MNEs with little or less international experience compared to MNEs with a lot of experience, tend to prefer non-equity modes, compared to a preference for equity modes of experienced MNEs. A main reason why experienced MNEs are more willingly to use equity modes is because they have more experience in dealing with local suppliers, partners, customers and governments (Herrmann and Datta, 2006). However, when experienced MNEs are faced with a market that has high institutional uncertainty or high demand uncertainty (resulting in a smaller market) it does not necessarily mean that they will still favor an equity entry strategy. Fish (2008) tried to identify this relationship but was not able to show the combined effect of uncertainty and previous international experience on entry- and penetration strategies. Ashan and Musteen (2011) argued that the international experience of MNEs does not eliminate uncertainties in the host market, however, it does make the MNE better able to manage these uncertainties. Therefore we can say that having more international experience compared to other MNEs is a competitive advantage in handling challenges you face in the markets which provides them with better growth opportunities. Therefore experienced MNEs have more confidence in entering uncertain markets and tend to do this sooner than non-experienced MNEs. In general based on the business literature it has been found that MNEs with a lot of international experience will prefer equity entry- and penetration modes, while MNEs with little or less international experience will prefer non-equity entry- and penetration modes. If we relate the above to the market for medical devices in CEE we come to the hypothesis:

Hypothesis 3a: Previous international experience has a positive influence on equity entry mode choices of international MDMs in the medical device markets of CEE

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which of these two has a higher influence on these entry mode choices. However, based on previous literature it is suggested that uncertainty in the host market environment is the main factor on which MNEs base their strategies in general. Therefore this research expects the influence of uncertainty in the host market to have a higher effect on entry mode choices in CEE than previous international experience of MDMs. This leads to the following hypothesis:

Hypothesis 3b: Uncertainty has a higher influence on entry mode choice than previous international experience of MDMs in the medical device market in CEE

2.3) The role of international Marketing

As was mentioned earlier this study focuses on entry- and marketing strategies with the purpose of expanding the existing client based by starting sales and marketing in a foreign country; leading to either a equity or non equity mode of entrance. This type of entry- and marketing strategies can also be called a “client-seeking” strategy. So far we have focused on what entry strategies we have and what factors influence the choice between these strategies. In this section we will focus on the role of marketing in internationalization.

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strategy (Schuh, 2000). Porter (1986) argues that globalization should not lead to standardization of marketing. International marketing activities have an important role in increasing the value chain. Even if a company has a global product, local adaptation should be made in order to expand the international business of a company given the set of differences in market conditions between developed and developing countries (Springer, 1993). These differences in income lead to difference in demand and preference. Therefore Schuh (2000) suggests using a more diversified marketing strategy which addresses the differences in GDP, household income, and customer preferences and usage patterns. However, existing literature and studies have their short-comings and do not provide a clear picture of what international marketing strategies to use. Although, many studies suggest that in general MNEs use a high degree of standardization in marketing (Schuh, 2000). This is in itself no surprise, especially for truly global companies. There are several benefits to marketing standardization. Think about cost reductions from for example product design and packaging, and global brand management. The highest benefits of standardization come from product and brand standardization, although product standardization can also lead to lower sales in developing markets. However, smaller MNEs who are more regionally focused might adapt their market strategies to a higher extent. Especially in markets where products are special it has been noticed that MNEs tend to adapt their marketing strategies to better address the markets. Therefore, marketing adaptation is also expected to be more successful in the medical device industry in general, and specifically in CEE due to the nature of this market (developing). This leads to the following hypothesis:

Hypothesis 4a: International MDMs that use standardized global marketing and product strategies will be less successful compared to companies that adapt their marketing strategies to local conditions in the medical device markets in CEE

