International expansion strategies:
A research efficient framework and its application to the 10 EU accession countries
by Dirk Panhans and Lutz Kaufmann*
as presented at:
30th EIBA Annual Conference Track 5: Internationalization Strategies of MNCs
Competitive paper
Abstract
Established frameworks do not allow to easily measure the proliferation of various inter- national expansion strategies with readily available data. Therefore, a new framework is created and tested within the scope of a larger research project. As one part of this pro- ject, this article provides some preliminary insights on the expansion strategies that for- eign companies employ towards the 10 EU accession countries. In a first step, an explora- tory analysis addresses the question of what strategies are predominantly employed in the accession countries, where the respective foreign companies originate from, and what in- dustries are especially affected by those strategies. This analysis indicates that the acces- sion countries are on average still mostly regarded as export markets. Yet especially Es- tonia, Hungary, and Slovenia partially function as globally integrated platforms. In a sec- ond step, a confirmatory analysis tests the determinants of the strategies as predicted by the framework. This analysis suggests that for these countries, hidden trade barriers have a stronger impact on strategic choice than straightforward import duties. Also, the loca- tion of globally integrated platforms depends more on local technological know how than on wage levels.
1 1 Introduction
10 new countries joined the European Union (EU) in Mai 2004. Barriers to trade and to foreign direct investment (FDI) had been falling long before then, starting in 1991 with the collapse of the Warsaw Pact and the newly gained independence of the Baltic States and Slovenia. On their way towards accession, the eight formerly Eastern Block states, Cyprus, and Malta continuously opened their markets. With the entry into the EU most trade and investment barriers fell altogether. This has opened up new opportunities for foreign companies both from the EU and from third countries.
There are various forms of expansion. Foreign companies can locate stand-alone busi- nesses, sales offices, or other parts of a global value chain in the accession countries. On the one hand, stand-alone businesses comprise all functions from research & develop- ment to procurement and production to sales. On the other hand, sales offices only have operations at the very end of the value chain, including at times after sales services, dis- tribution, marketing and refurbishing. Finally, affiliates that represent parts of a global value chain may comprise single functions at any point of the value chain and must there- fore have resource interdependencies with foreign corporate group members.
Established frameworks do not allow to easily measure which of those international ex- pansion strategies companies employ. Therefore, a research efficient framework is cre- ated that allows to infer the distribution of international expansion strategies directed to- wards a region from readily available micro- and macroeconomic data. Also, this new framework models the determinants of strategic choice, i.e. the distinct sets of opportuni- ties each strategy offers and the barriers associated with them. All this is done within the scope of a greater research project. It aims at addressing three audiences. Managers can
use this new framework to benchmark themselves against competitors and to evaluate future expansion strategies. Policymakers can use it to determine how competitive their region is and how to further attract foreign companies. Academics can use it to focus their empirical work on practically relevant aspects and to test their hypotheses concern- ing international expansion strategies in a research efficient manner.
This paper is part of the research project. It is a first attempt to analyze what strategies companies employ towards the 10 EU accession countries and why. On the exploratory side, it is analyzed what strategies are directed towards the accession countries, specifi- cally how they differ from strategies employed elsewhere, how they differ between the accession countries, how they differ between the home countries of involved companies, and how they differ between various industries. On the confirmatory side, hypotheses re- garding the impact of barriers and hurdles on strategic choice are tested. As this project is still at an early stage, the findings give first indications rather than definite evidence.
This article is structured as follows. Chapter two reviews existing literature, develops the new framework, and specifies the research questions that are to be addressed. Chapter three outlines the methodology that enables the measurement of the expansion strategies directed towards the accession countries. Chapter four presents the exploratory findings of what strategies foreign companies use towards the accession countries and provides first confirmatory indications regarding the determinants of strategic choice. Finally, chapter five concludes with summarizing remarks and points out recommendations for future research.
2 Theory
A brief review of literature on established typologies of international expansion strategies identifies the research gap that creates the need for a new framework. First, the dimen- sions of the new framework are defined before the resulting strategies are described in detail. Then, the new framework is harmonized with existing typologies and determinants of strategic choice are described. Finally, the research questions are presented that then lead over to the next chapter describing the methodology used for further analyses.
2.1 Literature review
There is extensive literature on international expansion strategies. For an overview see see Harzing (2000). Most of it are alterations or empirical testings of one of the three ty- pologies provided by Perlmutter (1969), Stopford and Wells (1972), and Barlett and Gho- shal (1989). While all these typologies have their specific merits, neither of them allows for the research efficient analysis of business strategies from a regional perspective. By research efficient we mean that an analysis builds upon readily available micro- or mac- ro-level data rather than an independent survey. One well-known typology that has been tested by the means of macroeconomic data is the eclectic theory by Dunning (1977), which, however, only differentiates between two expansion strategies inside the bounda- ries of the firm.
Perlmutter (1969) categorized multinational companies according to the perspectives of management attitudes and human resource management. He initially derived three cate- gories: the ethnocentric company, which is centrally controlled by the home office, the polycentric company, which is characterized by a multitude of relatively independent
businesses well adapted to their various local environments, and finally the geocentric company, which is described as highly integrated across borders. It has been Perlmutter's merit to go beyond quantitative measures to describe how a company's internationaliza- tion is influenced by soft factors such as values, attitudes, experiences, habits, and preju- dices. Yet this preference for qualitative measures of international expansion does not allow for a research efficient analysis of strategies directed towards the accession coun- tries.
