Published on January 19, 2014
A Study of Internationalization of Companies from Emerging Economies (China and India) into Less Developed Countries in Africa Tonmoyee Saikia, Viveka Sra, Monika Tanwar, Dheeraj Kumar, Van Acoleyen Ellen, Vishrut Shukla 1. Introduction In this age of globalization, trade relations across borders and multinational companies have become the norm of doing business. Taking this trend of open markets forward, the rise of a new pack of multinationals from middle-income, emerging and developing economies that are shaking up entire industries, is a fairly recent development. In this paper, we focus on the reasoning and execution of internationalization strategy adopted by emerging-economies multinationals (EMNCs) from India and China for their investments abroad in less developed countries, especially focusing on their activities in Africa. 2. Why do EMNCs from India and China internationalize? A variety of factors influence the decision of EMNCs to internationalize beyond their home market. Before listing down these factors, we review existing literature and then study relevant frameworks which we can use to derive the reasoning of internationalization. 2.1. Theoretical Literature Review of General Frameworks Dunning developed a holistic framework named the OLI framework i to explain why MNCs in general might want to choose Foreign Direct Investment (FDI) in foreign countries instead of any other method such as licensing use of their name or product to foreign producers or sellers, or simply exporting their products for sale in foreign countries, or outsourcing parts of its production process (eg: back-office activities such as customer service or payroll processing) to overseas locations. The OLI framework points out three required elements for a firm to engage in FDI: (a) Ownership Advantage which means that the firm has valuable resources and/or capabilities which allow it to achieve positive profits. As a result of having specific assets, the firm may have comparatively lower costs or it may be able to charge higher prices than competitors and potentially make greater economic profits, both in short and long term. Low-cost production process, brand equity or superior technology or knowhow are examples of such assets. The framework thus allows for answering the question of why firms internationalize and will be explored further with examples in later part of this paper; (b) Location Advantage means the firm can attain higher profits when producing the good or service abroad, rather than producing it in the home market and exporting it to foreign markets. This advantage answers the question of where companies internationalize and locational nuances will be dealt with in detail in the relevant subsequent section of this paper; and (c) Internalization Advantage meaning it is most interesting or most profitable for the firm to internationalize through owning a facility abroad, rather than licensing, franchising or entering by forming a joint venture with another firm in the target market. This advantage has a role in explaining the question on how firms internationalize i.e. deciding upon which entry mode to take. We will touch upon this advantage once again when we discuss the entry modes in detail in later sections of this paper. Over time, Dunning has added a number of supplementary features to the powerful OLI framework. A significant one of these new decisional parameters is whether foreign direct investment is in line with the firm’s
long-term strategy, and hence, was put forward as a fourth element (Dunning (1993a, p.79)), besides ownership, location and internalization elements already existing in the framework ii. As an implication of the OLI framework, Franco et aliii describe the four main motivations for firms to internationalize. These are: (a) Resource-seeking Motivation where the main aim of the firm’s internationalization is to acquire resources at a lower cost than in its home country or that are not or insufficiently available in its home country. An example of this is the strategy of Chinese companies to internationalize in Africa for assuring access to sufficient natural resources available there; (b) Market-seeking Motivation where the firm’s actions are driven by having access to bigger markets. Sub-motivations can be of the form such that the firm wants to avoid the cost of serving the market from a distance (recently, this entails also the ‘cost’ of potential competitors more easily entering the target market, if the firm does not have a physical presence there), to better adapt its product or service to suit the tastes of target market and needs or to follow its up or downstream partners that have started up foreign subsidiaries there; (c) Efficiency-seeking Motivation which comes into play in case of two situations: either when firms try to benefit from lower cost or availability of factor endowments in various countries or when they try to leverage benefit from economies of scale and scope or differences in consumer tastes and supply capabilities and; (d) Strategicasset-seeking Motivation where rather than exploiting its specific asset (ownership advantage), the firm wants to internationalize in order to acquire new assets such as technology or process know-hows from foreign players. 2.2. Theoretical Literature Review of Frameworks Suited for EMNCs Beyond the OLI framework which discuss in general why firms adopt the FDI route to internationalization, there are frameworks better suited to emerging market multinationals or EMNCs such as the Comparative Ownership Advantage framework. Sun et al. (2012)iv integrate the ideas of the theory of comparative advantage by Ricardo and the OLIframework by Dunning to explain mergers and acquisitions by EMNCs and validate their framework by undertaking a research on cross-border M&As by Indian and Chinese companies. Ricardo’s points can themselves partly explain the evolution of China’s comparative advantage from exporting resource-intensive primary products, over labourintensive products, to capital-intensive products and increasingly doing M&As, through the changes in factor endowments and relative prices of those factors. The OLI framework is very well capable of explaining FDI by MNCs from developed countries. However, the ownership advantage enjoyed by EMNCs is not that outspoken since those companies seldom possess top-class management, organization efficiency, technology or product and process know-hows, so much so that few researchers even go to the extent of propagating that EMNC’s, in turn, have an ownership disadvantage. Sun et al. try to integrate and adapt both theories with the aim of more fully explaining EMNCs’ internationalization. Similar to the theory of comparative advantage, the authors start from differences in factor endowments across countries which lead to differences in capability and resource structure at the ownership level, possibly leading to comparative ownership advantages for firms in that country. These advantages in fact result from the complementarity of country-specific advantages (CSA) based on differences in relative endowments of labour and capital in the industry, and firm-specific advantages (FSA) based on the firm’s capability structure. For example, companies could combine their brand building (FSA) with the huge domestic market (CSA), which could lead to a strong brand (comparative ownership advantage) to be
