How well do traditional theories explain the internationalisation of service MNEs from small and open economies?--case: national telecommunication companies.
* This paper discusses international market and operation strategies of service MNEs from small and open economies (SMOPECs). The focus in the analysis will be on the special challenges that these type of companies face in their internationalisation process.
* A conceptual framework and propositions are developed based on earlier research of internationalisation of manufacturing companies and companies in different service sectors. A multicase study of four service MNEs, which are telecommunications operators (telcos), is used to illustrate and test the propositions.
* International processes of the case companies deviate in many areas from those suggested by traditional theories, especially their market strategies. Several industry specific characteristics played an important part in this, as they further enhanced many challenges common to internationalising companies from smaller countries.
Keywords: Internationalisation Process * Market Strategy * Operation Strategy * Foreign Direct Investments (FDI) * Services * Telecommunications * Small Countries * Small and Open Economies (SMOPECs)
Background and Research Gap
Firms' international market and operation strategies have been an area of wide research interest in international business for decades. Traditionally, the research on firms' internationalisation has been covered in two main research streams: 'Economic' and 'process' streams of internationalisation (Benito/Welch 1994, Liesch et al. 2002). Dunning (2000) argued that regardless of some disparities, most of these economic and process theories are complementary and together they contribute to the overall knowledge on internationalisation theories.
Despite the fact that the original internationalisation process models were developed three decades ago, and attracted considerable criticism over the years, they still seem to offer important concepts to help understand internationalisation as a dynamic process. Moreover, Liesch et al. (2002) even argued that the development of these models is still at the very early phase, and there are still many under-researched areas in how companies internationalise.
One such area is research on the internationalisation of service MNEs from small countries. Many of the existing theories on FDI and internationalisation are developed based on research of large MNEs from large countries (Larimo 2003), and this applies especially to internationalising service MNEs. However, there is evidence to suggest that companies from smaller countries often face specific challenges in their internationalisation. In some industries, such as network industries with high capital investments, these challenges can be very significant.
Objectives of the Research
This cross-border multiple-case study will analyse in depth four companies from small and open economies (SMOPECs), which operate in a capital intensive service industry, the telecommunications industry. SMOPECs are small countries that have opened their borders into international trade with no, or only limited trade barriers (Kirpalani/Luostarinen 1999, Benito et al. 2002, Maitland/Nicholas 2002, Merrett 2002, Larimo 2003, Luostarinen/Gabrielsson 2006) (1). These countries are similar in that MNEs originating from them face special challenges similar to each other, thus also providing opportunities to learn from each other (Liesch et al. 2002, Dick/Merrett 2007).
Objectives of the research are to analyse how the market and operation strategies of these companies vary from those suggested by traditional theories developed in the context of manufacturing companies, and from the strategies of other service sector companies. Also, the factors influencing these strategies will be analysed. This will address the call by several researchers (e.g., Clark et al. 1996, Lovelock/Yip 1996, Westhead et al. 2001), to extend the existing theories of internationalisation by studying industries and sectors that have not been the focus of earlier research, and/or which have recently faced significant changes in their business environment.
The underlying aim is to extend the research on the internationalisation of services and MNEs from smaller countries, and to contribute to the development of a more comprehensive framework to analyse the internationalisation process of a firm in general. It is argued in this paper that the internationalisation patterns of SMOPEC MNEs may also serve as a model to MNEs from other, less developed small countries. Due to SMOPECs relatively early participation in the internationalisation developments valuable longitudinal data of MNEs from these countries is available for the analysis.
The findings should be useful for managers of telecommunications companies and other network industries, and for policy makers in small countries. Often the importance of MNEs for their home country is relatively much greater for small countries, than it is for the larger countries, as any major challenge that these companies face has a potential to influence the whole national economy (Benito et al. 2002). The types of companies studied in this paper are among the largest companies in their country, and more generally, these industries are very important to the economic development of the whole country, making this research topic very relevant.
The paper is organised as follows. First, the literature on the internationalisation of a firm, including discussion of recent challenges to traditional theories, is reviewed. The internationalisation of services and challenges that small country MNEs face in their internationalisation process will be discussed, and the telecommunications industry reviewed. Building on this discussion the conceptual framework and propositions are developed, and the methodology introduced. The case study findings are reported and analysed, and results discussed. Finally, conclusions are drawn, and theoretical and managerial implications presented.
Review of Internationalisation Theories
Traditional Internationalisation Theories
Most theories of the internationalisation of the firm were developed after World War II, largely between 1960 and 1990. This was a natural consequence of the rapid rise in foreign direct investments (FDI) in the 1950s and 1960s (Dunning 2006). Since then the internationalisation of the firm has been one of the central themes within international business research (Buckley/Casson 1993).
Most of the seminal theories on internationalisation, with their background in economics, are often referred to as FDI-theories and have focused on the reasons and motivations for large MNEs to exist, giving rise to such theories as: The product cycle theory (Vernon 1966); transaction cost theory (Williamson 1979, Anderson/Gatignon 1986); internalisation theory (Buckley/Casson 1976, 1982); and the eclectic paradigm (Dunning 1971, 1988). The emphasis in these theories has been on physical assets and rational economic actions, with less focus on human environment and behaviour (Benito/Welch 1994, Dunning 2006).
