How has the cross-border expansion of multinational companies from emerging markets been different from previous internationalization? Via numerous case studies, Andrei Panibratov highlights similarities, but also stresses differences, namely in countries with higher government intervention.
In this third part of our coverage of Andrei Panibratov’s book International Strategy of Emerging Market Firms, we turn from theoretical realms to down-to-earth stories of emerging multinationals expanding beyond their borders into foreign lands. The numerous case studies throughout the book confirm the fundamental basics of going abroad, but also stress some interesting differences, namely in handling the geo-politics of countries with heavy handed governmental intervention in business, and in overcoming the liability of foreignness, a handicap that emerging market firms need to address.
Russia: letting the bear loose
Perhaps the most revealing insights are on Russian multinationals, where Panibratov benefits from first-hand exposure. His analysis of Alfa-Bank’s expansion, first into neighboring former Soviet Republics, shows the influence of cultural similarities (language, government influence, ways of doing business) in the choices when going abroad. Yet, in a later phase, Alfa-Bank went beyond the ex-Soviet Republics, into established financial markets or low-tax havens, in pursuit of the cash from newly wealthy Russian tycoons or companies needing international financial support. For steelmaker Severstal, international expansion boomed in 2005, but maybe too much so. Its resource-seeking acquisitions have born out well in areas such as Africa and Kazakhstan. But its capability-seeking ventures in the USA or Europe had lackluster results, leading to sell-offs as of 2011. So one could say that Severstal used international forays as a means to increase its knowledge of foreign markets and improve its management overall. It was only a matter of time for $158 billion strong Gazprom, the Russian state-owned oil & gas giant, to foray out of its Siberian homeland into foreign pastures. Its abundant cash flows meant that acquisitions in its core business and in diversified upstream or downstream segments were all within reach. Yet the company also realized that government ownership came with strings attached: some foreign investments came as diktat; yet, when in dire straits, the company could rely on the deep pockets of the world’s 10th largest economy.
China: reclaiming its historic importance
Like many Chinese manufacturers, Hangzhou-based Geely started with exports of its low-price cars, namely to other emerging markets in the Middle East, Eastern Europe, and South America. Exports exploded from 15,000 units in 2012 to over 120,000 units one year later. Geely’s first toehold in foreign investment was via assembly plants in some foreign markets, where Geely vehicles were built up from imported kits. Geely then bet bigger in the UK, with two acquisitions linked to the urban taxicab market (Emerald Automotive and then Manganese Bronze, the famed maker of the spacious black London cabs). Yet the biggest bet was on Volvo, which Geely acquired in 2010.
For ZTE, the Chinese manufacturer of telecoms networking equipment, handsets and terminals, international expansion occurred in three distinct phases. Phase 1 (1995 to 2004) involved market analysis and then penetration to select emerging areas, namely Indonesia. Phase 2, until 2009, was kick-started by ZTE’s listing on the Hong Kong stock exchange. ZTE galloped into further markets such as Brazil, India, Russia or Pakistan. In 2005 the company declared a “year of internationalization”, and promptly moved its international headquarters to Singapore, where 14 expansion areas were defined, comprising 70 target countries. Phase 3 has seen expansion into tougher, well established and highly competitive markets, namely in the developed world. Of key importance for ZTE is the international scope of its research and development branches, and the company has spawned over twenty R&D centers, mostly in China, but also including France and India.
Brazil: leveraging off domestic strengths
For his analysis of Brazilian multinationals going abroad, Panibratov chose companies in the primary and secondary sectors. On the one hand Vale, the mining and metals giant, and at the other end Embraer, the aircraft manufacturer. Mimicking other large extraction giants, Vale’s expansion initially was one of “following the minerals”, taking the $38 billion company beyond the Brazilian underground into remote areas of Asia or Africa. Yet Vale’s expansion also confronted the underground of shady business deals, with corruption being a frequent companion to deal-making, especially in low governance emerging markets.
For Embraer, international expansion meant following its export footsteps, namely by setting up maintenance centers in the USA and then France. Yet the company moved from wholly-owned to joint venture for its Chinese expansion, where Harbin Aircraft was selected as the local partner to actually assemble the ERJ 145 plane locally.
India: brainpower travels well
Tata Motors: Like many emerging market automotive firms, Tata’s various divisions (cars, buses, commercial vehicles) started by exporting low-priced ready-made vehicles, mostly to other emerging markets. As of 2001, the success of the Indica car model in India filled Tata’s coffers, giving the company a needed ego boost, and enabled the financing of foreign ventures. Expansion strategies adapted to local opportunities: in South Korea it was outright acquisition of Daewoo Commercial Vehicles; for bus manufacturing, joint ventures were inked in Spain and then Brazil; another JV was formed in Thailand for pickup trucks. In a striking parallel to Geely’s acquisition of Volvo, Tata made its biggest move in 2007, when it acquired Jaguar and Land Rover from Ford for $ 3 billion.