utilized while internationalizing. The term comparative is used because the EMNCs do not have an absolute advantage over MNCs from developed countries and other EMNCs. This stems from the theory of comparative advantage as well as international differences in management and technology in sectors lead to differences in firms’ capabilities (FSA), which lead to cost differences. To explain EMNCs engaging in cross-border mergers and acquisitions (M&As), Sun et al. (2012) state that EMNCs acquire foreign companies that have complementarities with their comparative ownership advantage both on CSA and FSA levels. Developing this idea further for five elements, the authors in fact provide an extension of the ownership advantage of Dunning’s OLI framework as per the model below. National-Industrial Factor Endowment Dynamic Learning Value Creation Comparative Ownership Reconfiguration of Value Chain Advantage Institutional Facilitation & Constraint The elements elaborate as follows: (a) National-industrial Factor Endowments where EMNCs try to integrate the FSAs of their target into their own CSAs. Feliciano and Lipsey (2002)v show that EMNCs acquire firms in industries where their home country seems to have a comparative advantage; (b) Dynamic Learning which deals with EMNCs wanting to integrate the CSAs in location and factor endowments of their target market into their FSAs through learning. The example of the Chinese manufacturer of hardware and consumer electronics Lenovo, who acquired IBM’s PC department in 2004, is quite apt here. IBM’s comparative ownership advantage partially stemmed from the United States’ CSA in institutions that stimulate innovation and technologies. By acquiring IBM’s PC department, Lenovo could climb up the learning curve and strengthen its comparative ownership advantage. Since 2011, it has the second largest market share worldwide in manufacturing computersvi; (c) Value Creation where, as already mentioned, EMNCs try to strengthen their comparative ownership advantage with the complementary assets of their target. Following Schumpeter (1934)vii, if firms integrate heterogeneous assets from their different subsidiaries across the world, this should be done through creative destruction since this would lead to value creation for the firm. The importance of the pre-deal approach (how negotiation takes place, the deal structure, hostile vs. friendly takeovers) in post-M&A integration should not be neglected as they have a bearing on the firm’s capability of future value creation. Hostile takeovers, for example, often result in resistance of the target’s management and nonintegration, which leads rather to value destruction than value creation; (d) Reconfiguration of Value Chain when by internalizing the resources from different countries (CSA), EMNCs can move up the value curve and optimize their position in the value chain. For example, in order to satisfy the growing need for resources in China, Chinese EMNCs are particularly investing in resource-rich countries mainly in Africa as shown by the research by Sun et al. (2012) where they focus on backward integration in their value chain. In this way they secure resources and optimize their position in the value chain; and (e) Institutional Facilitation and
Constraints which stem from the fact that a country’s institutions can be both a facilitator and a constraint. The authors focus on the facilitating role of institutions in cross-border M&As based on Luo et al (2010)viii. They show that in India, private EMNCs play the bigger role in large-scale cross-border M&As, whereas in China state-owned EMNCs dominate the scene. Given that the market is comparatively more liberated in India, private enterprises can easily finance their cross-border M&As through well-developed financial markets. However in China, in contrast, the government still controls a lot of crucial elements of the market for example, the financial market consists only of state-owned banks. This gives state-owned EMNCs better access to financing for its cross-border M&As. Gammeltoft et al. (2012)ix try to explain the rise in foreign investments by EMNCs with the contingency theory which maintains if the economic environment changes, companies will adapt their strategies and structures to maintain the fit with the economic environment. By maintaining the fit, companies are able to conserve their performance or to benefit from new opportunities. Nowadays, the global economy is changing rapidly, especially posing new threats and opportunities for emerging markets, in response to which, EMNCs try to maintain the fit by investing in foreign markets. The authors add that for MNCs, a fit needs to be attained on multiple dimensions. For a firm operating in one economic environment, there are typically two fits to be attained i.e. (a) internal and (b) external. Firms must adapt their structure, practices and resources to their strategy i.e. obtain internal fit, which is also linked to the fourth element Dunning added to the OLI framework (FDI must be aligned with the long-term strategy of the firm). Firms adapting their structure, practices and resources to their economic environment do so to achieve an external fit. For MNCs, both internal and external fit are extended to several dimensions (see figure below). The internal fit also includes the relationship between units in different locations and the external fit applies to home, host and global environment. For EMNCs, when investing in developed economies, these fits are definitely even more challenging, since their home country is often characterized by heterogenic and segmented institutional environments, as opposed to the developed markets’ institutional environment. Lack of experience or capabilities in internationalization within the organization or management make this challenge even bigger. 2.3. Explaining Why Indian EMNCs Internationalize Buckley et al. (2012)x research host-home country linkages as an extra element to be added to Dunning’s OLI-framework in explaining the cross-border acquisitions done by Indian
EMNCs in recent years. The authors examine the explanatory power of home-country factors, host-country factors, distance between host and home country and host-home country linkages (both trade and non-trade). A discussion of the latter three categories of factors is held in the next section of this paper where we explore where EMNCs choose to internationalize. The home-country factors researched are the (a) domestic capital market; (b) knowledge of English language; and (c) foreign exchange rate. They show that the number and value of Indian EMNCs’ cross-border acquisitions is positively related to the domestic stock market index and English-speaking countries, and negatively related to the depreciation of the USD against the INR. In an independent study by Accenture captured in the form of the report ‘India Goes Global: How Cross-Border Acquisitions are Powering Growth’xi, the firm researches the motivation of Indian companies to internationalize. The findings highlight three main motivations of Indian EMNCs: (a) Need to Find New Markets to Sustain Top-line Growth which is related to the market-seeking motivation in Dunning’s framework discussed earlier. Researching this motivation further, they find that 76% of Indian companies going abroad do so in order to operate closer to their customers; (b) Need to Expand Own Capabilities and Assets by acquiring specific skills, knowledge and technology that are either unavailable or of inadequate quality at home, this being directly related to the strategic-asset seeking motivation in Dunning’s framework; (c) Need to Expand Product or Service Portfolio to increase their market share which also relates to the strategic-asset seeking motivation in Dunning’s framework. The Accenture report also argues that ‘the setting’ i.e. countryspecific advantages are favourable as well in this case. In India, a favourable political and economic environment has been created over the last couple of years. For example, it was permitted to make overseas investments for 100% of net worth in 2004, the Reserve Bank of India allowed domestic banks to lend to Indian companies for overseas acquisitions in 2005 and foreign exchange reserves have increased. Also, financing conditions have been improved through positive evolution of the banking system and India’s credit rating and an increasing number of private equity players. The business confidence is growing as well because of the growing amount of Indian managers who have studied abroad and have experience in operations of MNCs and/or outsourcing. 2.4. Explaining Why Chinese EMNCs Internationalize Wang et al. (2012)xii test the explanatory power of the institutional theory, industrial organization economics and resource-based view of the firm (each theory focuses respectively on country, industry and firm level factors) for Chinese outward FDI. They find that the industrial and institutional/country level play the biggest role in explaining these investments, whereas the firm-level variables for technological and advertising resources (measured as the ratio of respectively R&D and advertising expenditure to total sales) are not as important. The industrial factors include (a) industry competition measured as the growth in the number of firms in each 4-digit industry since firms often react to higher competitive pressures by engaging in international expansion; (b) level of foreign presence in an industry measured with capital share accounted for by all foreign-owned enterprises in each 4-digit industry; and (c) high vs. low-technological industry. The institutional factors include (a) state ownership and (b) whether the industry is ‘encouraged’ or not. Chinese government has recently distinguished between industries that are encouraged to expand internationally and industries which are not. The industries that are encouraged gain government support in areas