In contrast to the economic theories, internationalisation process theories focused on the dynamic changes in internationalisation over time (Benito/Welch 1994). This research is best illustrated by the internationalisation stages models developed in Nordic countries, including the Uppsala Model (Johanson/Wiedersheim-Paul 1975, Johanson/Vahlne 1977, Johanson/Vahlne 1990) and Luostarinen's (1979, 1994) research in Finland; and the US based Innovation Related models and theories (Bilkey/Tesar 1977, Czinkota 1982, Cavusgil 1984). All of these process models have emphasized the gradual and incremental nature of the firm's internationalisation. The concept of psychic distance, consisting of cultural and physical distance (Johanson/Wiedersheim-Paul 1975, Johanson/Vahlne 1977, Johanson/Vahlne 2006), is one of the key concepts in the process models.
Challenges to Traditional Internationalisation Theories
Despite their seminal position in international business research, these traditional theories have also faced some criticism, in that they were not able to explain the internationalisation of all type of industries and companies in every situational context. Subsequent research attempted to extend these early theories, such as for instance Johansson and Mattson's (1988) network approach, Dunning's (1995) findings of alliance capitalism in contrast to the dominance of large MNEs, studies on born global companies (Knight/ Cavusgil 1996), and research on internationalisation of services (Erramilli 1990, Clark et al. 1996). There have also been studies that have argued that internationalisation is so context specific that no clear patterns can be identified (Reid 1983, Turnbull 1987).
It could be argued that some of these reported challenges and deviations to the internationalisation processes of firms may be related to general globalisation developments (Forsgren 2002), although it seems that there are several other factors influencing these processes. Many of the internationalisation theories seem to be more context specific than perhaps has been previously acknowledged: Country specific factors of home country and host country, the industry factors and the nature of the product, and company specific characteristics all seem to be very relevant in relation to the internationalisation of a firm (Dunning 2000). Thus, there is a need to extend the existing theories by studying industries and sectors that have not been the focus of earlier research, or which have recently faced significant changes in their business environment.
Internationalisation of Services and Network Industries
Internationalisation of Services
The last few decades have demonstrated significant changes in regard to the internationalisation of service industries. The importance of services to the world economy has increased rapidly, and most service industries have increased their international involvement significantly (Clark et al. 1996, Aharoni/Nachum 2000, Javalgi et al. 2003). However, most early theories were based on research on manufacturing companies. There are still uncertainties as to how well the traditional theories based on manufacturing companies apply to service companies (Bouquet et al. 2004). Researchers have indicated many different service characteristics, such as intangibility, inseparability, and heterogeneity to be reasons for the deviations in the process of internationalisation between manufacturing and service companies that traditional process theories have not been able to explain (Erramilli 1990, Knight 1999, Javalgi et al. 2003). Some operation modes, for example, exporting, may not be applicable to most services (Erramilli 1990, Javalgi et al. 2003).
However, there seem to be significant differences in how different service sectors have internationalised (Lovelock/Yip 1996), as services are heterogeneous in relation to their internationalisation strategies (Knight 1999, Bouquet et al. 2004). Thus, the research on the internationalisation of services needs to be more sector specific (Knight 1999, Bouquet et al. 2004). Addressing this need, some studies have classified services in different categories based on their business processes. Examples of these kinds of classifications are foreign-tradable services, location-bound services and combination services (Boddewyn et al. 1986); contact-based services, vehicle-based services, asset-based services and object-based services (Clark et al. 1996); and hard- and soft-services (Erramilli 1990). These categories are partly based on service characteristics.
Some categories, in which goods are embedded in services, may follow more traditional internationalisation processes, such as hard-services (Erramilli 1990) or foreign-tradable services (Boddewyn et al. 1986). On the other hand, some categories may require very committed operation modes at the early phase of internationalisation, as soft-services (Erramilli 1990), location-bound services (Boddewyn et al. 1986), or asset-based services (Clark et al. 1996). Many of these latter sectors are capital intensive and enjoy economies of scale advantages. To summarize, it could be argued that due to their particular service characteristics, when compared to manufacturing companies, many service companies face additional challenges in their internationalisation because of requirements for committed operation modes. However, it is accepted that these may vary across service sectors.
One special service sector is business services, in which companies often internationalises by following their domestic industrialised customers abroad (Aharoni 1996, Roberts 1999). Thus, they often start their internationalisation by entering countries with small psychic distance, although this first phase of their internationalisation may be more rapid than in manufacturing industries due to smaller uncertainties and lower levels of risks.
Internationalisation of Network Industries
Network industries are service industries that include airlines, telecommunications, utilities, and the banking sector (Shy 2002, Stienstra et al. 2004). These industries share some unique characteristics, such as network externalities and the role of government (Economides 1996, Crystal 1999, Shy 2002). Partly due to these factors Ehret (2004) and Fjeldstad et al. (2004) argued that some traditional internationalisation theories cannot adequately explain the internationalisation process of such sectors.
Generally, the existence of network externalities provides a competitive advantage to larger companies and can result in a winner take all situation (Liebowitz 2002). This perception of 'winner take all' or 'first mover advantage' situation may result in very aggressive internationalisation strategies. This, when combined with the asset-specificity in network industries, causes risks involved in rapid expansion to be greater than in most other service industries (Glachant 2002). It could be argued that this is a challenge especially for companies with limited resources. This may result in a situation where, for example, a global strategy, although a strategically optimal solution for a network company, may turn out to be too risky a solution relative to the company's resources.