Stopford and Wells (1972) later categorized multinational companies according to their organizational structure, building their typology along the dimensions of foreign sales and foreign diversification. They observed three major different organizational structures for organizing foreign activities: the area division in cases of high foreign sales but low foreign diversification, the product division in cases of low foreign sales but high foreign diversification, and finally the global matrix in cases of both high foreign sales and for- eign diversification. It has been their achievement to add an organizational perspective to international management, describing how organizational structure changes according to different stages of internationalization. Yet although they supported their analysis with 187 in-depth interviews, their model was never formally tested.
Barlett and Ghoshal (1989) conceived a typology spanned by the dimensions of cost pressure and pressure for local responsiveness, much similar to a previous classification by Rall (1988). The four resulting expansion types comprise the international company, centrally managed and engaged abroad mostly through exports, the multinational com- pany, spread across countries and well adapted to the various local environments, the global company, characterized by its central yet worldwide integrated structure aimed at
global efficiency, and finally the transnational company, a hybrid of the former two forms and therefore aimed at both global efficiency and local adaptation simultaneously.
It has been their merit to conceive a typology on the strategic direction of a company.
Thereby, they have been so influential on international business literature that it is their terminology that is most prevalent today. Also, their typology has been empirically vali- dated several times by the means of large scale mail surveys (e.g. Roth and Morrison 1990, Leong and Tan 1993, Ghoshal and Nohria 1993, Harzing 2000). Yet due to the la- tent character of its main determinants – namely cost pressure and pressure for local re- sponsiveness – no empirical testing of this typology builds upon readily available macro- economic data that would allow for a research efficient way of analyzing business strat- egy from a regional perspective.
Dunning describes in his eclectic theory how ownership advantages, internationalization advantages, and locational advantages determine the international expansion strategy of firms (Dunning 1977). There he distinguishes between three strategies: contractual re- source transfer (i.e. outside the boundaries of the firm) in case of only ownership advan- tages, exporting in case of additional internationalization advantages, and FDI in case of additional locational advantages. In his empirical testing, however, he concentrates on the two strategies within the boundaries of the firm: exporting and FDI (Dunning 1980). It is interesting to note that he explicitly describes these strategies are "alternative to each other in serving foreign markets". This ignores for instance Barlett and Ghoshal's global company, where some parts of the value chain are placed abroad to serve the home mar- ket more efficiently. Because in that case, both FDI and exporting are employed simulta- neously.
Established typologies either do not include all relevant strategies or do not allow for a research efficient analysis of expansion strategies towards certain regions. Therefore, a new framework needs to be constructed that is exhaustive and that can be conceptualized by routinely gathered statistical data. Sethi et al. (2003) advocate the use of macroeco- nomic indicators, which represent an aggregation of routinely collected business-level figures.
2.2 Relevant dimensions
Besides building on routinely gathered statistical company data, the dimensions of the new framework need to represent the main decision variables concerning the configura- tion of value creation systems. According to Root (1988), there are three questions con- cerning such value creation systems: Where to locate value creation, what resource- interdependencies to establish between different locations, and how to structure the own- ership of these locations.
The offshoring dimension describes whether a certain step of the value chain is located in the company's home country or abroad. Foreign value creation can be performed in vari- ous forms, such as licenses & franchises, joint ventures, and wholly owned subsidiaries, which can in turn be created by mergers, acquisitions, or greenfield development (Meiss- ner/Gerber 1980).
The integration dimension describes whether there are resource-interdependencies be- tween different locations. On a binary scale, there are the alternatives of no integration, i.e. the location operates as a stand-alone business or full integration, i.e. there are inten-
sive upstream and/or downstream interdependencies with other corporate group members (Welge 1989).
The outsourcing dimension describes the ownership structure of these entities. In reality the ownership may range from wholly owned subsidiaries to equity joint ventures to mi- nority investments to portfolio investments to complete outsourcing. On a binary scale, there are the options of majority owned affiliates with an equity share of at least 50 per- cent and outsourced operations with less or no equity share. Outsourced operations may apply to support functions (Meier et al. 1997) but also to production itself (Picot 1991) or to any other function such as research & development, procurement, or sales (Hanser 1993).
2.3 Resulting strategies
Combining these three dimensions creates the value creation cube depicted in figure 1.
This systematization reflects two major research questions of international business lit- erature: Offshoring and integration refer to the research stream concerning forms of in- ternational expansion (e.g., Barlett/Ghoshal 1989), whereas outsourcing reflects the re- search stream concerning the boundaries of the firm (e.g., Buckley/Casson 1976). Please note that the dimensions of the cube correspond well to the strategies Dunning (1977) described as alternative. Thus the value creation cube goes beyond the eclectic paradigm in that it freely combines the former three strategies.
The international expansion cube comprises eight generic positions, whereof six describe distinct strategies towards foreign countries (shaded grey): Export Orientation, Business Transfer, and Global Integration represent expansion strategies within the boundaries of
the firm, whereas Export Partnering, Licensing & Franchising, and Foreign Subcontract- ing represent contractual expansion strategies.
