Internationalization trajectory of multinationals : a comparative study of an EM MNE and DC MNE

Master thesis

Internationalization trajectory of multinationals: A

comparative study of an EM MNE and DC MNE

MSc Business Administration International Management

Martijn van den Heuvel 10173056 10th December, 2014

Supervisor: Prof. Suzana B. Rodrigues

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Abstract

Although emerging market multinational enterprises (EM MNEs) are relatively new players, they nonetheless have a significant impact on the global economy (Bonaglia, 2007; Guillén and Carcia-Canal, 2009; World Bank, 2014). Previous studies have suggested that these companies differ from multinationals of developed countries in their internationalization trajectories (Mathews, 2002; Luo and Tung, 2007; Li, 2010). However, the strategic choices and behavior of these multinationals are still relatively unexplored (Ramamurti and Singh, 2009; Bonaglia, 2007). In order to gain insight into their internationalization trajectories, this thesis compares two multinational companies in the mining industry: one from a developed country – BHP Billiton (Australia) – and another from an emerging economy – Vale (Brazil). The research covers these multinationals’ internationalization trajectories from 2002 to 2013, drawing primarily from their annual reports. It studies their foreign entry and reveals aspects of their internationalization trajectories not yet investigated, such as evolution of their foreign presence. Their internationalization trajectories are analyzed in the context of market pressures that have affected the mining industry during the period of study. The research analyzes in particular the companies’ adjustments to variations in China’s economic growth and commodity prices. Though a latecomer, Vale has internationalized quite quickly in the past decade, changing from a regional company to a global one with an international scope larger than its competitor, BHP Billiton. Despite its fast pace, like its competitors Vale has had to reduce its internationalization rhythm to adjust to market pressures which Vale seemed to be slower to respond to than BHP Billiton. In addition, Vale seemed to be more sensitive to political pressures. Indeed, political pressures to concentrate on the home market may have affected company performance, measured in terms of share value and scope. This suggests the relevance of home country influence on the stability of emerging market multinationals’ international strategies in comparison to multinationals from developed countries. On the other hand, the more aggressive search for expansion Vale has had to undertake to overcome its latecomer disadvantages as an emerging market multinational has enabled it to become a first mover in a rapid changing environment by jumping in in response to China’s demand for example. Moreover, Vale continued to expand, even when the scale and scope of the business were almost equal to that of BHP Billiton. This expansion brings new opportunities, but also threats that must be dealt with. To face market pressures both companies seems to de-internationalize. As Vale’s internationalization process is characterized by an accelerated expansion, its simultaneous de-internationalization also shows signals of an accelerated process in comparison to BHP Billiton. It seems that being ‘erratic’ is in the nature of EM MNEs.

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Key words:

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Table of Contents

1. Introduction ... 1

2. Literature Review ... 3

2.1 Multinational Enterprise and Internationalization ... 3

2.2 Internationalization Trajectory ... 5

2.2.1 Foreign Entry ... 5

2.2.1.1 Strategic Aspects of Foreign Entry... 6

2.2.1.2 Theories of Internationalization (theories of foreign entry) ... 10

2.2.2 Evolution of Foreign Presence ... 19

2.3 Market Drivers ... 19

2.3.1 Variations in China’s Economic Growth... 19

2.3.2 Commodity Prices ... 20 3. Methodology... 22 3.1 Case Selection ... 22 3.1.2 BHP Billiton ... 23 3.1.3 Vale ... 25 3.2 Data Collection ... 28 3.3 Data Analysis ... 29 3.3.1 Point of View ... 29 3.3.2 Research Design ... 31 3.3.3 Analysis ... 32 4. Findings ... 34 4.1 Market Drivers ... 34 4.2 Firm Performance ... 35 4.3 Measurements of Internationalization ... 37 4.4 Internationalization Trajectory ... 38 4.4.1 Foreign Entry ... 38