such as tax collection, fast approval process, customs etc. Firm-level variables such as R&D, advertising, human resources and operating costs can account for variations across companies of the same industry. Research by Zang et al. (2011)xiii focuses on the role of institutional characteristics in the completion of cross-border acquisitions by Chinese EMNCs. They find that cross-border acquisitions by Chinese EMNC are less likely to take place if any of the following holds: (a) target country has institutional quality worse than China itself. Good institutions facilitate international transactions in two ways. First, they ensure clearly defined rules of how to acquire firms in the target country, which reduces costs and time for the acquirer to decipher the procedures and regulation and second, they ensure strong legal enforceability and in this way extend protection to the acquirer while lowering the asymmetric information costs; (b) target industry is sensitive to political concerns due to which it is more likely that host country resists acquisitions in specific types of industries; or (c) the acquiring firm is stateowned as state-owned firms have as good as a sovereign backing. The authors also add that the quality of the host country’s institutions moderate the impact of learning experience from prior acquisitions and that of state-ownership in the acquirer (i.e. host country’s institutions in free markets and democracy) on likelihood of deal completion. Another research by Niosi et al. (2009)xiv focusing on Indian and Chinese software EMNCs find that, although Chinese and Indian software industries followed two different paths in the past, they are now converging partially. Some Chinese software companies are increasingly outsourcing their services, as opposed to the industry-wide focus on domestic services in the past. Indian software companies, besides their past focus on export, are now increasingly paying attention even to their home market. The authors test the explanatory power of the Product Life Cycle theory and the OLI-framework and find confirmation with them. Also, cultural factors and asset exploitation vs. asset acquisition can explain elements of the internationalization of those companies. However, the authors argue that there is no single path of achieving internationalization since each firm’s experience has its unique aspects. They find that the largest software EMNCs, both from China and India, are trying to move up the value chain to higher value-added segments. 3. Where do EMNCs from India and China internationalize? Indian and Chinese EMNCs have invested in different under developed countries across various sectors of the industry. In this section, we take a closer look at how these firms decide where to invest and examples of sectors which are attracting investments especially in Africa. 3.1. Theoretical Literature Review of General Frameworks In Dunning’s OLI framework, Location Advantage i.e. when the firm can attain higher profits by producing goods or services abroad, rather than producing in home markets, aids firms to decide where they must invest to internationalize. Possible types of location advantage that a firm can have are: (a) access to natural resources needed to produce products (eg: oil and mineral resources) or cheaper to extract natural resources at the location tying to the resourceseeking motivation discussed previously; (b) less costly capital and labour inputs which the production uses intensively; (c) favour extended by the target country’s government to encourage local production which may result in unexpected positive externalities for the investor firms (eg: reduced tariffs on import of goods produced elsewhere, tax breaks,
supporting policies, land availability, differential treatment etc.); (d) transportation costs to the markets where the product is sold (home country, host country or internationally) may be lower if production is done in that country; and (e) market size of the target location itself may be lucrative tying directly to the market-seeking motivation discussed previously (eg: telecom EMNCs are entering under developed markets to capitalize on the ongoing mobility revolution as these economies open up). Even if production is more profitable in the foreign country, the EMNCs need not always own the facility since several methods of investments exist which will be discussed in the next section. In case of Indian EMNCs, host country factors such as market size, local intangible assets and openness of host economy to investments are the significant factors deciding their internationalization strategy whereas availability of natural resources does not come across as a significant decision variable. Buckley et al. in their work identify distance between the home and the host country as another prominent factor which guides the selection of host country for internationalization. Ghamawat (2001)xv suggested the popular CAGE (Cultural, Administrative, Geographical and Economic) distance framework. While economic dimension of distance, characterised by endowment of natural resources, labour, knowledge resources and GDP of the host country, has already been highlighted previously, administrative dimension relies on host-home country linkages covered later. Both geographical (physical) and cultural dimensions of distance contribute immensely to the host country selection for investment by firms by affecting the transport costs and transaction costs respectively. Physical distance between the host-home countries, as described above, directly contributes to transportation costs if the market of products is home country. The geographical distance obviously does not matter much for services. Cultural distance, defined as the way people interact with one another, firms and institutions, religion, language and societal norms, is instrumental is creating difference between countries and deter trade. Cultural closeness helps reduce transaction costs and lowers the risks of entering a foreign market owing to similarity in customs, ways of doing business and familiarity or greater understanding of business laws. Buckley’s work talks about host-home country-specific linkages that are reliable measures of administrative distance between the two countries as proposed by Ghamawat. Social, political and economic ties between the two countries in question can become a very significant source of competitive advantage for firms looking to internationalize as such country-specific linkages become FSAs in the long-term as compared to competition. As facilitators of international economic exchange, country-specific linkages in the form of trade body memberships, bilateral agreements and treaties such as recognizing each other as the most favoured nation for doing business and those guaranteeing relaxed investment norms etc. are becoming increasingly important to the global value chain of firms. While foreign-trade linkages usually begin with simple transactional exports, firms often decide to explore other options such as joint ventures, FDI etc. to increase their control in the investment as their understanding of the foreign market grows. Even non-trade linkages i.e. the socio-politicaleconomic relations such as membership of nation forums (eg: G20, G15, Commonwealth Nations etc.) contribute to the complementarities among countries which invariable find a reflection in the form of institutional near-uniformity provided by all members to firms intending to internationalize in one another. In case of Indian EMNCs, the linkage variables performed favourably for foreign investments with North-South linkages at country-level also being significant.
