U p p s a l a U n i v e r s i t y : D e p a r t m e n t o f B u s i n e s s S t u d i e s
Internationalization Motivations of Emerging Market Multinationals Projected From the Angle of Technological Industry:
THE 2x2 MODEL
Master Thesis 2011 08
Fall
Authors Baton Mati Yue Jimmy Shi Supervisor Martin Johanson
27-05-2011
Abstract Abstract
Multinational corporations (MNCs) raised from emerging markets (EM) have drawn enormous attention to the world in recent decades. These internationalization activities have not only signaled characterized features of globalization, but also foreseen the future of strengthened “latecomer” global position emerged from developing countries. However, current studies have shown sufficient lack on research towards motivation behind EM MNCs’ internationalization. Many current theories and models were followed by patterns applied within those more developed countries. Nevertheless, EM MNCs appeared to hold different motivations approaching to internationalization. Thus, this paper documents a series of reasons that triggered EM MNCs to internationalize. In particular, studies carried out from this paper have concluded into a 2x2 Model, which characterized that the EM MNCs’
internationalization motives are incorporated from two perspectives (institutional based and resource based) into two approaches (asset seeking and opportunity seeking). Four case studies of multinationals in technological industry from two emerging markets are included in this paper, in order to attest validity of the 2x2 Model; these multinationals are Lenovo (China), Haier (China), Arçelik (Turkey), and Vestel (Turkey). We believe that technological industry is one of the most significant industries from emerging markets that is intensively involved in international activities; the selected firms have shown devoted global strategies and created certain size of impact in the global market, which is genuinely representative towards our studies.
Key words: Emerging Markets, Internationalization, Multinationals, Motivations, 2x2 Model, China, Turkey, Technological Industry,
Table of Contents iii Table of Contents
Abstract ... ii
Table of Contents ... iii
1. Introduction ... 1
1.1 Background ... 1
1.2 Research Problems ... 1
1.3 Purpose ... 1
1.4 Terminologies ... 2
1.4.1 What do we mean by “Emerging Markets”? ... 2
1.4.2 What do we mean by “Internationalization”? ... 2
1.4.3 What do we mean by “Motives” or “Motivations”? ... 3
2. Literature review ... 4
2.1 Introduction ... 4
2.2 Approaches ... 4
2.2.1 Asset-seeking approach ... 4
2.2.2 Opportunity-seeking approach ... 5
2.3 Perspectives ... 6
2.3.1 Institutional based perspective ... 6
2.3.2 Resource based perspective ... 8
2.4 Literature Conclusion: Prelude of 2x2 Model ... 9
2.4.1 Approaches vs. Perspectives ... 10
3. Methodology ... 11
3.1 Research Strategy ... 11
3.1.1 Why China and Turkey? ... 11
3.1.2 Research Process ... 11
3.2 Case Selection ... 12
3.3 Data Collection ... 13
3.3.1 Overview ... 13
3.3.2 Nature of data ... 13
3.3.3 Reliability & Validity ... 14
4. Case Studies ... 15
4.1 China ... 15
4.1.1 Lenovo ... 15
4.1.2 Haier ... 17
4.2 Turkey ... 19
4.2.1 Arçelik A.Ş. ... 19
4.2.2 Vestel Group ... 21
5. Analysis ... 24
Table of Contents
5.1 Approaches: Asset-seeking vs. Opportunity-seeking ... 24
5.1.1 Asset-seeking ... 25
5.1.2 Opportunity-seeking ... 26
5.2 Perspectives: Institutional based vs. Resource based ... 27
5.2.1 Institutional based ... 28
5.2.2 Resource based ... 29
5.3 Differences between China and Turkey ... 30
5.4 Consolidated review of the 2x2 Model ... 30
5.4.1 Impact of perspectives over approaches ... 31
5.4.2 Approaches defining motivations ... 33
6. Conclusion ... 34
6.1 Limitations ... 34
6.2 Further research proposals ... 35
References ... 36
Appendix ... 41
Exhibit 1: Haier’s major oversea FDI ... 41
Exhibit 2: Case studies comparison chart (Full View) ... 42
1. Introduction 1 1. Introduction
1.1 Background
The rise of MNCs from emerging markets gradually became a characteristic phenomenon in today’s global economy. Studies of international business are also shifting its attention from developed countries to developing countries imperceptibly. Current prevailing internationalization theories and models are comprehensive, but most of which are done upon research of firms in developed countries, who hold easier access to capital and have a more liberal base of political and economic environment. While developing markets still have difficulties into reaching these favorable market economy conditions, MNCs emerging from developing countries may be urged to behave differently when they choose to go international: the motivations behind the strategic decisions towards venturing into international markets might propagate from different conditions as compared to firms from developed markets.
1.2 Research Problems
1. What is the internationalization motivation behind emerging market multinational corporations (EM MNCs)?
2. Are the motivations from emerging market multinationals to go abroad conformant with theories established on developed market experiences, or EM MNCs are prone to exceptional characteristics that can be used to define their internationalization motivations?
3. Can we summarize the motivations into an effective model?
1.3 Purpose
The intention of our research is to find the motivation behind the internationalization of MNCs from emerging markets, using case studies and integrated theory review. Even though studies are shifting attention to emerging markets, there is still deficient research regarding motivations behind EM MNCs internationalization. Acknowledging the rising importance of their position in a global marketplace, there is a necessity to formulate a concentrated analysis. This paper is intended to provide a focused direction of studies to draw attention for researches hereafter to further develop this topic.
1. Introduction 1.4 Terminologies
The main focus of this paper is related to the motivations of multinationals from Emerging Markets towards internationalization. Several terms used herein may have different definition and create confusion, thus we are hereby clarifying these terms in order to establish better understanding of our thesis.