Business Transfer
Global Integration
Export Orientation National
Focus
National Subcon- tracting
Export Partnering
Foreign Subcontracting Licensing &
Franchising
Outsourcing (ownership)
Integration (across borders) Offshoring
(value creation)
Figure 1: International expansion cube
Export Orientation is characterized by foreign resource interdependencies without actu-
ally having proper foreign operations and without outsourcing to other companies. In this case, most value creation is performed domestically yet sales are international. The main focus is on economies of scale, notably the spreading of R&D costs and fixed production costs over a larger sales volume. Without the global market, some research intensive products would not even exist, such as research intensive pharmaceuticals. Similarly, Toyota could not have exploited learning curve effects through its volume production system.
Business Transfer is characterized by stand-alone foreign operations within the bounda- ries of the firm. The main idea is to replicate the domestic business system abroad in or-
der to exploit it in other markets. As such, this strategy is primarily market-seeking. It is often used in case of high trade barriers (Corden 1967) or where high country-specific customization is demanded.
Global Integration is characterized by foreign operations that have intensive resource-
interdependencies with the parent company or other corporate group members (Malnight 1996). This strategy builds on the idea of deconstructing the value chain and placing each process step at the ideal location and processing the entire volume there (Hedlund 1986, Barlett/Ghoshal 1989, White/Poynter 1990). The choice of location depends upon loca- tion-specific resources, such as low factor costs (e.g. textile manufacturing in India), qualifications and externalities (e.g. pharmaceutical research clusters), or proximity to natural resources, suppliers, and other strategic resources. As such, this strategy is mostly resource- or efficiency-seeking. It allows combining firm-specific with country-specific advantages (see Rugman/Verbeke 2003). Although the term "global" may suggest that operations span multiple continents (Rugman/Verbeke 2004), we use this term also for integration within a continent or region. Note that for Global Integration, a high share of exports is intra-company.
Export Partnering corresponds to the strategy of Export Orientation outside the firm.
This strategy is mostly used in early stages of market development, as it does not require the management capacity needed to establish own export operations. At the same time, the local market knowledge of incumbent sales agents can be utilized.
Licensing & Franchising corresponds to the strategy of Business Transfer outside the firm. Because operations are simultaneously offshored and outsourced but not integrated with other parts of the firm, it means that a third party operates the entire business system
in another country. The goal is to exploit firm-specific core-competencies against weaker foreign competitors without actually having to incur any investments and associated risks and without having to dedicate significant management capacity.
Foreign Subcontracting corresponds to the strategy of Global Integration outside the
firm. This requires the outsourcing of activities to a third party, their relocation to another country, and their integration with other activities of the corporate group. Thus this strat- egy poses the highest barriers, yet also offers the highest opportunities. Specialization advantages of third party providers are combined with host country advantages and scale advantages of high volume production. Companies employing this strategy to a large ex- tent take a role as orchestrators, as Nike or Gap for example.
Similar to the empirical testing conducted by Dunning (1980) we want to concentrate on the international expansion strategies within the boundaries of the firm, reducing the in- ternational expansion cube to the matrix of the front level of figure 1. This certainly is a focus, as according to Buckley and Casson (2003), contractual alternatives are of growing importance. Yet we do so for reasons of research efficiency. Within the boundaries of the firm, offshoring corresponds to foreign value creation based on FDI. Similarly, integrat- ing corresponds to intra-firm imports and exports of services, intermediates, and finished products. Thus this matrix combines the two strategies used in the testing by Dunning (1980) to create the third of Global Integration.
2.4 Harmonization with existing frameworks
Table 1 shows how the new framework can be harmonized with existing typologies.
None of them included the base case of National Focus, yet the remaining categories cor-
respond well to each other. A company characterized by Export Orientation is necessarily centrally controlled as an ethnocentric or international company, and exhibits high for- eign sales at low foreign diversification as Stopford and Well's area division. Companies following the strategy of Business Transfer build up many independent foreign busi- nesses adapted to their various local environments, which is the very characteristic of polycentric and multinational companies, and they exhibit the high foreign diversification determinant for the product division. Globally integrated companies in turn exhibit the central yet integrated structure aimed at global efficiency that is also typical for geocen- tric and global companies, while exhibiting both high foreign sales and diversification typical of the global matrix structure.
National Focus
Export Orientation
Business Transfer
Global
Integration (other) Perlmutter (1969) - Ethnocentric Polycentric Geocentric
Stopford/Wells (1972) - Area division Product division Global Matrix
Dunning (1977) - Exports FDI - Contractual forms
Barlett/Ghoshal (1989) - International Multinational Global Transnational
Table 1: Harmonization with existing frameworks
The only two categories not present in the new framework are Dunning's contractual forms and Barlett and Ghoshal's transnational company. Dunning's contractual forms were excluded on purpose to concentrate on the international expansion strategies within the boundaries of the firm. Barlett and Ghoshal's transnational company is simply a mix- ture of strategies: The downstream processes such as marketing or distribution follow the strategy of Business Transfer, because functions closest to the customer are replicated in each market to provide local responsiveness. The upstream processes such as R&D or procurement are centralized and therefore follow either the strategy of Export Orientation (if located in the home country) or the strategy of Global Integration (if located elsewhere
abroad). Where these upstream processes are located actually matters, as these two alter- natives are fundamentally different in terms of underlying philosophies and resulting economies. Thus the new framework even adds clarity by omitting the category "transna- tional".