Product management

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Companies that do make use of adaptive marketing will create higher customer value and by doing so increase their sales. A good example of marketing adaptation is changing or adapting your product to local market conditions and local demand. What is so special about CEE is that the region consists of more than 17 countries and most of these countries have their own language. One of these adaptations is to translate all equipment for every country. In the medical device industry this is referred to as “Localizations”. In many countries, from a market demand perspective, offering localized products is a prerequisite to sell successfully. As was mentioned most global market leaders, in this case GE and Philips, focus on standardized products. While the smaller local companies focus on other opportunities in the markets. Therefore in CEE we see that these global companies do not adapt their product too much to better address local market demand. On the other hand more locally focused companies such as Draeger to adapt their marketing and product management to local conditions. As a result Draeger offers a fully localized product portfolio which is considered to be a competitive advantage. However, localizing medical devices is very expensive and therefore not all companies do this, but the ones who do are expected to be more successful; leading to the following hypothesis:

Hypothesis 4b: International MDMs that offer fully localized products in the CEE medical device market will have higher market shares than MDMs that do not offer this

Pricing Strategies

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price. Only when a good price in combination with good quality can be offered it is considered as a competitive advantage. All of the above leads to the following hypothesis:

Hypothesis 4c: Offering fully localized qualitative products in the CEE medical device markets has a higher influence on success than being price competitive in life saving care settings

In the analysis section we will apply marketing to the case study of the medical device market in CEE. This will help to understand to what extend marketing strategies are adjusted for a transitional and developing market. Furthermore, we will dive deeper in medical device specific marketing which is an interesting concept with the important role of DMU management. Important to note already is that literature suggest that consumer goods have a higher level of local adaptation of marketing strategies compared to high-tech product, s.a. medical devices and products for the B2B market (Hill and Still, 1984).

In the end the analysis will help to either accept or reject a hypothesis which will further support the findings in the theoretical framework in a combination with the case study of the medical device industry in CEE.

Decision Making Unit (DMU) Management

Personal selling is acknowledged as one of the most effective marketing strategies, especially in B2B environments in which product decisions are complex (Chang, 1995). The main idea is that the sales force has a “unique” message for all customers and by doing so create a special and close relationship with the customer or the decision making unit (DMU). As will be explained further in the analysis part the medical device industry is a very complex business with a lot of different stakeholders influencing buying processes. DMU management is therefore considered to be a critical success factor to win tenders and other business in the medical device industry. Some companies are more successful than others in building this close relationship with the customer and are therefore expected to gain higher market shares in the medical device industry in CEE. To check this, the following hypothesis will be tested:

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- 23 - 2.4) Conceptual Model

Based on the findings in the theoretical framework a conceptual model has been developed reflecting the concepts found in existing business and academic literature. This will be the guideline for the empirical research in the case study and will help to explain what strategies MDMs use in CEE.

Conceptual Model

Figure 4: Conceptual Model (Authors Creation, based on Theoretical Framework)

3.) Methodology

3.1 Research Design

The purpose of this research is to identify what entry- and marketing strategies MDMs use to enter- and penetrate the CEE markets for medical devices. In the theoretical framework a lot of theories regarding internationalization and entry methods have been described. These theories will be used to identify how effective these strategies are in a growth market such as CEE and by doing so extend and review the existing theories. Testing existing theories in a specific environment, in this case the medical device industry in CEE, can be done by a Case Study to test theory to actual observations in the market. The analysis part of this research will focus on a case study of the market for medical device in CEE. Therefore the research will mainly be

Entry Mode Choice (Equity vs. Non-Equity)

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qualitative, although quantitative data is used to support qualitative findings. In the end this will lead to working proposition in the discussion that can empirically be supported based on the findings in the theory, and the findings of the observations in the case study.

3.1.1) Qualitative research and Triangulation

As been said by Myers (2009) “one of the benefits of qualitative research is that it allows a researcher to see and understand the context within which decisions and actions take place.” (p.5). The context often helps to explain why, in this case medical device manufacturers, acted as they did. Another reason to do a qualitative research instead of a quantitative one is that in quantitative research a lot of social and cultural aspects are lost, which are hard to define in numbers. Since this is an important part of the research the focus is on qualitative research. The only problem is that it will be difficult to generalize the findings to other business environments.

Since the research makes use of several methods (qualitative, quantitative and small case studies/examples) we are speaking about “triangulation”. In this case more than one research method to gather data and information is being used. This will help us to create a “complete picture” of the situation in the medical device market in CEE and will benefit the quality of the research.

