How Do Managerial Biases Affect Foreign Market Entry Decisions?

Abstract

In this practitioner-focused study, we discuss how cognitive biases impair foreign market entry decisions. Focusing on three factors that are central to the evaluation of foreign markets: cost, control, and uncertainty, we explain how decision-making biases undermine their assessment and the ways in which the biases can be mitigated. Specifically, overconfidence bias and the sunk cost fallacy negatively affect the estimation of entry costs which can be mitigated by a strong governance structure and independent reviews; anchoring and confirmation biases undermine the assessment of an appropriate level of control requiring the use of systematic decision frameworks and decision extension tools; and representativeness and availability biases limit the comprehension of environmental uncertainty suggesting mitigation strategies such as the challenging of internal assumptions and devil’s advocacy. By explicating how managerial biases turn into flawed assessments of foreign markets, our study uncovers the mechanisms that explain and potentially remedy cognitive pitfalls during internationalization.