These comparisons show that the novel typology well reflects earlier categories at large, while taking a different perspective and being sufficiently distinct to justify a new termi- nology for clear demarcation.
2.5 Opportunities and barriers
A specific set of opportunities and barriers characterizes each strategy as depicted in fig- ure 2.
National Focus Business Transfer
•Market opportunities
•Economies of scope
Export Orientation
•Market expansion
•Economies of scale Global Integration
•Market opportunities
•Economies of location
•Economies of scale
•Economies of scope
Opportunities Barriers
Transfer barriers
•Control and governance issues
•Differing business environment
•Discrimination against foreigners Trade barriers
•Tariffs
•Quotas
•National regulations
•Transpor- tation and communi- cation costs
•Exchange rate effects
•Hetero- geneous preferences
•Managerial difficulties
•Others Offshoring
(value creation)
Integration (across borders)
Figure 2: Opportunities and barriers
First, market opportunities describe the revenue opportunities of foreign engagement.
This may be for specific market characteristics such as high market volume or growth, or
for more strategic reasons such as product life cycle extension or gaining first mover ad- vantages in market penetration. Especially the diagonally located strategies of Export Orientation and Business Transfer exploit this opportunity.
Second, economies of scale are decreasing unit costs at higher output due to the spreading of fixed costs (notably in research & development), increasing efficiency (e.g. in produc- tion), or faster learning curve effects (see Buckley/Casson 1976, Caves 1971). Yet also the extended bargaining power towards suppliers resulting from higher procurement vol- ume belongs to this category. Scale may be achieved by pooling volume across countries as in Export Orientation or Global Integration. Yet Business Transfer does not profit from economies of scale, as only local volume is processed in each country.
Third, geographical economies of scope arise when different regions or divisions share common competencies or overhead functions. The concept mainly builds on the idea of utilizing firm-specific core competencies in other countries or promoting managerial learning by having a multi-country presence (Tallman/Fladmore-Lindquist 2002). Ac- cordingly, only strategies with foreign value creation exploit this opportunity, i.e. Busi- ness Transfer and Global Integration. Please note that in the following, economies of scope refers only to geographical scope, as we exclude horizontal and vertical scope from analysis.
Fourth, economies of location exploit local advantages of the host country in performing certain steps of value creation, such as low factor costs, local skills and knowledge, spill- over-effects in industry clusters, or proximity to natural resources or key suppliers. Such characteristics of host countries can only lead to a competitive advantage for firms if they are transferred abroad. Ghemawat (2003) refers to this as the arbitrage function of the
firm. Only Global Integration exploits this opportunity, as this is the only strategy that combines foreign value creation with cross-border integration. Please note that absolute (Smith 1776) rather than relative national advantages (Ricardo 1817) are relevant from a business perspective.
This categorization of opportunities is designed to be mutually exclusive and collectively exhaustive. Learning effects, often mentioned in international business literature, are not considered an extra category in this article, as learning is already included in the other types. Economies of scope, for instance, include the firm wide utilization of core compe- tencies. Economies of scale include the spreading of research & development costs across countries and the acceleration of learning through learning curve effects. Economies of location include the internalization of local knowledge and knowledge-spillovers from other companies in clusters.
Concerning barriers, Transfer barriers are associated with the offshoring dimension.
These may include control and governance issues of transferring processes or knowledge (Kim et al. 2003), disadvantages in the business environment of the host country, or host country discrimination against foreign firms.
Trade barriers are associated with the integrating dimension. These may include dis-
criminations against trade such as tariffs, quotas, or local content requirements, external limitations such as transportation costs, exchange rate effects, or differing customer pref- erences, as well as general managerial difficulties of coordinating such activities across countries.
These opportunities and barriers determine the choice of strategic posture. Some of them are largely country-specific, such as market opportunities, economies of location, trade barriers, and transfer barriers. Others are largely independent from country characteristics such as economies of scale and scope. Thus it is to be expected that strategies towards the recent EU accession countries differ from those towards other regions and that they also differ between those countries.
2.6 Research questions
This paper intents to answer two questions. On the exploratory side, it will be analyzed what strategies are directed towards the accession countries. On the confirmatory side, hypotheses regarding the impact of barriers and hurdles on strategic choice are being tested.
Concerning the exploratory question it is to be shown what shares of foreign activities directed towards the accession countries follow the strategies of Export Orientation, Business Transfer, and Global Integration. This will be a novelty, as previous empiricism either did not describe strategies towards a specific target region (as empiricism based on Barlett/Ghoshal 1989) or did not distinguish between Business Transfer and Global Inte- gration (as Dunning 1980). In a first step these shares are compared between the block of accession countries and other regions. In a second step differences between the accession countries are analyzed. Furthermore, it is analyzed how the strategies towards the acces- sion countries differ between the companies from different home countries. Finally, dif- ferences between various industries are shown.
Concerning the confirmatory question the consistency of the novel framework is tested.
