International Business | Diversity and Migration | Asia-Pacific | Europe

Immigrants and their Social Networks Aid Foreign Market Entry

Fast Facts:

  • The “immigrant effect” refers to employing immigrants from a country to which an MNC is expanding to manage operations in that country.
  • MNCs that use the immigrant effect tend to choose FDI (joint ventures or wholly-owned subsidiaries) over exporting as a foreign market entry strategy, because the knowledge and connections that immigrants provide reduce uncertainty and allow the greater resource commitment that FDI requires.

When companies expand to overseas markets, they have to decide what entry strategy to use—should they export their products to the new market, enter a joint venture with a local partner, or set up a own wholly-owned subsidiary in the overseas location? They may also have to deal with significant differences from their home country, in regulations, business practices, and consumer behavior. Navigating these challenges is not easy, but one thing than can help is what is known as the “immigrant effect”: employing immigrants from the target country in key decision-making positions to manage operations in that country. 

Immigrants and their social networks can contribute significantly to the establishment and success of overseas business operations. They offer familiarity with customers, host government regulations, culture, languages, and customs, and often have valuable business contacts.

Rosalie Tung of SFU’s Beedie School of Business and Henry Chung of Massey University (Albany Campus) in Auckland, New Zealand studied multinational corporations with operations in Europe and China to learn more about how they use the immigrant effect to aid foreign market entry. For their research they focused on manufacturing and service firms based in Australia and New Zealand because these countries, like Canada, have opened their doors to immigrants from around the world. 

The researchers found that the greater the dissimilarities between the foreign market and the home market, the more likely MNCs are to rely on the immigrant effect to overcome barriers and resistance associated with market entry. Using immigrants and their networks also affects market entry strategy. Foreign direct investment (FDI), in the form of either joint ventures or wholly-owned subsidiaries, involves a much greater commitment of resources than exporting does, and is therefore considered to be riskier. But the foreign market knowledge that immigrant employees provide reduces uncertainty and risk, so MNCs that place such employees in key management positions are more likely to choose FDI as an entry strategy. 

Other findings from Tung and Chang’s research are that the relationship between the immigrant effect and FDI as a foreign market entry strategy holds in both developed (e.g., New Zealand) and developing (e.g., greater China) regions of the world, and that smaller MNCs are especially likely to rely on the immigrant effect when they enter overseas markets.

The researchers warn that immigrant insights alone do ensure success in new markets. They recommend that companies use a broad variety of means to analyze and gain knowledge and experience concerning a target market. But they stress that immigrants and their social networks are useful to “gather market information and acquire useful business connections when operating in (a) region.”