Internationalization of Emerging Economies and Firms

After the First World War international business became an integral part of the activities of firms in economically advanced economies. The internationalization process intensified under the impact of the growing national economic activities, the international movement of capital, the demand for raw materials and food, the introduction of international property laws, and the development of technology and infrastructure. Consequently, multinational corporations (MNCs) experienced accelerated growth and became dominant players in the world marketplace. MNCs entered overseas markets via exporting and foreign direct investment (FDI).

As Yair Aharoni (2010) has pointed out, ‘globalization compels almost all firms to organize all value-added activities in a global manner’. Globalization has, in no small measure, been driven by foreign direct investment (FDI). While world FDI flows averaged US$50 billion during the first half of the 1980s, they had reached US$2.1 trillion in 2007 (before declining, I would say temporarily, to US$1.1 trillion in 2009, on account of the financial crisis and recession) (UNCTAD, 2010) (Table 2.1).¹

Most of the publications concerning internationalization of multinational enterprises (MNEs) focus on companies originating from the countries of the triad including North America, the European Union and Japan. The largest trade exchange in the world as well as investment capital flows in the form of foreign direct investment (FDI) take place between these regions.

The interface and interplay between inward and outward foreign direct investment (IFDI and OFDI), coupled with economic development, constitutes the essence of the Investment Development Path (IDP) paradigm, the central theoretical model in this study. In the context of this model, a comparative analysis is conducted of the IDPs of ten Central and Eastern European (CEE) countries, all members of the European Union (EU). They include Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. This group of countries shows relative homogeneity in terms of sharing the same communist heritage, common experience in establishing and developing a market economy, and in acceding to the EU: with eight countries joining the EU in 2004 and two (Bulgaria and Romania) in 2007. All of these countries show relative homogeneity in terms of many socio-economic variables (Niroomand and Nissan, 2007) and have exhibited a tendency to economic convergence over the last two decades (Amplatz, 2003; Matkowski and Próchniak, 2007). At the same time though, there are considerable differences between them in their level of development and in completion of the transition process to the market-led system. In fact, one can distinguish more homogenous subregions in the CEE-10 group (see e.g. Caporale et al., 2009), namely the Central European countries (the CEE-5: the Czech Republic, Hungary, Poland, Slovakia and Slovenia), the Baltic countries (the B-3: Estonia, Latvia and Lithuania), and the two Balkan countries located in south-eastern Europe (the SEE-2: Bulgaria and Romania).

We believe we know much about the role of foreign direct investment (FDI) in development, but the present economic and financial crisis has called for a renewed attention towards the role of FDI in the economic development of nations and regions. The instability in the world economy and the pressing need for investment in the developed world have given birth to a much greater economic nationalism that has induced more restrictive approaches to outward foreign direct investment (OFDI) based on the argument that firms should give priority to investing in their domestic market. Many investors have frozen their plans for overseas investments; and some have even disinvested or shifted operations from foreign markets back to their home country or another cheaper location. The number of investors who are actively engaged in reinvesting their profits in host economies has substantially decreased. Profits earned overseas have started to flow back to home countries, which has had a negative effect on the balance of payments of host countries. The trade-off between high growth and vulnerability has shifted towards a much greater economic security and less vulnerability.

The first study of fast internationalizing small to medium-sized enterprises (SMEs) was conducted by Rennie (1993). He identified a ‘new breed’ of Australian firms which were ‘born-global’. According to this study, born-global firms tended to be small with, for example, average sales of less than US$16 million and to be relatively young in age (for instance with an average age of 14 years). They should have begun exporting, on average, two years after their establishment and have generated three-quarters of their total sales via exporting. Such companies were found in all industries, but they all applied new technologies to developing unique products or a new way of doing business and, according to Junkkari (2000), as a result were strikingly competitive against established large players. Born-global firms or international new ventures (INVs) are firms that are international and entrepreneurial in their business dealings. Wright and Ricks (1994) highlighted international entrepreneurship (IE) as a newly emerging research arena and they defined internationalization speed as: time between discovery of an opportunity and first foreign entry, speed with which country scope is increased (market selection and spreading), and speed of international commitment (mode of entry versus export share). Oviatt and McDougall (1994) found that many of the firms they studied were not truly global and thus decided to call INVs these new fast internationalizing SMEs instead of born globals or global start-ups.