As depicted in figure 2, each strategy is expected to be characterized by a distinct set of opportunities and barriers. According to the concept of fit, companies should adapt their strategies towards a region to the extent of opportunities and barriers there. Economies of scale and scope is neglected from analysis, as they are industry specific rather than coun- try specific. This leaves to be tested what impact opportunities of market opportunities, economies of location, trade barriers and FDI barriers have on the strategies of Export Orientation, Business Transfer, and Global Integration.
3 Methodology
In the previous chapter, a new framework has been introduced that allows for a research efficient analysis of the expansion strategies towards the accession countries. This chap- ter will describe the data sources that are used and the conceptualization of variables that makes our framework measurable by the given data. This is to give an understanding how we reached the results that are discussed in the next chapter.
We take a macroeconomic perspective, basing our analysis only on aggregated data. We do so because such aggregated data is more comprehensively available and gives a better overview over trends than single company data (Sethi et al. 2003). For an overview of data used see table 2.
Concerning the measurement of strategies, a multitude of sources is consulted. For Ex- port Orientation, imports by the accession countries are taken as a proxy. These imports consist of the exports of foreign companies towards the accession countries and exports of foreign affiliates of companies with a home-base in the accession countries towards
their parents. Yet the second category seems negligible in size, as the stock of outward FDI is still low for the accession countries. Therefore the proxy should be sufficiently good. Business Transfer and Global Integration are both measured by the sales of foreign affiliates located in the accession countries. Whereas Business Transfer corresponds to the local sales of those affiliates, Global Integration corresponds to their exports towards their home country or third countries. For Poland, Hungary, the Czech Republic, and Slovenia, this data is available in the World Investment Directory (UNCTAD 2004a).
Updated and completed data is found at the statistical offices or national banks of those countries. For all other countries, the sales and exports of foreign affiliates is extrapolated from data of German foreign affiliates in the accession countries. This is achieved by us- ing the reciprocal of the share of German companies on the total inward FDI stock as a factor.
Variable Item Country Source Editor
Strategies Export Orientation
Imports by accession countries all Statistical Yearbook 2003 for Foreign Countries
Federal Statistical Office Germany (2004) Business Sales and exports by foreign affiliates PL, HU, CZ, SL World Investment Directory UNCTAD (2004a)
Transfer Statistical yearbook of Poland 2003 Central Statistical Office (2004)
and Statistical yearbook of Hungary 2003 Central Statistical Office (2004)
Global Foreign Direct Investment 2002 Czech National Bank (2004)
Integration Direct Investment 1994-2002 Bank of Slovenia (2004)
Sales of German affiliates abroad all but PL, HU, CZ, SL Kapitalverflechtung mit dem Ausland (Capital linkages with abroad)
German Central Bank (2004) Inward FDI stock from Germany all but PL, HU, CZ, SL Handbook of Statistics 2003 UNCTAD (2004b) Total inward FDI stock all but PL, HU, CZ, SL World Investment Report 2002 UNCTAD (2002)
Oppor- Trade Import duties all World Development Indicators 2001 World Bank (2002)
tunities barriers Hidden trade barriers all but CY, MT Global Competitiveness World Economic Forum (2002) and
barriers
Irregular payments in exports & imports
Report 2001-2002 FDI Intellectual property protection
barriers Favorism in decisions of gov.
Business cost of corruption
Market Market size (GDP) all Handbook of Statistics 2003 UNCTAD (2004b)
oppor- Market growth (GDP growth)
tunities Buyer sophistication all but CY, MT Global Competitiveness World Economic Forum (2002)
Economies Technological sophistication Report 2001-2002
of location Wages all Statistical yearbook
on candidate countries 2003
Eurostat (2004) Corporate tax rate all but SL World Development Indicators 2001 World Bank (2001)
Table 2: Data sources
Concerning the measurement of opportunities and barriers, each variable is supported by three items. This only represents a selection from a multitude of possible items. For trade
barriers open and hidden trade barriers are considered. Hidden barriers are based on a survey conducted by the World Economic Forum (2002). Also FDI barriers are measured by various items from that survey. Opportunities of market expansion are measured by market size, market growth and buyer sophistication. For market size the logarithm of gross domestic product (GDP) is taken, for market growth the change in GDP. Econo- mies of location are measured by technological sophistication, the wage level, and the corporate tax rate. Because the wages are in absolute values, again the logarithm is taken.
Please note that productivity levels are not incorporated in the analysis, as country-level productivity is often irrelevant for company-level new investment decisions.
For the exploratory part, the absolute figures for Export Orientation, Business Transfer, and Global Integration are for convenience reasons transformed into a sum (the total of foreign activities) and shares (the distribution of strategies). For the home country per- spective on expansion strategies, Poland is chosen as the host country because it is the largest country in terms of attracted foreign activity. For the industry perspective Slove- nia is chosen due to the industry detail available.
For the confirmatory part only a single regression analysis is used in this paper due to the early stage in the research process and the low number of observed countries. A proper multiple regression analysis for the structural model coupled with a factor analysis for the measurement model will be conducted at a later point of time. Thus here, single items are regressed against single strategies. For each regression, the correlation coefficient is dis- played and a F-test is performed to describe the significance of the result. In cases where data is not available for all 10 accession countries, this is respected in the calculation of significance level. All correlations significant at <0.01, <0.05 und <0.20 are marked. The
tolerance of 0.20 is used to account for the low number of data points with only 10 acces- sion countries.