3.2. Theoretical Literature Review of Frameworks Suited for EMNCs Fung and Herrero (2012)xvi in their paper analyse the FDI outflows from China and India in general and try to find out determinants of these outflows based on three factors: (a) Factors derived from the perceived need of both the countries; (b) Characteristics of target economies India and China want to invest in; and (c) GDP of India, China and bilateral exchange rates. Elaboration of the above factors provides significant insights into the trends of where EMNCs from both these countries invest for internationalization. As per their empirical research, below is a comparison of factors identified and their significance in determining FDI outflow from India and China respectively: Variable GDP (Host country) GDP per capita (Host Country) Distance Border Corruption Law and order Bilateral Exchange rates Share of fuels in total exports Share of foods in total exports Share of Ore and metals in total exports Share of Electrical, Machinery in total exports Home country’s GDP R&D expenditure IT expenditure Import, Export Capital control on FDI Free trade agreement Dependence of India FDI Outflow Dependence of China FDI Outflow Yes (Investment in Smaller GDP) Yes (investment in large GDP) Yes (Investment in larger GDP per capita) Yes(Investment in Far countries) Yes (Investment in countries Farther to India) Yes (Investment in less corrupt countries) Yes (Investment in better Law and order countries) Yes ( Increase in exchange rates increases FDI outflows) Yes (More share required more FDI investment) Yes (More share required more FDI investment) Yes (Investment in Smaller GDP per capita) Yes (investment in closer countries) Yes (Investment in countries Closer to China) Yes (investment in more corrupt countries) Not Significant Not Significant Not Significant Not Significant Not Significant Yes (better GDP leads to more FDI outflows) Not Significant Not Significant Not Significant Not Significant Yes (more IT expenditure more FDI) Not Significant Yes (negatively significant) Not Significant Yes (positively significant) Yes (positively significant) Not Significant Yes (Decrease in Yuan increase FDI outflows) Yes (More share required more FDI investment) Not Significant At a macro level, the main reason for Indian and Chinese companies to go beyond their own territories is to exploit market and resource economies of scale and scope. However, when examined carefully, the motivations of EMNCs from both these countries and their respective
strategies for internationalization is not similar. Major investments by Indian EMNCs in the African continent are largely done in service-based sectors whereas Chinese firms have shown greater interest in primarily natural resource-intensive and labour-intensive sectors. Individual sectors that have attracted investments are discussed in the next section. An important reason which can explain the divergent strategies of Indian and Chinese EMNCs as described above is the past history of evolution of the businesses in both individual countries. While Indian businesses, many of them family-owned, have seen corporate evolution over a longer period, Chinese business groups are relatively new and have risen aggressively with considerable backing from the Chinese government. 3.3. Sectors Where Indian EMNCs are Investing in Africa From the publicly available investment data, the four major sectors of investment by Indian EMNCs in Africa can be derived as follows: 3.3.1. Automobile Sectorxvii Large Indian firms such as Tata Motors, Mahindra & Mahindra and Maruti Suzuki have grown their presence in African countries over the last few years. A majority of Africa’s vehicle demand is fulfilled by import from countries like Japan, Germany and US but even then, the Indian car manufacturers have made their presence felt successfully in African countries in recent years. Compared to other BRICS countries, Indian EMNCs have grown faster in the automobile sector in African continent, a case in point being Tata Motors, which has been growing in the passenger vehicle manufacturing space while Mahindra‘s major area of growth is trucks and tractors. Exports from the Indian motorcycle manufacturing firms have also increased 175% to Africa since 2008. Because of the increasing demand in African countries, the Indian automobile firms have set up assembly plants in African countries such as South Africa, Rwanda, Angola, Uganda, Nigeria, Ghana and others like Sierra Leone. One of reasons for the rising presence of Indian automobile manufacturers in Africa is the similarity between the conditions of African markets and that in the Indian markets. Both markets demand robust and less costly transportation solutions. In addition to market conditions, increasing disposable income of consumers, improving infrastructure and the ability of Indian automobile manufacturers to make available vehicles at comparatively cheaper prices are a few other significant reasons for Indian EMNCs in this sector to grow in the emerging economic environment of Africa. 3.3.2. Pharmaceutical Sectorxviii Indian Pharmaceutical companies such as Cipla, Ranbaxy, Crux Pharmaceutical and Dr. Reddy’s Laboratories are increasingly expanding their businesses in less-developed African markets. These firms have offices established in countries such as South Africa, Nigeria, Egypt and Morocco, all of which contribute more to the GDP per capita in comparison to the other African countries. Indian pharmaceutical firms are also trying to target presence in other countries such as Cameroon, Gambia, Senegal, Tanzania, Kenya and Uganda which can be classified to be in a phase of transition with their economies having picked up growth momentums fairly recently. Investments made by Indian pharmaceuticals companies in lessdeveloped economies, especially in African countries, are driven by the initiatives taken by the host-country governments, high demand of low-priced, generic drugs in the host markets, increasing health consciousness and availability of international funding for expanding in
these target markets. A large population battling with the prevalence of a wide number of diseases also provides Indian pharmaceutical companies a more effective ecosystem to perform their clinical trials and drug safety studies incurring lower costs. 3.3.3. Telecommunication Sectorxix Indian telecom EMNCs such as Bharti Airtel, Reliance InfoComm and Tata Communication are rapidly expanding their businesses in less-developed African economies. Bharti Airtel has already acquired one of Africa’s biggest telecom company Zain in $10.7 Billion. This acquisition was targeted to help Bharti Airtel expand its business in 15 African countries including Nigeria, Kenya and Tanzania and help the firm add over 40 Million subscribers, a volume almost 35% of Airtel’s Indian subscriber base (137 Million). Other companies such as Reliance and Tata are also investing in the African continent by acquiring local companies or investing partly in them. Tata Communication acquired South African company Neotel whereas Reliance’s subsidiary FLAG Telecom has invested heavily in NGN Systems. The reason for Indian EMNCs to invest in the international telecom sector is market-seeking motivation given the aggressive domestic competition that all of them are facing in India. Due to cut throat competitive scenario in the domestic market, the profitable option lied outside India and less competitive African markets were suitable alternatives. Countries like Mozambique, Libya and Angola are still in duopolies and other countries have less than 4-5 telecom operators which attracts Indian firms to invest in less-developed African countries. 