Whither global strategy? A dilemma for developing country firms Frenky Tirtowijoyo Susilo Li Bin Shaik Jaheer Abbas Tan Shao Yi Tshering Tashi
Setting the stage (Speed) • Speed of foreign direct investments from developing and transition economies (UN, 2006) –Outflows: US$133 B. –Total value: US$1, 400 B, or 13% of world total (was US$335 B in 1995). –Chinese acquisitions exceeded $5 B (was US$450 M in 2001).
Setting the stage (Value of FDIs) Rank Value ($ M) Acquiring company Home economy Num. of deals 1 36, 475 Sing. Tel Singapore 49 2 15, 205 Hutchison Whampoa Ltd Hong Kong, China 58 3 12, 799 Weather Investments II Sarl Egypt 4 12, 484 Cemex Mexico 40 44 1 5 9, 098 DBS Group Singapore 6 8, 152 Ambev Brazil 5 7 6, 925 Saudi Oger Ltd Saudi Arabia 2 8 6, 325 Metro Curtainwall & Cladding Malaysia 2 9 6, 209 Investcorp Bahrain 29 10 5, 634 America Movil SA Mexico 19 11 5, 567 CITIC Group China 22 12 5, 540 Singapore Power Pte Ltd Singapore 8 13 5, 469 Flextronics International Ltd Singapore 50 14 4, 567 CNPC China 5 15 3, 824 Mobile Telecommunication Co Kuwait 3
Setting the stage (Range) • Earlier: Newly industrialising economies of Asia, LA and West Asian economies Economy 2005 ($ M) 470, 458 British Virgin Islands 123, 167 Russian Federation • Present: Wide range of developing countries including lower income economies Hong Kong, China 120, 417 Singapore 110, 932 97, 293 Brazil 71, 556 China 46, 311 Malaysia • Top five sources accounted for 66% of the stock of FDI from developing economies Taiwan, Province of China 44, 480 South Africa 38, 503 Korea, Republic of 36, 478
Setting the stage (Industrial scope) • Diverse: Oil extraction, cement production, automobiles, PCs, cell phones and services Industry 2005 ($ million) Percentage share Primary (Natural Resources) 11, 420 1. 3 Secondary (Manufacturing) 117, 047 13. 5 Tertiary (Services) 704, 014 81. 0 37, 075 4. 3 Unspecified
Agenda • International strategy or stay-put ? • Low-profile global strategy or to tackle matured, global markets ? • Acquisitions vs. Greenfield vs. Alliances ? • Must the firms tackle globalisation? Is it too late ? • Will FDIs hurt or help the firm’s globalisation process ? • Concluding remarks
International strategy or stay-put? • Natural extension of exports (UN, 2006) • Need to access markets and resources. • Subsequently reduce production and transaction costs through coordination of activities. • Institutional factors (Deng, 2007; Asiamoney, 2007 b; Liu and Li, 2006; Luo, 2002) • Bounded rationality—active government involvement in businesses— generate foreign exchange reserves, import strategically vital materials, export -oriented policies. • Bureaucracy—difficult to get land, licenses and approvals. • Domestic supplies cannot satisfy rapid economic growth rate, limited potential for further development. • Produce closer to targeted market and to bypass non-tariff barriers on imports. • CNPC, CNOOC, Sinopec, Minmetal, Nanjing Automobile, Lenovo.
International strategy or stay-put? • Induced by developed countries (Lancher, 2007; Liu and Li, 2006; Bonaglia et al. , 2007). • Trade liberalisation/WTO membership has resulted in global companies investing in home country. Best defense is to have presence in competitors’ home markets. • Lenovo: Harassment by Dell and HP in China.
Low-profile strategy (focused, smaller markets) or tackle matured global? • Exploration/Asset-augmenting perspective (Rui and Yip, 2008; Deng, 2007; Hirt, 2006; Asiamoney, 2007 a; Liu and Li, 2006; Roy, 2005; Hoskisson et al. , 2004; Luo, 2002) • Developing country firms—latecomers in industrial countries; lack innovation and technological capabilities. • To compensate for competitive disadvantage: quickly gain new resources and capabilities: market intelligence and power, technological know-how, management expertise and reputation. • Location, internationalisation, and ownership advantages. (Dunning, 1981) • China: Lenovo (branding, technology and US distribution channels), Huawei (technology), Haier (branding), Minmetal & Sinochem (resources). • Mexico: Cemex (market). • Russia: Severstal, Novolipetsk, Norilsk (metals). • Korean Republic: Samsung (technology, market). • To realise and augment potential competitive advantage. (Nayyar, 2008) • Haier deliberately chose tough markets (e. g. , Germany) for “easier” future acquisitions.
