Tuesday, March 18, 2014

Going Abroad to Fail, or to Succeed? Experience Matters

The current news is that the negotiations of a merger between apparel chains Fast Retailing and J Crew Group have stopped, at least for the time being. Fast Retailing is the owner of the large Uniqlo chain of clothing stores, while J Crew has staged a recovery after being taken private in 2011. Despite J Crew’s recovery, there is no doubt that the merger would be a takeover of J Crew by the much larger Fast Retailing, which is now expanding from a solid base in Asia and has stated ambitions to become the largest chain in the US, and in the world overall.

Would the merger have succeeded? Well, any merger can fail simply because it becomes too expensive, and there is no doubt that J Crew’s owners want to be paid well. But more importantly, does Fast Retailing, which started in Japan and has now spread mostly across Asia, know how to do business in the USA? The question may seem strange from the viewpoint of US retailers, which find the USA to be easy and many Asian countries (especially Japan) to be very complicated places to do business. What they overlook is that the US is not easier, just different.

Any place where business happens there are set customs of doing business and set rules for doing business that could easily have been different, and in many places are different. Firms that go abroad try to follow the rules, and adapt to the set customs to the extent they agree that they make sense. The rules and customs are often called institutions, and a big topic in research is just how complicated changes in institutions are in one nation, one industry. But for firms that go abroad, the complications are worse. They change institutions whenever they enter a new nation. They end up competing with firms that don’t experience any changes, because they were already there. Institutions are a major reason expansion abroad is difficult.

So what about Fast Retailing then? Well, research by Susan Perkins recently published in Administrative Science Quarterly shows that firms learn institutions and institutional change. Already being in the US is obviously going to help Fast Retailing. And, having entered many different nations, even in Asia far away from the US, has the potential to teach Fast Retailing how to enter one more nation. This is less obvious because these prior entries give breadth of learning, but they do not give learning that is specifically useful for the US. But breadth also matters, as Perkins discovered. 

The CEO of Fast Retailing, Tadashi Yanai, is known to be confident about his decisions. In the case of a US expansion, he may have reason to do so based on the learning that Fast Retailing has picked up from prior entries.

Spector, M. 2014. Merger Talks Between J. Crew, Fast Retailing Break Down. Wall Street Journal, March 18 2014.