3.1.2) Scope

As both CEE, and the medical device industry is a fairly broad scope it is important to narrow down the research. For this sake this research only focuses on a specific part of the medical device market, namely; devices for patient care. These devices are being use to care for patients that have been diagnosed with a disease. Products that belong to this category are patient monitors, anesthesia and ventilation equipment, and ECG and other Cardiac equipment. This segmentation will help to narrow down the research.

3.2 Data Collection

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The qualitative data comes from academic and business literature mainly found through ebscohost (RUG). Furthermore, market insights and other qualitative information comes from the Case Study and direct interaction with business managers who work in the medical device industry in CEE. This has been collected through telephone meetings and informal meetings and discussion.

3.3 Analysis

In this section of the research we do an analysis of the case study; the medical device industry in CEE. First the CEE markets are being analyzed based on existing literature and trends in these markets. Then this will be linked to the medical device industry more specifically. This will include an identification of existing entry- and penetrations strategies that are currently being used by MDMs in CEE. These strategies will be related to the literature findings in the theoretical framework, which will help to identify the effectiveness and justification of these strategies. Afterwards, this will lead to empirically supported propositions in the discussion of this research.

4.) Case study: Analysis of CEE and the medical device market

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- 26 - 3.1 Central- and Eastern Europe

3.1.1) Factors influencing Entry Strategies in Central- and Eastern Europe The main reason MNEs have been entering CEE over the last two decades and investing in these markets is the fact that they are responding to a number of new opportunities due to the transition from a centrally planned command economy to a market economy. As a result a large potential new client base emerged in this region which could result in sales, marketing and market share growth. Many of these MNEs wanted to be in the first stream of entrants to make sure to get good market shares or even market domination (Gil et al. 2006). As was already mentioned this research focuses on sales and marketing in terms of entry strategies. However, entry mode decision needed to be taken and this was not as easy as these MNEs thought.

Uncertainty of the Host Market

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objectives when entering a foreign market have a strong preference for equity modes in order to take advantage of this new market and to make sure to limit the opportunities of competition. This is also the case because most industries in CEE only contain a few competitors and each of these firms owns a significant market share. Not having a local sales and marketing organization (equity mode) can cost you market share. However, these MNEs also acknowledge that under certain conditions an equity entry mode might not be the most profitable strategy to enter a market. Due to the high level of uncertainty after the fall of the iron curtain in CEE a lot of MNEs decided not to use an equity mode because the expected risk and associated transaction cost of the political and economical situation were too high. Therefore they preferred non-equity entry modes such as joint ventures and export modes. This was a way to enter CEE, however only with limited risk and limited investments. As Agarwal and Ramaswami (1992) and Brouthers et al (1998) argue; “Where international risks are high, independent shared-control modes are typically preferred” (p. 487). In CEE a lot of MNEs choose this method by contracting local sales agents and distributors. However, these MNEs also found that finding the right partners with desirable qualities was not so easy since these are not always available in newly emerging markets (Brouthers et al. 1998). This limited the entry mode choices from the perception of MNEs willing to enter CEE because their perception of qualitative local managers and companies was low.

Host Market Attractiveness

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- 28 - Table 1: Population Size CEE (Authors creation, source: Worldbank)

Especially the Baltic States, Slovakia, Slovenia, Croatia and Serbia show a small population and thus limited potential. However, on the other hand Poland, Romania and Ukraine show good

potential based on their large populations.

However, identifying the attractiveness on population solely is not possible. The combination of population size and their income is therefore important. In the tables below we can find total GDP per country and GDP per capita per country.

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- 29 - Table 3: GDP per Capita CEE (Authors creation, source: Worldbank)

Based on the GDP levels in the tables above we see that highest total GDP is for Poland, which is no surprise due to their large population. Therefore Poland is from the perspective of potential market size the most attractive market in CEE. However, we also note that the Ukraine has the largest population of CEE; however they have the 4th largest GDP level. This clearly says something about the underdeveloped stage Ukraine is still in and if no growth is shown the market attractiveness is limited. Countries such as Slovenia, Slovakia and Estonia show the highest GDP per capita ratios in CEE and are therefore attractive because there economy is more developed and the associated risks are therefore lower. However, their small population size limits its potential due to a relatively small total GDP level. Based on the combination of population and GDP Poland, Romania, the Czech Republic and Ukraine have the most attractive markets. However, for the latter, Ukraine, a lot of growth is needed to become more developed. High uncertainty makes Ukraine still not very attractive. This would suggest using equity entry modes in Poland, Romania, the Czech Republic and Ukraine and non-equity modes in the other CEE countries.