3.3.4. Software Industries xx Top-tier Indian IT companies such as Tata Consulting Services, Mahindra Satyam and Infosys have stepped up their presence in less-developed African countries. Mahindra Satyam has increased its IT operations in Kenya, Nigeria and South Africa as they are continuously trying to capture increasing IT demands from east African regions. Mahindra Satyam wants to capitalize on its win of the FIFA 2010 World Cup IT system contract and is trying to increase its business in Africa by providing enterprise resource planning and cloud solutions to regional industries in the host country. Mahindra Satyam has tied up with Infosys in the African market to capture maximum IT contracts from local industries. TCS was the first company to enter South Africa and has helped industries in the country and other subSaharan countries scale up their businesses by providing them better IT solutions ever since. TCS has also setup its IT operations in Kenya, Uganda and Botswana. The reason for IT companies to spread out their services in less-developed African markets is high demand of IT solutions and infrastructure from growing local industries in host countries. In addition to these, companies are expecting winning more business contracts by providing services to the Indian telecom companies who have established their network in African economies. The huge demand from government institutions, telecom services providers, educational institutions and regional business and financial institutions have invoked high motivation in Indian IT companies to internationalize in African countries. 3.4. Sectors Where Chinese EMNCs are Investing in Africa Africa is home currently to 10% of the world's oil reserves, 40% of gold, 80 to 90% of chrome and platinum metal groups. xxi China currently has trade worth about $200 Billion with Africa.xxii From the publicly available investment data, one can derive that primarily, investments by Chinese
EMNCs in the African continent as of 2011 end, were done in four major sectors which include manufacturing (15.6% of investment), mining (30.6%), finance and banking (19.5%) and construction businesses (16.4%). There are 7 Chinese industrial zones (special economic zones) in Africa (refer to Appendix ‘A’ for figure) where maximum investments from Chinese EMNCs are going in. A detailed analysis of Chinese investments in the top 4 sectors is as follows: 3.4.1. Mining Sectorxxiii Chinese investments into the mining industries in Africa have amounted to a total of $140 Billion, which is more than 75% of China’s total investment in this sector around the world. Major Chinese players which are in the mining business are Henan International Mining Corp. Ltd, Yongcheng Coal, Henan Yongshang Metals and Minerals, Xuchang Minerals and Industry, Henan Hongxing Mining Machinery, Henan Ruishi Special Refractory Company and others. These companies have invested primarily in regions such as sub-Saharan Africa (South Africa, Ghana and Gabon) for mining cobalt, manganese, chromium and timber. Apart from these countries, China has shown interest in the central southern African countries such as Tanzania, Zambia and Mozambique with the intention of extracting copper, gold, iron and other base metals. The main reason for Chinese investment in mining industries is the dependence of its home economy on natural resources (as demonstrated in the graphxxiv below) where Africa provides a great opportunity. In addition, African countries are also benefiting from Chinese investments in the mining sector – their presence has created more employment and improved the income levels of the labours – explaining why Chinese mining firms are getting favourable reception and support from the host-country governments set up their operation in less developed African regions. 3.4.2. Construction Sectorxxv Chinese construction firms are involved in the labour-intensive construction activities such as housing development and road pavements as well as technology-intensive construction activities such as for power generation, telecommunication and petrochemicals. The profitability of such Chinese firms has been increasing rapidly due to their instrumental role in the rapid economic development of these regions. Some examples of construction projects
in which Chinese EMNCs have invested are Ring Road construction project in Ethiopia, Mauritania port project, an international airport, Sheraton hotel and one famous mosque in Algeria and oil and hydro-power projects in Sudan. Chinese construction companies with significant presence in the less-developed African markets are CRCC, SINOHYDRO, CGGC, CMEC and CSCEC. Countries where Chinese construction firms have invested are Tanzania, Ghana, Zambia, Mozambique, Ethiopia and Democratic Republic of Congo. Technical superiority, comparative cost advantages, cheap labour wages in the host country and past management experience in handling projects in these regions are some of the important determinants which have scripted success of Chinese construction firms in Africa. 3.4.3. Manufacturing Sectorxxvi Foreign investments in the manufacturing sector form a significant portion of china’s OFDI (Outward Foreign Direct Investment) flow. Chinese firms have heavily invested in this sector in less-developed countries of Africa such as Nigeria and Ghana. Also, 65% of Chinese investment in Ethiopia is in the manufacturing sector alone. Major Chinese manufacturing firms that have invested in less-developed African regions are Zhongyuan Petroleum Exploration Bureau, state-owned energy firm China Power Investment Corporation, CPI International, Power Construction Corporation of China and Footwear manufacturer Huajian Group. The total investment of Chinese manufacturing firms in Africa reached $1.33 Billion during the period 2009-2012. The reason for such firms to invest in Africa is the capacity of African economy to absorb foreign direct investments across diverse sectors. In less developed countries there, the infrastructure availability and development and manufacturing capabilities are the major pillars to base rapid economic growth upon, thus FDI policies in such countries are encouraging and flexible. 3.4.4. Financial/Banking Sectorxxvii In the banking/financial sector, Chinese EMNCs have shown remarkable growth in the last few years. Some of the major Chinese investments in banking sector are (a) investment by the Industrial and Commercial bank of China (ICBC) which picked up a 20% stake in the Standard Bank, the largest bank of the African continent by paying $5.5 Billion in a deal; (b) expansion of operations by the Bank of China and China Construction Bank right since the year 2000 in different African countries; (c) investments by China EXIM bank and China Development Bank in major infrastructure project in the African continent and (d) countryspecific investments by the state-owned bank China EXIM and China Development Bank in Mozambiquexxviii. The main reason which has driven Chinese banks to set up their presence in African countries is market-seeking i.e. to attract clients in the host country who are investing in different manufacturing and construction projects. The strategy of banks is to ride on the booming African economy and the often-approximated 50-year growth opportunities that firms can potentially get out from the same. Another important reason favouring internationalization of Chinese banks and financial institutions in Africa is the public perception that their savings will be safer with Chinese firms than with European banks due to strong government backing in China’s case.
