MSc THESIS IB&M
“ENTREPRENEURIAL EXPERIENCE OF EUROPEAN
ENTERPRISES DURING THEIR MARKET ENTRY
PROCESS IN PARAGUAY”
AUTHOR
Sebastian Zundl | S1834363
s.zundl@student.rug.nl
SUPERVISOR
Dr. Florian A.A. Becker-Ritterspach
CO-ASSESSOR
Drs. Henk A. Ritsema
TABLE OF CONTENTS
0. ABSTRACT ... 5
1. INTRODUCTION... 6
2. LITERATURE REVIEW AND GENERAL BACKGROUND ... 8
2.1. Drivers of Market Entry into Emerging Markets ... 8
2.1.1 Entry Mode... 10 2.1.2 Entry Time... 11 2.1.3 Firm Size ... 13 2.1.4 Cultural Distance... 13 2.1.5 Economic Distance... 14 2.1.6 Country Risk ... 15 2.1.7 Openness ... 16
2.2. Paraguay and the Mercosur ... 17
2.2.1 Business Geography of Paraguay... 18
2.2.2 Political Environment of Paraguay ... 20
2.2.3 Economic Facts about Paraguay ... 21
2.2.4 Role of Paraguay in the Mercosur... 25
2.3. Research Gap and Research Question... 26
3. METHODOLOGY... 29
3.1. Research Background and General Procedure ... 29
3.1.1 Type of Research and Measurement Model... 29
3.1.2 Data Sources... 31
3.1.3 Organization and Time Planning... 32
3.2. The Sample Cases ... 33
3.2.1 Case Propositions ... 33
3.2.2 Case Selection ... 34
3.2.3 Interview Layout ... 35
4. DATA AND RESULTS... 37
4.1. The Sample Cases ... 37
4.1.1 Sample Company 1 ... 37
4.1.2 Sample Company 2 ... 41
4.1.4 Sample Company 4 ... 48
4.1.5 Executive Summary ... 52
4.2. The Control Interviews... 54
4.3. Evaluation and Discussion of the Propositions ... 57
4.4. Drivers of Market Entry in Paraguay ... 60
4.4.1 Firm Level: Firm Strategy... 61
4.4.2 Country Level: Hard Location Factors... 63
4.4.3 Country Level: Soft Location Factors ... 64
4.5. Answer to Research Question ... 66
5. CONCLUSION ... 68
5.1. Implications for European Enterprises ... 68
5.2. Theory Development and Academic Contribution ... 71
5.3. Limitations ... 72
6. BIBLIOGRAPHY ... 73
7. APPENDIX ... 81
7.1. Figures and Graphs... 81
7.2. Research Preparations ... 84
7.3. Interview Transcripts... 86
7.3.1 Non-Anonyms Interviews ... 86
TABLE OF FIGURES
Figure 1: General Drivers of Market Entry Success/Failure... 10
Figure 2: Geographic Location of Firms in Paraguay... 19
Figure 3: Conceptual Model... 30
Figure 4: Measurement Model ... 31
Figure 5: Case Study Propositions ... 34
Figure 6: Evaluation Scale of the Independent Market Entry Variables... 58
Figure 7: Drivers of Market Entry Success/Failure in Paraguay ... 61
Figure 8: Original Model: Maslow’s Hierarchy of Needs ... 69
Figure 9: Adapted Model: Hierarchy of Needs in Paraguay... 70
Figure 10: Relative Number of Firms in Paraguay (Geographically Segmented) ... 81
Figure 11: Geographic Distribution of Selected Branches in Paraguay... 81
Figure 12: Paraguayan Balance of Trade 1991-2008 in Million USD... 82
Figure 13: Balance of Trade of the other Mercosur States 2000-2008 in Million USD ... 82
Figure 14: Number of Employees in Paraguayan Firms in 2002... 83
0. ABSTRACT
This study examines the effect of different market entry modes and different entry times on the entrepreneurial experience of European firms in Paraguay. A qualitative research design based on ethnographic techniques investigates four European sample firms and their experi-ence in the Paraguayan business market. In the course of the research, strong support for the variable market entry mode is found and a marginal influence of the variable market entry time is identified. Furthermore, additional relevant country-level and firm-level variables are identified that influence entrepreneurial experience of European firms in Paraguay. According to the 4 sample cases and 26 conducted control interviews at expert level in Paraguay, this study concludes with a new market entry model composed of 7 firm-specific and country-specific variables for European firms in Paraguay.
1. INTRODUCTION
This study analyses drivers of market entry success and failure. In detail, the research focuses on the experience of European firms that enter in the Republic of Paraguay. This issue is highly relevant, as the market entry in new markets is an up-to-date topic, as more and more firms decide to internationalize (Williamson and Zeng, 2009). A successful internationaliza-tion strategy implies a market entry process in different countries and regions that embrace developed and emerging market economies (Williamson and Zeng, 2009). Today, interna-tional-oriented firms focus augmented on emerging market countries and regions as they are generally stronger represented in developed countries than in emerging markets (Levich, 2001).
Besides investments in Asian countries, India, and Easter Europe, also the South American business region Mercosur becomes more and more appreciated in terms of foreign invest-ments (Krivonos, 2000; Rao and Teegen, 2001). In this regard, the four Mercosur members Argentina, Brazil, Paraguay, and Uruguay profit since the foundation of the Mercosur in 1991 from increasing international recognition (Bremser, 2004) and rising foreign direct invest-ments (Carranza, 2006). Focusing on the literature about the Mercosur, there are already sev-eral academic business studies about market entry issues in Argentina, Brazil, and Uruguay. As there is hardly available academic research about Paraguay, this paper focuses on the mar-ket entry into that country.
Consequently, this study contributes to the literature as it is the first academically based mar-ket entry study about Paraguay. In this study, the common country-specific and firm-specific market entry variables as defined by Choo and Mazzarol (2001), Keillor, Davila, and Hult (2001), Johnson and Tellis (2008), and Shi, Ho, and Siu (2001) are discussed. In particular, the thesis aims to give evidence about the effect of the two firm-strategy level variables ENTRY MODE and ENTRY TIME on the ENTREPRENEURIAL EXPERIENCE of Euro-pean firms in Paraguay. Furthermore, general conclusions about other significant market entry factors that have a positive or negative effect on entrepreneurial experience in Paraguay are identified. Finally, this study develops a new market entry model valid for European firms that aim to invest in Paraguay. The market entry model is composed of seven variables that are similar to the existing literature divided into firm-level and country-level issues.
2. LITERATURE REVIEW AND GENERAL BACKGROUND
2.1. Drivers of Market Entry into Emerging Markets
Using academic literature, this chapter discusses the main drivers of economic success and failure of enterprises that decide to internationalize by entering foreign markets. A special focus will be on emerging markets, as this study investigates the market entry experience of European firms in Paraguay, an emerging market economy in South America. Before this chapter discusses the relevant market entry success factors, it first depicts the academic back-ground why companies decide to internationalize. The profound focus on the reasons for in-ternationalization is therefore important, as this thesis will identify in the results and conclu-sions section that success factors are strongly dependent on the host country context and on the company internal motivation to internationalize.