Low-profile strategy (focused, smaller markets) or tackle matured global? • Exploitation (Rui and Yip, 2008; Roy, 2005; Hoskisson et al. , 2004) • To exploit existing group resources and capabilities in other developing countries. • Chinese: Strength and numbers in technical education, govt. investment in science and technology; SOE low costs of finance. • Middle East: Deep pockets. • Egypt: Orascom Telecoms (Wind Telecom). • Singapore: Sing. Tel (Optus, Globe, Bharti, Telkomsel, AIS), DBS (SEA), PSA (world’s second largest port operator).
Acquisitions vs. Greenfield vs. Alliances? • Acquisitions (Slaughter, 2008; Rui and Yip, 2008; Liu and Zou, 2007; UN, 2006) • Institutional environment so different from those firms they seek to imitate: time pressures, need to acquire multiple capabilities at once. • Easy, fast way to obtain a complete set of new capabilities. • Overcome institutional constraints (lack of IP laws, local protectionism) and augment institutional advantage (government policies). • New voices in national-security: –CNOOC vs. Chevron vs. US Committee on Foreign Investments (CFIUS). –China Minmetals on Canadian copper and zinc miner Noranda. –Russia’s Severstal on US’s Rouge steel, Italy’s Lucchini and Canada’s Stelco. • Requires prior development of organisational capabilities to absorb learning.
Acquisitions vs. Greenfield vs. Alliances? • Greenfield (Slaughter, 2008; Yin and Shanley, 2008; UN, 2006) • To protect proprietary technologies. • To develop, acquire, and transfer technology and knowledge to head office (e. g. , Haier). • Industry conditions are influential in deciding M&A or greenfield. –Market concentration, high barriers to entry, slow growth or excess capacity may hamper • Alliances (Yin and Shanley, 2008; UN, 2006) • Value of benefits (e. g. , technology) must be easily quantifiable. • Easier to exit when necessary. • When there is regulatory scrutiny and increased costs of regulatory compliance. • Continuing cooperation among partners is beneficial and where centralised control harm cooperation and destroy a combination’s value. –Huawei: Siemens, 3 Com (2003), Symantec (2007) • Specific choice of location (UN, 2006) • Host and target country advantages or assets: policy framework, business facilitation measures, conditions and economic determinants.
Must the firms tackle globalisation? • Most exposed to global competition (Rui, 2008; UN, 2006) – 81%: Tertiary activities (business, financial and trade-related) • Infosys, Wipro. – 13%: Manufacturing (automotives, electronics, IT services) • Almost all Asian: Acer, Huawei, Samsung Electronics, Hyundai Motor, Kia Motor. – 1. 3%: Primary (oil, gas, mining) and resource-based (metals, steel) • Competing head-on with their developed-country rivals. • In all developing regions and in the Russian federation. • Why such origins and sectoral composition? –Comparative advantages: cost factor variations in labour, land capital. • Asset-augmenting –Competitive advantages: fostered through government policies and institutions. • Asset-exploiting (but make sure it is more profitable to do FDI than just exports) –Ownership and access: Relative advantages. –Products/services, processes and value-chain niches: Market niches. –Networks and relationships: Intergovernmental relationships. –Organisational structure and business culture: Institutional affinity. –Ownership form: China, Singapore, South Africa.
Is it too late to tackle globalisation? • Could it be too early instead? Dunning’s investment development path theory (five stages): related to a country’s level and structure of economic development. (UN, 2006) UK Germany Finland Sweden France Taiwan Net India China S. Africa outbound 0 Brazil investment Nigeria Saudi Arabia Rep. Korea per capita USA Philippines Malaysia Hong Kong Singapore Stage 1 Stage 2 Stage 3 GDP per capita Stage 4 Stage 5
Is it too late to tackle globalisation? • Five stages from being recipient to source of FDI –Stage 1: Few country-level factors that will attract inward FDI. –Stage 2: Inward FDI starts to rise (domestic firms are still developing). –Stage 3: Inward FDI starts to decline (domestic firms more competitive). –Stage 4: Outward FDI ≥ Inward FDI (domestic firms capable of competing with foreign firms). –Stage 5: Net investment position of country fluctuates around zero. • Also predicts composition of investments: –Both inward and outward FDI: Move from low-tech/resource-based industries to high value-adding activities. • Limitations of Dunning’s IDP concept –Location-specific aspects count: Singapore, very negative NOI per capita, thanks to its strategic position in SEA (prime location for regional HQ, operations and services). –Many stage 1 and 2 developing countries are investing significant FDI overseas (probably because they receive large amounts of inward FDI, so the net cancels it out). –Stage 1 and 2 companies are conducting FDI earlier than might be expected? • Need to possess firm-specific or competitive advantages to facilitate FDI. • India, a poor country, but has significant number of companies with a strong industrial base.
