by Francine Lafontaine Ross School of Business University of Michigan and
David Leibsohn Ross School of Business University of Michigan
This paper examines the factors that affect not only entry but also the subsequent growth of retail chains within international markets. Specifically, we focus on McDonald’s expansion around the globe. Arguably, McDonald’s has introduced the American concept of fast food and franchising to many foreign markets. Moreover, this firm has by now expanded throughout most of the world. Thus it is of particular interest to examine the international expansion path that this firm has chosen to pursue. The pattern of entry into foreign markets and growth that we observe contradicts the notion that McDonald’s expanded abroad only after saturating existing markets. Instead, we find evidence that consistent with traditional profit maximization arguments for a multi-market firm, as we see McDonald’s allocating resources to achieve growth across many desirable markets, particularly favoring those with higher GDP per capita. More importantly, we find that some of the factors that affect expansion post-entry are different from those that affect entry. We interpret these results as evidence that McDonald’s optimally focuses on those factors that affect profitability post entry whereas it also considers factors that affect the sunk cost of entry ex ante.
Preliminary and incomplete, please do not quote
An extensive body of literature on firm expansion beyond domestic borders in international business has focused on entry, specifically the issues of timing and mode of entry, where the latter typically takes the form of exporting, licensing, joint venture or FDI.1 While this literature has provided useful insights regarding where and how firms enter foreign markets, it treats entry as its own end rather than the beginning of a firm’s foreign market involvement. This focus on entry probably stems in part from the frequent use of manufacturers as the empirical setting for analyzing expansion; a manufacturer can enter a foreign market at the outset with a plant large enough to service the needs of the market for some time to come. In this context, entry rightly may be seen as the end as well as the beginning of a firm’s foreign market investment. But as the U.S. moves increasingly from a largely manufacturing-based economy towards a more service-based economy, understanding how service firms expand abroad becomes increasingly important. And the reality is that service firms typically enter foreign markets with one or a few locations and then expand their geographic coverage of the foreign market over time in their quest for customers. In that case, when and how these firms develop additional locations in foreign markets becomes potentially more important than choosing the timing and mode of entry for the initial location(s). In this paper we employ the empirical context of fast-food franchising to gain a richer understanding of international expansion by service firms within as well as across foreign markets. We focus on the expansion of the firm—McDonald’s—credited with introducing the
See e.g. Hymer 1976; Davidson 1983; Anderson & Gatignon 1986; Teece 1986; Dunning 1988; Gatignon & Anderson 1988; Kogut & Singh 1988; Barkema, Bell & Pennings 1996; Buckley & Casson 1998; Shaver 1998; Mitra & Golder 2002.
Preliminary and incomplete, please do not quote concept of franchising itself to many of the markets where it operates. Most importantly, this firm has by now expanded throughout most of the world. Looking back at the pattern of expansion that it pursued is of particular interest as it allows us to uncover what draws firms to particular markets opportunities before others that we know they will still pursue later. We use data on the number of outlets that McDonald’s...