4 Results
First, exploratory results are aimed at better understanding the strategies of foreign com- panies towards the accession countries. Then, a confirmatory analysis is to test the ex- pected impact of the barriers and opportunities on strategic posture.
4.1 Exploratory results
Figure 3 illustrates the position of the accession countries in the world with respect to the total volume of attracted foreign activities and the distribution of strategies directed to- wards the region. All 10 accession countries taken together attract a total volume of 367 billion USD in 2001, which consists of all exports by foreign companies towards the ac- cession countries and all local sales and exports by foreign affiliates in the accession countries. For comparison, the 12 largest countries in terms of attracted foreign activity are listed.
It can be seen that even taken together the accession countries are relatively small in terms of attracted foreign activity. Also it can be seen that the share of Export Orientation towards the accession countries is much higher than on world average, much to the ex- pense of Global Integration. This means that on average the accession countries still func- tion mainly as an export market rather than a value creation platform. This is partly due to the proximity to established sites in Western Europe. But it is also partly due to the relatively small domestic markets of some of the accession countries, as some industries require a minimum efficient scale that cannot be reached by domestic demand only. Yet
the high levels of current FDI inflows into these countries suggest that Business Transfer and Global Integration may grow faster than Export Orientation.
1,738 1,373
1,192 881 715 672 532 525 510 484
367 1,293
3,487 U.S.
Germany China UK France Hong Kong Canada Belgium Spain Italy Singapore Japan 10 accession countries
31 27 29 44 23
72
46
63 47 58
57 53 49
50 34
50 44 27
26
39 5 25 24 18 20 28
19 39
21 12 50
2
15 23
28 26 18
28 32 Foreign activities
In bn USD 2001
Distribution of strategies In percent
Σ= 18,331 34 43 23
World
EO BT GI
Host countries
Figure 3: Comparison of accession countries with the world, 2001
Also note the low levels of Global Integration directed towards the U.S., which is due to the large domestic market and relatively high factor costs. Also note the very low levels of Business Transfer and Global Integration directed towards Japan, which due to high informal FDI barriers.
Figure 4 compares the accession countries with each other. Poland, Hungary, and the Czech Republic are the largest countries in terms of attracted foreign activity, making up for nearly 80 percent of all accession countries. These three countries also exhibit the highest shares of Business Transfer, as large markets tend to reach minimum efficient scales easier by domestic demand. In smaller countries like Lithuania or Estonia, the do- mestic markets may not be big enough to justify a separate business system there, so de- mand is largely satisfied by Export Orientation.
92 80
17 10 9 8 8 6
25 Poland 112
Hungary Czech Republic Slovakia Slovenia Cyprus Lithuania Estonia Malta Latvia
70 62 60 49
44 41
43 30 20 22 22 15
29 37
11 23
14 11 18
8 8 23
11 14 70
62 59 43 36
45
Σ= 367 46 39 15
total
Foreign activities In bn USD 2001
Distribution of strategies In percent
Host countries
EO BT GI
Figure 4: Comparison between accession countries, 2001
Also note the high shares of Global Integration attracted by Estonia and Hungary. Estonia early opened up its investment and trade regime and especially attracts companies from the geographically and culturally close Finland, which use Estonia as an export platform for automotive parts, IT and communication technology, and lately also shared services.
Hungary profits from early preferential agreements with the EU and the establishment of industrial free trade zones that simplify production for exports. Especially foreign auto- motive and electronics companies use Hungary as an export platform as depicted in fig- ure 5. According to the World Investment Report (UNCTAD 2002), exports from Hun- gary were mainly in primary products, manufactures based on primary products, and low tech back in 1985. Today, automotive and electronics alone make up for more than half of Hungarian exports. It is interesting to note that the exporters are not Hungarian com- panies but affiliates of foreign companies from all over the world. Not only European companies use Hungary as a production platform, but also U.S. and Asian companies do
so to combine the good production conditions of Hungary with its proximity to the large EU-15 market.
Share of product on total exports from Hungary
In percent (cummulative)
1985 1990 1995 2000
Primary products Resource-based mfg.
Low tech
0 5 10 15 20 25 30 35 40 45
50 •Combustion engines
•Passenger cars
•Parts of motor vehicles
•Data processing machines
•Dictating machines
•Telecom. equ.
•Electrical equipment
•Electrical machinery
•TV receivers
Automotive
•Volkswagen (Germany)
•General Motors (U.S.)
•Suzuki Motor (Japan)
•North American Bus Industries (U.S.)
•Delphi Automotive Systems (U.S.)
•Renault (France)
•Continental (Germany) Electronics
•IBM (U.S.)
•Philips Electronics (Netherlands)
•General Electric (U.S.)
