Mental Models and Successful First‐mover Entry Decisions: Empirical Evidence from Chinese Entrepreneurs

Existing research has identified a variety of mechanisms through which early entrants may be able to develop competitive advantages that favorably influence performance relative to later entrants. At the same time, later entrants can sometimes enjoy cost advantages arising from free riding and the resolution of uncertainty. Despite the impressive array of possible explanations linking entry timing with performance, it is unclear how these explanations align with the cognitive representations that guide managerial decision making. The authors address this gap in the literature by arguing that the resource‐based view of the firm provides potential insight into the way that perceived pioneer advantages and disadvantages influence managerial behavior. The resource‐based view argues that the value of various pioneer advantages will depend on the degree to which those advantages enable pioneers to access and control resources that are costly to copy. Because legal and cultural variables also influence access to resources, the value of specific dimensions of pioneer advantage will vary depending on the macroenvironment within which a firm operates. To test this reasoning, the authors examine the impact of perceived pioneer advantages on the number of first‐mover entry decisions of Chinese service entrepreneurs, who operate in an environment characterized by underdeveloped legal institutions and inadequate legal protections, a fledgling capital market, the limited availability of information about products and industries, and an emphasis on personal connections. The authors hypothesize that these unique characteristics of Chinese markets will affect the perceived importance of sources of pioneer advantage identified in studies of Western (primarily United States) firms. Using data collected from 302 Chinese service entrepreneurs, the authors find strong evidence that the number of pioneer entry decisions made by Chinese entrepreneurs are strongly tied to entrepreneurs’ perceptions that pioneer firms tend to outperform later entrants and have the ability to preempt key assets. In addition, the number of entry decisions is negatively related to perceptions of pioneer cost disadvantages and the level of uncertainty faced by pioneers relative to later entrants. However, consistent with the research hypotheses, perceptions of pioneer leadership and cost advantages do not significantly influence the entry decisions of Chinese service entrepreneurs.     

Firm resources and entry-related advantages: An empirical study in China

The majority of research on order of market entry has focused on market pioneer advantages or the specialized assets that industry incumbents would need to possess. However, relatively little attention has been paid to whether and how certain firm resources or capabilities may provide latecomers with entry-related advantages. This issue is of particular interest when multinational organizations decide to enter emerging markets, such as China, where the transitional economy provides both opportunities and challenges. This study attempts to bridge this gap by discussing the entry-related advantages in terms of pioneer advantages, early follower advantages, and late entrant advantages, and by investigating how each of the entry-related advantages has unique impacts on market performance. In particular, this study examines the relations between innovation management, firm resources, entry-related advantages, and market performance simultaneously with cross-sectional data from 191 firms in China. Our findings reveal that technical resources and skills (R&S), marketing R&S, and market intelligence are associated with different advantages for market pioneers, early followers, and late entrants. Technical R&S is also found to have significant impacts on order of market entry as pioneers. Furthermore, the findings show that remarkable differences exist among the three entrant types (i.e., market pioneers, early followers, and late entrants) in their strategic approaches to attain market performance. We offer implications to foreign firms operating in China or intending to enter China's markets.     

First-mover advantages from pioneering new markets: A survey of empirical evidence

Market pioneers can develop first-mover advantages that span decades. The most general first-mover advantage that helps explain higher pioneer market share levels is a broad product line or brand proliferation. In markets for experience goods, pioneers tend to shape consumer tastes and preferences in favor of the pioneering brand. While the preliminary results vary by industry, they indicate that market pioneers donot tend to perish more often than later entrants. Accounting profits for market pioneers generally are lower in the first four years of operation, but higher thereafter. Overall, market pioneers follow innovative strategies that have high initial costs and risks, but yield high potential returns.     

Are market pioneers intrinsically stronger than later entrants?

