Should an emerging multinational go for full ownership or should it limit itself to partial risk? In this second part of our coverage of Andrei Panibratov’s book International Strategy of Emerging Market Firms, we look at the ownership models that multinationals espouse in their forays abroad: partial ownership via joint ventures, or wholly-owned subsidiaries.
When a company has decided to make the jump abroad, and therefore risk its hard-earned funds in a foreign environment, it faces the choice of going all the way – via a wholly-owned subsidiary (WOS) – or hedging its bets by creating a local joint venture (JV) with a partner company.
JV or WOS? The choice mostly reflects a corporate attitude toward risk, but not only.
Joint ventures, according to author Andrei Panibratov, are particularly suited when the host-country partner can contribute more than just money. For example if the partner has links to local suppliers, or institutions, or can manage local staff. A partner can contribute important resources to make the joint venture successful. Yet joint ventures, like any partnership, can hit hard times. Trademark sharing can prove problematic. Intellectual property can escape. Differing expectations by the partners can toll the bell of the union.
This helps explain why wholly-owned subsidiaries can offer solace to multinationals seeking expansion. Although 100% ownership might require deeper pockets upfront, it does provide full control and decision-making autonomy.
What explains the ownership choice of a multinational expanding beyond its domestic borders? Andrei Panibratov introduces us to a special alphabet soup: OLI, TCA and RBV; three theoretical frameworks that provide academic underpinnings to understand corporate choices.
The Ownership, Location and Internalization (OLI) theory emphasizes the benefits that ownership carries, namely in terms of competitive advantage and proprietary skills. The Transaction Cost Approach (TCA) weighs the costs and benefits of ownership options, with a bias for low risk: a company should invest the smallest amount possible until proven otherwise. Lastly, the Resource-based View (RBV) examines value based on both partners’ resources, whether financial, human or intangible. The sum of the resources brought to the table by both partners helps to explain whether a joint venture is necessary, or whether the multinational should go it alone.
What influences the choice?
According to Panibratov, four main factors determine the choice of the company going abroad, whether based in developed or emerging markets.
One of the first factors is resource efficiency, and in particular resource sufficiency. For a mining company that has a high level of dependency on local supply in, say, Namibia, it will make greater sense to strike a joint venture partnership in order to insure local supply. Such might not be the case for a chip-maker that has its proprietary technologies and wishes to keep a tight lid on its patent wealth.
Empirical studies have revealed the link between market “appeal” (either sheer size or growth rate) and the degree of ownership sought by multinationals. Smaller markets with lower appeal may justify partial ownership, whereas big, juicy markets (e.g. China, Brazil, USA, Germany, etc.) will make companies consider full ownership, when feasible.
Corruption is more like a yes-no toggle switch, than a ownership mode determinant. Some companies, for moral and for regulatory reasons, will not touch a corrupt country with a 10-foot pole. Other companies, perhaps from countries that themselves experience domestic corruption (e.g. China, Russia, etc.) might not be as fearful, since there is a lower “psychic barrier” to investing in foreign markets with corrupt practices.
For Panibratov, a fourth important determinant of ownership mode in foreign forays is the regulatory level in the destination market: “… too much red tape is a hindrance to getting business done.” (page 26). So, although a minimum of regulatory stability is required for smooth business operations, companies think twice when regulatory levels are high, since this implies additional transaction costs which waste precious management time.
Stay tuned for more
Given the depth of the material in the book, we will publish four instalments of which the first three cover theoretical aspects, while the last article will focus more on the numerous case studies:
* in this issue (Issue 56) we look at ownership modes;
* in Issue 55 we looked at the entry modes for companies going abroad;
* in Issue 58 we’ll look at how globalization models have evolved over time;
* in Issue 59 we’ll see how globalization models were affected by the international forays of companies from emerging markets, namely the BRIC quartet of Brazil, Russia, India and China.
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/