The important role of government in network industries can be demonstrated in a government's support of the activities of companies in international markets (Crystal 1999). This has been necessary because in respect to their ability to enter foreign markets, companies in network industries have often faced greater barriers than companies in other sectors (Ramamurti/Sarathy 1997, Crystal 1999). For instance, companies in network industries have often faced challenges where host countries do not offer reciprocal access to their markets (Crystal 1999). Host governments may act as mediators to protect domestic companies from the influence of globalisation (Clougherty 2001). Some governments deem it to be necessary to protect domestic companies against, for example, US-based service companies, which may have an international competitive edge due to the large size of their domestic market and the economies of scale that result (Crystal 1999). In summary, the political influence that governments can yield in relation to the internationalisation processes of companies in network industries varies significantly from that applying to most manufacturing companies (Crystal 1999).
Challenges in Internationalisation for Service MNEs from Smaller Countries
Many traditional models on internationalisation, especially economic models, and also many strategic management theories, have focused on the internationalisation of large MNEs from the largest economies of the world, such as USA, Japan, Germany, and the UK (Carr/Garcia 2003, Larimo 2003, Dick/Merrett 2007). However, for companies outside these main markets internationalisation brings some special challenges (Hubbard et al. 2002, Gabrielsson/Gabrielsson 2004).
It is often reported that MNEs from smaller countries seem to be relatively more internationalised when compared to MNEs from large countries (Pedersen/Petersen 2004, Hirsch 2006), as there are stronger push forces for companies to internationalise due to small domestic markets (Larimo 1995, Benito et al. 2002, Pedersen/Petersen 2004). However, in spite of that, at a global level most MNEs still originate in the largest economies of the world (Hirsch 2006) (2). Also, large country MNEs in general are much larger in size than small country MNEs (Hirsch 2006). Due to the integration of markets, for example in the EU, some researchers (Brouthers/Wilkinson 2002) have argued that the local advantages that small to mid-sized firms had in the fragmented European markets are deteriorating, and large MNEs from the US and Japan will gain a competitive advantage due to their larger size and relative efficiency. The concept of a distance premium describes this issue in that small country firms have a handicap due to their smaller domestic markets in benefiting from the higher efficiency achieved by the economies of scale advantages (Hirsch 2006). Also, other studies have reported the liability of origin-effect in that small domestic markets do not support economies of scale advantages, which in some cases may even be a necessary precondition to enter international markets (Bartlett/ Ghoshal 1992, Lowell/Fraser 1999, Larimo 1995, Benito et al. 2002).
Thus, it seems that to survive MNEs from smaller countries need to grow rapidly, often requiring large investments. However, the size of the investment is often listed as a major problem by many small country MNEs (Larimo 1995, Carr/Garcia 2003), and in many service sectors, especially in network industries, large investments are often a requirement. Small country MNEs may lack resources in several areas, such as financial and management resources, due to narrow domestic resource pools (Hubbard et al. 2002, Gabrielsson/Gabrielsson 2004). This all may cause that large MNEs with significant resources dominate in these types of sectors (Knight 1999, Buckley et al. 2001), bringing significant challenges to small country MNEs.
These challenges are further increased when moving from the international stage to a truly global competitive one (Gabrielsson/Gabrielsson 2004), where economies of scale advantages are emphasized even more than in early phases of internationalisation. D'Aveni (2002), in his study on pressure maps, divided companies into orchestrators and targets, and considered that the targets, second-tier companies in globalising industries, often face huge challenges. As discussed above, even the largest MNEs from small countries are mostly second-tier companies when compared with the largest players in the industry. As a result, MNEs from smaller countries with their limited resources often need to find alternative evolutionary paths, and these patterns are often different from those suggested by the mainstream internationalisation theories (Carr/Garcia 2003), or they need to avoid industries in which investments required are very large (Morkel/Osegowitsch 1999).
Some means to overcome these challenges have been reported in research: For example, MNEs from smaller countries can enter into strategic alliances with each other to compete with the dominant MNEs in the industry (Cho 1998, D'Aveni 2002), or they can implement niche strategies (Benito et al. 2002, Hubbard et al. 2002, Dick/Merrett 2007). Also, many researchers have emphasized the relatively significant role of governments in developing businesses and supporting MNEs internationalisation from smaller countries, when compared to MNEs from large countries (Lewis 1999, Rugman/Hodgetts 2001, Benito et al. 2002, Hubbard et al. 2002). Thus, it could be argued that for firms in network industries that originate from smaller countries, the role of governments is a significant factor influencing their internationalisation strategies. Some findings towards this direction have been reported, for example, in airline industries (Goodovitch 1997, Ramamurti/ Sarathy 1997, Antoniou 2001) and in the banking industry (Boldt-Christmas et al. 2001, Benjamin/Merrett 2007, Dick et al. 2007), where the competitiveness of these companies has been heavily influenced by government regulations and policies.
As discussed earlier, there are few studies that have focused on the internationalisation processes of service MNEs from smaller countries. Bold-Christmas et al. (2001) studied internationalisation of Norwegian banks. They noted that these banks followed their customers to international markets, but also recognised the limitations of this approach, since for a small country there were relatively few MNEs to follow in the first place. These banks also had some retail banking operations overseas, but their importance to the overall operations was small. Rugman and Girod's (2003) findings on Ahold, a retailer from the Netherlands, reported a very unique pattern of growth. The company avoided direct competition with the global MNEs of the industry in their neighbouring countries, for example, in Germany, France, and the UK, and instead entered Spain, Scandinavia, and North America. This type of market strategy was different from those suggested by traditional internationalisation theories. Similar findings were reported also on another retail company, Delhaize from Belgium.