4. How do EMNCs from India and China internationalize? While the internationalization process by the two Asian giants China and India has been followed mainly for asset-seeking or market-seeking purposes respectively, the expansions of Indian and Chinese firms have followed certain patterns in their internationalization trajectories over the years in terms of the level, pace and the temporal concentration and mode of entry. The mode of entry determines how the investment would be further executed in the host country and EMNCs use one of the following prevalent modes of entry to venture into any country: (a) Joint Venturesxxix where two parties enter into a business agreement in agreeing to develop a new entity and new assets by contributing equity for a finite period of time during which they share revenues, expenses and assets and exercise control over the enterprise; (b) Mergers and Acquisitionsxxx which refer to the buying, selling, dividing and combining of different companies and similar entities with the objective of growing rapidly in a sector or location of origin, or a new field or new location, without creating a subsidiary, any other child entity or using a joint venture. A merger, which may be vertical or horizontal in nature, refers to a legal consolidation of companies into one entity, whereas an acquisition occurs when one company takes over another and completely establishes itself as the new owner and no new company is formed. Vertical mergers occur when two or more firms that operate at different levels within an industry’s supply chain merge operations with the purpose of putting to use the increased synergies to run a more efficient operation, decrease reliance on outside agencies and increase their combined profitability. Horizontal mergers, on the other hand, are consolidations that occur between firms operating in the same space, often as competitors offering the same good or service; (c) Green Field Venturesxxxi which is a form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. Most parent companies also create new long-term jobs in the foreign country by hiring new local employees. MNCs generally follow this route to enter into developing countries and build new factories and/or stores as the host countries often offer the MNCs tax-breaks, subsidies and other types of incentives to set up green field investments; (d) Organic Growthxxxii which refers to the true growth of a company when it uses its internal profits to expand and this expansion may be in international territories. It excludes any growth acquired from takeovers, acquisitions and mergers; (e) Licensingxxxiii, a mode of entry in which a written agreement is entered into by the contractual owner of a property or activity giving permission to another to use that property or engage in an activity in relation to that property with some consideration being exchanged between the licensor and the licensee; (f) Cooperation where certain businesses gain an advantage into foreign countries by using a judicious mixture of cooperation with suppliers, customers and firms producing complementary or related products as the MNC; (g) Outsourcingxxxiv which is a practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally and is increasingly being used by many MNCs to expand into other countries. Outsourcing is an effective cost-saving strategy when used properly; and (h) Franchisingxxxv which refers to the practice of using another firm's successful business model. Franchise is a type of license that a party (franchisee) acquires to have access to a business's (the franchisor) intangible assets like proprietary knowledge, processes and trademarks in order to allow the party to sell a product or provide a service under the business's name. This mode of governance can be used to expand in highly competitive industries. In exchange for gaining the franchise, the franchisee usually pays the franchisor initial start-up and annual licensing fees.
Chinese and Indian EMNCs entering into Africa follow these modes but the choice of an entry mode is a complex decision depending on many factors, both exogenous and also firm specific. The dual advantage of access to rich natural resources and market potential offered by the growing middle class in Africa is now beginning to affect the sectoral composition of investments of Indian and Chinese EMNCs. As expected, this change in objective has created implication for the mode of entry and setting up of businesses in Africa as well. While the companies preferred green field ventures in the earlier phase driven by resource-seeking motivation, there has been a gradual shift towards acquisitions in several sectors to gain quick access to potential markets to sell EMNCs’ offerings in some cases and productive resources in others. Green field ventures are still the preferred mode of entry in select sectors such as mining and agriculture, with companies establishing processing units and plantations, as substantiated by Ferrochrome smelter by Tata Steel and the Jatropha plantations by Emami. Meanwhile, in other sectors such as telecom, EMNCs are preferring acquisitions as exemplified by Bharti Airtel’s acquisition of Zain Africa to expand its footprint in the continent. As mentioned previously using contingency theory, EMNCs look for multidimensional strategic fits at firm-specific (eg: organizational structure, degree of planning, centralization, formality, degree of international experience’s, nature of management - family run and nonfamily-run firms etc.), country-specific (eg: foreign investment policy and regulations) and exogenous (eg: technological change, market size) levels while choosing to internationalize and in the process, realign their systems and strategies of expansion with the prevailing structures at each front. Achieving this fit poses special challenges for EMNCs from China and India due to the characteristics of their institutional systems and the institutional distance between them and the target host countries. It is quite evident that EMNCs may select shortterm contracting and JVs as preferred entry modes to avoid risks and minimize the uncertainty resulting from weaker institutional environments in host countries while environments that support foreign business development may be a magnet for EMNCs to set up their own green field ventures. Collaborating with local partners via the JV arrangement allows EMNCs to leverage partners’ local knowledge and reduces administrative costs. An example from the African context is Endiama, Angola’s largest diamond producing company, which has agreed to do business directly with the large Indian diamond industry. In return, India would be opening an institute for jewellery manufacturing and a cutting and polishing centre in the Angolan capital, Luanda. Historical factors also differentiate the investment approaches of both countries in Africa. India has traditionally been involved in trade with Africa due to a shared history of colonialism with it while China has no such background. When it comes to investment, India looks at Africa as a region similar to itself, resulting in a collaborative relationship with most businesses and hence, Indian EMNCs adopt mergers, acquisitions and JVs as the preferred mode of entry with a greater likelihood. Since China has no such trade-led historical background with African nations, most Chinese EMNCs are looking at Africa as a source of natural and cost efficient resources which can be exploited for secure source of raw materials and energy.