Internationalization processes have been very actively researched for about the last five decades. During this period, many views about companies’ foreign involvement have emerged. Some of them, including the Uppsala (U) model, the innovation-related internationalization (I) models and the Finnish (Helsinki) model, emphasize the importance of experiential knowledge for internationalization. They state that the lack of knowledge forces firms to internationalize slowly by entering culturally and geographically closest countries and by using initially simpler foreign operation modes such as direct and indirect exporting. Only after acquiring the necessary experiential knowledge are they able to enter other countries and use more complicated entry/operation modes. Some other research streams, including the literature on international new ventures, born globals and other fast internationalizers and the network approach to internationalization, have shown that internationalization does not have to be that slow, as knowledge can be also acquired by other means rather than through experience. Consequently, some enterprises may start their internationalization from farther markets, even from other continents, without having any activities on its home continent. They may also use more advanced entry modes and skip the earlier stages of internationalization.

In this chapter the process of internationalization of Russian hi-tech multinational enterprises (MNEs) is analysed with a focus on telecommunications and IT companies that are expanding abroad. Of particular interest are the choices that Russian MNEs make when facing entry challenges, environmental constraints and investment alternatives.

Worldwide, cross-border investments increased up until 2007. Since then, cross-border acquisitions have led the recovery of foreign direct investment (FDI) (World Investment Report, 2010). Accordingly, cross-border mergers and acquisitions (M&As¹) increase their importance in international business transactions. Due to their international nature, cross-border acquisitions involve unique challenges, because of the various economic, institutional or regulatory, and cultural diversity structures (Hoecklin, 1995; Child et al., 2001; Very and Schweiger, 2001).

Presently, price-competitive manufactures from the emerging economies of Asia are flooding the world market. The welfare gains to the consumers in the mature Western economies are undisputed and the persistently high growth rates of emerging economies, such as those of China, Taiwan and Vietnam, are, to a large extent, driven by the successful export of manufacturers.¹ However, from the perspective of individual firms in these emerging economies the export blessings are questionable. Generally, the competition among the exporting firms is extremely tough (Kessing and Lall, 1992; Hobday, 1995; Piore and Ruiz Durán, 1998) and it is now standard procedure for global buyers to appropriate the productivity gains of local manufacturers by incorporating annual price reductions in their sourcing contracts (Gereffi, 1999; Ernst, 2001). A way to escape such a price and profit squeeze might be to ‘move up the value chain’ into more lucrative upstream and downstream activities (Schmitz, 2006). In contrast to manufacturing, research and development (R&D) and marketing, sales are assumed to be less competitive activities with better opportunities for monopolistic earnings because entry barriers to these upstream and downstream activities are high in general (Wise and Baumgartner, 1999; Powell and Snellman, 2004). Hence, by embarking on a catch-up process (Schmitz and Knorringa, 2000; Kaplinsky et al., 2003; Mudambi, 2008) or a functional upgrading process (Gereffi, 1999; Kaplinsky and Morris, 2001; Humphrey and Schmitz, 2004) in the direction of the two higher ends of the global value chain, emerging economy firms may improve their possibilities for appropriating the value they create in the global chain and thereby generate economic rent.

The international entrepreneurship research stream has challenged many of the traditional theories on internationalization and encouraged researchers to examine international business activities from new perspectives (McDougall et al., 2003). Over the years, several theories on international trade and international business have been developed to explain firms’ activities outside their national boundaries such as the classical trade theories by Smith (1994 [1776]) and Ricardo (1978 [1817]). However, these two theories focus on the internationalization process at the national level, rather than at the firm level. Subsequent researchers (see for example, Hymer, 1976; Buckley and Casson, 1976; Dunning, 1988) have contributed significantly to the field of international business by explaining the growth of multinational enterprises (MNEs) and have provided insights into the reasons for foreign direct investment (FDI). The widely acclaimed Upsalla model (Johanson and Vahlne, 1977), which explained that MNEs engage in FDI incrementally and sequentially, has been criticized by entrepreneurship researchers as not being able to explain the emergence of international new ventures (INVs) — those that are new ventures and international from inception (Oviatt and McDougall, 1994, 2005).

Until recently, China has been widely known as a destination for foreign direct investment (FDI). However, since 2002, Chinese outward foreign direct investment (OFDI) has increased substantially — by fourfold in the period from 2005 to 2009, and China was ranked as the sixth largest global outbound investor in 2009 (UNCTAD, 2010). It is also estimated that by the end of 2009 there were around 13,000 businesses with Chinese capital in 177 countries (MOFCOM, 2010). Table 12.1 shows the evolution of Chinese OFDI flows and stocks.