4.4.2 Evolution of Foreign Presence ... 55

5. Discussion and Conclusion ... 58

5.1 Discussion ... 58

5.2 Limitations and Future Research ... 60

5.3 Conclusions ... 60

Acknowledgements ... 62

References ... 63

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A Presence in different countries ... 70

B Revenues per geographical segment ... 73

C Revenues by business segment ... 75

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Index of Figures

Figure 1: Internationalization Trajectory ... 5

Figure 2: Foreign Entry. Derived from the literature ... 6

Figure 3: Hierarchical model of entry modes. By Pan and Tse, 2000, p. 538 ... 8

Figure 4: Framework ... 21

Figure 5: Global presence, BHP Billiton (2013) ... 24

Figure 6: Global presence of Vale (2013) ... 26

Figure 7: Triangle of reciprocity ... 30

Figure 8: Annual GDP growth in %, China and the world (2000-2013) ... 34

Figure 9: Historical commodity base metals price index in US dollars... 35

Figure 10: Total revenues in billions of US dollars, BHP Billiton and Vale (2002-2013) ... 35

Figure 11: Historical share price in US dollars (NYSE), BHP Billiton and Vale, beginning of the year (2002-2014) ... 36

Figure 12: Foreign sales to total sales ratio, BHP Billiton and Vale (2002-2013) ... 37

Figure 13: Foreign assets to total assets ratio, BHP Billiton and Vale (2002-2013) ... 38

Figure 14: Physical presence in number of different countries, BHP Billiton and Vale (2002-2013) . 39 Figure 15: Revenues by geographical segment in %, BHP Billiton (2002-2013) ... 43

Figure 16: Revenues by geographical segment in %, Vale (2002-2013) ... 43

Figure 17: Revenues by business segment in %, BHP Billiton (2002-2013) ... 46

Figure 18: Revenues by business segment in %, Vale (2002-2013) ... 46

Figure 19: Historical prices of iron ore (2000-2013) ... 47

Figure 20 and Figure 21: Equity-based entry modes (relative) of BHP Billiton and Vale (2002-2013) ... 50

Figure 22: Exploration by number of different countries (exclusive of home country) BHP Billiton and Vale (2002-2013) ... 53

Figure 23: R&D ratio of total expenditures, BHP Billiton and Vale (2002-2013) ... 54

Figure 24: Changes of foreign ownership, BHP Billiton (2002-2013) ... 56

Figure 25: Changes of foreign ownership, Vale (2002-2013) ... 56

Index of Tables

Table 2: BHP Billiton fact sheet (2013) …...24

Table 3: Vale fact sheet (2013)………..…….26

Table 4: Annual reports BHP Billiton and Vale by number of pages (2001-2013)……….…….…..………..….29

Table 5: Number of different countries of first time entering, BHP Billiton and Vale (2002-2013)………...………...41

Table 6: Entry modes of BHP Billiton by country and timing (2002-2013)………..49

Table 7: Entry modes of Vale by country and timing (2002-2013)…….………...…...49

Table 8: Number of different countries of first time exploring, BHP Billiton and Vale (2002-2013)………...………...53

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1. Introduction

An economy that was once dominated by developed country multinationals enterprises (DC MNEs) is now facing increasing competitiveness from emerging market multinational enterprises (EM MNEs). EM MNEs are compensating for their international lateness and are increasingly becoming global players whose impact on the world economy will only increase in the coming years (Guillén and Carcia-Canal, 2009; Fleury and Fleury, 2011). They thereby seem to deviate from the traditional internationalization process followed by DC MNEs (Malhotra et al, 2003; Luo and Tung, 2007; Ramamurti and Singh, 2009; Li, 2010).

