Managerial Implications

Our study suggests a first-mover advantage for foreign enterprises that invest early in a transitional economy like China. Because of the lack of information and the immaturity of market institutions, the risks faced by first movers are very high, but they may be able to shape the institutions and set the industry standards for the followers. As the first ones to bring new institutions to China, they have the opportunity to persuade, coach and train local

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partners to adopt the rules of the game in which they have excelled. These institutions may not be suited to the local environment entirely, and therefore adaptation is necessary. Early investors who successfully adapted the transplanted institutions to suit the local environment accumulated institution-specific knowledge to sustain their competitive advantages. They became the role models to be imitated by latecomers and the resulting mimetic behavior gradually led to a formation of industry norms. The networks that were established by early entrants became more powerful when more followers joined the system. The leaders of the system increased their centrality and brought more resources under their control as the network expanded. Such a process engenders a positive network externality to benefit the original architect of the network. This is exactly the case of Master Kong, which was the first foreign investor to introduce instant noodles to China. Master Kong became synonymous with instant noodles in China. The way Master Kong distributed instant noodles became the norm of the industry practices, and the distribution network it established became one of the most resourceful platforms for food distribution. Master Kong was able to exploit the valuable network assets for its new product lines outside instant noodles, such as drinks and dairy products that were never produced by modern technologies before Master Kong came to China.

As a latecomer, it would have been very difficult for PFC to break the business models instituted by Master Kong, which were already “imprinted” in the local business community.

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Local wholesalers and retailers would have been suspicious of new ways of doing business, and even if they were willing to experiment with the new models, extra costs would have arisen from maintaining a dual system to accommodate two distinctive business models. On the other hand, there were good reasons for PFC to join the networks that were already functional. It saved PFC the costs associated with training downstream retailers, who also liked to see alternative suppliers increase their product variety, hence realizing economies of scope. By adopting the same type of organizations and processes as Master Kong, PFC reduced the risks of failure because Master Kong was its chief competitor anyway. However, the joining of PFC, which is Taiwan’s largest food producer, gave the distribution network established by Master Kong even more legitimacy, which in turn, allowed Master Kong to extend its network to other regions or to deepen its reach to smaller retailers. When its network power was sufficiently strong, Master Kong could even replace a regional agent with a wholly-owned subsidiary, hence allowing it to discriminate against the PFC products.

Of course, this “first-mover advantage” will be realized only if the early entrants survive the hostile environments, and it is not always the first ones that succeed in becoming the market leaders.

The research on institutional environments and organizational behaviors has identified three types of mimetic behaviors, namely frequency-based, trait-based, and outcome-based imitations (Haunschild & Miner 1997). The case of PFC imitating its predecessor, Master

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Kong, can be classified as trait-based imitation whereby PFC adopted the practices that were considered “legitimate” because its practitioner was prestigious, large, and successful. The legitimized practices are not necessarily the most efficient ones, however. Our study of the PFC case reveals that firms that adopt the same practices create a network effect that encourages the followers to join the bandwagon. Mimetic behaviors occur not because of legitimacy consideration which is important in an uncertain environment (DiMaggio &

Powell 1983; Abrahamson & Rosenkopf 1993), but also because imitation breaks the entry barrier to the established network.

One kind of institution that has been conspicuously missing in terms of influencing the entry mode decisions of foreign investors in China, at least in the area of food distribution, is professional norms. Because of the short history of marketization in China, few professional associations have been established, and there is no distinct set of obligations and responsibilities that is commonly-recognized by practitioners within the distribution industries.

Private enterprises have yet to play an important role in China’s economy and

“professionalism” is still superseded by political ideologies even today. Although the Chinese government has transplanted several Western professional accreditation systems into China, they have yet to become a “filter” for practitioners like those in Western countries (DiMaggio

& Powell 1983). Industry associations, which are dominated by state-owned and cadre-managed large enterprises, mainly serve as a conduit for political campaigns or for the

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dissemination of official policies rather than as an autonomous sanctioning mechanism like those in Western countries. They play an insignificant role in terms of establishing codes of conduct for their members, or in expressing professional opinions on issues of social concern.

Under communist rule, all professions had to serve political purposes. Professionals were sometimes intimidated or deliberately ridiculed by the authorities to make them submit to policies.

When professional norms are missing, regulative institutions and relation-based institutions serve as the major forces in constraining economic behaviors. Relation-based institutions usually operate at the personal level, and regulative institutions are tied to political powers. Therefore political and personal connections are particularly important when doing business in China. When professional norms are missing, business network ties seem to be the closest substitute, and those who are able to establish the largest business networks will have the power to construct a proxy for industry norms. MNCs have attempted to impose Western professional norms on China, but they have succeeded only partially because of a lack of network ties to support their campaigns (Cooper et al. 2002).