1.4.1 What do we mean by “Emerging Markets”?
When targeting at Emerging Markets, we address countries that are experiencing economic reforms towards market-oriented economies. These countries have come along structural reforms and effectively transitioned from being developing countries. (Li, 2007) Emerging Markets are big economies with broad markets and characterized by high growth rates and increasing global political and economic importance. Due to the nature of our research, the group of emerging market economies will not address smaller-sized developing countries, but rather those that have created stability and confidence in their institutions to enable for free flow of outward and inward investments. (Heakal, 2003)
1.4.2 What do we mean by “Internationalization”?
The subject focused most in this paper are international firms that originated from emerging markets to exercise outward FDI1 in one or more foreign markets, and take efficient control over company itself, along with value-added activities. Under such definition,
“internationalization” in this paper includes, but is not limited to, activities such as oversea subsidiaries, distribution channels, point of sales, etc. Certain types of subject will be excluded from our research due to the characteristic of our research target. We will not consider large import and export companies within their home countries, as outward FDI are not engaged. Companies with insignificant shares of oversea joint venture will be excluded due to lack of efficient control over their units abroad. Fully state-owned enterprises are also the exclusion from our research due to the reason that governmental policy may affect the natural decision of firms, and consequently misdirect our research target. Lastly, our research will not contain oversea investment due to certain financial purposes to solely or mainly aid the headquarter in home country, such as company established in Cayman and Virgin Islands for the purpose of tax evasion, as well as reverse investments. These companies do not generate value-added activities through such internationalization process.
1. Introduction 3 1.4.3 What do we mean by “Motives” or “Motivations”?
According to Cambridge Advanced Learner’s Dictionary, motivation is ‘the need or reason for doing something’. While in this paper we are primarily focused on establishing these motivations or reasons for firms to participate in events that are associated with foreign markets, we take into account the relations between external factors and internal strategies of a firm that leads them towards undertaking internationalization activities. For each firm, there can be different internationalization motivation at separate stages within the firm’s growing history. According to summarization from Preet S. Aulakh (2007), the internationalization attempt can be generalized into three phases:
1. International expansion into other developing country markets;
2. International activities to participate in a global supply network of established multinationals, specifically exporting;
3. Establish global network to compete in more developed markets, associated with value-added products and services in global market (Mathews, 2006).
Our attempt of the analysis of motivation is lying more specifically on the third phrase, summarizing the reasons of multinationals from emerging markets to rather compete on the global market instead of their home markets.
2. Literature review 2. Literature review
2.1 Introduction
The role of emerging markets in the economic scape of the last decades has experienced a measurable increase. Rising from negligible players in global outward FDI in mid-1980s, developing countries reached outflows of $133 billion in 2005, resulting in 17% of the World’s total (UNCTAD, 2006). The development of these trends and the motives of the internationalization offensive by EM MNCs were studied by various researchers (Mathews, 2006; Gaur & Kumar, 2010; Cuervo-Cazurra & Genc, 2008), claiming that the emergence of EM MNCs is pushing for new models and theories.
2.2 Approaches
Historically, the main motivation for firms from developed countries towards internationalization activities through typical Western models follows the path to expand an existing domestic know-how or technology internationally (Aulakh, 2007). However, firms from emerging markets tend to use internationalization process to reach certain benchmarks or improvements to revamp itself, and to gain strength to compete in a broader market stage.
In a simplified comparison view, the motivation of firms from developed countries tend to offer other countries what the firm has already had; on the contrary, firms from developing countries tend to receive from internationalization what the firm does not have, or is not yet capable of reaching. A broad summarization of motivations behind all EM MNCs’ approach towards internationalization can be generalized into asset seeking and opportunity seeking (Luo & Tung, 2007). Approaches in this paper are defined as the different aspects of drivers that influence EM MNCs when they formulate internationalization motivations.
2.2.1 Asset-seeking approach
International business theorists have established that conventionally for a firm to successfully establish international presence, it must already possess superior competitive capability, resources, or know-how within its structure of firm-specific advantages (Chen & Chen, 1998). Whereas this idea holds true, the advances in globalization also brought forth the ever- increasing role of relatively less competitive multinationals from developing countries, which approached internationalization for different motives.
2. Literature review 5 Firms from developed countries with rich experience in foreign markets usually belong to the conventional internationalization theory, since these firms exploit their proprietary assets to multiply or obtain markets other than their home market (Wesson, 1999). Such firms tend to better utilize their resources and rely on their firm-specific advantage to enter new markets;
therefore, their approach to internationalization, which was initially suggested by Hymer (1976), was an asset-exploitation approach. Yet, as Chen & Chen (1998) suggested, many other researchers agree that the recent emerging market MNCs have provided new perspectives as to the motivations and strategic choices of firms going abroad (Sutherland, 2009; Gaur & Kumar, 2010; Pradhan, 2010). These ideas support the approach that not all firms engaged in international business have the avant-garde firm-specific position to take on competitive challenges in a global marketplace. In fact, a rising number of emerging markets’
MNCs tend to internationalize exactly because of lacking resources, technology, or know- how in their home market (Makino, Lau, & Yeh, 2002). These firms seek foreign markets in order to gain knowledge and access to relevant resources, thus Dunning (1988) and other researchers suggested that these firms belong to the asset-seeking approach.
Even though these two approaches seem to represent opposite motivations, they are not mutually exclusive, but rather complementary. Gaur & Kumar (2010) suggested that as much as emerging market MNCs are considered to be missing resources, they do have firm-specific advantages, though of a different nature than developed country MNCs. Thus, even because emerging market firms’ aim is to gain new resources abroad, they still exploit their unique firm-specific advantage to establish competitiveness in foreign markets.
When it comes to asset seeking, emerging market MNCs see themselves as lagging behind their developed countries counterparts, so cross-border expansion helps them to overcome competitive disadvantages (Child & Rodrigues, 2005). The resources and capabilities these firms seek for are usually hard to create or imitate, and commonly scarce in developing countries. When EM MNCs internationalize, Deng (2007) agrees that they tend to focus on fast access to strategic resources through mergers, acquisitions, or joint ventures, in order to gain access to assets that “are available on better terms” to host-country firms than firms’
own indigenous market. (Wesson, 1999).
2.2.2 Opportunity-seeking approach
The idea of opportunity seeking can be traced back to early researches such as Schumpeter (1934) and Kirzner (1973). Many developed country firms’ main motivations were partly involved in exploring new opportunities abroad. Holm et al. (2009) has summarized that
2. Literature review proactive firms would eventually find and try various approaches to create opportunities actively, and it would lead to broader range of customers, suppliers, products, technologies, and furthermore, innovated techniques to organize the internal operations. Firms from emerging markets too, share similar motivations in terms of opportunity seeking. Even though each country of origin has its unique characteristics, the motivation to seek new market opportunities is a common denominator among emerging markets’ MNCs (Luo &
Tang, 2007). The Springboard Model initiated by Luo and Tung (2007) suggested that MNCs in emerging markets tend to use internationalization process as a conjunctive medium (springboard) to achieve goals related to asset and opportunity seeking. Within the springboard theory, specific opportunities available for emerging markets MNCs are not only limited to increased company size and reputation, leveraged cost-efficient manufacturing capabilities, and enhanced business diversification; opportunities that EM MNCs seek through internationalization also reached to areas such as gaining preferential treatment by both home country and foreign country’s governments, escaping from institutional or market constraints, as well as to bypass trade barriers into developed countries (Luo & Tung, 2007).