A fundamental question is whether the concepts of conventional internationalization theories could be applied to understand the internationalization process of multinationals from emerging countries. There are ongoing debates in the international business (IB) literature about the relevance of applying these traditional models to the new multinationals’ strategic behavior (Li, 2010). In fact, many of the conventional theories have been adapted over time (Cuervo-Azurra, 2008). Even the most influential models, such as the OLI paradigm (Dunning, 1977) and the Uppsala Model (Johanson and Vahlne, 1977), have been modified (Li, 2010). However, as these adaptations are reactions, they are path dependent as opposed to path-breaking. Scholars such as Matthews (2006), Barkema and Drogendijk (2007), and Li (2007) note that instead of extending old research to explain this new phenomenon, the IB literature needs fresh insights (Li, 2010):

We posit that, while the conventional models can remain valid, they are more relevant for MNE early-movers than MNE latecomers or newcomers, especially more valid for the “old” issues of minimizing risk and cost than the “new” issues of maximizing opportunity and value. Hence, it is imperative to adopt a path-breaking approach to exploring the new species of MNE. (Li, 2010, p. 44).

Nevertheless, as others state, these traditional models are probably suitable for all waves of internationalization (Ramamurti and Singh, 2009). As Wells (1983) wonders:

Can the same concepts that have proved useful in studies of the traditional multinationals help in understanding the new foreign investors [Third World multinationals]? My contention is that they can and the process of applying the concepts to the new firms aids in understanding both the concepts and the different kind of multinationals. (Ramamurti and Singh, 2009, p. 11).

2 Meanwhile, IB scholars have developed new theories of internationalization regarding emerging market multinationals. Despite their relevance, there is consensus within the IB literature that emerging market multinationals and their internationalization processes are still relatively unexplored topics that need to be examined (Bonaglia et al, 2007; Ramamurti and Singh, 2009; Ramamurti, 2012). Moreover, as this topic is subject to a world that is changing quickly, it is crucial to have research that is recent. In addition, the theories of internationalization mainly explain the foreign entry of firms, and to a lesser extent the evolution of foreign presence (Santangelo and Meyer, 2011). To truly understand the whole internationalization trajectory of both DC MNEs and EM MNEs (and how they differ), both are crucial to consider.

This study analyzes both of these aspects and covers the entire internationalization trajectory of a DC MNE and an EM MNE. Its input to the IB literature is twofold: it contributes to the field of research concerning EM MNEs and their internationalization process as well as studying the evolution of foreign presence (a part that is rarely studied). The study will yield more insights into the internationalization trajectory of EM MNEs (as compared to DC MNEs) and it will contribute to a deeper understanding of their internationalization processes, given that their complete internationalization trajectory is covered.

In order to gain a deeper understanding of the internationalization of EM MNEs as compared to DC MNEs, I compare the internationalization trajectories of two multinationals in the mining industry: one from a developed country – BHP Billiton from Australia – and one from an emerging market – Vale from Brazil – over the time span 2002 to 2013.The internationalization trajectories of these two competitors are analyzed in the context of two particular market pressures that affected the mining industry during the period of study, namely variations in China’s economic growth and commodity prices (PWC, 2013).

Structure of the thesis

The aim of this research is to gain insights into the internationalization trajectories of an EM MNE in comparison to those of a DC MNE. It proceeds as follows. First, an extensive literature review is presented. It begins with a short explanation of the basic concepts used in this study and then takes apart the central notion of internationalization trajectory (which consists of an examination of both foreign entry and the evolution of foreign presence). This is followed by a section about market pressures that particularly affected the mining industry during the time span of the study. A framework that has been derived from the literature and the market drivers is then proposed. In the methodology section I outline how the results are analyzed and are presented thereafter in the findings section. Finally a discussion and conclusions are presented. This study is constructed to answer the following question:

How do the internationalization trajectories of a DC MNE and an EM MNE differ over time under the same market drivers?

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2. Literature Review

An MNE is defined as a firm that owns and controls value-adding activities in at least two different countries (Buckley and Casson, 2009; Rugman and Verbeke, 2001). Excluded from this definition are large import and export companies, firms that only are involved in minority joint ventures, companies that mainly invest in so-called tax-haven countries and state-owned enterprises (SOEs) whose objectives are purely of a political character (Luo and Tung, 2007).