Review of the Telecommunications Industry
In the telecommunication industry, particularly in the telecom operator (telco) business, de-regulation started in the mid 1980s and accelerated in the 1990's. Indeed, it was not until the 1990s that most telcos started their active internationalisation phase including significant foreign investments (Sarkar et al. 1999). Following this development the telecommunications industry, especially mobile and internet communications, has been perhaps the most dynamic service industry of the 1990s (Bohlin et al. 2001, Shy 2002).
Suddenly, companies who had operated as national monopolies faced competition in their domestic markets and started to look for new growth areas, mostly internationally. However, the industry, like other network industries, is very capital intensive which raised additional challenges for telcos from smaller countries. It could be argued that with their limited resources and balance sheets it was relatively more challenging to invest internationally compared to ex-monopoly telcos from the world's largest and economically most powerful countries. Companies such as American Telephone and Telegraph (AT&T), British Telecom (BT), Cable & Wireless (C&W), Deutsche Telekom (DT), and Nippon Telephone and Telegraph (NTT) were identified as the largest players in the global telecommunications sector (Heng/Low 1990, Shy 2002).
To compete successfully against these large companies, companies from smaller countries needed to develop alternative strategies for their internationalisation. Traditional internationalisation models based on the internationalisation of manufacturing companies did not provide adequate guidance on how companies in a capital intensive and deregulated network industry should internationalise.
Although there is plenty of research on telecommunications companies, there is little research with an international business focus (Sarkar et al. 1999), partly because telecommunications companies started to internationalise later than many other service sectors and this development has seen very rapid changes since the mid 1990s. The few valuable studies (Sarkar et al. 1999, Stienstra et al. 2004) on the internationalisation of telcos have focused mostly on telcos from large countries and are mostly based on secondary data.
Conceptual Framework and Proposition Development
Based partly on the models developed by Luostarinen (1979, 1994) and Welch and Luostarinen (1988), and Dunning's OLI-model (1988, 1995, 2000), a conceptual framework was developed to analyse international marketing and operation strategies of service MNEs from SMOPECs (see Fig. 1). The framework identifies five groups of factors that potentially influence these strategies. Two of these groups are the focus of this study: Industry specific and home country specific factors. The aim is to identify the specific factors that have been the most important to the market and operation strategies of the case companies.
Based on the traditional internationalisation process theories manufacturing companies internationalise incrementally in regard to their operation strategies. That is, they first start with export modes, and then gradually enter to more committed modes such as foreign country-based subsidiaries. However, due to service characteristics such as intangibility and inseparability, service companies start their internationalisation with more committed operation modes. This is especially so with soft-services, location-based services, and asset-based services such as network industries/telcos (Sarkar et al. 1999). This fact is further enhanced by the first mover advantages caused by network externalities, and industry growth and deregulation (Sarkar et al. 1999, Ramamurti 2000, Fjeldstad et al. 2004). Thus, our first proposition, that telecommunication operators start their internationalisation from the start with direct investment modes.
[FIGURE 1 OMITTED]
However, as discussed earlier, telcos from smaller countries lack resources when compared to large country telcos. This issue is emphasized in network industries, which are asset-specific, and capital investment needs are higher than in most other services. This increases risks and creates pressures to internationalise carefully. Partly because of this, and partly due to some host government regulations discussed earlier, small country telcos often use minority joint-ventures as an operation mode to share the risks, rather than fully owned FDIs suggested by economic theories based on transaction costs and internalisation. Moreover, these companies also enter into strategic alliances to balance risk and to better achieve a first mover advantage. Thus, our second proposition, that instead of investing in fully owned subsidiaries, small country telcos enter international markets with minority joint ventures and/or through strategic alliances.
With regard to their market strategies, traditional theories suggest that due to uncertainty with respect to foreign markets, companies reduce risk by starting their internationalisation by first entering into neighbouring countries and large lead markets, and then, step-by-step, as their organisations' experiences accumulate, these firms gradually enter more distant foreign countries. In addition, the latest theories on regionalisation suggest that this development first proceeds in the domestic continent, before globalising to other continents. However, in an industry with very rapid growth and network externalities, and in which globalisation proceeds fast, there are pressures to enter rapidly many markets around the world (first mover advantage). Thus, we also suggest, that telcos rapidly enter distant markets.
However, telcos from smaller countries have limited resources, as discussed earlier. Thus, they face significant challenges to enter large and/or developed countries and many markets simultaneously. Moreover, government's role and technological developments in the industry will influence internationalisation patterns. All this opens relatively better opportunities for SMOPEC telcos in developing countries. This fact may cause a psychic distance paradox (Evans et al. 2000, Tihanyi et al. 2005). This leads to our final proposition, that there are significant deviations in market strategies, as telcos from SMOPECs enter developing countries early, even if they are physically and culturally distant, rather than neighbouring developed countries. The role of psychic distance is less significant in their internationalisation than traditional theories would suggest and psychic distance paradox is supported.