2.3 Perspectives
So far, we have discussed the internationalization motives of Emerging Market MNCs from asset seeking and opportunity seeking approaches. Even though theory behind MNC motivation is comprehensive, our focus remains on developing countries. Within these frames, researchers have come to acknowledge the importance of institutional and resource- based perspectives as pushers of motivators for the developing market firm. Perspectives in this paper are defined as relevant internal and external factors, which are directly or indirectly associated with, or influence both approaches.
2.3.1 Institutional based perspective
From an Institutional perspective, firms operate within a social framework of norms, values and taken-for-granted assumptions (Meyer & Rowan, 1977). From the time Meyer & Rowan published the article, the conception of the firm’s environment remains similar. Its significance to EM MNCs is even more pervasive: the political and economic ideology of developing countries has long served as a motivator or even de-motivator for cross-border ventures from EM firms. Within the institutional-view, we identify two groups of researchers, focusing on economic-institutional and social-institutional analyses.
2. Literature review 7 Economic-Institutional Analysis. The first group of researchers focuses on the role and the interaction of the emerging firm within its institutional environment. Gammeltoft et al.
(2010) divided this environment in macro and micro levels; where macro would concern government activities, whereas the micro would focus on firm’s internal operations. The effects of macro-level activities in the forms of access to resources, preferential treatment or subsidies are factors that motivate behavioral patterns of EM firms. The role of the macro- level institutions by Demirbag et al. (2010) emphasized institutional influences of Turkish MNC location choice. Motivators such as political constraint and, knowledge infrastructure in host market are institutional influences that motivate EM MNCs to go abroad (Demirbag, Tatoglu, & Glaister, 2010). Other papers support such claims, by addressing the main motivators of internationalization as liberalization of home regulatory market, investment and taxation incentives at the macroeconomic level. Other motivating influencers include the effect of home environment as push factors2 and host environment as pull factors3 (Erdilek, 2008; UNCTAD, 2005). These home and host market factors can produce adverse motivation reactions to EM firms, where firms tend to be prone to “institutional arbitrage” – where their TCE4 logic of seeking efficiency in one side, and immature market conditions at home on the other side lead them to strategically exit their home market rather than strategically enter a host market (Boisot & Meyer, 2008). Furthermore, because emerging markets suffer from underdeveloped institutional and market infrastructure, technology and the legitimacy acquisition are major motivators for firm to internationalize in order to overcome the negative image of country of origin label (Gaur & Kumar, 2010; Johansson, Ronkainen, & Czinkota, 1994;). Bartlett & Ghoshal (2000) suggests that the lack of international experience of EM MNCs is a contributing factor that makes the country of origin a liability for these firms.
Social-Institutional Analysis. The second theoretical bloc focuses on the social-institutional drivers of internationalization. Since the institutional theories according to this group focus on the level of social definition of firms’ behavior (Oliver, 1997), there is an inclination to relate the Uppsala model as a new trend that emerges from institutional drivers of emerging market internationalization. EM FDI in the 80s was mainly directed towards other emerging markets due to similarities in market demand and institutional structure, making firm-specific skills appropriate (Cuervo-Cazurra & Genc, 2008). Later on, EM MNCs acknowledged this
2 Home environment as push factor – when production costs rise in the home market, or firm’s stakeholders cross borders, forcing the firm to go global as well (Erdilek, 2008)
3 Host environment as pull factors – appears when foreign markets offer better growth opportunities and cost structure, access to natural resources and government incentives etc. (Erdilek, 2008; UNCTAD, 2005)
4 TCE – Transaction Cost Economics
2. Literature review strategy’s limitations to face global competition, and lack of contribution to firm’s value chain through learning processes (Guillen & Garcia-Canal, 2009). In order to develop these resources, EM firms lean towards the opportunity-seeking approach, pushing them to enter more developed markets for asset-seeking purposes (Cuervo-Cazurrra et.al., 2008; Guillen et.al. , 2009). Building over this assumption, it can be concluded that knowledge acquisition is both an institutional motivator for EM firms and critical element in the Uppsala model (Johanson & Vahlne, 2009). According to Johanson & Valne’s model, firms should develop institutional and market-level knowledge to succeed in internationalization activities. In fact, evidence of Business Networks have been found in EM MNCs, in the form of Business Groups, such as Chinese Haier or Turkish Arçelik (Yaprak & Karademir, 2010), which allows these firms to use the Business Group’s networks and resources to better position in foreign markets, and more effectively exchange market information and institutional networks.
2.3.2 Resource based perspective
Apart from the institutional perspective, the motivations can also be indicated from the view of resource-based perspective. Under resource-based view, a firm is treated as a 3-in-1 structure: resources, skills, and capabilities (Wernerfelt, 1984). The motivation for a firm to look over the international market, is somewhat based on the decision of either developing its resources, skills, and capabilities internally or purchasing externally (Yaprak & Karademir, 2009). Resource selection and accumulation affects both internal decision and external strategic factor of the firms (Oliver, 1997). In the respect of such philosophy, an international transactional relationship is established, due to the fact that firms cannot possibly or efficiently generate all necessary resources internally (Zacharakis, 1997). Thus, the resource- based view has grown into a so-called resource-exchange theory: where firms offer competitive advantages in exchange for receiving benefits in order to supersede competitive disadvantages. Relatedly, diversified firms under the same group are able to benefit themselves by sharing tangible or intangible assets among each other (Chang & Hong, 2000).
The competitive advantage of such firm’s resources should be sustainable and consistent in order to guarantee future expansion of the firm in a global standard (Oliver, 1997).
