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10.13007/205
Ideas for Leaders #205
Working Abroad: The Value of
Experience
Key Concept
Intuitively, experience reduces the chance of failure. An experienced manager
will make fewer mistakes than the inexperienced manager. The same logic
can be applied to international business activity: companies experienced in
foreign markets are going to fail less frequently than companies without
foreign experience.
New research shows, however, that this assumption is too simple. Previous
experience in a foreign market helps if the company returns to that market. It
also helps if the company ventures into a different foreign market, but only,
the research shows, as long as the situational context between the new
market and the previously experienced market is similar. If the context is
dissimilar, it is actually better to have no experience in foreign countries than
irrelevant experience; previous irrelevant experience becomes harmful.
Idea Summary
Susan Perkins, a professor at Northwestern University’s Kellogg School of
Management, and a visiting professor at MIT’s Sloan School of Management,
sought to empirically measure the role of prior international experience in the
success or failure of a firm’s subsequent international activities. She based
her research on data from the investment activity of 96 foreign-owned firms in
the Brazilian telecom industry between 1997 and 2004. The parent companies
of these firms came from 18 home countries.
Using a variety of methodologies, Perkins was able to determine the
similarities and differences between the regulatory environments of a number
of different countries. This was required so that she could identify compare
the prior foreign environment experienced by the firms in her research with the
environment they were facing in Brazil. The choice of the telecommunications
industry was helpful because of its codified regulatory environment.
Based on the research, Perkins confirmed the following hypotheses and
conclusions:
Multinational firms with prior experience in institutional environments similar to the
target country’s environment are more likely to succeed. In other words, if a firm
experienced with an institutional environment that was similar to Brazil’s is more likely to
succeed than a firm with a foreign experience that was dissimilar to Brazil’s institutional
environment.
The learning penalty from dissimilar experience was disproportionate to the learning
advantage from similar experience. Perkins’ research illustrated that the likelihood to fail
after experiencing a dissimilar environment was much higher than the likelihood to succeed
from experience in a similar environment.
Authors
Perkins, Susan E.
Institutions
Kellogg School of Management
Source
Administrative Science Quarterly
Idea conceived
January 2012
Idea posted
September 2013
DOI number
Subject
Globalization
Cross-cultural Management
Emerging Markets
Global Operations
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The breadth of experience within a target country will have a positive effect on the
chances for the firm’s survival in that market. Based on her research, Perkins determined
that “industry regulation is a function of six institutional dimensions.” These six regulatory
dimensions include: regulatory competitive market structure (e.g., pricing); regulatory
standards; regulatory political competition and regulatory governance structure (both related to
the political power of regulators); and regulatory stability (the effectiveness of the regulatory
agencies). The more experience across the various dimensions, the greater the knowledge
base for a company to draw on for future foreign investments.
The greatest chance for success comes from depth (repetition) of experience. The
more often the firm has repeated the experience in a certain institutional dimension, the more
likely the chance for success. Depth can involve one country or several countries with a similar
context. One firm, for example, has competence centers in its various subsidiaries staffed by
personnel with extensive experience in their environments — people, as one executive
explained, “who have already passed through this experience three, four, five times before.”
Business Application
There are both positive and negative lessons to draw from Perkins’ research:
Do not apply irrelevant experience to a new situation or context. The classic example of
this mistake is the U.S. executive who wants to do things “the way we do it at home.” Perkins
gives the example of a major U.S. telecom firm whose revenue projects were 25 percent less
than expected because it assumed the regulatory market in Brazil was similar to the regulatory
situation in the U.S. Applying irrelevant experience is worse than having no experience at all.
Be aware of the ‘experienced’ international manager who will overestimate future
performance. Experience is invaluable as long as it is in a context that is relevant to the new
situation. The biggest mistakes that managers make is overestimating performance outcomes
and inflating expectations because they assume that their knowledge from another foreign
experience can be plugged into the new host country. When they fail, they assume the cause
was outside market factors — and had nothing to do with their own misguided decisions.
Strategically combine elements of the knowledge pool created by the breadth and
depth of your experience to fit the situation in new markets. You have developed
routines — for example, political strategies to mitigate political hazards — to deal with the
institutional environments in several countries. Combine these “experience-based capabilities”
to address the particular situation of a new institutional environment. For example, if the
regulatory environments in Brazil and Turkey are similar to the environment in India, parse the
prior experiences with the various dimensions (political, market structure, regulatory stability,
etc.) of the first two countries and combine the capabilities that best apply to the situation in
India.
Further Reading
“When Does Prior Experience Pay? Institutional Experience and the Case of the
Multinational Corporation,” by Susan Perkins. Forthcoming, Administrative Science
Quarterly. MIT Sloan School Working Paper 4986-13.
“The Risks and Rewards of Experience Abroad,” Susan Perkins, Kellogg Insight, 5
August 2013.
Further Relevant Resources
Susan Perkin’s profile at The Kellogg School of Management
Kellogg School of Management Executive Education profile at IEDP
© Copyright IEDP Ideas for Leaders 2013
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