Generally, the main intention of companies to enter foreign markets consists in the opportu-nity to improve their local and global competitiveness (Kotler and Bliemel, 2001; Williamson and Zeng, 2009) as well as to maximize the opportunities for long-term corporate survival (Kotler and Keller, 2008). During the internationalization process from the home country to the geographically new host country, the corporate motivation and future entrepreneurial aims of the company must be clearly defined to be able to develop a suitable market entry strategy (Greve, 2000). According to Phatak, Bhagat, and Kashlak (2004) there is a variety of motiva-tions to internationalize for companies that imply distinct entry strategies and proceedings. In this context, corporate motivation to enlarge business activities from the home market to a new host market might contain both, i.e. proactive market entry factors (e.g. Briggeman, Gunderson, and Detre, 2006; Fershtman, Manajan, and Muller, 1990; Ghosh and Saha, 2007; Kotabe, Sahay, and Aulakh, 1996) and reactive market entry factors (e.g. Gunay, 2008; Moul-ton and Thomas, 1988; Wisch, 2007).
mar-ket entry strategy usually aims at building up early mover advantages into the host marmar-ket and at building up barriers for competitors (Briggeman, Gunderson, and Detre, 2006).
In contrast to the proactive factors, the reactive reasons are driven by a competitive pressure that forces a company to fight for market share and base their internationalization decision on this strategic pressure (Moulton and Thomas, 1988). The reactive pressure might derive from a direct or indirect competitor that enters a certain business region and the company is afraid of losing market share in that target market to its competitor (Gunay, 2008). Furthermore, declining domestic sales that force a company to search for new target markets abroad are a classical reactive factor (Wisch, 2007).
It is remarkable that proactive and reactive reasons for internationalization are valid for both, i.e. developed and emerging market economies. In this context, Williamson and Zeng (2009) point out that a global growing strategy in competitive markets always includes the market entry in developed and emerging markets to operate on a broad basis and to maximize effi-ciency towards competitors. The increasing importance of the emerging markets is further underlined by strong financial investments into those markets, particularly since the early 1980s (Levich, 2001). The main reason for this development besides the classical argument of cheaper production facilities and lower taxes (Bremser, 2004; EU Commission, 2004; Moses, 2008; Senior Nello, 2005) is also due to a large aggregate buying power of emerging socie-ties, even if the individual income and buying power might be much lower than in developed countries (Prahalad and Hammond, 2008). Similar to that, Khanna and Palepu (2008) and Khanna, Palepu, and Sinha (2008) expose that welfare and buying power generally increases by means of larger foreign investments into those markets. Consequently, the strong invest-ments into emerging markets since the 1980s as depicted by Levich (2001) increased wealth and buying power so that emerging markets are interesting as production market and product target market.
Coming along with an increasing willingness and necessity for enterprises to enter foreign markets to remain competitive, it is crucial to define the actual factors for market entry suc-cess and failure. As a foreign market entry prosuc-cess generally requires an individual strategy for a certain country or region (Rodríguez, 2008), several unique cross-boarder determinants that are characteristic of a certain geographical business area, must be considered (Gerpott and Jakopin, 2008). In the context of market entry success, Johnson and Tellis (2008) defined seven economic drivers on the firm- and country-level that influence later success or failure of enterprises in foreign markets.
(cf. 2.1.2), and FIRM SIZE (cf. 2.1.3) as well as the four country-level variables CULTURAL DISTANCE (cf. 2.1.4), ECONOMIC DISTANCE (cf. 2.1.5), COUNTRY RISK (cf. 2.1.6), and OPENNESS (cf. 2.1.7) influence corporate success in foreign markets. Other authors such as Choo and Mazzarol (2001), Keillor, Davila, and Hult (2001), and Shi, Ho, and Siu (2001) define in their methodology similar market entry variables differing in terminology but expressing mainly similar market entry success and failure factors as Johnson and Tellis (2008).
Figure 1: General Drivers of Market Entry Success/Failure
FIRM LEVEL Entry Mode
Firm Strategy
Entry Time
FIRM LEVEL
Firm Resources Firm Size
COUNTRY LEVEL Cultural Distance Historical Success
Host-Home Location
Economic Distance
COUNTRY LEVEL Country Risk
Host Characteristics
Openness
Source: Johnson and Tellis (2008)
2.1.1 Entry Mode
The different market entry modes differ mainly in terms of the level of control that the home company exercises over its subsidiary in the host market and the total risk of the FDI in the host country (Brouthers, 2002; Herrmann and Datta, 2002). The control level ranges from high to low, depending on the individual entry mode (Makino and Neupert, 2000) and in-cludes the firm’s ability to influence systems, methods, and decisions in the host market (Bradley and Gannon, 2000). In the context of different entry modes, Choo and Mazzarol (2001) found out, that basically the following four entry modes – i.e. (1) acquisition, (2) wholly owned subsidiary, (3) licensing, and (4) franchising – are the common modes chosen by foreign firms. Phatak, Bhagat, and Kashlak (2004) categorize those four entry mode into the two main categories “Wholly Owned International Choice” and “Cooperative Interna-tional Choice”. According to their differentiation, “Wholly Owned InternaInterna-tional Choice” em-braces the entry modes acquisition and wholly owned subsidiary and “Cooperative Interna-tional Choice” contains the forms of licensing and franchising. More general, Pan and Tse (2000) distinguish between equity-based entry modes and non-equity-based entry modes in-fluencing the risk level in the host country. In their model, licensing and franchising form part of the non-equity entry modes and acquisition and wholly owned subsidiary form part of eq-uity-based market entry.
Similar to Brouthers (2002) and Herrmann and Datta (2002), Phatak, Bhagat, and Kashlak (2004) agree that the higher the level of control over the local subsidiary is, the higher is also the risk of market failure. Therefore, a variety of studies (e.g. Cristina and Esteban, 2002; Driscoll and Paliwoda, 1997) argue that in the case of a relatively high cultural distance be-tween home and host country, a low-control entry mode should be used to reduce market fail-ure risks. Leung, Rigby, and Young (2003) further emphasize that market entry failfail-ure can therefore be reduced by entering with a local partner to profit from his experience and to spread risks.
2.1.2 Entry Time
According to the literature, first movers generate direct advantages over their competitors that enter the market at a later point of time (Poulsen, 2007), as the longer operating experience of first movers in the foreign market often creates a market entry barrier for late entering com-petitors (Briggeman, Gunderson, and Detre, 2006). Market entry barriers for late movers are further aggravated by established reputation effects and the first moving companies benefit in the host market from their experience. Thus, later entrants have to cope with expensive learn-ing effects to operate on the same experience level in the foreign market as the first movers already do (Heritier, Knill, and Mingers, 1996). In addition, first movers are often able to benefit from financial competitive advantages as they can often operate in a monopolistic way before late movers join the market (Cottrell and Sick, 2005). In this regard, they can exploit the advantage to be the first one offering a new type of product to the host market (Lieberman and Montgomery, 1988).
Nevertheless, it is important to consider that in the academic literature mainly positive exam-ples of first moving companies are dealt with those companies that failed are in most studies not included. To this extent, it is crucial to point out that first movers have a much higher fail-ure rate than late movers (Rhee, 2006). Moreover, late movers can reduce technological ex-penses and market specific uncertainties in target markets profiting from the experience of first moving companies (Spence, 1984). Therefore, late movers can benefit from the pioneers’ experience in the foreign market (Shamsie, Phelps, and Kuperman, 2004) although they are confronted with higher establishment and learning costs as exposed before by Heritier, Knill, and Mingers (1996). Experience-based benefits of late movers derive principally from lower technology and R&D expenditure in comparison to first movers (Suarez and Lanzolla, 2005) and from advantages deriving from free-rider effects (Lieberman and Montgomery, 1998). To this end, late movers can reach cost efficiency as their imitation costs are usually lower than the innovation costs that first movers have to deal with (Spence, 1981; 1984).