Organizational economics, which include transaction costs and agency costs, help EMNCs choose the most appropriate governance mechanisms and contracts to minimize the risk and the costs associated with the model of entry. JVs have their own risk of opportunism by the foreign partners and the arrangement of a JV bears the transaction costs of discovering a proper partner, drafting an agreement, and bonding contractual arrangements, as well as the transaction costs of adaptation, monitoring, enforcement, termination. However, the costs are dynamic and as firms accumulate more international experience, the need for a local partner’s help decreases and sharing management control does not seem like a feasible option. Leading to dissolution of JVs. Environmental variability is a critical contextual factor in EMNCs’ internationalization design in a foreign country including the entry mode. Depending on the type of environment, the firms would take up the role of one of the following: (a) defenders, who compete on price and quality rather than invest heavily in innovation, often focus on niche markets and seek to improve their efficiency in existing operations. They need more mechanistic structures with more central coordination and may follow the route of mergers and acquisitions; (b) prospectors, who search for market opportunities, look to pioneer new products and experiment with different responses to environmental changes. Structurally very organic, they need a high level of decentralization; (c) analyzers, who have traits of both the prospectors and the defenders since they seek to simultaneously harvest on a stable base of existing products and customers and scan for new market opportunities, balancing autonomy with control. JVs are the mode of entry typically preferred by analyzers; and (d) reactors, who lack a consistent strategy and only adjust their behaviour if forced to do so by the environment. EMNCs belonging to this category adopt the mode of entry best suited for the on-the-ground operations once they zero down on the target host country. 4.1. Indian EMNCs’ Investment Modes in Africa The foreign direct investments from India have been heavily influenced by the policy regime in the country. This has influenced not only the motivations and destinations of investment, but also the modes of entry in the destination countries. As the table below depicts, in the first phase of investment until 1990, particularly in Africa, the Indian companies largely operated small operations as joint ventures seeking resources and markets based on adapted and scaled down technologies in relatively low technology sectors. In the second phase, which saw the onset of reforms and greater freedom to invest abroad, Indian companies looked at Africa to support their exports with local presence. The investments were concentrated in select industries such as pharmaceuticals and IT software in which Indian companies developed some cost-effective processes. The entry mode was largely through setting up of green field ventures. The third phase in the evolution of Indian EMNCs in Africa, which started from the year 2000 onwards, is a phase of cooperation between the two geographic entities marked by the first India-Africa Forum Summit, held in April 2008 in New Delhi. The forum heralded a new era of co-operation by offering additional credit, project financing and trade preferences and by 2011, both parties agreed to beef up engagement on several vital areas, including closer co-operation on agriculture and skills development. This has led to huge advances in Africa in the past decade by the Indian corporate sector—and especially by India’s leading multinational Tata Group, which currently operates in 11 Sub-Saharan African markets, and state-owned companies such as the Oil and Natural Gas Corporation (ONGC). The mode of entry has been a mix of acquisitions, JVs and outsourcing depending on the sector in question i.e. Indian EMNCs are now adopting more or less a ‘reactor’ route in African countries.
First Phase (pre -1990s) Ownership Advantages Adapted and scaleddown technologies Motivations Market-seeking Sectors Magnitudes Entry modes Destinations Low technology: light engineering, palm oil refining, rayon, paper Small Green field, contracting Asian and African lowincome countries Second Phase (1990s) Third Phase (2000-) Managerial expertise, lowCost-effective cost production and processes engineering ability Strategic assets and natural Trade-supporting resources seeking Information Metals, pharmaceuticals, technology services, automobiles pharmaceuticals, etc. Moderate Large Green field Acquisitions, green field Resource-rich and strategic resource-rich/countries (eg: Similar to exports UK, USA, Russia, Korea, Singapore, South Africa) 4.2. Chinese EMNCs’ Investment Modes in Africa As discussed earlier, Chinese EMNCs see business presence in Africa as an opportunity to help satisfy its massive energy and resource needs. Apart from the trade exchanges during the colonial era, China’s entry into Africa in recent times can be traced back to late 1970s when the Asian economy opened up after gradual liberalization starting 1978. It was in 1980s when the Chinese government started showing interest in African countries beyond marginal trade relations. The political influences from China go back even longer – the Tanzania railways that Chinese government built in the 1960’s between Tanzania and Zambia, as part of its ideological strategy to counter Moscow’s influence in East Africa is an example. This was followed by a pursuit of the African markets, what is known as the ‘exporting revolution’ in the late 1950s and the early 1960s. However, the latter half of the 1990s saw the incoming of Chinese private companies as well. The former president Jiang Zemin in his 1996 tour to Africa comprised an established agenda of five point proposal, emphasizing “reliable friendship, sovereign equality, non-intervention, mutually beneficial, development and international cooperation strengthening the sustainability dimension of bilateral and regional trade agreements, by developing commitments to sustainable development and encouraging the use of sustainability impact assessments”. The agreement mechanisms allowed the massive Chinese private sector to seek business opportunity in Africa in order to fulfil the local demand for fuel and mineral resources in China. Due to the involvement of the Chinese government, Chinese companies are better positioned to make short term losses for long-term gains. China is now following a strategic policy of internationalization in Africa. This involves working in bilateral collaborations with governments of countries like Mozambique, Angola etc. while indulging in low key diplomacy and long-term investment to develop infrastructure of the African nations. It is following a soft power strategy in several nations by providing non-financial aid and other assistance in curbing diseases. On the other hand, it is also strategically acquiring control over oil resources. For example, The China National Petroleum Corporation (CNPC), a stateowned company, owns a 30–41 percent stake in three of Sudan’s major oil companies—the Greater Nile Petroleum Operating Company, Petrodar Operating Company, and the Red Sea Petroleum Operating Company. Chinese state has also encouraged investments in agriculture as well as fisheries and hence, in Gabon, Mozambique and Namibia joint ventures have been