•Flextronics International (Singapore)
•Samsung Electronics (Korea)
•Erricson (Sweden)
•Siemens (Germany) Hungarian exporters Category
Medium and high tech
Figure 5: Export platform Hungary
Figure 6 depicts the countries of origin of companies active in Poland. Companies from Germany, the Netherlands, and France alone make up for nearly half of total foreign ac- tivity. Overall EU companies have a strong presence in Poland due to the geographical proximity and the low hurdles within the common market. The high share of Business Transfer from the Netherlands may be a distortion as some foreign investors use the Netherlands as an investment vehicle. Comparing the other largest host countries Ger- many, France, and the U.S. the data suggests that geographical proximity has a positive impact on the share of Export Orientation. Also Russia stands out with its very high share of Export Orientation, which may be due to the overall low investment activity of Rus- sian companies. Also note that the share of Global Integration is largely the same for companies from different home countries. Yet the meaning of Polish operations may be
different for German and U.S. companies: Whereas German companies may tightly inte- grate Polish operations into their domestic value creation system, U.S. companies may use Poland as a stand-alone platform for the EU-15 market.
78 38
28 20 17 16 12 12 11 10
30 Germany 120
Netherlands France US Italy Russia Sweden UK Austria Switzerland Denmark Korea
37 61 35 25
30 31
46 77
50 55
21 1 51
33 54 60
60 56
12 13 14 13 17
0 12
6 11 15 10 13 99
62 32
36 10
42
Σ= 483 45 44 11
total
Foreign activities In bn zloty 2000
Distribution of strategies In percent
Home countries
EO BT GI
EU
Figure 6: Home countries of foreign companies active in Poland, 2000
Figure 7 displays the top 12 industries of foreign activity in Slovenia. Similar to Estonia and Hungary mentioned earlier, automotive and electronics are the areas of highest for- eign involvement. Yet Slovenia functions mostly as a sales market for foreign companies.
Especially in the manufacturing industries the share of Export Orientation towards Slo- venia is exceptionally high, which is somewhat compensated by higher shares of Busi- ness Transfer in services (not seen in the figure). Also noticeable is the high ratio of Global Integration to Business Transfer in many manufacturing industries. This means that because the host market lacks sufficient market size, companies invest in Slovenia mostly for exports. In machinery and equipment, for instance, more than 80 percent of production by foreign companies is exported again. Also note that especially scale indus-
tries show high levels of Export Orientation, as for example electrical and electronic equipment, metal and metal products, and chemicals.
369 359
299 293 178 129 109 75 63 50
343 Motor vehicles 515
Electrical/electronic eq.
Metal and products Chemicals Machinery and equ.
Textiles, leather, clothing Wood, publishing, printing Food, beverages, tobacco Rubber/plastics products Mineral products Agric., hunting, forestry Other manufacturing
62 77 73 69
98 93
8 5
5 6 4 10 11
18 6 15
2 4 34
16 13 15 23 25 27 5 21
16 0 3 65
73 79
82 79 58
Σ= 3664 62 20 18
Slovenia total
Foreign activities In bn tolar 2000
Distribution of strategies In percent
Top 12 industries
EO BT GI
Figure 7: Industry split of foreign companies active in Slovenia, 2000
4.2 Confirmatory results
To confirm the expected impact of the barriers and opportunities on strategic posture, various items of barriers and opportunities are for the 10 accession countries regressed with the shares of strategies of attracted foreign activity. The result is depicted in table 3.
Trade barriers are expected to have a negative impact on Export Orientation and Global
Integration. This expectation is supported by the regression analysis. Hidden trade barri- ers negatively impact Global Integration at a significance level of <0.01. For a detailed analysis, see figure 8. The three countries identified earlier for being subject to high lev- els of Global Integration – Estonia, Hungary, and Slovenia – are also the countries with the smallest hidden trade barriers. Similarly, irregular payments in exports and imports have a negative impact on Export Orientation. That means that companies actually trans-
fer value creation to those countries to avoid the attrition associated with trade. Interest- ingly, these hidden barriers have a clearer impact on strategic posture than straightaway import duties.
Item Strategies
EO BT GI
Trade Import duties -0.21 0.37 -0.26
barriers Hidden trade barriers 0.28 0.14 -0.85 ***
Irregular payments in exports & imports -0.58 * 0.68 * -0.20
FDI Intellectual property protection 0.53 * -0.23 -0.62 *
barriers Favoritism in decisions of gov. -0.60 * 0.75 ** -0.30 Business costs of corruption 0.57 * -0.22 -0.71 **
Market Market size -0.67 * 0.70 ** 0.06
opportunities Market growth -0.32 0.09 0.51 *
Buyer sophistication -0.29 0.22 0.15
Economies Technological sophistication -0.57 * 0.29 0.58 *
of location Wages -0.29 0.21 0.21
Corporate tax rate -0.15 -0.11 0.54 *
Significance level: *<0.20, **<0.05, ***<0.01
Table 3: Regression analysis
FDI barriers are expected to have a negative impact on Business Transfer and Global
Integration. This expectation is supported by the regression results of barriers concerning intellectual property protection and business costs of corruption. Both have a negative impact on Global Integration and a positive one on Export Orientation. Thus companies are avoiding investments into countries with poor property protection and high levels of corruption to prevent technological drainage. Contrary to the expectations, favorism in decisions of government officials positively correlates with Business Transfer and nega- tively with Export Orientation. This may be because favorism requires companies to be- come insiders to gain government contracts. An exporter with only a sales office in the host country probably does not have the same buy-in with local officials as a foreign af- filiate that employs many locals and brings technology into the country.