2.1.3 Firm Size
The influence of the variable firm size is controversially discussed in the context of market entry success drivers. Some researchers (e.g. Choo and Mazzarol, 2001; Leung, Rigby, and Young, 2003; Phatak, Bhagat, and Kashlak, 2004; Shi, 1998; Shi, Ho, and Siu, 2001) argue that larger companies – measured by number of employees, annual turnover, and market share – can easier enter successfully into foreign markets than their smaller counterparts. It is as-sumed that they can easier deal with the local industry dynamics in the host market (Resende, 2007). On the other hand, authors like Giordano (2008), Klette and Kortum (2004), and Svet-ličič, Jaklič, and Burger (2007) argue that market entry success is not correlated with firm size, so that SMEs are not inferior to MNCs.
Following Shi (1998), larger enterprises have the advantage of already established brand names and export networks that facilitates the market entry process and reduces their failure rate in the foreign market. Therefore, bigger firms tend to be more efficient in equity-intensive entry modes than their smaller counterparts (Leung, Rigby, and Young, 2003). The main reason for their higher efficiency is due to scale economies (Phatak, Bhagat, and Kashlak, 2004), reducing operative costs and increasing total efficiency (Kasman, 2005). Due to different levels of scale economies and reputation effects, SMEs and MNCs will need to select different entry modes and individual strategies to operate successfully in a foreign mar-ket (Choo and Mazzarol, 2001; Shi, Ho, and Siu, 2001).
Apart from the fact that scale economies from larger enterprises are an important factor to increase efficiency in a new host market, also smaller companies can create an individual unique selling proposition (Giordano, 2008). Svetličič, Jaklič, and Burger (2007) prove that SMEs often focus on niche markets so that their competitive strengths in exactly based in their exclusive business segment. Therefore, both MNCs and SMEs can operate efficiently in their segments (Klette and Kortum, 2004).
2.1.4 Cultural Distance
According to Ghemawat (2001) cultural distance strongly influences market entry success, as in case of a large cultural distance between the host and home country, the entring company will have difficulties to adapt to the host country cultural environment. Therefore, manage-ment has to react with internal strategies to different business surroundings in the home and host markets (Evans, Mavondo, and Bridson, 2008).
study disclose further dimensions to evaluate cultural differences in a foreign country context (Diehl, Terlutter, and Mueller, 2008; Javidan, Stahl, Brodbeck, and Wilderom, 2005). All cultural distance studies focus mainly on distinct cultural, language, and social norms that affect foreign market entrants (Ghemawat, 2001).
Consequently, a large cultural distance between two countries increases the market entry risk for a home company operating in that host market (Driscoll and Paliwoda, 1997). Therefore it must be considered that the larger the cultural distance, the necessary it is to include a local partner to reduce the failure risk (Cristina and Esteban, 2002). In terms of possible entry modes in highly risky markets, a foreign company will be more likely to choose a non-equity-base entry mode (Driscoll and Paliwoda, 1997). More precisely, foreign companies prefer joint ventures to acquisition when the cultural distance with regard to the host market is large (Jung, 2004) as local partners generally help to reduce the corporate failure risk. Thus, a large cultural distance between home and host market can be reduced (Leung, Rigby, and Young, 2003). To avoid large cultural distances and not being dependent on a local partner, foreign businesses generally search for countries with small cultural distance to keep failure risk cal-culable and maintaining a high level of control in the target market (Evans, Mavondo, and Bridson, 2008).
2.1.5 Economic Distance
Similar to the cultural distance between two countries, the economic distance also influences the success of a firm entering a new host market (Driscoll and Paliwoda, 1997). More pre-cisely, economic distance is defined as a measure of economic disparity between the home country and the host country (Ghemawat, 2001). The economic distance further affects a firm’s strategic activities and behavior in the host market (Yan and Gray, 1994).
Generally, the market entry risk increases when the economic distance between the home country and the host country is large (Evans, Mavondo, and Bridson, 2008). It is remarkable that this statement is valid for both directions, i.e. risk occurs when the host market is more developed as well as when the host market is less developed than the home country (Tsang and Yip, 2007). Consequently, differences in economic development between two countries are correlated with the risk of the market entry process. Generally, foreign companies are more willing to invest in markets that are similar to their home economy framework, because the internal risk evaluation can be realized more efficiently in similar markets than in totally different market surroundings (Hosseini, 2008).
and similar buying attributes and even a related buying power from the consumers can be ex-pected (Hochreiter and Siklos, 2004). Moreover, similar economic development is often in-dicative of the country’s infrastructure. In this context, it can be expected that infrastructure such as airports, roads, and railways are similarly available in the host country, so that estab-lished corporate distribution networks can be used (Ghemawat, 2001). Altogether, a small economic distance between a home country and a host country is favorable for companies that intend to enter a new market.
2.1.6 Country Risk
The variable country risk affects the entire market entry process, as the higher the risk of a host country, the higher is also the threat of uncertain incidents for a foreign company enter-ing the host country (Brouthers, 1995; 2002). Followenter-ing the definition of Erb, Harvey, and Viskanta (1995), the country risk is composed of three different factors that embrace political, financial, and economic sources. More general, a difference is made between contextual risk and transactional risk (Dikmen and Birgonul, 2004; Jacobides and Winter, 2007; Jung, 2004; Ojala and Tyrväinen, 2007; 2008; Rodríguez, 2008).
The contextual risk components describe all those risk sources that deal with the market envi-ronment. Following Rodríguez (2008), foreign investors are confronted with a political risk whenever a functioning institutional environment is endangered by an instable political sys-tem in a host country. This further implies that the host country accepts foreign ownership (Agarwal and Feils, 2007; Ojala and Tyrväinen, 2008) so that the market entrant is allowed to play an active role in an alliance, network, or a wholly owned subsidiary (Ojala and Tyrväinen, 2007; 2008). Moreover, also currency and financial stability (Jung, 2004) as well as the security of financial sources and funds (Dikmen and Birgonul, 2004) in the host coun-try must be evaluated.
The transactional risk components deal with the company’s internal risk deriving from possi-ble opportunistic corporate behavior of the foreign investor (Johnson and Tellis, 2008). In this context, it must be ensured that a firm’s management really has an appropriate understanding of the economic context in the host market (Jacobides and Winter, 2007). Besides the pure economic understanding, the comprehension of the host market also comprises an understand-ing of cultural issues and peculiarities of the host country (Dikmen and Birgonul, 2004; Jung, 2004). Therefore, lower risk countries will attract FDIs more easily than higher risky ones (Agarwal and Feils, 2007).
modes, whereas a higher country risk often motivates a firm to enter by means of non-equity-based market entry modes (Morschett, Schramm-Klein, and Swoboda, 2008). More precisely, when a higher country risk is given, foreign firms tend to enter by means of local partnerships such as joint ventures. In the case of a relatively low country risk, foreign firms often enter a host market by means of Greenfield investments or acquisitions. Those entry processes are usually made without a local partner in the host country (Jung, 2004).