Looking over to MNCs from emerging markets, the need for resource exchange is even more obvious. According to Dunning’s eclectic paradigm (1988) of international production, resource and capability advantage within home country is considered as one of the most significant gains for firms in the international level. Such effect particularly reflected in those emerging markets with rich natural resources, such as countries in Latin America (Cuervo-
2. Literature review 9 Cazurra, 2007). On the contrast, emerging market MNCs can gain resources that they particularly lack of during the internationalization process. It is being argued that many superior technologies are controlled and exercised within developed countries, and developed countries tend to have wider and deeper technology pools than developing countries. This leads firms from emerging markets to go abroad and seek desired resources through mergers or acquisitions (Cuervo-Cazurra, 2007; Lall, 1983; Nelson, 1993). Thus, the resource-based view extends the importance of asset seeking behavior on emerging firms as a motivational pattern for internationalization processes when the firm is seeking assets out of its home market.
2.4 Literature Conclusion: Prelude of 2x2 Model
There is no doubt that many researchers have focused on the motives of internationalization processes for emerging market firms. So far, different theories tend to converge on their focus on the particularities of emerging markets and their environments. Throughout summarizing and addressing these theoretical perspectives regarding the internationalization motivations of emerging market firms, we concluded a “two-by-two” (2x2) Model (Figure 1), which is constructed by two approaches (asset seeking and opportunity seeking) and two
perspectives (institutional and resource-based). Whereas EM firms’ motivation approaches have been loosely grouped as either asset seeking or opportunity seeking, a clear pattern that EM firms choose is still argued upon. Even though there is a lack of comprehensive study tailored to emerging markets, theories propose that EM firms seek asset and opportunity in foreign markets by both exploiting their firm-specific advantages home, yet still seeking
Figure 1: 2x2 Model
2. Literature review advantages such as brand image and more challenging and advanced institutional infrastructure abroad. Better support for these perspectives has been reached by literature while studying both institutional and resource-based views in light of asset-seeking or opportunity-seeking. Theories emphasize the importance of the institutional environment for the emerging market firm by viewing its economic and social aspects. The resource-based view on the other hand, has gained theoretical importance due to lack of matching strategic resources with knowledge infrastructure in emerging markets, providing opportunities for firms to exchange firm-specific advantages in order to alleviate their disadvantages.
2.4.1 Approaches vs. Perspectives
Motivation belongs to psychological and cognitive studies that are defined through qualitative research methods and theoretical patterns. During the course of depicting the principal motivations that lead firms from emerging markets to internationalize, we organize the literature review mainly through motivation approaches and perspectives (See Figure 1).
When we address the theoretical approaches henceforth, we imply on the distinctive views that researchers have on firm’s motivations, more specifically approaches to motivations has a similar meaning to the aspects or types of motivations that affect the behavior of emerging market firms, be those motivations to seek assets or opportunities abroad. On the other hand, the theoretical perspectives, for the purposes of this paper, will condense the theoretical views on the conditions that influence firms’ motivations. By mentioning perspectives, we target the incidences or circumstances that may affect emerging market multinationals’
decisions towards both approaches. The correlations within the 2x2 Model should shed light to the specificities of emerging market firms; evaluations of which will be discussed through the case studies herein.
3. Methodology 11 3. Methodology
3.1 Research Strategy
Motivation is a study of managerial behavior, which sometimes cannot be solely determined or analyzed by numbers and statistics. In order to serve the purpose of our study, we decided to take a qualitative approach as a primary research method, and target mainly on two countries from emerging markets - China and Turkey. Each could possibly represent relevant economies around the peripheral geographical area, thus deliberating Asia and Eastern Europe, two continents where the idea and the impact of emerging markets was the strongest.
3.1.1 Why China and Turkey?
Selecting these countries was not coincidental, considering the economic implications they represent. According to World Bank (2010, 2011) both countries have undertaken efforts to reforms, and succeeded largely into switching to market-based economies. As China is a part of the BRIC5 economies, its internationalization behavior coincides with the other three. In the same way, Turkey is considered as the ‘next eleven’ – post-BRIC group of prospective economies that would rival developed countries in the future (Goldman Sachs, 2007). Thus, from a functional deduction, international organizations and economists have largely agreed on the idea that emerging markets can be grouped as the ‘BRICs’, the ‘next 11’ and other developing markets. We believe that by focusing on China and Turkey, we will effectively illustrate the two influential groups of emerging markets, and provide a complete picture on the effects and causes of these two country groups’ internationalization processes.
Considering that other developing markets have a lesser impact on the world economy, we set our primary focus on markets that have already reached some level of economic maturity.
3.1.2 Research Process
In order to gain greater understanding on the specific purposes of this paper, we reckoned that case studies of successful internationalized companies could possibly provide an enhanced view of our study. By summarizing the existing theories and models from previous academic studies, and examining case studies from each country mentioned above, it allows us to define the distinctive motivations from emerging market MNCs. Furthermore, the information generated from our study can help support a new framework or model that tends to be more valid and reasonable. Our research strategy can be summarized into a process shown in Figure 2.
5 BRIC – Brazil, Russia, India and China
3. Methodology
Figure 2: Research Process
The analysis part through the case studies focused on comparing and contrasting the cases, in order to pinpoint similarities and differences among the studied firms. The data generated through analysis also gave sufficient support and validity to our proposed model. Due to the fact that case studies give a current representation of firm behavior towards internationalization, analyzing the model through the cases should provide important practical insight into internationalization motives of EM MNCs.
3.2 Case Selection
Case study is an essential part of this project, whereas the examples shown in the case studies can possibly provide better and more persuasive evidence to exhibit the specific motivation this project is studying upon. During the case selection process, we felt the need of a focused industry in order to provide a more precise point of view. This way enables us to study the motivation of internationalization from EM MNCs in a relevantly micro measure, and later reflect the core ideology into a macro extent. One of the most important reasons for us to choose technological industry is simply because of the common interest of consumers worldwide. Technological industry around the globe suits a universal environment because the products and services provided are highly similar from country to country. Thus, internationalization process is widespread and relatively prevalent within the technological industry.
We have chosen Chinese and Turkish companies to complete our case studies. Both countries share the similarities of mass production in technological goods in the recent decade. As desired destination for outsource from many developed countries, Chinese and Turkish technological firms have equipped the skills over the years to produce and distribute technological goods and services substantially. However, more and more significant examples of firms from these developing countries have stepped onto the stage of global market lately, which has triggered the world’s attention dramatically. Thus, these firms make very interesting cases to determine EM MNCs internationalization motives.