the main entry in fish processing. Chinese companies enter into non-conditional agreements, owing to which, these agreements get executed rapidly. China is following an overall policy of complementarily in business conduct which decides the mode of investment and subsequently entry into the target African nations. While China’s FDI in Africa (data captured in Appendix ‘B’) is closely linked to trade volumes between the two regions, future FDI is likely to focus more on the private sector and the development of small and medium size enterprise (SMEs) as envisioned by researchers Kapinski and Morris (2009). 5. Operations and Execution of Strategy by EMNCs in Africa Both India and China are competing with each other to gain a share of the developmental projects in Africa and be part of the continent’s growth story. The entry of Chinese enterprises in Africa is mostly financed and supported by the Chinese government while Indian investments on the other hand, are led by private sector firms. Indian and Chinese companies try to replicate their low-cost profitability model to operate in Africa. However, the execution of operations is a difficult process due to the various complexities in the business environment there. EMNCs are hence required to maintain stringent control over costs to ensure that they have a positive cash flow from their African operations. In Africa, it is difficult to expand in a logical sequence due to the complexities involved. Conventional approaches such as establishing the brand in the biggest markets and then moving to Tier II & III markets does not lead to growth in Africa since the market is very disparate. Therefore, EMNCs typically start in one among the ten African markets that, according to Euromonitor data, account for 75% of the continent’s GDP. These markets are South Africa, Egypt, Nigeria, Algeria, Morocco, Angola, Libya, Sudan, Tunisia and Kenya. EMNCs also cannot depend on a simple plug-and-play strategy to enter and expand in this market as a single operating model does not guarantee profits or revenues. The experiential knowledge of African markets resulting from the company’s experience in their past or current operations in one African country helps firm tremendously in establishing their presence in the other countries. EMNCs face a number of challenges while internationalizing in Africa such as: (a) Bureaucracy or red tape which is a major concern and reduces the FDI inflow into Africa. However, recently the markets have opened up and the political scenario has stabilized as well, thereby making African an attractive destination for investments once again; (b) Complex Politics which means firms looking to operate in Africa for long-term have to understand and be sensitive to the politics and history of different African countries; (c) Infrastructure which is still evolving in most parts of the continent, requires firms to bear the infrastructural challenges related to transportation, supply chain, access to markets, Internet bandwidth, power, shipping, logistics etc.; (d) Language Barriers since African countries have dialects which differ from region to region within the continent itself and the knowledge of English is limited; (e) Cultural Differences which requires firms to develop an understanding about how host country’s culture differs from the home country’s culture in order to mitigate human resources issues and aid rapid growth. 5.1. Operations and Strategy Execution by Indian EMNCs in Africa As a recent trend, Indian business groups are also increasingly interacting with new generations of Indian diaspora who have been in Africa for decades to develop closer business ties with local governments. As far as financing is concerned, Indian EMNCs look
for organic and inorganic growth in markets in Africa. They reinvest profits back into their business or acquire local companies. For example, in the mining sector, Indian mining companies have a presence in the copper, cobalt and tin mining sectors in Congo. However, in contrast to China, which has a major presence in the mining sector in Africa, Indian mining companies operate on a very small scale. The main reason for this could be the lack of capital from Indian state owned banks and lack of government backing. These companies have expanded their operations primarily by reinvesting their own profits into the business. The strategy of Indian companies continues to be by and large market seeking. Their strategic focus is on the top ten markets in Africa and the markets are prioritized depending on the category of the product. For example, in the FMCG sector, Indian firm Marico marked its entry by first entering the hair care market in Egypt, where it acquired local Egyptian brandsFiancee and HairCode. After that, Marico entered South Africa by purchasing the consumer division of Enaleni Pharmaceuticals and also acquired Ingwe/Medi-Pac range of healthcare products from Guideline Trading.2 For marketing, Indian EMNCs make localization efforts to cater to the needs of the African consumer and their marketing communication reflects African culture, tastes and aspirations rather than a simple porting of Indians communication. For executing the key human resources strategy, once Indian EMNCs enter into Africa, they appoint a senior business leader as the CEO or Country Manager to be accountable for the African operations of the firm as a whole. For example, Bharti Airtel which operates across 16 countries in Africa has appointed Christian de Faria as the CEO for the company’s Africa Operations.xxxvi The objective of this is to have a focused leader develop a deep understanding of the needs of the African market. The Country Manager is also responsible for maintaining ties with the government of the country. While Indian companies send Indians to work on projects in African countries from time to time, they also emphasize on hiring local African talent. There has been a steady increase in the number of well-educated Indians working in different companies in Africa. Companies hiring Indians to work in Africa pay them an expatriate salary, which is non-taxable in addition to the basic salary. xxxvii Thus, Indians employees working in Africa are able to earn and save more which develops their motivation. Philanthropic services form a major activity of Indian EMNCs in Africa since these help in building goodwill for the companies among the African people. Bharti Airtel is seeking to leverage its presence through its non-corporate venture Bharti Foundation by setting up schools for the underprivileged in Africa. Similarly, Tata Consultancy Services South Africa, has established the Reach for a Dream Foundation, which fulfills the wishes of African children who have been diagnosed with life-threatening diseasesxxxviii. In April 2008, in a meeting of India’s political leaders with African leaders, India pledged more than $500 Million in grants for development projects in Africa. 5.2. Operations and Strategy Execution by Chinese EMNCs in Africa Since China’s FDI in Africa is led by enterprises which are government-owned, there is an exchange of infrastructure development in return for right to extract and retain natural resources. China has been able to get access into African countries by entering into deals to build critical infrastructure projects, like roads, railways, hospitals and educational institutes. China’s presence in the energy and mineral resource industries in Africa also helps increase its own energy security. Chinese government’s backing is also helping the Chinese companies gain a greater financial influence in developing projects in Africa. As far as
financing is concerned, besides financial support from Chinese government, the EMNCs utilize their own government’s ties with African governments, helping them scale up operations easily. For example, in the mining sector, Chinese state-owned companies are investing up to $3 Billion in two large copper and cobalt mines in Congo. xxxix Construction companies like China Wu Yi has handled 18 projects in Africa, including building a 21storey tower, complete with lecture halls and helipad, in Nairobi University. In China’s stateowned enterprises, political directives given by the Chinese government influences the business strategy rather than market forces. The Chinese EMNCs are willing to work with any government, regardless of its international diplomatic standing and does not interfere in the domestic affairs of the host country. Therefore, they have been able to invest in African regimes which are strife torn, but rich in resources. Chinese companies use a low-cost bidding strategy i.e. they always quote the lowest price to win infrastructure projects. They also maintain strict control over costs – investing in lower skilled labour and lower managerial costs. China has pledged developmental assistance and provided low interest loans to countries in Africa over the years, thus strengthening its ties with African governments. To further boost trade relations, Chinese government has declared zero tariff treatment to 25 African countries to facilitate imports from them into China. In human resources terms, the Chinese EMNCs mainly bring their own manpower from China to work on the projects a
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