2.1.7 Openness
The openness of a country is indicative of the market entry regulations and possible barriers for foreign firms (Johnson and Tellis, 2008). In line with most academic papers, Balle and Vaidya (2002), Batten and Vo (2009), as well as Chen, Imbs, and Scott (2009) argue that open and liberal countries are more attractive for foreign firms to invest. Therefore open countries are more able to increase their national welfare than less open ones. Nevertheless, Chang, Kaltani, and Loayza (2009) add that although economic openness is definitely an im-portant welfare variable of a country, it must be considered in the context of several other macroeconomic variables.
In terms of open and liberal markets, Batten and Vo (2009) conclude that economic openness positively affects the FDI flows into a national economy. Consequently, the more open and liberal a country is, the higher are the country’s chances to attract more foreign investments in one or more business sectors. Balle and Vaidya (2002) further found a positive correlation between the openness of a national economy and its macroeconomic welfare development. In this context, the attraction of new competitors creates a higher competition level among com-panies, which often comes along with falling prices and rising productivity in the national economy (Chen, Imbs, and Scott, 2009).
2.2. Paraguay and the Mercosur
This chapter investigates relevant issues concerning the Republic of Paraguay and the com-mon Southern American business market Mercosur. Particularly the business and economic issues will be discussed in detail in this chapter, as it serves as the basis for the later research process. In this regard, Paraguay specific issues are elaborately investigated in order to con-trast the later expert interviews and case study interviews with the country-specific issues in-vestigated in this section. Thus, this chapter focuses on business geography and demographic issues (cf. 2.2.1), Paraguay’s democratization process from a dictatorship to a democratic free-market economy (cf. 2.2.2), its general economic situation (cf. 2.2.3), and its role in the context of the common Southern American business market Mercosur (cf. 2.2.4). Due to hardly available academic sources that deal with the aforementioned issues I integrated mainly available data of reliable institutions such as the Paraguayan Ministry of Industry and Commerce (MIC), the Paraguayan Governmental Export Network (Rediex), the United States Agency for International Development (US AID), the Paraguayan Central Bank (BCP), and the German-Paraguayan Chamber of Industry and Commerce Abroad (AHK).
Generally, the foundation of the common Southern American business market Mercosur in 1991 aimed at improving political integration and economic development for the member states (Arieti, 2006). More precisely and following the Mercosur Constitution Treaty in its original form the following major goals are pursued with the foundation: (1) A higher foreign consideration of the four Mercosur member countries Argentina, Brazil, Paraguay, and Uru-guay should be reached. In this context, it is exposed that new trading partners should be at-tracted to raise trade with the member countries and FDI flows into the region should be in-creased. (2) Enhancing research and development (R&D) expenditure in common technologi-cal projects should further help every single Mercosur country to attract higher FDI flows. It is argued that an increasing R&D expenditure elevates the human capital and makes the member countries more interesting to foreign firms. (3) Similar to increasing human capital additional expenditure in infrastructure should also contribute to a higher attentiveness of the Mercosur members.
Mercosur is a step to improve the competitiveness of the Mercosur members, as every country in the Latin American economic union receives higher consideration of trading partners from the NAFTA, the EU, and the ASEAN business area (Carranza, 2006).
Although the Mercosur region is becoming ever more important for external business regions, detailed overall academic research has been conducted only for Argentina and Brazil as well as for minor parts for Uruguay. Focusing on Paraguay, there are only few areas that have been investigated in current academic literature. In the context of academic publications, general technological issues of Paraguay in the context of the Mercosur are discussed (Urquidi, 2005) especially when the development of the Internet is concerned (e.g. Hahn, 1999). Furthermore, the increasing university education level over the last few decades is elaborately described in current academic literature (e.g. Correa and dos Santos, 2004; de Oliveira and Guimarães, 2004). Apart from educational issues, also social and cultural changes since the democratiza-tion process from 1989 onwards and the foundademocratiza-tion of the Mercosur in 1991 has been studied in several paper such as Barber et al. (2008) and Leal and Malaguti (1996).
On the business and management level, da Cunha and Robredo (1993) describe the changing business market in Paraguay and positive effects for its national economy as presented by Rojas Barreto (1996). Nevertheless, the majority of academic business related studies focus on positive developing effects of the Paraguayan national economy in the context of the Mer-cosur business union. Special attention is paid to the benefits resulting from increasing trade of Paraguay with various trading partners and until now none academic information is avail-able about market entry issues and success drivers in Paraguay.
2.2.1 Business Geography of Paraguay
As presented in the map below, Paraguay is composed of 17 federal departments that differ considerably in terms of population density and industrialization. The most important cities in terms of economic activity and population are the capital Asuncion and Ciudad del Este. Asuncion is not only important for being the public Administration center, but also because it is the largest city of Paraguay and at the same time the headquarters of most significant com-panies in Paraguay and the production location of many major comcom-panies. Apart from the capital, the second most important city is Ciudad del Este, which is the shopping and trading capital of Paraguay (Schüller and Wagner, 2005; Sosa de Servín and Torres, 2009). Following the current annual report from 2009 of the Paraguayan Governmental statistic department DGEEC, 38.89% of the population lives in the region Central where there is also the capital and 11.50 % live in Alto Paraná where the City Ciudad del Este is located (Sosa de Servín and Torres, 2009). Thus, foreign investors need to be aware of the fact that the commercial area of Paraguay is strongly concentrated in two regions. Furthermore, most parts of the coun-try are only sparsely populated and economically not important.
Figure 2: Geographic Location of Firms in Paraguay
Paraguay's main trading partner are the other three Mercosur states Argentina, Brazil, and Uruguay so that the major parts of their exports remains in the Mercosur area and also the majority of national imports derive from one of the three Mercosur members (Republic of Paraguay, 2009; US AID, 2006). Their main export goods are all agricultural products and raw material that are listed in detail in the sub-chapter on economic facts about Paraguay (Re-public of Paraguay, 2003). Exports are mainly carried out by ship using the harbors next to the river Río Paraguay to bring the export goods to the larger sea harbors in the other Merco-sur countries Argentina, Brazil, or Uruguay (US AID, 2006). Moreover, Paraguay has two international airports that are located in the capital Asuncion and the trading city Ciudad del Este which, however, are less important for exportation and only interesting for passenger accommodation.
Following the CIA’s World Fact Book (2009), Paraguay has a low population density and a very young population. Thus, its population density amounts to only 15 inhabitants/m2. This is mainly due to the relatively unpopulated parts in the west of Paraguay where the Gran Chaco, an arid and very hot lowland region is located. In the Gran Chaco region, there are some federal departments, in particular Alto Paraguay and Boquerón in the geographic north-western parts that have almost no industry or inhabitants. In this context only 3% of the Para-guayan population lives in the Gran Chaco region that makes about 60% of the country’s area (Schüller and Wagner, 2005). With a median age of 21.9 years, the Paraguayan population is relatively young compared with the other Mercosur States, where the median age is 30 years in Argentina, 28.6 years in Brazil, and 33.4 years in Uruguay.
Considering the geographic location of firms in Paraguay, it is remarkable that they are highly concentrated in the region Central that includes the capital Asuncion (cf. Appendix 7.1). 75% of all the Paraguayan firms are located in the region of Central, 40% of them directly in the capital Asuncion (Republic of Paraguay, 2003). Similar to the population distribution in Para-guay, the second most important area is Alto Paraná where the City Ciudad del Este is located (Sosa de Servín and Torres, 2009).