The literature concerning MNEs is based on DC MNEs, which were the first firms that internationalized and are the founders of internationalization (Ramamurti and Singh, 2009). DC MNEs have always dominated the world economy and the shape of international expansion (Fleury and Fleury, 2011). However, this order is changing. EM MNEs are increasingly becoming key actors in the global economy (Fleury and Fleury, 2011). Nonetheless, their internationalization process remains relatively unexplored; even the concepts and definitions of EM MNEs are ambiguous in the IB literature.

EM MNEs

EM MNEs are labeled in different ways. They have been called ‘latecomer firms’ (Mathews, 2002), ‘unconventional multinationals’ (Li, 2003), ‘challengers’ (BCG, 2008), and ‘emerging multinationals’ (Ramamurti and Singh, 2009). The overall definition is similar to that of a DC MNE, except that an EM MNE originates from an emerging market. EM MNEs are in general characterized by their international lateness and the secondary role they play to established multinationals on the global stage. EM MNEs do not seem to have the competitive advantages that DC MNEs do, such as advanced technology and brand names (Rodrigues, 2010; Ramamurti, 2012). Their strengths are mainly based on country-specific advantages (CSAs), such as natural resources and cheap labor (Ramamurti, 2012).

EM MNEs are more heterogeneous than DC MNEs (Luo and Tung, 2007). Many firms are state-owned or were state-owned for several historical, economical and political reasons. They have different ownership structures due to the role of the government in their home countries (Luo and Tung, 2007). According to Luo and Tung (2007), EM MNEs can therefore best be categorized using four typologies that are based on ownership and international diversification, namely: niche entrepreneurs, world stage aspirants, transnational agents and commissioned specialists. Niche entrepreneurs are non-state-owned firms that do not receive any government support in the form of funding. To maximize the leverage of their strengths they operate only in a few specific markets outside their home countries and with specific products. These companies are therefore narrowly focused in international markets (Luo and Tung, 2007). World stage aspirants are also

non-state-4 owned enterprises that are diversified in the products that they offer within a broad geographical area. An example is the Brazilian aircraft manufacturer Embraer, which has many subsidiaries all over the world (Luo and Tung, 2007). Transnational agents are SOEs that have expanded heavily abroad to optimize their opportunities. They are (partly) subjected to governmental plans and influences when the government is an important shareholder. The aim of these companies is as a consequence also to support their home countries’ economy. These enterprises are mainly active in the mining and energy industry. Examples are Russia’s Gazprom and Brazil’s Vale (Luo and Tung, 2007). Commissioned specialists are state-owned EM MNEs that have a narrow focus on international markets that is intended to maximize the leverage of the enterprises’ strengths. They are subjected to governmental initiatives and support their home economies. An example is Brazil’s Banco do Brasil (Luo and Tung, 2007).

Studies in the ‘traditional’ IB literature about DC MNEs have not come up with a typology that reflects business ownership. This has seemed to be less necessary as DC MNEs are more homogeneous than EM MNEs (Da Silva, 2009). To really understand EM MNEs and their internationalization trajectories, however, this typology is needed; it would also strengthen the idea that EM MNEs deviate from conventional DC MNEs and help to clarify the underlying thoughts behind certain actions and strategies of EM MNEs. Since some, transnational agents and commissioned specialists are state-owned, they receive much more institutional support than niche entrepreneurs and world stage aspirants do. On the other hand, this also means that they are much more subject to political purposes and efforts and are less free in their choices. In addition, the choice of a foreign location could also be dependent on business ownership. State-owned enterprises may not get the best foreign locations due to misalignments between governmental influence and optimal strategic options (Luo and Tung, 2007).