Summarization New Model Case Studies Analysis
3. Methodology 13 Four company case studies from China (Lenovo, Haier) and Turkey (Arçelik, Vestel) were selected. Our objective in selecting these cases is to aim at MNCs in technological industry from China and Turkey that had recognized internationalization history, which can be best representing the motivations under unique condition of each country. Selected cases have significant appearances within our literature collection. Sufficient published studies have whelmed over these firms, which provides fundamental support to our paper.
3.3 Data Collection 3.3.1 Overview
Our selected cases are regarded as recognized multinational firms from emerging markets, thus the companies should have obtained certain size of influences publicly. This means that many existing articles, studies, or journals are available to be used as reference to our case studies. The theoretical nature of our paper is based on cross-referencing existing theories and models with findings from firms in our cases. This makes the data collection requirements to be bounded with theoretical opinions of other researchers, who have studied Internationalization of EM firms. Company data needed to establish the cases are thus available in other studies, company profiles, corporate and annual reports, as well as other secondary sources. Since firms’ motivations are created over a period of time, and are factors of changing environmental conditions, data provided from these sources are very important to create an understanding of firms’ behavioral pattern over the years. It could possibly improve the insight that these case studies provided to our project.
By comparing the findings of the company data with theoretical sources, we can check the validity of our findings and make efficient use of secondary data. The findings of this research method would then be benchmarked to the existing theories and models, in order to create a unique internationalization model for the motivation of emerging markets’ MNCs.
3.3.2 Nature of data
During the research phase for the companies, we have intensively gathered information from company websites, news agencies, and market reports regarding to our cases and the technological industries in Chinese and Turkish markets. The principal data collection will be secondary in nature, since we are interested in the firms’ internationalization processes scrutinized from a theoretical perspective, as well as various interpretations of any internationalization activity that our studied firms have undertaken in order to formulate a
3. Methodology more reliable research paper. During our research, we also found it important to solicit secondary data from other external sources such as UNCTAD, chambers of commerce, and statistical institutions etc., to better contribute to the comprehensiveness of the paper.
With regard to retrieving primary data from the firms studied in the case section of the paper, under a cost benefit analysis deliberated, we decided that cost implications were outweighing the benefits of their outcomes. This analysis was influenced primarily through three circumstances: time and money limitations, feasibility of longitudinal-study feedback, and availability. First, conducting a theoretical research is time consuming as it is; establishing contact to conduct interviews and observations would put further pressure on the schedule and compromise data quality itself. Then, interviews and observations would give us a current overview of firms’ internationalization rather than the entire process, and since motivation is a longitudinal study, secondary data add more value to this paper’s validity.
Finally, EM MNC officials are hard to reach as opposed to secondary data that have already addressed areas of interest in our case study.
3.3.3 Reliability & Validity
Regarding secondary data used while conducting the literature review and the case studies, several methodological measures were considered to establish data validity and reliability.
There have been numerous similar studies on the internationalization of the firms; yet more limited data exists targeting the motivations of EM MNCs specifically. A supplementary analysis of data from published academic sources is conducted, soliciting relevant information from these articles regarding motivations of EM firms to internationalize. Being the most used form of secondary data qualitative analysis according to Heaton (2008), this meta-analysis also emphasizes on reliability of sources, since these papers are published in respected journals worldwide.
The international scope of this research, and the theoretical focus also influenced our choice of secondary data. Saunders et al. (2009) acknowledge that researches requiring national or international comparisons would find secondary sources as major contributors towards answering research questions. They also suggest secondary data importance on case study formulation. In order to ensure that validity of these data is not compromised, we have scanned through or read numerous research articles prior to selecting the most valid ones for our paper. These articles were selected with strict search criteria relevant to the focus of our research, in order to efficiently target this focus and sustain data collection validity.
4. Case Studies 15 4. Case Studies
4.1 China
Chinese economy during 1950s and 1960s was predominantly planned and controlled by the government. All businesses were state-owned enterprises (SOEs), whereas private-owned enterprises (POEs) were strictly considered as illegal. In 1978, a phenomenal “open door”
policy initiated by Chinese government revolutionized the country’s economic perspectives.
The reform has brought POEs legalized, and provided extraordinary opportunities for Chinese people to own and self-manage businesses. Even though POEs receive limited government support, they can exercise more freely and expand quicker than SOEs, who hinder heavily under extensive government regulations (Biediger et al, 2004). The “open door” policy attracted enormous amount of inward FDI within China, as well as modern technology, advanced management styles, and global perspectives from many developed economies. Today, after three decades of incredible economic growth, the trend in China has gradually switched the direction from inward FDI to outward FDI, alongside a “go global”
policy in 2002 by Chinese government to encourage business with specific capabilities and know-how to operate abroad and set up China Investment Corporation (CIC) (Brainard &
Fenby, 2007).
4.1.1 Lenovo
Lenovo is a Chinese-based multinational computer technology corporation, which was first established in 1984 at Beijing, China, with 11 IT specialists and an investment of RMB 20 million (USD 3 million approximately) from Chinese Academy of Science Institution of Computing Technology. Today, the company is globally notable in computer product development, manufacture, and marketing, as well as IT related services. Lenovo is generally accepted as one of the most significant example of Chinese-based MNC, due to the remarkable acquisition of IBM PC Company Division (PCD) in 2005 (Associated Press, 2005).
Lenovo’s internationalization trend was caught at the “go global” period. At that time, Lenovo, as a successful Chinese POE, was already the largest manufacturer of personal computers in China, with approximately 30 percent of market share and USD 24 billion annual sales. However, the core business of the company was suffering from extensive competition from other leading foreign PC brands in China, such as Dell, Hewlett-Packard (HP), etc. These foreign ‘intruders’ posted serious threat to Lenovo, who witnessed the competitors’ sales force in China become stronger each year. Dell’s shipment increase
4. Case Studies reached 63% in 2003, and Lenovo only gained 15.1%. Some of these competitors even reached certain institutional contracts with the government. Under such pressure, the management team in Lenovo felt that critical action must be taken in order to place the company in a healthy business environment. There were two choices for Lenovo: the company could continue its low cost structure and make parts or products for other Original Equipment Manufacturers (OEMs) in large volume; or to form an expansion to sell branded products to other regions such as Europe and North America, thus open a new source of customer group.
