Multinationals on the Periphery

One of the primary features of globalization has been the growth and spread of multinational enterprises (MNEs), and their increasing significance in the economies of almost all countries, whether large or small, developing or industrialized. MNEs have sought to spatially distribute their value-adding activities globally to not only take advantage of market opportunities but also to exploit different specialized resources and capabilities that are unique to particular locations. In other words, in response to increasing cross-border competition and rivalry, firms have increasingly sought to organize their activities internationally to achieve greater efficiency in their value-adding activities, and thereby optimizing their market share and rent generation.

Within the past two decades, developing countries have been liberalizing their trade regimes. However, the beneficial effects of liberalized trade are still to be empirically substantiated. Yet, it is evident that small, developing countries are especially vulnerable to the consequences of a liberalized trading environment (Armstrong and Read, 1998). Moreover, it is the manufacturing sector of these economies that is particularly vulnerable to liberalized trade (ibid). This thus begs the question as to what the future viability of the local manufacturing firms of small, developing countries is in an increasingly liberalized trading environment.

Internationalization of Estonian enterprises started at the beginning of the 1990s. Several development plans and strategies that were suggested by Estonian businessmen and politicians at the beginning of 1990s considered Estonia’s role to be a link between East and West, namely between Western European countries and Russia. In reality, Estonia’s role has been to create a linkage between the Nordic countries and Latvia and Lithuania. Therefore, rather than acting as a mediator between two regions with a huge market potential, Estonian firms have limited their activities to meeting the demand of relatively small countries (Sweden, Finland Latvia, and Lithuania). This shift in strategies was mainly caused by the Russian crisis and implementation of double tariffs by Russia. Another reason for the selection of smaller target markets lies in the foreign owners’ strategies — they considered the risk level in the Russian market to be too high and chose to enter the Baltic countries.

Previous research has shown that firms from small economies are prone to internationalize quicker and to a larger extent than firms from larger countries. In general, their international activities are largely influenced by the limited size of their domestic markets (Krugman, 1991). The lack of strong local forces that retain activities at home further pushes firms to move activities, sometimes even those of strategic character, to foreign locations (Benito et al., 2002). Indeed, small and peripheral countries often actively try to attract and retain inward foreign direct investment (FDI), albeit with mixed results (see Chapter 6, this volume). It is generally recognized that both internal and external factors influence firms’ internationalization patterns. However, most of the research literature has hitherto focused on firm-specific (internal) issues and on country-level (external) issues. Internationalization has traditionally been seen as a reflection of home country advantages (Kogut, 1991; Porter, 1990) and of decision-makers’ (entrepreneurs’) willingness to act upon market opportunities abroad (Andersson, 2000; Cavusgil, 1980; Johanson and Vahlne, 1977). Industry factors are often overlooked, generalized too much, or inadequately measured (Makhija et al., 1997). After decades of research on the internationalization of business activities, we still have limited knowledge about the influence of industry-specific factors on firms’ internationalization patterns.

The purpose of this study is to describe the process of internationalization of SMEs and to explore the reasons for the differences in the pace of internationalization of firms. Empirical evidence, from many countries, supports the notion that firms often internationalize by benefiting from what they learn by experience, i.e., their market knowledge increases gradually and uncertainty and risk is reduced over time for each new country. However, in 1988 Johanson and Mattson pointed out that some firms follow other internationalization patterns. They argued that the degree of internationalization of markets (i.e., the frequency, intensity and integration of relationships across borders in the particular industry market) has an impact on the internationalization process of the individual firm. In highly internationalized markets, firms may leapfrog some of the stages in the learning process. More recently, many authors (e.g., Knight and Cavusgil, 1996; Madsen et al., 2000; Oviatt and McDougall, 1994) have found empirical evidence of yet another type. Some exporters are born global. These are firms that aim at international markets or even the global market from their inception. They do not seem to follow any kind of staged learning process leading to internationalization, i.e., their behaviour is beyond leapfrogging.

Nowadays most host countries, developed and developing alike, engage in an ever-increasing ‘race’ to attract FDI and MNEs’ activities (Ghauri and Oxelheim, 2003). FDI attraction is one of the main ways by which governments seek to stimulate fast-track economic growth, under the assumption that the positive spillovers from FDI outweigh possible negative effects. This generalized, unprecedented chase for MNE operations is evident in the number of pro-FDI policy measures successively implemented (UNCTAD, 2004) and in the increasing proactivity and targeting of FDI-related policies. Countries (and even subnational jurisdictions) scramble to attract projects and to boost their attractiveness by granting higher incentives than their locational competitors. By and large, relevant research has serious doubts on the long-term effectiveness of such incentives (Young, 2004).

When multinational firms shop the globe for possible investment locations, local capabilities are among the key variables influencing their decision. Everything else being equal, more highly developed human capital attracts more sophisticated foreign direct investment. But the relationship between human resources and capital flows is not confined to the situation pre-entry. Post-entry, foreign investors influence the demand for and the supply of skills. For example, they may approach a local training institution in order to obtain customized courses that produce graduates with a set of skills and competences the firms need, or influence the capabilities of their local suppliers along the value chain.

Corporate R&D, traditionally one of the most shielded and most centralized activities in the corporate value chain, has experienced a rapid internationalization over the last decade and a half. The risks of technology leakages, expensive double inventions, difficulties to control and a desire to reap economies of scale have traditionally led firms to concentrate their R&D activities within close proximity to corporate headquarters (see Ambos and Schlegelmilch, 2004; Pearce, 1989). A changing competitive environment, the increasing dispersion of knowledge and the concentration of competencies in so-called ‘pockets of knowledge’ around the world, has forced firms to absorb the risks of loosening control on their core competencies and to set up R&D units in overseas locations.

The World Trade Organization (WTO) is a trade regime that could be seen as one of the driving forces behind globalization of trade. The WTO is also one of the most efficient regulators of international trade. It therefore represents both a catalyst of, and a limitation on international trade. Since the Uruguay Round the WTO has become increasingly important for member states and their industry, as it has expanded to new areas such as intellectual property, services and even some investment. The WTO is the host of 148¹ vastly diverse member states. The multilateral principle of the WTO has, however, on many occasions been challenged by the unilateral actions of the US and the EU.² Rugman (2001) claims that these two actors are situated, so to speak, at the power-centre of the WTO because of the vast size of their domestic economies and the absence of effective regional groups in the rest of the world. However, the expectation was that the creation of the WTO dispute settlement procedures in 1994³ would provide peripheral as well as central member states and their companies with greater incentive to bring cases to the WTO (Croome, 1999; Schott and Buurman, 1994; Whalley, 1996). The question is therefore: who benefits more from the WTO system: companies from central, or companies from peripheral WTO member states?⁴