Are market pioneers more successful because they started with superior skills and resources? The absolute pioneer advantage hypothesis is that because market pioneering is desirable, firms with superior skills and resources naturally choose to pioneer new markets. The comparative advantage hypothesis is that market evolution changes success requirements. Market pioneer skills and resources differ from, but are not superior to later entrants. Empirical results across 171 diversification entrants tend to support the comparative advantage hypothesis. Skill and resource profiles are provided for market pioneers, early followers, and late entrants.     

The effect of the innovative environment on exit of entrepreneurial firms

To foster ‘creative destruction,’ entrants must survive the turbulent conditions they face in their first crucial years in the industry. We investigate how the external knowledge milieu of an entrant, conceptualized as its innovative environment, causes systematic variation in survival patterns. We test our model from 3,431 firms in 33 industries over 80 years. We depict the innovative environment along two knowledge‐related dimensions, namely technology regime and technology intensity. While the aligned state of the innovative environment, where product innovation exists in tandem with abundant innovation opportunities, promotes entrant survival, we find that this beneficial effect is more pronounced for small entrants due to a possible mitigation of scale disadvantages. Copyright © 2006 John Wiley & Sons, Ltd.     

ENTRY DETERRENCE BY NON‐HORIZONTAL MERGER*

We study when and how pure non‐horizontal mergers, whether cross‐product or vertical, can deter new entry. Organizational mergers implicitly commit firms to more aggressive price competition. Because heightened competition deters entry, mergers can occur in equilibrium even when, absent entry considerations, they do not. We show that, in order to prevent a flood of entrants, mergers arise even when a marginal merger costs incumbent firms more than does a marginal entrant.     

Better late than never: a study of late entrants in household electrical equipment

For the most part, studies on timing of entry have attempted to determine the advantages that early entrants may be able to develop and hold over subsequent entrants. Given that a large number of firms attempt to enter at a much later stage in the development of the market, it is particularly surprising that little research has attempted to examine the differences in the ability of late movers to penetrate the market. In this paper, we focus exclusively on late movers and examine the extent to which their early success can be tied to existing market conditions, their resource strengths, and their strategic positioning. Copyright © 2003 John Wiley & Sons, Ltd.     

A Comparative Study of Pioneer Entry Decisions in the United States and China

According to the resource‐based view of the firm, competitive advantages arise from control and deployment of productive resources that are rare and difficult to imitate. Through early entry, pioneers can gain preferential access to key resources. However, the value of that access depends on the presence of isolating mechanisms that limit or prevent competitive imitation. Isolating mechanisms increase the desirability of early entry by lengthening the time horizon over which the firm can earn Ricardian rents on those resources. To explore these implications of the resource‐based view, this study examines the impact of isolating mechanisms on pioneer advantages by analyzing the market entry timing decisions of 209 U.S. and 302 Chinese entrepreneurs. We hypothesize that the stronger intellectual property and legal protections available in the United States are an isolating mechanism that should increase the perceived importance of differentiation and cost advantages in the United States relative to China. Consistent with this argument, we find evidence that the relationships between the number of successful first‐mover decisions and (1) perceived pioneer differentiation advantages and (2) perceived cost advantages are relatively stronger in the United States than in China. We also argue that the importance of personal relationships in China constitutes an isolating mechanism that should increase the perceived importance of preemptive pioneer advantages in China relative to the United States. Consistent with this reasoning, we find that the coefficient linking perceptions of pioneer preemptive advantages with the number of successful first‐mover decisions is significant in the Chinese sample and not in the U.S. sample, but the difference between these coefficients is not significant. These results provide support for the argument that the availability of strong IP and legal protection encourages early entry decisions by entrepreneurs because these protections enhance the pioneer's ability to build a differentiated position in the minds of target customers and secure a cost advantage over later entrants. The results also support the argument that strong personal connections and the practice of reciprocity play a key role in the success of Chinese entrepreneurs.     

