As organizations grow to become multinationals, an important decision involves which countries to enter. Conventional wisdom says that repetition leads to efficiency, so the more countries a firm enters, the better its chances for success. However, according to a recent study, the key to success is not the number of countries previously entered, but rather the types of the company's prior experiences.
This and other details are included in the paper that resulted from the research, When Does Prior Experience Pay? Institutional Experience and the Case of the Multinational Company.
The field studies looked at whether it's beneficial for organizations to actually have prior experience before deciding to enter a new country and, if so, which experiences will help versus hinder success. The big question is: "When does prior experience pay and are there penalties for having the wrong type of experience?"
The studies show that when the host country environments are similar to places where the organization has prior experience, it increases their likelihood of survival. For example, if the company is based in Spain and then enters another Spanish-speaking country with similar regulatory institutions, it can accelerate its learning in the host country and have a better chance of success.
In contrast, having dissimilar prior experience makes the firm six times more likely to fail. Failure, in this case, means an unintentional exit from the new market.
According to the study, there is a learning penalty for using the wrong knowledge in a new context that is even greater than the benefit of having the right kind of experience. So, for instance, if a company utilizes experience gained in the United States to enter the regulatory environment in South Korea, it would be six times more likely to fail. If it doesn't adapt, it stands to lose more than it could gain with the right knowledge and experience.
In addition to similarity of experiences, of importance is the impact of breadth of regulatory experiences. Thus, going to 30 countries won't necessarily give a company breadth if those experiences aren't different enough.
So the conventional wisdom about the number of countries being the key factor isn't true if those countries aren't providing a breadth of experience. Companies need a broader base of knowledge. The sequencing of foreign investments is a key success factor.
The survey also reveals that gaining a breadth of knowledge sets up a company to...