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- 30 - Table 4: Population Size WE (Authors creation, source: Worldbank)

Looking at the population size table for Western Europe above we can immediately see the difference in terms of market attractiveness based on population. Western Europe has many countries with much bigger populations. If we combine this with the much higher total GDP table below we can conclude that the CEE market is very small and less attractive than the Western European markets.

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Therefore it is important for companies to identify the opportunity costs of investing in CEE instead of investing in Western Europe. Overall we can say that Eastern Europe is small and less attractive compared to Western Europe which is no surprise. Main reasons for this are smaller populations and lower GDP levels as a result of lower economic development in CEE. To summarize; within CEE we can conclude that based on the combination of population size and GDP levels Poland, Czech Republic and Hungary are the most interesting countries as has been summarized below. Ukraine and Romania can become interesting when their GDP levels will increase. Slovenia Slovakia Estonia Poland Czech Republic Hungary Croatia Lithuania Latvia Bulgaria Serbia Ukraine Romania

3.1.2) Marketing in Central- and Eastern Europe

Although most attention in internationalization literature is focused on entry strategies, marketing is an important factor influencing success in a foreign market. More specifically in CEE, since the fall of the iron curtain and the transition to a market economy a lot has changed in terms of marketing by MNEs in CEE. In the 90s most MNEs had difficulties with effect ive marketing in CEE due to the lack of understanding of foreign marketing campaigns. However, a lot has changed in the years after and major changes in marketing environment have been noticed by MNEs active in this transitional region. As a result of trade liberalization in CEE the pressure on local companies increased significantly to deliver higher quality at competitive

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prices. Furthermore marketing campaigns in these countries increased local competition and defense of their own markets (Hooley et al. 1996). As a main outcome of trade liberalization in terms of marketing and sales was an increasing demand in the CEE markets for higher quality products at a better price. Furthermore there was downward pressure on costs due to increasing levels of competition. Lastly technological change increased significantly.

In the theoretical framework previous research suggests that most MNEs make use of global marketing standardization. As a result they save cost by global product design, pricing and packaging. This is also suggested for CEE. Before 1989 direct presence of MNEs was not at all possible in CEE and there was no other option than using an external marketing approach which resulted in a standardized marketing approach for CEE. The fact that a lot of MNEs tend to prefer low- or non-equity modes due to several types of uncertainty in the region also supports the idea that marketing will not be adjusted so much for these CEE markets. Therefore, in general, it seems that the majority of MNEs active in CEE choose standardization for marketing in the region (Schuh, 2000). However, what is very interesting is the demand for product quality in the region and how MNEs adapt to this. Arnold and Quelch (1998) emphasize that in CEE it is often needed to offer several products with different quality to better address the market. By doing so a MNE is able to address the low-end, mid-range and high-end product groups of the market. They argue that MNEs should pay more attention to market specific conditions such as household income and GDP in order to develop products that the market can afford. However, this clearly takes a lot of investment in product development and product marketing which not all MNEs are willing to make for a region with high levels of uncertainty; although those who do will probably gain higher market shares.

3.2) The Medical Device Industry

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medical device industry in CEE we dive deeper into market conditions, uncertainty, CEE market attractiveness, and international experience and marketing.

3.2.1) General introduction to the Medical Device Market in CEE

The Product

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- 34 - The Customer

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- 35 -

The competitive landscape: Medical Device Manufacturers active in CEE

Most industries in CEE do not have a lot of firms competing in the market and this is no different for the medical device market in CEE. For the sake of narrowing down the research we only focus on a segment of the medical device industry, namely; the market for patient care, as was already mentioned in the methodology. Within this market in CEE we see fierce competition between multinational MDMs, local competitors and Asian vendors. Although Asian vendors can be identified as international MDMs we define them separately because their strategies are significantly different. As we are analyzing entry strategies we will only focus on MNEs and thus we only focus on international MDMs. Local competitors do not face the same challenges and are therefore not included. As a result our case study consists of 5 international MDMs .