The study reported in this paper is a cross-border multiple-case study which is based on an in depth analysis of four national telecommunications companies from SMOPECs: SingTel from Singapore, Sonera from Finland, Telia from Sweden, and Telstra from Australia. As the objective is to extend the existing internationalisation theories and models by testing a new perspective, this research strategy is appropriate (Sekaran 1992, Yin 2003, Marschan-Piekkari/Welch 2006). The study aims to describe how certain decisions on internationalisation have been made and why they have been made in a service industry not yet intensively studied with this perspective. The case study offers an excellent opportunity to understand these issues (Yin 2003).
Moreover, a multi-case study improves generalisability compared to a pure single-case study (Miles/Huberman 1994). The literal replication method, building on earlier theories, improves robustness and allows generalisation from the sample, although this generalisation does not have statistical grounds (Saunders et al. 2003, Yin 2003, Silverman 2005). Thus, the conceptual framework used in this study was developed using previous theories on internationalisation. This 'analytic generalisation' tactic follows the recommendations of Eisenhardt (1989) and Yin (2003). In the literal replication method the cases that all predict similar results will be chosen (Yin 2003, Silverman 2005); that is, the case companies in this study were selected from typical examples, rather than randomly. In this type of purposive sampling method the aim is for the cases to provide illustrative and rich data to focus on specific research questions/propositions (Saunders et al. 2003, Silverman 2005). This method enables comparisons with theories of internationalisation of manufacturing companies and other service sectors, but also allows new interpretations (Strauss/Corbin 1998). The selection of SMOPEC telcos, which have started their internationalisation in the early phases of the internationalisation of the telecommunication service sector, ensures sufficient data for longitudinal analysis, a recommended method when analysing the process of internationalisation.
The multi-case study protocol was build based on recommendations of Pauwels and Matthyssens (2004), and Yin (2003). The primary data for the empirical analysis has been collected by interviewing senior level managers or ex-managers responsible for internationalisation strategies of the case study companies. That is, CEO's, COO's and strategy directors responsible for the internationalisation strategies of the companies were interviewed. Some supportive interviews with managers from other levels were also conducted, especially for the pilot case study, to grasp better understanding of the internationalisation process. A total of 17 managers from the four case companies were interviewed. Interviews were semi-structured, starting with very open questions on the companies' internationalisation processes, but using the conceptual framework and a research question-form to ensure that all the important areas were covered. Interviews were recorded and transcribed. In addition, annual reports, company presentations, press releases, journal articles, books and book chapters, newspaper articles, and public statistics were used in case study analyses.
Yin's (2003) and Andersen and Skaates' (2004) recommendations for testing construct validity, internal validity, external validity, and reliability in a qualitative study were used. These include testing construct validity by using multiple sources of evidence and other triangulation tactics. Pattern matching and conceptual thinking have helped in achieving internal validity (Miles/Huberman 1994). NVivo software developed for a qualitative data analysis was used as a tool to analyse data together with qualitative data techniques proposed by Miles and Huberman (1994), such as contact summary forms, coding, and generating pattern codes. In addition, Miles and Huberman's (1994) recommendations on data displays, charts, matrices, figures, conceptually clustered matrix meta-matrices, and site-ordered descriptive matrix were used in analyses (and data presentation). These techniques are preferred when data are based on words rather than on numbers. External validity was ensured with literal replication (Yin 2003) over the four cases selected. A case study protocol was developed and a database created in order to maintain reliability (Yin 2003).
Empirical Cross-case Analysis, Examination of the Propositions, and Discussion of the Results
Empirical Cross-case Analysis
Based on cross-case analyses of the case companies this section will summarise the patterns that have emerged in their international market and operation strategies. During the data analysis four different phases of internationalisation process were identified.
All of the case companies were national monopolies and started their operations in the late 19th-early 20th century, very soon after Alfred Bell invented the telephone in 1876. Before entering foreign markets with outward operations, all of these domestic monopolies co-operated multilaterally and bilaterally with other telecommunication monopolies from other countries. Each company had its own secure domestic market and there were no threats from competitors, which caused co-operation to be very friendly and work well between mostly technically oriented managers and specialists. Moreover, the case study companies relied on foreign suppliers for telephone equipment, although at the later phase domestic telecommunication manufacturing industries started to develop with the help of government regulations.
When the first phase of outward internationalisation, the learning phase, started in the 1970s and 1980s, the companies followed different strategies than existing theories would suggest. All of the case companies started their outward internationalisation with consulting projects. However, these first operations were not in other developed countries and/or in neighbouring countries, but in developing countries. For example, SingTel had projects in Africa, the Middle East, and Asia; Sonera in Africa and South East Asia; Telia in Africa and Asia; and Telstra in Asia and the Middle East, all areas with a long psychic distance from the home country.
In the second phase, the opportunistic phase in the early 1990s, the case study companies started to invest in companies and networks in several different foreign markets. Most of these investments were joint ventures with local partners. Some examples of these were SingTel's investments in cable-TV operations in the U.K. and Sweden, in a full-service operator in Philippines, and mobile operations in Norway and Belgium; Sonera's investments in Russia, the Baltic countries, Turkey, Hungary, Hong Kong, and Lebanon; Telia's investments in mobile operations in the Baltic countries, and in Denmark, Latin America, and Africa; and Telstra's investments in Vietnam, India, Indonesia, and New Zealand. Instead of focusing on close and neighbouring developed countries or large 'lead' markets, most of the foreign direct investments these companies made were in less developed countries or in countries with long psychic distance from home markets. Some of the less developed countries that the companies entered were located within a close geographical distance, but even in these cases, it can be argued, the physic distance was greater than traditional theories would suggest for target markets at the early phase of internationalisation. Largely due to the nature of the product, inseparability and location-specificity of the telecommunications service, the operation modes included both committed marketing and production modes.