The result of both choices could lead Lenovo into complete different directions. According to Lenovo’s founder and chairman Liu Chuanzhi, Lenovo’s low cost strategy could not be maintained as a long-term strategy, due to cost in China was rising in a hasty pace. Such strategy would suffer significantly from other low-wage countries such as Malaysia, Thailand, and India. At the moment, Lenovo faced limited domestic expansion, and 30 percent share of Chinese PC market cannot satisfy a visionary corporation like Lenovo;
therefore, the company was obligated to break the ceiling and search for a new expansion strategy. At this point, the USD 200 billion global PC market posed a huge potential for Lenovo (Liu, 2007). Liu mentioned that businesses from developed countries often take global expansion as one of the critical aspects of business strategy, and Chinese company should behave the same way. Liu’s initial motivation was inspired by successful internationalized MNCs in Aisa, such as Sony of Japan, Samsung of Korea, and Haier of China. Accordingly, Lenovo was committed in global strategy, aiming at transforming its low-cost products into premium global brands.
Liu mentioned several difficulties Lenovo was facing in order to go abroad, which includes global brand recognition and presence, as well as human talents to manage and operate a global corporation (Liu, 2007). Regardless of the product quality from Lenovo, there is a dubious perception around the globe that “Made in China” products are equal to “Made Cheap” goods (Biediger et al, 2004). Such perception could hold back Lenovo’s international development dramatically, and make it even more difficult to receive global brand recognition that Lenovo was very much needed. However, Liu believed in an old Chinese idiom, which says, “There will be light at the end of the tunnel”. If the obstacles can be analyzed from a different angle, they might become opportunities the company can benefit from.
In 2005, Lenovo successfully acquired IBM PCD for USD 1.75 billion, who was also suffered from heavy financial trouble (Associated Press, 2005). Lenovo was granted the
4. Case Studies 17 permission to use IBM brand for 5 years to market the new lines of ThinkPad, one of the most famous notebook PC line from IBM. Formal Lenovo CEO Yang Yuanqing concluded three most important improvement that IBM PCD brought to Lenovo after the acquisition: 1) both brands were focused on innovation and premium quality, thus the acquisition pushed Lenovo into a high-tech global brand image without changing its primary ideology; 2) With the access to IBM PCD’s diversified products, management skills, and geographical point of sales, Lenovo is now developed into a global company with global perspectives and international channels; 3) Lenovo’s existing platform of procurement and manufacture processes have enhanced efficiency for the new company (Tu, 2005).
Yang’s summarization highlighted that the acquisition has brought mutual benefit to both Lenovo and IBM. In other words, Lenovo realized the goal of internationalization through the purchase of IBM PCD, while IBM has consolidated its strength through Lenovo’s resources.
Zhou Weikun, CEO of IBM China, described the acquisition as forming the strength of both companies to achieve new target on reaching better service, improving quality, enlarged quantities, and leaner cost management (Tu, 2005). IBM has gained advantage to access to lower end customer group through Lenovo’s low cost structure. IBM’s chairman and CEO, Samuel J. Palmisano, also stated in an open letter to the employees of IBM, that the main motivation of the acquisition was not to sell the PC business, but to establish a strategic connection in China through Lenovo; in return, IBM has provided opportunity for Lenovo to become a strong MNC, and supporting Lenovo with IBM’s technology, management skills, marketing and sales channels.
4.1.2 Haier
Another representing case of internationalization in China would be Haier Group. Comparing to Lenovo, Haier has started its internationalization process a lot earlier, and it owns extraordinarily significant position in most part of the world today. However, Haier Group is partially state-owned, which in some way, it may misdirect our research purpose in order to find the motivation. On the other hand, the internationalization process of Haier was symbolic enough to represent a very Chinese way of thinking towards internationalization;
Haier’s global strategy has set up successful examples for various newly internationalized companies from emerging markets, and it is also widely spread in studies regarding to EM MNCs. Therefore, we are taking Haier as a case study in order to provide extra validation towards our analysis.
4. Case Studies Haier is a Chinese based multinational company producing home appliances including refrigerators, air conditioners, washing machines, and televisions. The company was established in the 1920s under the name Qingdao Refrigerator Plant. During the 1980s, Haier suffered from huge debt, and was forced to perform a complete corporate restructure, which turned the company towards an entirely new organizational era; its internationalization process was also followed by this era. The company was officially renamed as the Haier Group in 1992, after the turnaround from its financial troubles. Haier currently owns the largest market share in white goods category across the whole world, with 6.1 percent share in 2010 (Jones, 2010).
Like many other developing countries, the internationalization process of Haier started with export from its plant in Qingdao, China. With a goal to build a global brand, Haier established production facilities in numerous countries from 1996 (See Exhibit 1 for Haier’s major oversea FDI in Appendix). In year 2000, Haier’s global facilities reached export volume of USD 420 million to more than 160 countries and regions, established over 40,000 sales network points internationally (Liu & Li, 2002).
The motivation of Haier’s internationalization process was determined from the angles of internal and external driving forces, according to the academic case study of Haier by Liu &
Li (2002). One of the major internal driving forces for Haier is the intense competition in China among foreign brands such as Electrolux, Siemens, GE electronics, and Whirlpool.
The company faced the threat of these foreign brands to become major players in China, thus a global strategy would suitable for a healthy growth for Haier. From a view of the TCE, home appliance’s transportation costs are above affordable. If Haier would remain as a Chinese based exporter, these shipping costs would post huge price disadvantage for the company. At this point, oversea subsidiaries could be able to solve such hassle to keep competitive cost advantage for Haier on the global stage. Furthermore, some subsidiaries can even help reduce or avoid tariffs in certain region, such as North American shipments from Haier’s plant in the USA.
On the other hand, home market constraint is one of the external driving forces for Haier to set its global strategy in motion (Liu & Li, 2002). As being said, intense competition among foreign brands leads Chinese home appliance market to be saturated. With continuous drop in market share, Haier found overseas expansion as an alternative solution to the market constraint. Furthermore, with the partial ownership of Chinese government, Haier’s internationalization was strongly encouraged by the government. Under such aspect, Haier received various ‘green light’ and institutional support, including the opportunity to establish
4. Case Studies 19 a financial company in order to finance Haier group in better terms; such act is difficult for other Chinese companies to achieve due to institutional restrictions.