In the table below an overview is given of the 5 companies in this case study including their main strengths and weaknesses.

Company Main Strengths Main Weaknesses

General Electric (USA)

Strong global brand name, global presence with many different products

High quality products

Lot of international experience Financial backbone

Little local adaptation of marketing and products Not competitive on price

Philips Healthcare

(The Netherlands, HQ in USA)

Strong global brand name, global presence with many different products

High quality products

Lot of international experience Financial backbone

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- 36 - Draeger Medical

(Germany)

Strong brand name in CEE specific due to early entrance (first mover advantage)

Adaptation of products to local market conditions

Specialized in the Intensive Care Unit (ICU) and Operating room (OR)

Not so wide product portfolio High Prices

Nihon Kohden (Japan)

Good brand name in patient monitoring

Not so wide product portfolio

Mindray (China)

Very competitive on price Low-segment

Brand image

Table 6: Competitive Overview CEE (Authors creation, source: Espicom, Informal Interviews)

Furthermore, as we are investigating entry-modes in the table below we can see what their entry mode strategies are in the CEE countries.

Company Equity Modes Non Equity Modes

General Electric Direct sales offices in: Poland, Czech Republic and currently starting in Hungary

Distributors and dealers in the rest of CEE

Philips Healthcare Only a direct sales office in Poland

Distributors and dealers in the rest of CEE

Draeger Medical Direct Sales offices in almost all CEE countries: Poland, Czech Republic, Hungary, Romania, Slovakia, Slovenia

Next to direct sales offices they make use of distributors and dealers

Nihon Kohden Direct sales offices in: Poland, Czech Republic and currently starting in Hungary

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Mindray Now starting a direct sales office in Poland

All sales go through distributors and dealers in all CEE countries except for Poland

Table 7: Entry Modes (Authors creation, source: Espicom, Informal Interviews)

From these 5 companies GE and Philips are by far the largest companies on a global scale and both have a lot of international experience. Therefore it is surprising that these companies often choose non equity modes, while smaller MDMs with less international experience choose equity modes in CEE. We will investigate this deeper in section 3.2.3.

3.2.2) Marketing and Sales of Medical Devices in CEE

Sales cycle: Tenders

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means that the company that meets the specifications with the lowest price will win the tender. This puts heavy pressure on the profitability of MDMs in CEE. Global conglomerates have difficulties in competing with local- and Asian manufacturers since price is the only consideration in these tenders. These global conglomerates clearly offer higher-end solutions, however it is impossible to compete on price with these local- and Asian manufacturers offering low-end and especially cheap solutions. Also, as was mentioned before, lobbying with DMUs in these countries can help to win tenders, but as you can imagine local companies have clear advantages in negotiating with their own governments. Since the flow business in CEE is so small compared to the business coming from tenders it is now a main focus of MDMs to become more competitive in these tenders. One of the initiatives to achieve this is by creating new products with have less value and less quality. Good examples are GE who are putting time and effort in “reverse innovation” and Philips Healthcare which now has a so called “value segment” and acquired a Chinese manufacturer of Patient Monitors in 2008 (e.g. Shenzen Goldway). Overall the sales of medical equipment is a direct negotiation between the manufacturer (or someone representing them) and the DMU. Those who manage this best will have a competitive advantage.