The international market strategies both in phases one and two were very opportunistic and diversified geographically. Any pattern in this internationalisation seemed to be based on the exploitation of core competencies such as technical and marketing knowledge in this industry. Moreover, these competencies were not ones that would provide a competitive edge in developed countries, compared to less developed ones. In addition, huge initial investments would have been required to enter more mature developed markets in which high levels of competition existed. These large investments were often perceived to be too risky for the case companies and this, together with still prevailing regulation, often prevented them from successfully entering developed countries. As discussed earlier, this is different to most manufacturing companies, which often start exporting their products to close neighbouring countries and to large markets with high purchase potential.
However, towards the end of the opportunistic phase, perceived 'first mover advantage' together with pressure from financial markets did cause the case companies to invest significantly in some large developed countries, such as Sonera in Germany and the U.S, and SingTel, Telia, and Telstra in comprehensive international data networks. During the most rapid growth phase in the industry, many of the case companies also established subsidiaries with very ambitious plans to grow globally in their own special niche, such as Zed by Sonera or Speedy Tomato by Telia. These subsidiaries were aiming to become leading mobile portals in the world. At some level, these subsidiaries attempted to follow a process similar to born global companies. However, most of these subsidiaries have now been terminated, sold, or integrated back into their parent companies.
In the third phase, starting at the end of 2000 and early 2001 and following the change in general market sentiment, a de-internationalisation phase followed the opportunistic growth phase. The case study companies started to retreat from several target markets. Little if any investments were made in distant markets. De-internationalisation and changes in the process were very remarkable and contradictory to more linear and deterministic processes suggested by most traditional models. Companies sold their shares in many 'global' joint ventures, retreated from some of their alliances or the importance of these alliances diminished, and started to focus more on their home region, or even on their domestic markets and immediate neighbouring countries. Furthermore, the companies started to sell their non-core assets, such as cable-TV and directory service companies, and focus more on a few selected businesses, such as mobile communications.
In the fourth phase, the maturisation phase, the case companies started to grow their businesses again but instead of global strategies they focussed on neighbouring markets and their own region. Companies became more focused both in their market strategies and product strategies. Most case companies strengthened their domestic base and increased their investments in regional mobile operations. Organisations developed from multinational to more transnational, as the companies aimed to achieve more synergies than earlier between their different country operations. It can be argued that, as the industry matured, the internationalisation processes moved towards more traditional ones.
One clearly separate area of the operations of the case companies was their B2B-activities. With these activities similar phases as discussed above were not identified, as the case companies followed operation strategies similar to other B2B-service sectors. They entered neighbouring countries and lead markets by first establishing sales or representative offices, and then soon after expanded with service and some production functions. That is, they 'followed their customers', large multinational enterprises (MNE) which had already started their internationalisation earlier, or they planned to enter other lead markets in the industry or the lead financial markets. For example, Telia opened an office in London, Sonera in Brussels and Boston, SingTel in most Asian large business cities and in the UK and the US, and Telstra in the UK. To offer B2B services to their global customers, the case study companies also actively participated in global intra-industry alliances. Later, some 'market seeking strategies' appeared, but clearly in B2B businesses the driving force was to follow globalising MNEs into international markets. While this process followed the suggestions of the traditional process theories at some level, it was, however, much more rapid. Thus, the results support the findings of the research on the internationalisation of B2B services (Roberts 1999). However, at the time of the research the importance of these international B2B operations for the case companies was still relatively small, when compared to their B2C or domestic B2B operations. It could be argued that this relates partly to the fact that not many global MNEs originate in smaller countries, thus the potential for this business area is limited.
Examination of the Propositions and Discussion of the Results
Our first proposition stated that telecommunication operators start their internationalisation from the beginning with committed operation modes. However, an interesting finding from this study was that, in fact, the case companies started their internationalisation with consulting projects long before they invested in foreign markets. This was a significant finding, as these companies did not have prior consulting operations to external customers in their domestic markets. Thus, it can be seen that they adjusted and developed their product portfolio, in order to overcome some of the challenges that service companies in network industries, especially from small countries, face. This first phase of internationalisation made it possible to learn and gain international experience, which then may have helped in more rapid internationalisation in the next phases. Also, some of the case companies mentioned that the international experience they gained in international inward operations was a valuable contribution to organisational learning. Although these consulting operations were never very important for the case companies in regard to revenues or profits, it seems that they did help in overcoming some of the early challenges in internationalisation linked to uncertainty and risk. In the second phase, the case companies followed a very opportunistic strategy with committed operation modes, which was in line with our proposition. In phase three, the case companies de-internationalised from several markets. This was the opposite to some of the deterministic traditional models. Similar findings on de-internationalisation have been reported earlier by Welch and Benito (1996). Based on the analysis, it can be summarised that our first proposition was not fully supported.
Our second proposition, which stated that instead of investing in fully owned subsidiaries, small country telcos enter international markets with minority JVs and/or through strategic alliances, was supported. This was evident especially in phase two, the opportunistic phase. However, the further internationalisation proceeded, the more the case companies increased their commitments and many of the strategic alliances were terminated and/or their significance reduced. It could be argued that the further the process proceeded and the industry matured in regard to internationalisation, the process moved towards traditional models. Although it was not expected, these companies also tried to implement global niche strategies in some product areas. However, this strategy did not fit well with the overall strategy of the companies, and these operations were later divested or terminated.