Wipro Technologies, an Indian IT firm specializing in services (software, technology infrastructure, business process outsourcing, product engineering), international expansion came first by lining up an amazing portfolio of clients from developed markets, namely the USA. Yet the company soon realized that a “string-of-pearls” tactic made the most sense: making small, easily digestible acquisitions, namely in one of its twelve industry specialities. These acquisitions enabled Wipro to transfer knowledge, and yielded faster entrance into highly specialized markets where greenfield efforts would have been slower or failed altogether.
Similar yet different
So, in the end, according to Andrei Panibratov, how does the international expansion of emerging multinationals differ from that of developed multinationals?
Well, there is no revolution here. The expansion justifications and models (exposed in our two previous instalments, here and here) remain largely the same. Yet Panibratov does emphasize two important differentiators.
The first has to do with an ability by emerging multinationals to navigate the intricacies of going abroad into countries of, shall we say, looser governance. These regions have higher levels of government influence in business, yet regulations are perhaps not written out explicitly. The leaders of emerging multinationals are often well acquainted with such vagaries, and can hold a steady course through these shoals.
Another differentiator? The liability of foreignness and its impact on the perception of an emerging multinational in various host countries. Is the German market ready to buy Indian or Chinese cars? Will Silicon Valley companies accept Indian programmers? This liability of foreignness is important since it implies additional costs for the emerging multinational. Factors such as cultural differences between home and host country, or unfamiliarity with host country conditions, or lack of proper network, or even negative nationalistic tendencies can all be part of the foreignness liability equation. They can prove strong obstacles in the race by emerging multinationals to grab back some of the market share from their developed brethren. But don’t expect this to hold them back.
Book Review in three parts for your reading pleasure
Given the depth of the material in the book, we have published three instalments of which the first two cover theoretical aspects, while the last and current article focuses more on the numerous case studies:
* in this issue (Issue 57), we have looked at how globalization models were affected by the international forays of companies from emerging markets, namely the BRIC quartet of Brazil, Russia, India and China.
* in Issue 56 we looked at the various ownership modes for emerging multinationals;
* in Issue 55 we looked at the entry modes for these companies going abroad;
Title: International Strategy of Emerging Market Firms: Absorbing Global Knowledge and Building Competitive Advantage
Author: Andrei Panibratov
Professor Andrei Panibratov is Professor, Department of Strategic and International Management, and Deputy Director, Center for the Study of Emerging Market and Russian Multinational Enterprises at Graduate School of Management at St Petersburg University. Professor Panibratov’ research and teaching area concentrate on internationalization of emerging economies’ firms, outward FDI from Russia, and Russian multinationals. Andrei is the author of a number of books and books’ chapters, several case studies, and many articles published in Russia and abroad. His recent book – Russian Multinationals: From Regional Supremacy to Global Lead, published with Routledge in 2012 – discusses the rise of Russian multinationals, examines Russian multinationals’ activities in key sectors, analyses the relationship between Russian multinationals and the Russian government and concludes by assessing how Russian multinationals are likely to develop in future. Another book of prof. Panibratov – «International Strategy of Emerging Market Firms: Absorbing Global Knowledge and Building Competitive Advantages» – published with Routledge in 2017, is dedicated to the key emerging economies – Brazil, Russia, India, China (BRIC), and also to other developing economies. This book presents theoretical foundations and detailed case studies of emerging multinationals’ activities and explains how emerging market firms accumulate and exploit market knowledge to develop competitive advantages while operating globally. Andrei serves as a board member of several leading international academic journals on international business and emerging markets.
Professor Panibratov holds his MBA degree from University of Wales (UK), PhD in Economics degree from the St. Petersburg State University, and Doctor in Economics degree from Moscow State University of Management. Andrei has visited professors’ training programs and development workshops at Haas School of Business UC Berkeley and Texas A&M University (USA), HEC-Paris (France), Aalto University School of Management (Finland), ECCH (France, Singapore) and WACRA (UK, Canada). Andrei was participating in consulting and research projects for World Bank (USA), UMIST (UK), City University of New York (USA), Aalto University School of Economics and Tampere University of Technology (Finland), European and Russian companies.
Professor Panibratov has sound teaching experience in Russian MNEs and emerging markets. He developed four new courses on emerging markets (including Russia) and their firms (including Russian MNEs) and has been teaching it in the GSOM programs and in a number of Russian and international universities and business schools since 2009. He is also a regular presenter or keynote speaker in research seminars and conferences around the world.
Professor Andrei Panibratov was nominated and elected as the National Representative of Russia and the Board Member of the European International Business Academy (EIBA) in the EIBA General Assembly in Vienna in December 2016. This is the first time when Russia’s representative appears at the EIBA Board. The appointment was made based on the EIBA Board recognition of the outstanding results of Professor Andrei Panibratov in the development and promotion of EIBA ideas and research directions among Russian scholar, and also with the respect to his important contribution in the IB studies in the context of Russia. Election of Professor Andrei Panibratov as of EIBA National Representative and Board Member is an outstanding opportunity for Saint Petersburg University to increase its international recognition and to bring Russian business and management scholars to the IB research agenda.
Click here for more details: http://gsom.spbu.ru/en/gsom/faculty/fulltime/panibratov/