2.2.2 Political Environment of Paraguay
Paraguay’s form of government is a presidential system that is democratically elected by the population. The democratic political system in the Republic of Paraguay is, however, a rela-tively young form of government, since up to 1989 the country was governed by a dictator-ship of the former General Alfredo Stroessner. Thus, the development process from a dicta-torship to a democratic state took place in the last 20 years.
it easy for Stroessner to take over the power in Paraguay. Several adaptations of the Para-guayan Constitution and federal laws made it possible to maintain the power of the regime. Stroessner created a legal environment disregarding human rights and implementing the own moral concepts and values in the Paraguayan society.
During the dictatorship in Paraguay, the rest of the world isolated the Republic of Paraguay. The isolation is on the one hand due to the totalitarian regime and the aforementioned disre-gard of the human rights. On the other hand Stroessner’s protection policy and acceptance of former Italian and German war criminals worsened Paraguay’s reputation abroad. Thus, the international image of Paraguay deteriorated in the period of the 1950s until the late 1980s before Stroessner lost his power in a military coup in 1989. Only the late democratization process after the 34-years-dictatorship improved that image and enabled Paraguay to join the Mercosur and improve its international relations.
2.2.3 Economic Facts about Paraguay
In comparison with Argentina, Brazil, and Uruguay, Paraguay has the lowest GDP and GDP per capita in the entire Mercosur region (World Fact Book, 2009). Paraguay’s 2007 GDP amounted to 11,798 million USD, which corresponds to a GDP per capita of 2,116 USD diex, 2008a). Considering that Paraguay has a total population of 6,009,143 inhabitants (Re-diex 2008b) its economic active workforce amount to 45.52%, i.e. in absolute terms 2,735,646 people (Rediex 2008a).
Focusing on the buying power of the Paraguayan population, richness is unequally distributed as the richest 10% consume 91 times more than the poorest 10% (Republic of Paraguay, 2009). This makes Paraguay one of the most unequal countries worldwide in terms of money distribution between the rich and the poor (United Nations, 2008). The difference in the in-come distribution is further underlined by the fact that the payment of more than 2/3 of the Paraguayan workers and employees is below the monthly national minimum wage of 1,341,775 PYG, corresponding to 268.36 USD1 per month (Republic of Paraguay, 2009). The issue of unequal wage distribution among the Paraguayan active workforce is a current topic in Paraguay, as the amount of very poor people and very rich people steadily increases (Rediex, 2008a; Republic of Paraguay, 2009). Undertaking a general classification into poor, very poor, and non-poor people in Paraguay, it is remarkable that the amount of poor people has been reduced in the last years. Nevertheless, in the same period of time, the amount of very poor people increased strongly and the amount of non-poor people also increased, but to a much lower extent than the number of very poor people (Sosa de Servín and Torres, 2009).
1
con-In its efforts to cope with the poverty issue and unequal wage distribution, the Republic of Paraguay (2009) basically defines three main reasons for poverty. These reasons are (1) the high number of family members, that amounts to an average 5.5 persons/family in the cities and 5.9 persons/family in the rural areas. (2) Poverty is aggravated by the low Paraguayan average educational level and (3) by serious sanitary problems that often lead to preventable illnesses among the poorer population.
Apart from the poverty, Paraguay is often considered too unattractive for FDI because of the market’s lack of transparency (Moses, 2008) and the Paraguayan business market has only a marginal purchasing power due to its relatively poor inhabitants (Rediex, 2008a; Republic of Paraguay, 2009). Furthermore, the political instability compared with the other Mercosur states and the high level of corruption also deter foreign companies from investing in the Re-public of Paraguay. Even in the context of Paraguay’s relatively low wage level (ReRe-public of Paraguay, 2009) it must be economically evaluated that this competitive advantage is in sev-eral business sectors confronted with a low educational level and low labor productivity in Paraguay (Moses, 2008).
Nevertheless, the aforementioned competitive disadvantage of a small and poor domestic market must be evaluated in the context of the entire Mercosur business market. Thus, accord-ing to the Constitution of the Mercosur, companies producaccord-ing in Paraguay have the right to export free of any barriers into the whole Mercosur area, comprising the richer national economies of Argentina, Brazil, and Uruguay (Carranza, 2006; EU Commission, 2004; Senior Nello, 2005). When focusing on the aforementioned fact that the major part of Paraguayan exports goes anyway into the Mercosur, (Paraguayan Central Bank, 2009; Republic of Para-guay, 2003), Paraguay’s competitive disadvantage of a too small business market (Moses, 2008) must objectively be weighed against the Paraguayan competitive advantages such as low production costs (Republic of Paraguay, 2009) and low labor costs (Moses, 2008; Rediex 2008a; 2008b).
Similar to its low wages and production costs, Paraguay is also attractive in terms of its low tax rates. In this context, Paraguay offers the lowest regional tax rate, ranging between 10 and 15 % (Moses, 2008). Moreover, also its rich natural resources and fertile agricultural ground are important arguments for foreign companies to invest in Paraguay (Rediex, 2008b). Never-theless, Paraguay uses many resources inefficiently and is not able to realize long-term finan-cial advantage out of its resources to increase national wealth (Moses, 2008). The best exam-ple for this are the world-leading hydroelectric power plants Itaipú and Yacyretá that produce efficiently energy, that is, however, sold at low prices far below the market price to neighbor countries.
The main cost driver is Paraguay’s geographic location in the center of Latin America, so that exports that go outside the Mercosur must first be transported to the large sea harbors to Ar-gentina, Brazil, or Uruguay (US AID, 2006). Nevertheless, only international exports outside the Mercosur are negatively affected as in the context of exports into the Mercosur area that are mainly realized by trucks, Paraguay profits from its geographic location in the centre of the Mercosur (Paraguayan Central Bank, 2009; Republic of Paraguay, 2003; Republic of Paraguay, 2009).
Considering the statistical investigation of the Republic of Paraguay (2003), it becomes obvi-ous that industrial production and administration is generally located in Asuncion and the re-gion of Central, whereas agricultural production is mostly located outside the rere-gion of Cen-tral (cf. Industry Distribution Map in Appendix 7.1). In this context, medical and optical manufacturing firms are completely located in Asuncion. Similar to that, 62% of the firms producing non-specified electric goods are located directly in Asuncion and 28.5% in the rest of the region Central. Only 9.5% of those firms are located in other parts of Paraguay. An opposite tendency can be observed for the agricultural production such as tobacco products, where only 7% of the firms are located in Asuncion and 28,5% in the region of Central, whereas 64,5% are located in the other regions of the country (Republic of Paraguay, 2003). Within the different enterprises and their distribution over the various parts of Paraguay, it is remarkable that enterprises and companies tend to be relatively small in terms of employees (cf. Appendix 7.1). Thus, about 75.5% of the companies and enterprises have between 1 to 10 employees, 10.4% between 11 and 19, 8.1% between 20 and 49, and 6.0% more than 50 (Re-public of Paraguay, 2003).