Our third proposition, which suggested that telcos rapidly enter distant markets, was supported. Also, our fourth proposition, that telcos from SMOPECs enter developing countries early, even if they are psychically and culturally distant, was supported. All this supported the earlier research findings of the psychic distance paradox.
There are several different factors that have contributed to the international market and operation strategies of the case companies. It could be argued, as supported in the literature, that some general globalisation factors have contributed to a more rapid overall process of internationalisation. Thus, in some part the rapid entries to distant markets can be attributed to this factor, especially the globalisation of large MNE customers, which has increased the need for service companies to follow their customers abroad (see Sharma/Blomstermo 2003).
However, most of the factors for the case companies seem to be industry specific and home country specific (see Table 1). Industry specific factors identified included deregulation developments, high growth of the industry, technological developments, network externalities, and industry structure. These factors resulted in significant first-mover advantages in the industry and a need for very rapid internationalisation processes to capitalise on the emerging opportunities. However, other industry specific factors such as the nature of the product/high capital intensity and the important role of governments caused some barriers and limitations to rapid internationalisation, and influenced in the deviations in observed internationalisation patterns, both in regard to market and operation strategies.
A home country specific factor that is relevant to MNEs from small countries is the small size of domestic markets, contributing to both limited resources of the companies and a need to search for further customers. This factor, together with the previously mentioned high capital intensity, brought additional challenges to the case companies and forced them to search for some alternative strategies to enter international markets. Another country specific factor, not directly linked to small countries, was that often neighbouring countries had political ambitions which prevented reciprocality of entry, or there were other interventionist government measures which shaped the industry structure. For example, in some cases political pressures in a neighbour country against investments from a 'competitor' country were identified. In many cases this caused the barriers for network industry companies to enter foreign market to be lower for distant and/or developing countries. These countries often welcomed financial, technological and managerial investments to further the development of their telecommunications infrastructure. Partly based on the above mentioned factors, the product cycle theory seems to still have some validity in this industry, as companies originating in advanced telecommunication markets used their domestic experience when expanding into less developed target markets (3).
Psychic distance still played an important role too, as often it is time consuming to send managers and specialists to distant countries, and it is less complex to do business in culturally close countries. However, often the other factors mentioned above overrode the psychic distance factor.
An interesting new finding that interviewees from each of the case companies reported spontaneously was that coming from a small country can sometimes be seen as an advantage against competitors from large countries. Due to the strategic importance of the sector and the still relatively high role of governments in the industry in most countries, companies from smaller countries were often perceived to be less threatening than those from large developed countries, and this has won them opportunities to enter joint ventures with foreign governments or with other local partners. There are some earlier research findings on this type of advantage from Australian companies (Lewis 1999), but other than these few findings, little other evidence has been found on this issue and it should be the subject of further research.
This study contributes to the research on the internationalisation of service MNEs and MNEs from small economies by providing data on the recent internationalisation developments in a service industry, by developing a conceptual framework to analyse international market and operation strategies, and identifying factors influencing these strategies. Also, some competitive advantages that MNEs from small countries may have in regard to their internationalisation were identified.
As the empirical data demonstrated, the international market and operation strategies of the case companies deviated in many areas from those suggested by traditional theories of internationalising manufacturing companies, and from those of some other service sectors. Some of the traditional, at some level deterministic models, may not have emphasized enough the influence of a small home country on international market and operation strategies. Moreover, several industry specific characteristics played an important part in this, as they further enhanced many challenges common to internationalising companies from smaller countries.
The deviations from the traditional models were most evident in the market strategies of the case companies, as the role of psychic distance was overridden by other factors, and in several cases even the psychic distance paradox was supported. However, this pattern developed more towards the traditional models the further the process proceeded, from a very opportunistic to a more mature one.
In operation strategies, more surprisingly, the patterns were at some level incremental. The characteristics of the industry suggest committed entry modes early. However, the case companies also implemented alternative strategies, especially at the early phase of internationalisation: Developed consulting projects, invested in minority JVs, and were also active in strategic alliances. This was partly expected, due to the challenges faced by MNEs from smaller countries, but some of the findings also offered new insights in how these types of companies may adapt their product strategies to overcome some of the challenges.
During the analysis four different phases of internationalisation were identified and in each of these some unique patterns of the internationalisation process were recognised. The phases were described as: Learning phase, opportunistic phase, de-internationalisation phase, and maturisation phase. As discussed, these phases were different from the incremental and deterministic phases identified in some traditional internationalisation process models.
This research project aimed to extend traditional theories by providing more understanding of the internationalisation of service MNEs from small countries. It focussed on telcos from SMOPECs, thus the findings are limited to these particular types of companies. However, it is argued that the results could also be applicable at some level to other network industries with similar service characteristics facing similar challenges. Results could also be applied to MNEs from other small countries, which are still at an early phase in their internationalisation development.