4.2 Turkey
Turkey has emerged from a prolonged period of political unrest, much like many developing countries in Eastern Europe. Even after embracing democracy and undergoing significant economic and political reforms, Turkish government struggled to sustain the rapid economic growth with its deficient infrastructure. The main players of the emerging Turkish economy were initially low-skilled based, where traditional agriculture and textile sectors dominated the employment levels. Still, due to effective reforms and EU agreements (1963 EU-Turkey Association Agreement; 1995 EU-Turkey Customs Union Agreement), more high-skilled, capital-intensive industry sectors have developed: mainly automotive, construction and technological industries. After a financial crisis in 2001, Turkey further adopted significant fiscal and financial reforms and took initiative into privatizing state enterprises. The impact was positive, where Turkey saw a strong growth era amounting 6% annually until 2009, when the Global Crisis caused a slowdown in growth.
Even though Turkish inbound FDI has suffered some cutbacks due to the recent global financial turmoil, EU still remains the biggest FDI investor and receiver for Turkey. Though investor suspicions have not yet vanished regarding country’s high account deficit, unstable policy-making, and fiscal imbalances, Turkish firms have found governmental support into going global. Having a Customs Union with the European Union enabled firms to have improved access to free flow of industrial goods and a strengthened Intellectual Property Rights protection. Technological industries finally had open access to developed markets, and the Customs Union Agreement guaranteed a preferential treatment of Turkish goods relative to those produced in other non-EU countries.
4.2.1 Arçelik A.Ş.
Arçelik was founded by Vehbi Koç in 1955 as a sub-unit firm under Koç Holding in Turkey.
Koç Holding remains one of Turkey’s biggest companies, ranking 273rd in Global Fortune 500 (CNN Money, 2010). Thanks to its strong brands, its sales amount for 7% of Turkey’s GDP and 8% of its total exports. Arçelik is Koç Group’s flagship firm, where 57% shares are controlled by Koç Group, 18% by Burla Group, and 25% are traded at Istanbul Stock Exchange. It employs 17,000 people on its 11 production facilities in Turkey, Romania,
4. Case Studies China and Russia, serving consumers in over 100 countries worldwide with its 10 brands.
Arçelik A.S. has achieved its goal to become the third largest household appliances company in EU, a market leader in Turkey and Romania, as well as second leading player in UK with 15% market share (Arcelik A.S., 2009).
Bonaglia and Goldstein (2007) characterized Arçelik as a latecomer MNC, due to the fact that its internationalization started in 2000s, after decades of partnership with European firms. Based on its latecomer status, Arçelik was able to adopt best practices and technologies to address changing market demands more efficiently than its established rivals in international markets, especially concerning greener energy. (Bonaglia and Goldstein, 2007). Its first international efforts dated in the 1980s, when the firm started exporting to neighboring countries. The institutional environment in Turkey was a considerable economical and entrepreneurial detriment of Arçelik’s cross border operations. When Turkey reached tariff reduction agreements with the then-European Community, the firm updated its strategic objectives into reaching new technologies in the European markets. After dominating the national market share, Arçelik’s international reach expanded initially to the US in 1988, and 9 years later to the EU, through OEM contracts with Sears and Whirlpool respectively. These contracts gave Arçelik the economies of scope to specialize its production and gain technological access to invest in its R&D, but prevented the firm from selling similar products under its own brands in these markets. Thus, Arçelik’s initial global ventures were largely focused on developing competitive technological levels in order to position itself strategically as a properly established and trusted global brand. Erdilek (2008) suggested that in spite of Arçelik and with other Turkish MNCs being latecomers to industrialization, such status makes joint ventures and OEM common initial internationalization strategies, because these firms tend to minimize risks and access superior strategy at the same time while establishing presence in foreign markets.
Over the decade, the firm’s reorganization led to a more proactive and direct approach to its internationalization process. Again, the fluctuations in the institutional political and economic environment when EU Agreement on Customs Union was signed in 1995 in one side, and financial crisis that erupted in 2001 in the other side, both played a role in Arçelik’s internationalization. In 2006, after increasing the shares to 72% in BEKO Elektronik, Arçelik A.S. decided to launch its Original Brand Manufacturer (OBM) strategy and enter European markets with its own brand. Because Arçelik is difficult to pronounce and remember in other languages, the firm decided to market its white goods and TVs under the BEKO flag.
4. Case Studies 21 Even though the firm tapped on exploiting its latecomer advantages, its success in international markets was challenged by country of origin label. Bartlett and Ghoshal (2000) warn that liabilities of origin are largely psychological factors that arise due to the lack of well-established international experience, misplaced knowledge of firm’s capabilities, or market threats. Since the country of origin label in Arçelik’s case was considered a liability rather than an asset, Arçelik/BEKO during the last decade underwent a serious streak of acquisitions of notable EU brands such as Altus and Arstil Mobilya in Turkey, Flavel and Leisure in UK, Blomberg and Grundig in Germany, Arctic in Romania, Elektrabregenz in Austria. The effect was visible, because the internationalization of brand identity made BEKO a truly international brand, as consumers through Europe often fail to identify the Turkish origin of Arçelik/BEKO products. These actions assisted Arçelik to build brand awareness and trust, while at the same time focus on developing specialized products from a pooled R&D and a safer legal protection of their property rights (Luo & Tung, 2007).
Having established its accelerated internationalization model (Bonaglia, Goldstein &
Mathews, 2007) by entering the developed markets of the EU and its two production plants in Turkey and Romania, Arçelik exploited its empowered brand to strengthen its position in neighboring developing countries in Balkans, Middle East, the ex-Soviet Turkic States and more importantly Russia. At this development stage, Arçelik’s production facilities in Russia (2006) and China (2007) were motivated rather from a market expansion and revenue generation objectives than seeking new assets or technologies in these markets. These ambitious ventures in two of the BRIC countries established the intentions of Arçelik A.S. to replicate its European international experience in a more global marketplace; because last decade’s progress was rather a good start than an accomplished goal.