Internationalization has traditionally been understood as a process of a gradual expansion overseas that starts with the firm’s engagement in low risk, low cost and low commitment foreign country operations, and gradually progresses to higher levels of cost, risk and commitment involvements. Nevertheless, recently, authors have increasingly recognized the emergence of firms that internationalize fast from inception to multiple countries manifesting high levels of international commitment (Oviatt and McDougall, 1995, 2005a; Parker, 1998; Rialp et al., 2005; Zhou et al., 2007). In the international business literature such firms have been recognized as born global, and typically considered to be outcomes of international entrepreneurship. Ultimately, the emergence of international entrepreneurship and born global firms has challenged the dominant view of internationalization as an evolutionary and gradual process of international involvement.

Internationalization has been a growth alternative for companies that allows them to reach new markets, gain scale and scope economies, increase firm security and profitability. In the last two decades, the globalization of economies, especially the emerging ones, has promoted a new competitive reality, which is more uncompromising, enabling the creation and implementation of previously unimaginable business models. Companies’ initiatives regarding internationalization have boosted the growth rate of foreign direct investment (FDI). In the late 1980s, the average annual growth had the value of about US$100 billion, while the 2000s witnessed an average annual growth of approximately US$600 billion, which represents a six-fold increase. More than 30 per cent of the global FDI value is currently invested in emerging economies stimulating their economic advancement.

During the first half of 2009, the FTSE International Emerging Markets Index was up 41.1 per cent, whereas the FTSE All World Developed Markets Index was up by only 7.2 per cent (Oakley, 2009). Still, most of the brands originating from emerging economies are practically unknown by the majority of Western consumers. In order to increase their profitability by ‘climbing up the value chain’, many headquarters of emerging-economy firms in Bangalore, Beijing, Moscow, Mumbai, São Paulo, Shanghai, Rio de Janeiro, St Petersburg, Shenzhen or Tianjin have realized that one of the critical success factors for their international reputation is related to their brand image. A number of new brand strategies have been developed and implemented by these firms in order to achieve a better status up the value chain. It is a understatement to state that the development of China in the last 20 years as a major economic power, mostly due to its enormous manufacturing capabilities, has been largely facilitated by the reputation of Chinese brands. It is a well known fact that the image of emerging economies in the West is not one of innovators and brand developers. Consequently this reality contributes to a deficiency in the country of origin (COO) effect in the internationalization of the firms from this part of the world. For this reason the definition of an international brand strategy is of core concern of many firms from emerging economies.

In the spring of 2011, the Danish press announced that the Indian billionaire Shrinivas Dempe would invest between DKK 75 and 100 million in the Danish Soccer club FC Midtjylland. FC Midtjylland was chosen out of 58 football clubs from 20 countries. The investment would allow the Indian investor to get a foothold in the Danish soccer league. But it was not only to get into the Danish soccer league that the investment was contemplating. FC Midtjylland had over the years built a unique and outstanding ability to develop soccer talent. Indeed, the investment was reported mainly to be motivated by acquiring knowledge about training and organization which eventually could be transferred over to the Indian soccer league. This would develop and enhance Indian talent and raise the standards in Indian football.

Internationalization at the country and firm level has assisted the growth and sustained expansion of developed economies and their firms over the last couple of centuries. Consequently, the understanding of internationalization patterns and theories explaining the causes, process and effects of firm internationalization have reflected the perspectives of advanced economies. In recent years, the internationalization process has engaged, on an ever growing basis, countries at a lower level of economic development that are driven by varying political agendas and state involvement in international activities with the objective to advance their national economy. On the one hand, the internationalization of emerging economies and firms has brought about imitative behaviour through the application of some conventional internationalization approaches and practices. On the other hand, many emerging economies and firms have reshaped the global business arena by applying new, unexpected strategies and tactics towards internationalization, accelerating its pace and getting international recognition over a short period of time. This development has challenged international business scholars to explain the phenomenon of the internationalization of emerging economies and firms. There is strong evidence that the recent achievements of many emerging economies has been continuously affecting the positions of developed countries in the world’s economy. Thus the internationalization of emerging economies and firms has posed questions concerning the omnipotent significance of internationalization patterns and models pertaining to developed economies and their firms.