DMU management and Marketing

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However, a part of marketing in the medical device industry that needs more attention are the patients who are going to be treated by the products. Even though their direct influence on buying decisions is small they should be taken into account. The DMU in the medical industry is very different, and thus marketing is very different but for some campaigns, it is important to follow up with a consumer campaign to attract patients to doctors. “Consumers are going to be looking for what procedure is right for them,” Hilton explains. Doctors can take advantage of this by promoting their new products and services, says Amy Jacobs, global director of marketing for Bausch & Lomb. “We see direct mail as effective with surgeons sending out mailings directly to their patients” promoting certain procedures with medical equipment. Good equipment can help doctors and medical institutions to reach out to potential patients successfully. Therefore it is also in the advantage of the DMU (the medical institutions) to have high quality equipment because it can help to establish a good name in the industry. Addressing these benefits to the DMU is also an important part of DMU management. We often see cooperation between medical institutions and MDMs and this is referred to as “reference sites”. Reference sites are hospitals that are using all equipment from a certain vendor and by doing so they become a perfect “reference” for the manufacturer to which they can refer to when having negotiations with other potential customers. This includes offering the possibility to the DMU to visit the “reference site” to see how the products are being used and speak to medical specialists using the equipment. This has been proven to be a very successful tool since within the medical equipment industry word-of-mouth and references from other medical specialists are very important. Building these reference site relationships clearly has its advantages for the medical device manufacturers, but there are definitely also benefits for the medical institutions. The MDMs will always make sure that their latest innovations and latest updates will be present in their reference site. This ensures these medical institutions of the best products and excellent customer service; not only saving a lot of money, but also having the best equipment in the market which will help to attract top medical specialists and accordingly more patients. Overall, we can clearly see that it has its advantages for both the MDM as well for the “reference site” itself, and it has been proven to be a very successful marketing tool.

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and ask questions and advice make it a very effective and successful for both sides (customer and manufacturer). Therefore MDMs are investing a lot in training session for which DMUs are invited. These sessions can be used to demonstrate the latest products and have a chat with the DMU about their preferences and what they are looking for. This is not only a great marketing and sales tool, but also a chance to grasp ideas from customers which then need to be transferred to R & D. Therefore organizing trainings and educational sessions is the most popular from in marketing there is within the medical device industry.

Overall we see that marketing within the market for medical devices is for a large part managing the DMU. Making sure to show the benefits of you products to the DMU and having direct interaction is very important. As a result DMU management is for a large part focused on building strong relationships.

Product and Brand Management

One of the main issues MDMs face in CEE is that they have problems to successfully address market demand in CEE. There are several reasons for this. First of all the region consists of 17 countries with a lot of different languages. Penetration of English as language is low and therefore products need to be translated. Next to that budgets for medical equipment are clearly lower than in Western Europe. This influences demand significantly and MDMs have issues addressing this demand for simple and low-end solutions. In this section this will be explained.

Localizations

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offer a fully localized product portfolio; as they are balancing the opportunity costs of these investments. Both companies are active in all markets over the world and in other industries as well. Investing in CEE might therefore not be a main priority. Philips could for example choose to use this money to invest in another opportunity: electronic toothbrush market in Brazil which already is of significant market size and has strong growth potential. This trade-off influences strategic marketing decisions for MDMs in CEE. Especially for those companies that are also active in other business environments and industries. However, they still keep the medical device market as an opportunity to invest in once it will grow by doing minor investments in setting up distribution channels. On the other hand we notice that some MDMs do have a more local approach in CEE. Best example is Draeger, a German medical device company, which offers a completely localized product portfolio in almost all CEE countries. When the markets in CEE started liberalizing they were one of the first entrants and have gained significant market share. Therefore localizing products is profitable because they have good chances on earning back these investments based on their strong market position. However, it is also strongly related to the opportunity costs and possibilities of investing elsewhere.

Low prices and Quality: “Reverse Innovation” and “Value Segment”

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businesses are to survive and prosper in the next decade, they must become as adept at reverse innovation as they are at glocalization. Success in developing countries is a prerequisite for continued vitality in developed one” (Immelt et al, 2009). This does count for all emerging markets in the world. Great examples of output so far are a special ECG and Ultrasound device for rural areas. It is fairly easy to develop these products since the knowledge is already available within the companies; it is just making products a bit simpler with less functionality.

