What Makes an Emerging Market Company Expand Internationally?

Sources : The full paper of the original research titled: International Venturing by Emerging Economy Firms: the Effects of Firm Capabilities, Home Country Networks, and Corporate Entepreneurship" is published in "Journal of International Business Studies", (2007) 38, 519-540 In the case of China, there are many disadvantages for companies who choose not to go abroad (such as undeveloped systems, protectionist rules, not to mention the fierce competition from foreigners). Traditionally, and this has certainly been the case for American companies, the thinking behind international corporate expansionism has been: When you have come up with a successful product or service, you reproduce that success overseas. Academic studies have tended to support this belief, that in order to make it abroad, you need to have some kind of firm-specific advantages that you can replicate in other markets. This allows firms to successfully challenge local companies in their home territories and compensate for the fact that they are on foreign ground in the process. With the new wave of companies emerging on the global scene, however, this theory doesnt seem to always fit. Take China, for example, where previously state-owned enterprises have been traditionally subject to more governmental controls, have had less resources to spread around, and have not been anywhere near as well known on the international scene as the likes of Pepsi or Nike. Yet Chinese companies have joined the realms of the worlds biggest overseas investors. In 2004, China spent more than US$5 billion in foreign direct investment (FDI), and going forward the country is expected to be in the top five of the biggest sources of FDI in the world. So how are Chinese companies doing this? The reasons still largely remain a mystery in the field of academia. One theory that has been put forward to explain the rise of Asian multinationals overseas in particular, is that they have moved abroad to find resources and know-how to compensate for the fact that they lack their own core competency to export. In other words, if you dont have a great service, then buy one. And this view naturally runs counter to any previous assumptions that have been made linking FDI with a companys capabilities. So which is it then?

For researchers from The Chinese University of Hong Kong (CUHK) along with other university partners in the U.S., it does not have to be a question of either-or. They set about to prove that there wasnt actually a choice to make here, that both factors could actually co-exist alongside each other, one approach not having to conflict with the other. Instead, the researchers wanted to see if there were any country-specific factors at play affecting these emerging market companies at home, which somehow influenced the relationship between FDI and any advantage the companies may possess. The researchers believed that in order to expand overseas, these companies needed to build themselves an advantage or develop a strategy as a direct response to whatever framework had been imposed on them in their particular home country. They needed to innovate. Furthermore they wanted to show that simply possessing a particular advantage did not necessarily warrant international expansion anyway, and was largely reliant on the situation at home. What was more important as a motivating characteristic, the researchers believed, was the companies relationships with the various other players that were operating in the frameworks they were operating in like government departments or other businesses their home country networks in other words. Another important factor, the researchers felt, was the level of corporate entrepreneurship the companies in question showed in response to institutional changes during their home countries' transitions to market-based economies. Obviously under these new market conditions, these companies have to fundamentally change how they operate in terms of scope of business, competitive approach as well as acquisition of new capabilities, in order to compete locally before they are ready to compete globally. How they react to this transition is a key signifier to whether they will invest overseas, the researchers believed. It is important to remember, in fact, that emerging market companies often face similar circumstances at home to the markets they invest in. As some emerging market countries liberalise their economies, inward FDI has often been actively encouraged, resulting in more competition, and then sending companies overseas themselves. In the case of China, there are many disadvantages for companies who choose not to go abroad (such as undeveloped systems, protectionist rules, not to mention the fierce competition from foreigners). Outward FDI by these companies can

actually help their situation back home, some studies have found, particularly when they have been operating in export markets. The researchers set out to test three key hypotheses. Firstly that any firm-specific advantage a Chinese company possessed will be moderated by the state of play at home vis a vis the competition they faced so the stronger the competition, and the higher their capability, the more likely they would leave home. Secondly, the stronger the export intensity, the more likely the company with these advantages will pursue international ventures. Thirdly, the ability of the company to exhibit levels ofentrepreneurship or innovation will also positively impact its ability to take its home capabilities or advantages abroad. A series of surveys were undertaken over the course of a year with 274 Chinese companies, located in Beijing, Shanghai and Guangdong (the top three Chinese provinces when it comes to outward FDI). The surveys' respondents were CEOs or their deputies, who were asked to detail their core competencies, and relationships with their home networks. They were also quizzed on their levels of entrepreneurial, or innovative activities, in addition to their views on FDI. The results were telling and did support the researchers overall beliefs that in emerging economies, an extension of existing theories of internationalisation is necessary. It needs to bear in mind the unique framework within which these companies have to operate at home and the challenges they face which determine how they strategically evolve. Adaptation was part of the process which led to internationalisation. Home advantages did indeed count when it came to venturing abroad, but two of three factors in question related to business network ties and institutional network ties, supporting the researchers beliefs that strong relationships at home bolstered overseas expansion by the companies in question. And within those networks, the role of the institutional network ties were much more influential than business networks, offering companies in question a certain legitimacy, which they could use to their advantage overseas. That being said, for export-intensive companies, the role of business networks were important they were more likely to expand overseas, the stronger the relationship was.

Secondly, the results showed that companies which faced stiff competition at home, particularly those that invested heavily in research and development, were more likely to move abroad as a way of overcoming disadvantages they were experiencing. And thirdly, it was found that a level of corporate entrepreneurship at home helped companies expand, all else being equal. Again adaptation being key, and this has been particularly notable amongst companies in China. Future research is still needed in this area, the researchers say, particularly when it comes to assessing the role of network ties, which some believe will be a short-lived factor as economies liberalise and eventually mature. Informal relationships will be replaced, for example by market institutions. Then there is also, of course the role of the institutions in the foreign country to consider in future research as well. But as it stands now, our understanding has at least been further expanded about the events that have led to a much greater number of Chinese companies venturing outside of China. What Makes an Emerging Market Company Expand Internationally? 22 23 Sources : The full paper of the original research titled "International Venturing by Emerging Economy Firms: the Effects of Firm Capabilities, Home Country Networks, and Corporate Entepreneurship" is published in "Journal of International Business Studies", (2007) 38, 519-540. Research Team : Daphne W Yiu, Chung Ming Lau, Garry D Bruton Daphne W Yiu is Assistant Professor of the Department of Management, The Chinese University of Hong Kong Chung Ming Lau is Professor of the Department of Management, The Chinese University of Hong Kong International Venturing of Chinese Companies