Internet companies' growth strategies: determinants of investment intensity and long‐term performance

To exploit first‐mover advantages, pioneers may be motivated to amass customers before rivals enter the market. Likewise, when they enjoy increasing returns due to network effects, static scale economies, or learning effects, companies have incentives to invest aggressively in growth. This paper presents econometric analysis of factors that determined the intensity of Internet companies' investments in growth, and analyzes the long‐term performance consequences of such investments. Results indicate that first movers spent significantly more on upfront marketing than non‐pioneers. Contrary to expectations, however, firms in markets that exhibited increasing returns did not spend more on their early customer acquisition efforts than other sample companies. Although the typical sample company did not earn positive long‐term returns, heavy early investments in growth were nevertheless economically rational. In most cases, reducing marketing outlays would have worsened a bad outcome, consistent with an inverted ‘U’ relationship between long‐term returns and upfront marketing spending. Thus, the typical sample company invested in marketing, ex ante, at levels close to those that would have maximized returns, observed ex post. Copyright © 2006 John Wiley & Sons, Ltd.     

First mover advantages in international business and firm‐specific political resources

While the currently prevailing conceptual framework of first mover advantages (FMAs) specifies various market mechanisms through which first movers can gain pioneering benefits, it is incomplete by failing to consider the role of political resources in creating FMAs. In this context, this article aims to add the political mechanism to the current classification of FMA mechanisms. The article further serves as a window to an understanding of the long‐term process of acquiring, sustaining, and exploiting firm‐specific political resources in international business, which has been neglected in prior studies on business–government relations. Detailed analysis of three case studies suggests that the causal relationship between political resources and FMAs is a complex one; while non‐market strategies can be used successfully by first movers, they can also be used by late movers to neutralize FMAs. The article proposes a model for understanding the link between FMAs and political resources. Copyright © 2006 John Wiley & Sons, Ltd.     

Advances in the competitiveness of pan‐European rail freight services: findings from a case study

The European rail freight market is ostensibly a free market where, from 1 January 2007, both incumbent and new‐entrant operators are able to compete on every line and in every European Union country. The main objective of this research paper is to assess the advances in the competitiveness of the pan‐European rail freight services operated by a new‐entrant (private) operator. Its main focus is to assess and contribute to the understanding of the advances towards competitiveness and the future prospects in the open European rail freight market, including dealing with challenges (e.g. dormant and departure of partners, suspension of the project, indistinct roles and responsibilities of operating partners) at different phases of the research, development and service offerings, that will be an important contribution to the Research and Development (R&D) policy and management arena in the Europe rail freight transport sector. The current research applies a case study research approach. The assessment of the rail freight service is performed by conducting two phases: first, a comparison of the progress between first and second year of the REorganisation of Transport networks by advanced RAil freight Concepts (RETRACK) rail freight service, operated by a new entrant and conducted on the corridor between two hubs – Cologne, Germany, and Györ, Hungary, and secondly a comparison of the opinions of customers on the RETRACK service and its competitors. From the comparative study between the first and second years, the study finds that the new‐entrant operator was able to offer an increased number of services by consolidating cargo from satellite connections at both ends of the operational corridor by adopting a pragmatic and flexible approach. The customer satisfaction survey suggests that the new‐entrant operator offered better service in terms of price, transit time, reliability and information flow/management compared to its competitors' services (offered by incumbent rail operators) on the corridor. However, their service was inferior to that of its competitors, in terms of frequency and availability of service. These less‐well performed service factors have improved gradually over time. The study suggests that intra‐rail competition has improved, but that inter‐modal completion is yet to be achieved. The ups and downs of the project provide important lessons for R&D management, academia and policy makers. The study suggests that a pan‐European rail freight service can be efficiently and effectively run by new‐entrant operators, and this will lead to more intra‐modal competition. However, they have yet to achieve competitiveness that will result in a shift of cargo from road to rail by offering an improved service that at least matches the major attributes of road freight service, e.g. price, transit time, door‐to‐door service and working in a collaborative way with other actors.     