0%
10%
20%
30%
1.9 2.4 2.9 3.4 3.9
Share of Global Integration
Hidden trade barriers (1 low, 7 high) Poland
Czech Republic Hungary
Latvia Estonia
Slovakia Slovenia
Lithuania
Figure 8: Impact of hidden trade barriers on Global Integration
Market opportunities are expected to have a positive impact on Export Orientation and
Business Transfer, whereas Global Integration should be independent of host country market opportunities because products are sold abroad. This expectation is only partially supported. Market size has a strong positive effect on Business Transfer, yet correlates negatively with Export Orientation. This is because Business Transfer and Export Orien- tation substitute each other. At large, companies either export to a country if it lacks suf- ficient scale, or transfer their businesses there and produce on site. Market growth sur- prisingly shows a positive correlation with Global Integration. Yet this may be due to re- verse causalities, as export platforms can help to stimulate economic growth in the host country. Buyer sophistication shows no significant relationship to any strategy, indicating that premium market segments may not be the main concern of foreign companies in the accession countries.
Economies of location are expected to have a positive impact only on Global Integration.
As expected, high levels of technological sophistication and low corporate tax rates sig- nificantly correlate with Global Integration. Moreover, high levels of technological so- phistication are negatively correlated with Export Orientation, which means that compa- nies prefer exporting to markets that are technologically behind. Surprisingly, no relation between the wage level and Global Integration could be found. This means that the qual- ity of labor is more important for foreign companies than its price.
Overall the expectations from the model concerning the determinants of strategic choice are largely supported by the analysis: For each barrier and opportunity, at least one vari- able shows the expected relationship on a significant level. Further testing with more items and countries is, however, necessary to conduct a proper structural equation analy- sis supporting the framework.
5 Implications & extensions
A research efficient framework has been developed that allows to measure international expansion strategies and to test the determinants of strategic choice. A fist application of this framework to macroeconomic data provides a rough overview over strategies em- ployed by foreign companies towards the 10 EU accession countries and gives some pre- liminary support for the consistency of the framework.
On the explorative side, the analysis shows that overall companies employ more Export Orientation towards the accession countries than on world average. This can partly be explained by the small market sizes of the accession countries, partly by the proximity to established production sites in Western Europe. Especially Estonia, Hungary, and Slove-
nia have been successful in attracting automotive and electronics companies pursuing Global Integration. This success can be traced back to especially open trade and FDI re- gimes in those countries. A breakdown by home countries suggests that proximity favors Export Orientation. Similarly, a breakdown by industries indicates that especially scale industries in manufacturing tend to pursue Export Orientation.
On the confirmative side, the validity of the framework concerning the determinants of strategic choice is supported at large. Moreover it is found that hidden trade barriers have a stronger impact on strategic choice than straightforward import duties. Contrary to ex- pectations it is found that companies meet problems of government favorism by trying to become insiders via Business Transfer. Also, Business Transfer strongly depends on market size. Global Integration is favored by economies of location, such as technologi- cal sophistication and low corporate taxes. Surprisingly, wage levels alone are not suffi- cient to attract Global Integration.
While our research project is still in an early stage, we hope to have made some interest- ing contributions for all three audiences. For managers of foreign companies it may have been insightful that small countries such as Cyprus or Lithuania are mainly served by Ex- port Orientation, whereas larger countries such as Poland, Hungary, or the Czech Repub- lic are common targets for Business Transfer. Also, it may have shown them the attrac- tiveness of Hungary, Estonia, and Slovenia for Global Integration. Policy makers from the accession countries may have learned about the importance of keeping their corporate tax rates low. Also, the analysis may have shown them that further technological devel- opment seems to be vital for further attracting foreign companies, as most of the acces- sion countries cannot compete on wages alone with the new low-cost frontier of South
Eastern Europe (SEE), the Coalition of Independent States (CIS), and Turkey. Academics may have learned about the convenience of the new framework for the research efficient measurement of international expansion strategies. Also, the confirmatory testing may have added to the face-validity of the framework and thereby contributed to existing re- search.
Further research is needed to fully utilize the potential offered by the new model. While addressing the strategies of foreign companies towards the EU accession countries, this analysis raises further questions concerning the development of strategies over time, the resource-interdependencies of foreign affiliates at various stages of the value chain, and the impact of strategic choice on performance. Moreover, a proper structural equation analysis based on more items and countries is needed to further test the consistency of the framework.
A longitudinal analysis based on macroeconomic data could be performed to understand the changes in employed strategies over time. Then it could even be observed how the strategies have adapted to decreasing barriers over time. An analysis on the company- level could add extra insight into the roles that foreign affiliates in the accession countries play within their group network. Until now, trade has been taken as a proxy for integra- tion. Yet it would certainly be insightful to understand what part of trade actually repre- sents intra-company resource-dependencies, and at what points in the value chains for- eign affiliates are integrated.
A proper structural equation modeling could support the validity of the model. Therefore, variables need to be supported by a more comprehensive list of items and more than 10 countries need to be used for testing. If these data restrictions are eliminated, data could
either be analyzed by factoring items and conducting multivariate regression analyses be- tween resulting factors, or by testing a structural equation model. A second enhancement of the confirmatory analysis would be to extend it to examine the effect of strategic choice on performance. There is plenty of contradicting literature on the performance of foreign operations (Ruigrok/Wagner 2003), so incorporating expansion strategies as an independent variable may be enlightening.
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