As discussed throughout the paper, MNEs from most small countries face similar challenges: Relatively smaller domestic markets, limited resources, being often second-tier companies, especially in capital-intensive sectors dominated by large country MNEs. Also, the role and the impact of government policy are often greater in smaller countries. Further, the finding of a possible competitive advantage created by the perception of SMOPEC MNEs being less threatening in the marketplace may apply to all small countries. However, it needs to be acknowledged that as the internationalisation processes of many MNEs from less developed small countries lag behind those of SMOPEC MNEs, there may also be some significant and as yet unexplained differences. For example, it is not clear if all these internationalisation phases are directly applicable to all MNEs from small developing/emerging markets. For example, it could be expected that the role of international B2B operations would be even smaller than for SMOPEC MNEs, due to the relatively very small number of domestic MNEs to follow.
The implications for all managers but especially managers from MNEs in small countries lie in identifying the unique strategies required through the different internationalisation phases. These phases require and result in very different internationalisation processes with regards to both operation and market strategies. For example, small country service MNEs may need to adjust their products to overcome some of the challenges at the early phase of internationalisation, acknowledge the benefits of inward internationalisation in learning, implement alternative operation strategies, and be unprejudiced with regards to their market strategies. For service MNEs from small countries the optimal market strategies may be very unconventional. For both managers and policy makers it is equally important to acknowledge the important roles of government and political strategies in the process of internationalisation for these types of companies.
Scope for future research includes more in-depth analyses on host market characteristics, such as the sophistication of consumers and the overall development level of the markets. Also, although this study focused on the process of internationalisation it would be useful to include further analysis of the performance of different operations/companies so as to identify optimal strategies for the long-run. Studies on the internationalisation processes of service MNEs from small and developing/emerging countries could also include an analysis of the optimal level of government support/restrictions and their timing (that is, how to balance deregulation/regulation), the role of inward internationalisation, discussion of the applicability of strategic alliances and/or transnational strategies in which the companies in these countries operate as a part of a larger international organisation, as well as more specific studies on the role of regionalisation developments and psychic distance.
Received: 01.07.2007 / Revised: 04.04.2008 / Accepted: 01.05.2008
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(1) SMOPECs include Austria, Belgium, Denmark, Finland, Ireland, Israel, the Netherlands, New Zealand, Norway, Portugal, Sweden and Switzerland. A broader definition can also include countries such as Australia, Hong Kong and Singapore, as the challenges they face with regards to their internationalisation are similar (Liesch, et al. 2002, Merret, 2002, Dick/Merret 2007).
(2) For example, in 2006 75 percent of the Fortune Global 500 MNEs originated in the largest developed countries; that is, the G7 countries (USA, Japan, Germany, UK, France, Italy and Canada). (Fortune, July 24th, 2006 Issue).
(3) One of the traditional internationalisation economic theories, Vernon's (1966) product cycle theory, is similar to process theories in that it also sees internationalisation as a process. The theory originated at a time when the US was clearly the most developed country in the world after World War II. The US based multinational companies used their experience from sophisticated domestic markets to, first, export their products to other markets, and later, to establish production facilities internationally. As its main focus was on large MNEs and FDI, it is listed among the economic models.
This study is a part of a larger on-going research project (Laanti, 2008, forthcoming), which analyses internationalisation strategies of SMOPEC telcos. The research project is funded and supported by The Foundation for Economic Education, The Finnish Cultural Foundation, HPY's Research Foundation and the International Telecommunication Union. The authors want to also acknowledge the key interviewees of each case company for their valuable support for the project.
Ph.D. Candidate R. Laanti ([mail]) * Professor F. McDougall * Senior Lecturer G. Baume
Adelaide Graduate School of Business, University of Adelaide, Adelaide, Australia
Table 1: Factors Influencing Operation and Market Strategies of SMOPEC Telcos Factors Influencing Factor Impact on Operation Operation and Market Strategies Strategies +=accelerating -=limiting Industry Specific * Network externali- * 'First Mover Factors ties advantage/Economies of * High capital- scale advantages' + intensity * 'Follow the herd' * Regulation/deregu- reaction, an urge to lation capitalise the * Industry structure: opportunities before Monopolistic > Oligo- there are none left + polistic markets * Opportunistic * Product (complex Strategies (committed telecom systems and operation modes/FDI)+ physical networks) > * Different phases of Service characteris- internationalisation tics: Location bound process =/- services' and Asset- * Learning phase bound-services' + * Opportunistic phase * Technological * De-internationalisa- development tion phase * maturisation phase Home Country * Size of the domestic * Size of the market Specific Factors market contributing to the * Development level of limited resources of the domestic market SMOPEC MNEs - * Location of the * High risks > Risk domestic market sharing operation * Relatively greater modes (JVs, alliances) role of governments +/- and political * Adapting product strategies strategies to less committed modes (i.e. consulting project (exports) instead of immediate FDI) +/- * Pressures to internationalise + vs. limitations to internationalise - Factors Influencing Impact on Market Operation and Market Strategies Strategies +=accelerating -=limiting Industry Specific * 'First Mover Factors advantage/Economies of scale advantages'+ * 'Follow the herd' reaction, an urge to capitalise the opportunities before there are none left + * Opportunistic strategies (less emphasis on psychic distance) + * Different phases of internationalisation process +/- * Learning phase * Opportunistic phase * De-internationalisation phase * Maturisation phase * 'Product cycle' phenomena / psychic distance paradox + Home Country * Competitive Specific Factors advantage +/- * Smaller countries perceived less as a threat as international investors/JV partners + * 'Product cycle' phenomena / psychic distance paradox ++
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|Author:||Laanti, Riku; McDougall, Fred; Baume, Georges|
|Publication:||Management International Review|
|Date:||Jan 1, 2009|
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