4.2.2 Vestel Group
Drawing a similar pattern of business organization, Vestel also belongs to transnational business group, which holds the name of its founder, the Zorlu Group. Established in 1950s, Zorlu Holding quickly expanded from textile to electronics, energy production and real estate services. The Zorlu conglomerate, with Vestel as its flagship company for more than a decade, sustained the position of a Turkish pioneer on exporting into new markets, topping the list of Turkish firms as one of the biggest exporters. (ISS Corporate Services, Inc. , 2010) Vestel was thus founded in 1994, setting its objective to employing extensive R&D efforts in order to provide high-quality products. Its customers are grouped into 3 principal categories.
The A-brands are prominent global manufacturing brands for which Vestel produces
4. Case Studies premium goods, such as Panasonic, LG, Sharp, JVC, Toshiba, Hitachi and Sanyo. The B- brands are retailers like Carrefour for which Vestel has OEM contracts operated under thin margins, considerable volumes, and high competitive structure. The last group is the OBM sales under acquired brands in EU or own brand in Turkey and neighboring countries. (Ilman, 2009) Because deals with OEM and ODM6 partners have established competitive pressure for new technologies; this last decade saw a change in the approach of international markets, where the company started developing technology and products under its own name. Vestel opened its first production plant outside Turkey in order to reach new markets for its branded goods. By establishing its Russian plant, Vestel would penetrate the Russian market along with other CIS7 countries, while staying out of European markets in order not to compete with its partners for whom Vestel produces OEM goods. In his dissertation, Ilman (2009) observed that Vestel’s market expansion had initially started in Europe, then continued in the regions around Turkey, while only recently has the firm ventured into new markets that are geographically more distant (Ilman, 2009). This pattern serves to overcome technology and brand name deficiencies by acquiring companies and experience in Europe prior to establishing own brand presence in home market and psychically close countries as a springboard for a more international expansion.
Except expanding its market reach on a more global landscape, Vestel has also achieved into enforcing its OEM and brand products with an extended network of R&D centers worldwide.
By starting its internationalization with its research department first, Vestel has effectively sought to develop necessary firm-specific advantages in order to preserve its competitiveness, while keeping the production costs down by maintaining low cost conditions in the home market. The firm’s institutional environment has allowed it to have a natural competitive advantage over Far East competitors because of the Customs Union between Turkey and EU, geographical proximity to EU markets, and tax advantages in CIS countries through its establishment in Russia.
While Vestel continues to offer OEM products in EU, and exports to 127 countries worldwide, the firm has focused its branded internationalization efforts in proximate emerging countries markets. Yaprak and Karademir (2010) adhered to the importance of business group affiliation of Vestel brand for its accelerated internationalization since the 1990s. Building over experiences from other Zorlu Group affiliates and related knowledge spillover, Vestel sought new markets for different strategic motives. Markets such as ex- Soviet States, the Middle East, North African and South Asian countries provided Vestel with
6 ODM – Original Design Manufacturer
4. Case Studies 23 an opportunity to exploit its R&D advancement, technological capabilities and quality standards into penetrating these markets and establishing a positive brand image. In order to better reach these goals, Vestel recently acquired Velfrost brand, along with Finlux and Luxor - companies with recognized and respected image in Northern Europe and Russia.
Seeking to further improve its brand, Vestel’s ventures with Graetz and Telefunken serve to strengthen Vestel’s position in EU markets.
These ventures also play an important role into transferring a positive brand image to the markets where Vestel sells under its own brand name. Furthermore, the company was an early participant of Turkish Government’s Turquality program that offered incentives to firms that contributed to the improvement of Turkey’s country of origin label image. (Tac &
Aglargoz, 2007)
Having established a strong global market position in televisions as well as a growing influence in white goods production, Vestel can also take advantage of economies of scale.
This adds another important preferential benchmark factor vis-à-vis Asian competitors, especially when targeting European markets, giving Vestel the competitive edge into successfully establishing its own international presence. With revenues generated from international activities reaching USD 2.4 billion or 77% of its entire production, Vestel is trying to establish itself as a serious contender for global market share.
5. Analysis 5. Analysis
5.1 Approaches: Asset-seeking vs. Opportunity-seeking
Approaches from the 2x2 Model are corresponding to the main motivation for EM MNCs towards internationalization. These motivations are, as mentioned in the model, asset-seeking and opportunity-seeking. Theoretically, conditions that influence EM firms to go abroad would most likely to land in one of these two approaches. Indubitably, firms’ motivations often appear too complicated to be categorized solely within one of the approaches. Many firms’ motivation consist both asset-seeking and opportunity-seeking with different degree of needs suitable for the firm itself. However, different firms could value one approach over another, depending on the nature and condition of the firm’s attempts and expectations from its internationalization process. In other words, some firms are more of asset-seeking-type firms, while some are more of opportunity-seeking-type.
The following chart summarized the approaches of all four firms from the case studies, and categorized into asset-seeking and opportunity-seeking:
Approaches
Asset-seeking Opportunity-seeking
Lenovo
- Acquisition of IBM to establish global brand recognition and presence;
- Management skills and human talents in order to match a global standard and perspectives;
- More advanced technology to transform its low-cost products into premium global brands.
- Wider range of international customer base comparing to the limited market within domestic market;
- More point of sales in different region open new opportunities to create diversified products;
- Increased chances to access into new marketing and sales channels.
Haier
- Establishment of foreign subsidiaries and international sales network broaden the firm’s market flexibility;
- New technology acquisition and management skills through M&A and joint ventures.
- New markets create essential opportunity to solve firm’s financial constraint;
- New ventures in a bigger realm of global market to avoid domestic market constraint;
- New organizational structure to help the firm to exist from a financial troubled position.
Arçelik
- OEM (Sears and Whirlpool) partnerships to develop technology and know-how;
- Aggressive series of brand acquisitions in developed EU countries to gain access to new resources and capabilities;
- Presence in developed markets to help establish strong & positive brand image.
- Latecomer MNC status made them flexible to address changing market needs more effectively and exploit rivals’ established market positioning, as well as target niche markets;
- Penetrate the market with OBM strategy using the BEKO brand image in European countries;
- Enter emerging markets by exploiting the created brand image in EU;
- Offer highly competitive products at lower costs by exploiting their relatively superior technology and adoptability in other emerging markets.
Vestel - Pooled R&D in developed markets to develop superior products;
- Exploit mass production abilities to produce for retailer OEMs under thin margins and highly