Apart from the negative balance of trade, Paraguay features a surplus in its national budget of 0.9% measured in GDP. This surplus allows Paraguay to grant tax advantages to investors and to offer a variety of economic liberties making the country interesting for FDI (Rediex, 2008b; Moses, 2008). Generally, Paraguay’s liberal business policy pays off and helps its national economy to cope with the current global financial crisis. Following the Economic Climate Index2 study of the German ifo Institute (2008; 2009) and the Brazilian IBRE Insti-tute (2008) Latin American countries such as Paraguay are only marginally affected by the current economic crisis and are not that strongly affected in terms of economic climate than European countries or the United States (ifo & IBRE, 2008; ifo, 2009). Particularly, the Mer-cosur countries Uruguay, Brazil, and Paraguay brave the crisis in the global context with high scores in the Economic Climate Index. In the Latin American ranking, the Mercosur members Uruguay (Rank 1), Brazil (Rank 3), and Paraguay (Rank 4) outperform the other Latin American states (ifo & IBRE, 2008).
Similar to the current Economic Climate Index, Paraguay also ranks relatively well in the cur-rent World Bank (2008) Doing Business Index3. Although its ranking position declined from number 69 in the previous year (World Bank, 2007) to number 82 in the current year (World Bank, 2008), it is still a positive ranking for a third world country. According to the World Bank (2008), the main reason for the decline in rank is mainly due to the difficulty to employ highly educated workers and employees in Paraguay. In the benchmark with the other Merco-sur countries, Paraguay stands out for the relatively low duration of 35 days within a corpora-tion can be founded. The attractiveness of Paraguay for foreign investors is further underlined by the Heritage Economic Freedom Index 20094. In this index, Paraguay ranks number 79 out of 179 investigated countries (Miller and Holmes, 2009). Similar to the previous indexes this ranking is higher-than-average in the context of developing countries and positive for Para-guay. Particularly in the Mercosur context, Paraguay performs well, as only Uruguay (rank 38) is better ranked than Paraguay and Brazil (rank 105) and Argentina (rank 138) perform worse (Miller and Holmes, 2009).
2
The “Economic Climate Index” measures the attractiveness of different markets and calculates on the basis of different measures a ranking presenting the business atmosphere in a particular country or region in comparison to other countries and regions.
3
The “Doing Business Index” of the World Bank uses indicators to analyze economic outcomes of 181 economies, evaluates which reforms have worked in each national economy, and presents in subsections for investors which economy is profitable to invest in.
4
2.2.4 Role of Paraguay in the Mercosur
Considering the entire Mercosur region, Paraguay is a small nation in the demographic and economic context. Although Paraguay with its 6 million inhabitants has about 1.75 times more inhabitants than Uruguay (3.45 million), it is, however, much smaller compared with Argentina (40.5 million) and Brazil (198.5 million) (Bremser, 2004; Carranza, 2006). Measur-ing its economic importance in terms of GDP and GDP per capita, Paraguay ranks the least important Mercosur country (World Fact Book, 2009). Argentina and Brazil are demographi-cally and economidemographi-cally the most powerful countries in the Mercosur, although in the global context, Brazil is considerably more powerful than Argentina (Paraguayan Central Bank, 2009; Rediex 2008a; 2008b).
2.3. Research Gap and Research Question
This chapter defines the research gap, the research intention of the study, and formulates the actual research question. Deriving from the research question, three sub-questions will be affiliated that embrace the major components of the research question. In addition, the aca-demic relevance for the research is briefly justified in this chapter and presented in detail in the methodology part in chapter 3.
As presented in the introductory section and in the literature part, the issue of the market entry into the four Mercosur member states is an up-to-date topic for European businesses. In par-ticular the following three economic hard facts justify a detailed analysis of the Mercosur business region. (1) Foreign investments of European businesses into Argentina, Brazil, Para-guay, and Uruguay have strongly increased since the foundation of the Mercosur (Bremser, 2004). (2) Coming along with increasing FDI flows into the Mercosur countries, all four member states achieved also a higher European recognition (Carranza, 2006) and (3) trade between Europe and the Mercosur increased in that period (EU Commission, 2004; Senior Nello, 2005). Although the Mercosur exists since 1991, academically-based studies in terms of market entry issues have never been realized for Paraguay. In this regard, there are several business studies of the Mercosur members Argentina, Brazil, and Uruguay, but only marginal research on Paraguay. Consequently, my study deals with the research gap to be the first aca-demic-based investigation of relevant market entry characteristics in Paraguay focusing on related drivers of success and failure.
I will base my investigation on common country-specific and firm-specific variables that have been recognized by other existing market entry studies such as Choo and Mazzarol (2001), Johnson and Tellis (2008), Keillor, Davila, and Hult (2001), as well as Shi, Ho, and Siu (2001). Although none of the available studies deals with the Republic of Paraguay as a target market, the variables used in that research can be applied in my study to evaluate the compo-nents of market entry success and failure in Paraguay. As expressed before and defined by Gerpott and Jakopin (2008) and Rodríguez (2008), I will also pay special attention to certain geographically and cultural determinants that might be different in the European and Para-guayan context.
In particular, I consider the seven country-specific and firm-specific variables defined by Johnson and Tellis (2008). To ensure a clear research specialization, I will explicitly focus on the firm-strategy variables MARKET ENTRY TIME and the MARKET ENTRY MODE of
will further be justified following the assumptions of Faust (2002) who found similar results in his investigation about the relations between the European Union and the Mercosur. Thus, Faust (2002) came to the conclusion that both, i.e. the entry mode and the entry time, have the strongest influence on the success of European firms in each of the four Mercosur countries. To develop the research question of my study, I take into consideration the fact that market entry success and the related entrepreneurial experience of European firms in the Mercosur will highly be influenced by the firm-strategy variables MARKET ENTRY TIME and the
MARKET ENTRY MODE (Choo and Mazzarol, 2001; Faust, 2002; Johnson and Tellis, 2008;
Keillor, Davila, and Hult, 2001; Shi, Ho, and Siu, 2001). Consequently, I define the firm-strategy variables MARKET ENTRY TIME and the MARKET ENTRY MODE as independent
variables for my method. Thus, I will evaluate the experience of European enterprises in Paraguay in the context of the two defined independent variables. Thus, I define the variable ENTREPRENEURIAL EXPERIENCE as the dependent variable and I set up the following research question:
To what extent are different market entry modes and different points of time relevant to the market entry experience of European enterprises in the Paraguayan business market?
Focusing on the components of the research question, a line of sub-questions is defined in order to investigate the market entry topic comprehensively. Separate from the research ques-tion, the analysis must focus on the applicability of the academic argument that a market entry without a local partner in a higher-control strategy over the local subsidiary increases the fail-ure risk and contributes generally to a worse entrepreneurial experience in the host market (e.g. Brouthers, 2002; Herrmann and Datta, 2002; Phatak, Bhagat, and Kashlak, 2004). Figur-ing out whether the market entry with or without a local Paraguayan partner is more likely to be related with a positive entrepreneurial experience, I set up the following sub-question:
Sub-question 1: To what extent does a market entry process with or without a local partner influence the entrepreneurial experience in Paraguay?
Chandy and Tellis (2000), Lieberman and Montgomery (1998), Min, Kalwani, and Robinson (2006), Rhee (2006), Shamsie, Phelps and Kuperman (2004), Spence (1981; 1984), as well as Suarez and Lanzolla (2005), are affecting entrepreneurial experience more strongly in Para-guay must be answered. To this end, the experience of firms that entered at different time points needs to be analyzed and the following sub-question must be researched:
Sub-question 2: To what extent do distinct market entry times influence the entrepre-neurial experience in Paraguay?