We see a similar strategy within Philips. They also recognize the need to be able to deliver products to emerging markets that meet market demand. Developing products at home and trying to sell them everywhere is no longer successful. Philips has now a special product group called “the value segment” which contains of simple solutions. In 2008 Philips already set the first steps with acquiring a company called “Goldway” specializing in patient monitors. Next to their own portfolio Philips now also addresses the low-end patient monitoring market which so far has been successful in a lot of markets. While not all products have been localized for CEE they have already increased their market share within this segment in the region. An important part of emerging markets are the rural areas where not all people have access to healthcare. Both GE and Philips are now also focusing on solutions and activities to start to develop these markets.

3.2.3) Factors influencing strategies of MDMs in CEE

Now we have identified the competitive landscape and learned more about the market for medical devices in CEE we can apply our findings in the theoretical framework to the medical device industry in CEE and find out how this has influenced entry- and marketing strategies so far for MDMs in this market.

Environmental Uncertainty in the Host Markets

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economies. When economies change institutions change as well. Institutions are responsible for regulation in the market and when this is changing it becomes unstable. As a result uncertainty increases. However, today more than 20 years passed while for most CEE countries this transition period still has not been finished. The DMDs who entered the CEE markets in the 90s during this transition period tend to prefer non-equity modes. Countries that have successfully gone through this transition period tend to be able to attract MDMs with equity modes. The best example is Poland which has shown strong growth over the last years and constantly improving institutional structures resulting in political stability, strong rule of law and low corruption. Therefore the potential risks and uncertainty for this market have become smaller convincing MDMs to start direct equity operations in this market. All MDMs active in CEE now have an equity entrance strategy in Poland. Other countries such as Serbia and Ukraine have gone through transition less successfully resulting in unstable political- and economical situations, high levels of corruption and weak rule of law. Therefore the associated uncertainty and risk of these markets is still big stimulating MDMs to use non-equity entry strategies in these countries. Especially for Ukraine this is noticeable since they could potentially be an interesting market for MDMs due to its large population (largest of CEE). Therefore host market attractiveness is an important factor in entry mode decisions for MDMs in CEE.

Host Market Attractiveness

As can be concluded from the previous section host market attractiveness comes for a significant part from the level of uncertainty perception MDMs have of a market in CEE. A direct link to entry mode choices is easily made since almost all existing literature argues that lower levels of uncertainty in combination with high market attractiveness stimulates equity entry modes. Market attractiveness for MDMs depends mainly on two factors: the current size of the healthcare and medical equipment market, and growth potential of a country.

Size of the market

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is bigger than in Romania, while the population of Romania is almost 3 times bigger. This says something about economic development in Romania. This also helps to explain why GE is starting an equity mode in Hungary and not in Romania. In the theoretical section a hypothesis was formulated that stated that market size is positively correlated with equity entry modes. Thus the higher the market size; the more MDMs are willing to use equity entry modes. Based on table 8 this would mean that MDMs mainly use equity modes in Poland and the Czech Republic. This will be tested in the analysis.

Table 8: Healthcare Exp. CEE (Authors creation, source: Worldbank, WHO)

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- 45 -

Table 9: Market for Medical Equipment CEE (in US$ Billions) (Authors creation, source: Worldbank, WHO)

Growth Potential – Growth Environment Scores

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- 46 -

Table 10: Growth Environment Scores CEE (Authors calculations. Data sources: Worldbank, WHO, Eurostat)

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- 47 - International Experience of MDMs

A final factor that has been acknowledged by existing literature to have a strong effect on entry mode choices is the amount of previous international experience of MNEs, and in this case of MDMs in CEE. The companies in this case study with the highest level of international experience are GE and Philips. Both companies have been in business for more than 100 years and are active all over the world. The other companies Nihon Kohden, Draeger and Mindray are MNEs, however their international experience is significantly less compared to GE and Philips, and most of their international experience comes from recent activities. Therefore the suggestion from the existing literature and the theoretical framework would assume that GE and Philips would be the companies using equity entry modes most extensively in the medical device market in CEE because international experience seems to have a positive influence on equity entry modes. However, the contrary is true. Philips only uses an equity entry mode in Poland, and GE only in Poland and the Czech Republic. Also surprising is that a company with relatively little international experience uses an equity mode in almost all CEE countries (Draeger).