Will FDIs help or hurt the globalisation process? • Economic (Asiamoney, 2007 a; UN, 2006) • May be locked into sourcing all of its products from parent entity. • Asset-exploiting • Relatively quick improvement of financial and market performance. • Asset-augmenting • Improves competitiveness and long-term performance. • Extent of benefit depends on ability to integrate acquired assets. • Industry restructuring due to efficiency-seeking: e. g. , transfer of manufacturing jobs. • Macroeconomics (financial resource flows, balance of payment, domestic investment), trade and employment effects in the home economy. • Cultural • M&A is tough and requires deep local knowledge and international experience—differ from those prevalent in home country. (Hirt, 2006) • Society (Asiamoney, 2007 b; Liu and Zou, 2007; UN, 2006) • Tata: 70% of group’s 2006 revenues from India, accused of investing too much outside India. • Greenfield packages assets (capital, technology, organisational and managerial practices and market access). i. e. , beneficial spill-over effects.
Concluding remarks • International strategy or stay-put? –Natural extension of exports –Institutional factors –Induced by developed countries • Low-profile global strategy or to tackle matured, global markets? –Exploration/asset-augmenting –Exploitation • Acquisitions vs. Greenfield vs. Alliances? • Must the firms tackle globalisation? Is it too late? –Maybe it is too early instead? • Will FDIs hurt or help the firm’s globalisation process? –Economic –Cultural –Society
References (1) Asiamoney (2007 a). League Tables (M&A)---Chinese acquisitions in the US. Asiamoney, April 2007. Asiamoney (2007 b). India—Tata’s global ambitions show no sign of abating. Asiamoney, July/August 2007. Bonaglia, F. and Goldstein, A. and Mathews, J. A. (2007). Accelerated internationlization by emerging markets’ multinationals: The case of the white goods sector. Journal of World Business, 42, 369— 383. Chen, C. and Findlay, C. (2003). A review of cross-border mergers and acquisitions in APEC Investment Experts’ Group. Deng, P. (2007). Investing for strategic resources and its rationale: The case of outward FDI from Chinese companies. Business Horizons, 50, 71— 81. Dunning, J. H. (1981). International Production and the Multi-national Enterprise. George Allen & Unwin, London. Hirt, M. , & Orr, G. (2006). Helping China’s companies master global M&A. Mc. Kinsey Quarterly. Hoskisson, R. E. and Kim H. and White. R. E. and Tihanyi, L. (2004). A framework for understanding international diversification by business groups from emerging economies. Advances in International Management, 16, 137— 163. Hui, C. S. (2007). India on acquisition trail to push growth opportunities. ICIS Chemical Business, 2(60). Lancher, D. (2007). Tata forges a new giant. Institutional Investor-International Edition, 32(2), 28. Liu, H. and Li, K. (2006). Strategic implications of emerging Chinese multinationals: The Haier case study. European Management Journal, 20(6), 699— 706.
References (2) Liu, X. and Zou, H. (2007). The impact of Greenfield FDI and mergers and acquisitions on innovation in Chinese high-tech industries, Journal of World Business, doi: 10. 1016/j. jwb. 2007. 11. 004. Luo, Y. (2002). Partnering with foreign businesses: Perspectives from Chinese firms. Journal of Business Research, 55, 481— 493. Nayyar, D. (2008). The internationalization of firms from India: Investment, mergers and acquisitions. Oxford Development Studies, 36(1). 111— 131. Roy, S. (2005). Prey becomes predator. Euromoney, 36(438), 90— 93. Rui, H. and Yip, G. S. (2008). Foreign acquisitions by Chinese firms: A strategic intent perspective. Journal of World Business, doi: 10. 1016/j. jwb. 2007. 11. 006. Slaughter, M. J. (2008). What Tata tells us. Wall Street Journal (Eastern ed. ). New York, N. Y. : Mar 27, 2008, A. 15. UN. (2006). FDI from developing and transition economies: Implications for development. World Investment Report 2006. New York and Geneva: 2006. Yin, X. and Shanley, M. (2008). Industry determinants of the “merger versus alliance” decision. Academy of Management Review, 33(2), 473— 491. Young, S. and Huang, C. -H. and Mc. Dermott, M. (1996). Internationalization and competitive catch-up processes: Case study evidence on Chinese multinational enterprises. Management International Review, 36(4), 295— 314.
Thank You
What we covered tonight • International strategy or stay-put? –Natural extension of exports –Institutional factors –Induced by developed countries • Low-profile global strategy or to tackle matured, global markets? –Exploration/asset-augmenting –Exploitation • Acquisitions vs. Greenfield vs. Alliances? • Must the firms tackle globalisation? Is it too late? –Maybe it is too early instead? • Will FDIs hurt or help the firm’s globalisation process? –Economic –Cultural –Society
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