Apart from the firm-strategy variables ENTRY MODE and ENTRY TIME depicted before, relevant location factors of Paraguay must also be analyzed to understand the overall entre-preneurial experience in Paraguay and to draw final conclusions. Thus, the competitive strengths of Paraguay’s liberal business market (Peña, 2005; Peña and Rozemberg, 2005) and the weaknesses defined in the literature section must be evaluated. In this regard, positive and negative location factors are contrasted and the real attractiveness of the Paraguayan market for European firms can be assessed. In detail, the competitive advantage of low taxes (Moses, 2008; Rediex 2008b), the cheapest labor costs in the Mercosur (Moses, 2008; Rediex 2008a), the favorable geographic location of Paraguay (Paraguayan Central Bank, 2009), and free trade opportunities (EU Commission, 2004; Paraguayan Central Bank, 2009; Senior Nello, 2005) must be contrasted with the economic and social disadvantages in Paraguay. Finally, the following sub-question must be investigated:
3. METHODOLOGY
3.1. Research Background and General Procedure
This chapter presents the general academic background and procedure of the research. In sub-chapter 3.1.1, the research procedure of this paper is presented. In detail, it explains the re-search techniques, defines the variables, and sets up a conceptual and measurement model. Once the modeling is completed, subchapter 3.1.2 presents the major data sources used for the research. Last, subchapter 3.1.3 presents the time planning for the investigation process in the sample firms in Paraguay.
3.1.1 Type of Research and Measurement Model
Following the methodological conclusions of Gill and Johnson (2005) and Marschan-Piekkari and Welch (2005), this study will use inductive research techniques to answer the openly formulated research question and its sub-questions. More precisely, a qualitative investigation approach will be applied, as the research gap defined before underlines an unknown research topic that aims at providing newly-made insights into the subject of the Paraguayan market entry. The qualitative investigation will be based on case studies that embrace narrative inter-views and participant observations as major research techniques. In this context, I will follow the research implication from Gill and Johnson (2005), Marschan-Piekkari and Welch (2005), as well as Yin (2003), that ethnography is one of the most efficient research techniques to generate unknown data from hardly investigated issues such as the topic of market entry suc-cess drivers for European Businesses in Paraguay.
Academically formulated, this study will investigate the impact of the independent variables MARKET ENTRY TIME and MARKET ENTRY MODE on the dependent variable MARKET
ENTRY EXPERIENCE that foreign enterprises had in the Paraguayan business market. Following
the literature on market entry drivers in emerging markets (cf. chapter 2.1), the conceptual model below assumes that both independent variables have an impact on the dependent vari-able MARKET ENTRY EXPERIENCE.
Ger-man SMEs operating in Paraguay which all offer a promising product or service in the Para-guayan market.
The reason why this study concentrates explicitly on the firm strategy variables ENTRY MODE and ENTRY TIME is due to the results and findings from similar market entry studies covering other business regions. Thus, both variables are identified to be strongly correlated with entrepreneurial experience in the host market. In order to investigate the conceptual model below, the two independent variables need to be more precisely defined in the follow-ing section.
Figure 3: Conceptual Model
Independent Variable 1
Market Entry Time
Dependent Variable
Sample Firm’s Experience
Independent Variable 2
Market Entry Mode
In terms of the MARKET ENTRY TIME variable, a difference must be made between foreign
companies that entered the Paraguayan market before the foundation of the Mercosur (i.e. before 1991 = T1) and those enterprises joining Paraguay after the economic union came into
effect (i.e. after 1991 = T2). Following the assumptions from the literature review part, e.g.
Bremser (2004), Carranza (2006), EU Commission (2004) and Senior Nello (2005), this time differentiation is justified by the economic fact that all Mercosur members, particularly Para-guay and UruPara-guay, became economically more interesting for FDI from 1991 onwards as foreign trade increased and economic growth was accelerated. Therefore, different entrepre-neurial experience before and after the foundation of the Mercosur are expectable.
Focusing on the MARKET ENTRY MODE variable I follow the assumptions from McLarty
(2000), Peña (2005), and Peña & Rozemberg (2005) that the entry mode is characterized by the interplay between the risk level of the market entry operation and the degree of control that a foreign investor has over its subsidiary. Following Brouthers (2002), Herrmann and Datta (2002) as well as Phatak, Bhagat, and Kashlak (2004) the failure risk decreases when a local partner is involved but at the same time the control of that firm over the foreign subsidi-ary decreases and vice versa. To cope with the different risk and control levels, this study dif-ferentiates between a market entry process without a local partner (Entry Mode 1 = EM1) and
In this context, I define the measurement model as a 2 x 2 matrix dealing with a multiple case design as proposed by Yin (2003). The matrix comprises four cases that combine the four components Entry Time 1 (T1), Entry Time 2 (T2), Entry Mode 1 (EM1), and Entry Mode 2
(EM2). Defining the cases to evaluate the experience of the German sample enterprises in
Paraguay, Case 1 measures the experience of the first sample company that entered at the En-try Time 1 using the EnEn-try Mode 1. For Case 2 EnEn-try Time 2 and EnEn-try Mode 1 will be de-fined, Case 3 implies a combination of Entry Time 1 and Entry Mode 2, and case 4 will meas-ure the experience of a sample enterprise that entered at Entry Time 2 using Entry Mode 2. The cases defined before are graphically illustrated in the measurement model below.
Figure 4: Measurement Model
T1 T2
EM1
Experience Sample Enterprise 1 * (T1/EM1)
Experience Sample Enterprise 2 * (T2/EM1)
EM2
Experience Sample Enterprise 3 * (T1/EM2)
Experience Sample Enterprise 4 * (T2/EM2)
* = Experience of the individual Sample Enterprise at its predefined Time (T) and its Entry Mode (EM)
3.1.2 Data Sources
The selection of the sample companies for the research was realized in cooperation with the Paraguayan Ministry of Industry and Commerce (MIC), the governmental Paraguayan export network Rediex, and the German-Paraguayan Chamber of Industry and Commerce Abroad (AHK). The combination of German and Paraguayan governmental institutions was mainly done because of their expert knowledge of German enterprises operating in Paraguay. Conse-quently, the risk of inaccurate results deriving from unsuitable sample companies that do not fulfill the predefined variables is minimized.
Besides my observations and interviews with the four sample companies, I arranged further interviews at expert level to verify the reliability of the case studies. In this regard, additional experts on company level and institutional level were selected. On the company level, I inter-viewed executives and managers of diverse companies operating in Paraguay. On the tional level, I interviewed executives from distinct departments of the governmental institu-tions AHK, MIC, and Rediex.
addi-tional input about success drivers in Paraguay, this study further includes 26 addiaddi-tional inter-views with 16 different experts. The transcripts of the most relevant interinter-views are attached in condensed version in the appendix 7.3.
3.1.3 Organization and Time Planning
The research process to investigate the experience of the four sample firms and the expert control interviews have been realized in Paraguay in a two months period. The overall re-search process in Paraguay was based on three steps that comprised (1) an initial interview section at expert level, (2) the actual sample case research, and (3) concluding expert inter-views to assess the results and conclusions in terms of their validity.