RELATIONSHIPS,COMPETITION AND THE STRUCTURE OF INVESTMENT BANKING MARKETS*

It is well known that competition can destroy incentives to invest in firm‐specific relationships. This paper examines how the tension between relationships and competition is resolved in the investment banking market, which for decades has been characterized by both relationships and competition. The model studies the impact on relationships of four different dimensions of competition: non‐exclusive relationships, competition from arm's‐length intermediaries, non‐price competition, and endogenous entry. The analysis shows how market equilibrium adjusts so that relationships are sustained in the face of such competition. Banks are shown to establish relationships without either local or aggregate monopoly power. The model rationalizes two distinct empirical regularities of market structure: the invariance of market concentration to market size; and a pyramidal market structure with an oligopoly comprising similar‐sized players at the top and a large number of small banks at the bottom. The analysis may also shed light on the industrial organization of other professional service industries.     

The learning curve,technology barriers to entry,and competitive survival in the chemical processing industries

This paper evaluates entry and survival rates in a sample of 39 chemical product industries. The analysis focuses on learning-based cost advantages potentially held by incumbent firms. A logit model of entry gives no evidence that entry decisions were sensitive to the cumulative production lead held by incumbents. Entry was facilitated by the fact that for most products, technology was available from a range of sources. A hazard function model reveals that entrant survival rates were unrelated to order of entry or source of process technology. However, survival was adversely affected when the leading incumbent held a large cumulative output advantage or when entrants built plants of sub-optimal scale. Thus, a large incumbent lead in production experience did not deter new entry but did reduce the entrant'S probability of survival.     

Why Do Firms Enter a New Product Market? A Two‐Dimensional Framework for Market Entry Motivation and Behavior

What are the energetic forces that induce established firms to enter new product markets? While most previous research has explained the economic profits expected from a new product market as firms' distinctive motivation for market entry, some recent studies also emphasize interfirm competition and benchmarking activities as another important factor that motivates firms' new market entry. To explain the established firms' diverse new product market entry behaviors, this study presents a two‐dimensional scheme of entry motivation in terms of the degrees of target market profit focus and competitor focus. The first dimension captures the economic motivation of firms' new market entry that ranges from focusing on the direct expected profits from the target market to considering more strategic/indirect benefit incentives. The second dimension captures the degree of firms' external motivation for entry affected by competitors that ranges from independent entry decisions to fully competitor‐oriented entry decisions. Using multiple‐industry survey data, the current study empirically verifies that these two entry motivation dimensions explain a great portion of actual firms' new product market entry behaviors and that they are independent of each other. Subsequently, this study validates that firms' operational size and their environmental factors like perceived technological uncertainty and competitive intensity upon new market entry affect the degrees of the two dimensions of firms' new product market entry motivation. More specifically, large firms less emphasize target‐market profits than small firms, and when perceived technological uncertainty is high, potential market entrants become less target market profit focused but more competitor focused. Under a highly competitive new market condition, firms focus on both target‐market profits and competitors. Based on the analysis of new market entry motivation dimensions, the current study proposes a new typology of established firms' market entry behaviors. The suggested typology represents the four different types of new product market entrants and examines specific characteristics and entry strategies for each type of potential entrants. This entry‐motivation framework should provide a deeper understanding of the backgrounds of entry behaviors and assist firms in developing appropriate entry strategies and in advantageously responding to rival firms' actions with regard to entry.     

Profitability of small‐ and medium‐sized enterprises in high‐tech industries: the case of the biotechnology industry

This paper investigates the profitability determinants of small‐ and medium‐sized enterprises in high‐tech industries. Literature review suggests that innovator position, market awareness, niche operation, and internationalization should have positive impacts on SMTEs' profitability. However, the empirical results partially agree with, and partially dissent from, the propositions. Copyright © 2003 John Wiley & Sons, Ltd.     