3.2.4) Entry strategies of MDMs in CEE

Overall existing literature suggests several factors that have an influence on entry mode decisions of MNEs. Environmental uncertainty (including institutional transition) is expected to have a negative influence on the equity modes, market attractiveness and international experience are expected to have a positive influence on equity modes. However, so far these expectations were not all being met in our case study; the medical device industry in CEE. In the next section we will go into more detail in these factors influencing entry mode decisions and several propositions will be made regarding the medical device market in CEE.

5.) Discussion

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- 48 - 5.1) Discussion

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- 49 -

Table 11: Institutional Transition in CEE (Authors creation, source: EBRD)

A second factor to have strong influence on entry mode decision, identified by previous research and the theoretical framework, is the attractiveness of the host market. As identified in the analysis the attractiveness the medical device market depends on market size in the host country and growth potential of the host country. As was shown in table 9 Poland and the Czech Republic represent the most attractive medical device markets in CEE at this moment. If we compare this to our findings in the case study we see that all international MDMs use an equity mode in Poland and almost all (except for Philips) use an equity mode in the Czech Republic. Furthermore, Hungary is the 3rd most attractive market and GE is now starting an equity mode there. Together we see that the attractiveness of the market is positively related to equity entry mode choices. Therefore we accept hypothesis 2a based on the case study that supports the proposition that a more attractive host market increases de likelihood equity entry modes by MDMs.

Transition Indicators Poland Romania Hungary Slovakia Slovenia Bulgaria Estonia Latvia Lithuania Ukraine Croatia Serbia

Large scale privatisation 3.67000 3.67000 4.00000 4.00000 3.00000 4.00000 4.00000 3.67000 4.00000 3.00000 3.33000 2.67000

Small scale privatisation 4.33000 3.67000 4.33000 4.33000 4.33000 4.00000 4.33000 4.33000 4.33000 4.00000 4.33000 3.67000

Enterprise restructuring 3.67000 2.67000 3.67000 3.67000 3.00000 2.67000 3.67000 3.00000 3.00000 2.33000 3.00000 2.33000

Price liberalization 4.33000 4.33000 4.33000 4.33000 4.00000 4.33000 4.33000 4.33000 4.33000 4.00000 4.00000 4.00000

Trade & Forex system 4.33000 4.33000 4.33000 4.33000 4.33000 4.33000 4.33000 4.33000 4.33000 4.00000 4.33000 4.00000

Competition Policy 3.33000 3.00000 3.33000 3.33000 2.67000 3.00000 3.67000 3.33000 3.33000 2.33000 3.00000 2.33000

Banking reform & interest

rate liberalization 3.67000 3.33000 3.67000 3.67000 3.33000 3.67000 4.00000 3.67000 3.67000 3.00000 4.00000 3.00000 Securities markets &

non-bank financial institutions 4.00000 3.00000 4.00000 2.67000 3.00000 3.00000 3.67000 3.00000 3.33000 2.67000 3.00000 2.00000

Overall infrastructure reform 3.67000 3.33000 3.67000 3.33000 3.00000 3.00000 3.33000 3.00000 3.00000 2.33000 3.00000 2.33000 Telecommunications 4.00000 3.33000 4.00000 3.67000 3.33000 3.67000 4.00000 3.33000 3.67000 2.67000 4.00000 3.00000 Railways 4.00000 4.00000 3.67000 3.00000 3.00000 3.33000 4.00000 3.67000 3.00000 2.00000 2.67000 3.00000 Electric power 3.33000 3.67000 3.67000 4.00000 3.00000 3.67000 3.33000 3.33000 3.33000 3.00000 3.00000 2.33000 Roads 3.67000 3.00000 3.67000 2.67000 3.00000 2.67000 2.33000 2.33000 2.33000 2.33000 3.00000 2.67000

Water and waste water 3.67000 3.33000 3.67000 3.33000 3.33000 3.00000 4.00000 3.33000 3.33000 2.00000 3.33000 2.00000

Average 3.83357 3.47571 3.85786 3.59500 3.30857 3.45286 3.78500 3.47500 3.49857 2.83286 3.42786 2.80929

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