First, initial interviews with representatives from the governmental institutions MIC, Rediex, and AHK as well as with managers of distinct Paraguayan companies were realized. The ba-sic idea of the first step was to discuss the initial assumptions and ideas of the study with the experts, to gain new insights into the market entry issue that might be relevant for the case study research, and possibly to adapt the research procedure. For step one, a realistic time-frame of two weeks, i.e. 10 working days, was calculated.
Second, the actual case study investigation took place in the four sample firms. For each sam-ple firm, I calculated a workload of 3 to 4 working days. The investigation in every company comprised interview sections with 3 to 4 executives as well as a 1 day observation procedure of the working processes and general talks on the work floor level. To make sure that the short time planning of 3 to 4 working days would be met, appointments for the interviews and the observation process had been arranged for in advance.
Third, concluding expert interviews were conducted to discuss the results with pre-selected experts. Similar to step one, the experts were all members of the governmental institutions MIC, Rediex, and AHK supplemented by executives from selected Paraguayan companies. The justification of the final step in Latin America is based on the implications from academic research literature, e.g. Marschan-Piekkari and Welch (2005) and Yin (2003), stating that one or more sample companies might be unable or unwilling to answer certain questions. The time planning for the final step in Paraguay took about 5 working days, i.e. 1 week.
3.2. The Sample Cases
This chapter focuses on the methodology of the sample cases that are investigated in this study. Based on the literature, subchapter 3.2.1 provides a forecast of the four sample cases before the case selection is justified in subchapter 3.2.2. Last, subchapter 3.2.3 provides an exploration of the individual components of the interview outlines that are used to interview the sample firms’ management and the control experts.
3.2.1 Case Propositions
Focusing on the measurement model and the literature assumption about drivers of market entry success and failure, it can be assumed that the investigations in each of the four sample firms result in different observations. In this context, I assume that the different entry times T1
and T2 as well as the different entry modes EM1 and EM2 influence the German sample
com-panies’ experience in Paraguay.
According to the academic literature, a company that enters a foreign market usually benefits from the market experience of a local partner (e.g. Leung, Rigby, and Young, 2003). The partner’s experience generally helps to reduce cultural barriers in the host- and home-country context (e.g. Herrmann and Datta, 2002). Although the operational failure risk for a foreign company diminishes when a local partner is involved, its degree of control decreases too (e.g. Makino and Neupert, 2000). Particularly when the cultural distance between the home and host country is large, as it is the case with Germany and Paraguay5, foreign companies are usually better off with a local partner (e.g. Driscoll and Paliwoda, 1997). Considering the implications from the literature, I predict that the market entry with a local partner (EM2) is
more promising for foreign companies than the market entry without a local partner (EM1).
With reference to the market entry time, I also follow the general assumptions of the literature section. According to Shamsie, Phelps, and Kuperman (2004) as well as Suarez and Lanzolla (2005), late moving companies usually profit from the experience of the first movers. Learn-ing from their experience, late movLearn-ing firms can further profit from imitation effects and ap-ply free-rider strategies (e.g. Lieberman and Montgomery, 1998) to reduce their failure risk (e.g. Rhee, 2006). Consequently, I predict that late-moving companies that entered Paraguay after 1991 at entry time T2 will have a better entrepreneurial experience than their
early-moving competitors that entered Paraguay before 1991, i.e. entry time T1.
Focusing on the propositions made before, the positive or negative effects of the MARKET ENTRY MODE components EM1 and EM2 as well as the MARKET ENTRY TIME components
5
intro-T1 and T2 from the measurement model can be allocated to the four sample firms. To use a
simple mathematic evaluation scheme for the different entry modes and entry times of the sample companies, I assign a minus sign (-) to EM1, a plus sign (+) to EM2, a minus sign (-)
to T1, and a plus sign (+) to T2. Applying this mathematical evaluation to the original
meas-urement model, the following proposition matrix results for the four sample cases of the re-search:
Figure 5: Case Study Propositions
T1 T2
EM1
Experience Sample Enterprise 1 *
- / -
Experience Sample Enterprise 2 *
- / +
EM2
Experience Sample Enterprise 3 *
+ /
-Experience Sample Enterprise 4 *
+ / +
Following the model, I predict that a company entering Paraguay with a local partner (EM2)
and after 1991 (T2), such as sample enterprise 4, will exhibit the best entrepreneurial
experi-ence in Paraguay. However, companies that enter without a local partner (EM1) and before
1991 (T1), such as sample enterprise 1, will perform inferior than the other three sample
en-terprises. The sample enterprises 2 (EM1 / T2 = - / +) and 3 (EM2 / T1 = + / -) will, according
to my predictions, both perform inferior than sample enterprise 4 but superior than sample enterprise 1.
3.2.2 Case Selection
The selection of the sample cases was realized in cooperation with the Paraguayan Ministry of Industry and Commerce (MIC), the Paraguayan governmental export network Rediex, and the German-Paraguayan Chamber of Industry and Commerce Abroad (AHK). Those institutions were involved because of two reasons. (1) Those organizations have the best knowledge of foreign enterprises in Paraguay and due to their knowledge it was guaranteed that the prede-fined variables are strictly considered in the selection of sample enterprises. (2) I followed the academic implications of Gill and Johnson (2005) and Yin (2003) that reliable institutions such as AHK, MIC, and Rediex increase a company’s willingness to participate in the re-search process.
This email is also attached in a Spanish and an English version in appendix 7.2. Within 5 working days, 4 relevant firms were found and allocated to the 4 sample cases. At the end of the selection process, appointments with managers and executives for the interview sessions were arranged and the general proceeding of for observation process on the work floor of the sample firms was reviewed with the experts.
Sample Company 1 is a medium-sized Paraguayan stock corporation (S.A.) that was founded by a German family in the 1950s (i.e. T1) without a local partner (i.e. EM1). The sample
com-pany operates in the printing sector and offers mainly graphic design and every type of print-outs for commercial customers. Moreover it produces security checks for banks and financial firms, produces labels and packaging designs for manufacturing companies, and offers web designs.
Sample Company 2 is a small to medium-sized Paraguayan stock corporation (S.A.) founded in 2002 (i.e. T2) without a Paraguayan partner (i.e. EM1). It operates in the tourism and
hospi-tality industry. The sample company operates a hotel and restaurants as well as external cater-ing services are offered and events for business customers are organized.
Sample Company 3 is a small to medium-sized Paraguayan stock corporation (S.A.) founded shortly before the South American economic union Mercosur came into effect (i.e. T1) that
entered the Paraguayan market together with a local Paraguayan partner (i.e. EM2). Its
opera-tive industry is the security branch. The sample company mainly offers security services dur-ing events, physical protection for real estates, and transportation of cash and valuable goods to commercial and private customers.
Sample Company 4 is a small Paraguayan limited liability company (S.R.L.) and was founded in 2006 (i.e. T2) with a local Paraguayan partner company (i.e. EM2). It produces heat-isolated
doors and windows. Although all 4 sample companies vary in their products, they all offer promising products and fulfill the evaluation variables defined before.
3.2.3 Interview Layout
The sample case interviews and the control interviews with industry experts were both con-ducted in form of semi-structured interviews. Thus, I followed the academic research conclu-sions from Marschan-Piekkari and Welch (2005) and Yin (2003), that a rough guideline dur-ing interview-based research serves best to shed a light on relatively undiscovered issues. As the market entry issue in Paraguay has never been the subject of academic research until now, the semi-structured interviews were chosen to question possible unexpected answers and to deepen unique experience of the interviewees during the conversations.