Implications of regulation for entry and investment in the local loop

A number of countries around the world are trying to promote competition at the local loop as demand for higher bandwidth to the home increases. Different technologies (xDSL, cable modems, and wireless local loop) offer alternative solutions and the issue for regulators is to design a framework that promotes competition and investment. Regulators can promote competition in a number of ways, but two “pure” strategies are services and infrastructure competition. This paper models the regulator and incumbent–entrant interactions explicitly in order to understand how the structure of the voice services might evolve under different regulatory frameworks. Our analysis suggests that a “mix” of infrastructure and service competition like the one promoted in Netherlands, stimulates investment by incumbents and entrants alike and offers better consumer benefits. The message for policy makers is that the introduction of “sunset clauses” provides new entrants with strong incentives to invest while allowing them to enter in service competition and to acquire important knowledge about their new market.     

Product development strategies for established market pioneers,early followers,and late entrants

At the time of entry, market pioneers are known for emphasizing major product development projects. After being in the market for many years, however, do market pioneers, early followers, and late entrants maintain different product development strategies? Data from 2273 established manufacturing businesses reveal that market pioneers have the highest probability of engaging in product development, which covers product R&D spending as well as new product sales. Even so, market pioneers and early followers tend to emphasize minor projects, such as product improvements and line extensions. Late entrants are less likely to engage in product development, but those that do tend to emphasize major development efforts. Copyright © 2002 John Wiley & Sons, Ltd.     

Pioneering Advantages and Entrepreneurs' First‐mover Decisions: An Empirical Investigation for the United States and China

New ventures are often launched for the purpose of pioneering an innovative new product or service in the marketplace. Entrepreneurs or founders of new ventures thus often have to make the decision whether to be the market pioneer or the first mover. While being a first mover potentially is advantageous, it also involves taking risks and facing uncertainties. Entrepreneurs must assess the benefits and risks of pioneering in the first‐mover decision‐making process to realize the potential competitive advantages associated with being a pioneer. Previous research has shown how entrepreneurs perceive potential gains and losses associated with exploring opportunities as the key defining element of entrepreneurial decision‐making. Past studies have also indicated that cultural and business environmental factors affect both perceptions and decision‐making. However, studies to date have insufficiently addressed the relationship between entrepreneurs' perceived pioneering advantages/disadvantages and their first‐mover decisions, with little attention to cross‐national differences. This study includes hypotheses postulating how entrepreneurs' perceived advantages and disadvantages of pioneering affect the number of first‐mover decisions made by entrepreneurs in two different cultural contexts, the United States and China. We collect data from 152 U.S. entrepreneurs and 140 Chinese entrepreneurs over a four‐year period and carry out empirical tests on the hypotheses using Poisson regression models. Our results provide insight on how culture affects perceptions of advantages and disadvantages of pioneering, and how these perceptions impact the likelihood of making a first‐mover decision. We find that a higher level of perceived advantages will drive first‐mover decisions, whereas perceived disadvantages will deter first‐mover decisions. The negative effect of perceived erosion disadvantages on the number of first‐mover decisions was higher for Chinese entrepreneurs, consistent with the high risk‐aversion culture in China. However, this effect was not found for perceived uncertainty disadvantages, suggesting that the risk‐averse characteristics of Chinese entrepreneurs is an oversimplification, and that the Chinese cultural, business, and legal environment helps offset uncertainty disadvantages. We also find an interesting positive moderating effect of perceived advantage on the relationship between perceived disadvantages and the number of first‐mover decisions in China only. That is, if perceived advantages are low, Chinese entrepreneurs are more risk averse than U.S. entrepreneurs; but if perceived advantages are high, Chinese entrepreneurs are more risk‐seeking than U.S. entrepreneurs. This finding again challenges the risk aversion conclusion found by previous studies of Chinese managers.     

Switching Costs in Two‐Sided Markets

In many markets, there are switching costs and network effects. Yet the literature generally deals with them separately. This paper bridges the gap by analyzing their interaction (or ‘indirect bargain’) in a dynamic two‐sided market. It shows that in the symmetric equilibrium, the classic result that the first‐period price is U‐shaped in switching costs does not emerge, but instead switching costs always intensify the first‐period price competition. Moreover, an increase in switching costs on one side decreases the first‐period price on the other side. Policies that ignore these effects may overestimate the extent to which switching costs can reduce welfare.