Internationalization

Internationalization relates to a firm’s expansion into other countries. This concept is explained by many authors who have tried to ‘catch’ the core of this process. As Hymer (1960) puts it: “Internationalization is having the drive of controlling foreign activities to reduce competition in that country or to fully acquire the returns of certain capabilities” (Hymer, 1960, p. 25). Or, as Beamish et al (1997) define it, internationalization is “the process by which firms increase their awareness of the influence of international activities on their future, and establish and conduct transactions with firms from other countries” (Andersen, 1997, p. 29). These definitions have in similar that a company broadens its horizon beyond the domestic market in search of creating value-adding activities abroad. This process consists of roughly two phases: a firm’s entry into a foreign country and the evolution of foreign presence. Together these events shape the internationalization trajectory of a firm over time.

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2.2 Internationalization Trajectory

In this study, an internationalization trajectory is defined as a firm’s foreign entries plus its evolution of foreign presence (see Figure 1). A firm’s internationalization trajectory is subject to various market and non-market pressures, as explained in the market pressures section.

Figure 1: Internationalization Trajectory

This section begins with an examination of foreign entry, which serves as the basis for internationalization. Foreign entry consists of multiple strategic aspects, which are emphasized below. The theories of internationalization in relation to both DC MNEs and EM MNEs have incorporated these strategic aspects and are emphasized thereafter, together with strategy-based views that could be applied to both categories of enterprises as well. The evolution of foreign presence, on the other hand, is less emphasized in the IB literature and is not included in internationalization theories. However, as this subject is indeed part of the internationalization trajectory, it is examined after foreign entry. 2.2.1 Foreign Entry

Within the IB literature, there are four questions that aim to clarify the internationalization of firms: Why do firms internationalize? Where do they locate? How do they enter this foreign market? When do they enter this foreign market? These theoretical questions can be translated into practice using the four key strategic aspects that shape firms’ foreign entry, as depicted in Figure 2. These strategic aspects are all mutually related.

Foreign

Entry

Evolution

of Foreign

Presence

Internationalization

Trajectory

6 Figure 2: Foreign Entry. Derived from the literature

2.2.1.1 Strategic Aspects of Foreign Entry

Motives (why)

In the traditional IB literature, it is broadly recognized that there are three motives for MNEs to engage in foreign direct investment (FDI): resource seeking, market seeking and efficiency seeking (Dunning, 2000). The IB literature has been enriched with two motives that have been added as a reaction to the new waves of internationalization, namely the strategic asset-seeking and the opportunity-seeking motives. When applying the former to traditional DC MNEs, it refers mainly to protect strategic assets, as opposed to searching for them (Dunning, 1998; Dunning, 2000). When applied to EM MNEs, it refers in particular to search for strategic assets.

Resource seeking and market seeking were the most common motives for the firms that first internationalized. These motives are still important for firms that are internationalizing for the first time. When firms are already multinationals, efficiency seeking and strategic asset seeking become more important (Dunning, 2000). When firms are expanding abroad to acquire specific resources that have a higher quality and lower prices than could be obtained in their home countries, they act according to the resource seeking motive (Dunning, 1998). Although there are different kinds of resources, the most important ones are physical resources (such as fuels and industrial minerals) and labor resources (such as cheap and highly skilled labor). When firms make foreign investments to reach new markets where they could supply their goods and services, the market seeking motive is leading. They have the intention to increase their market size and revenues or they have to follow their customers to maintain their most important contacts (Dunning and Lundan, 2008). Firms that invest abroad to increase their cost efficiencies are efficiency seekers. These efficiencies are driven by

Foreign

Entry of

a Firm

7 economies of scale and scope or through arbitrage. The latter is the possession of comparative advantages in relation to the new markets being operated in (Dunning and Lundan, 2008). When firms expand abroad to gain access to specific foreign technology and knowledge, they are strategic asset seekers. It is a long-term vision used to protect and improve companies’ global competitiveness (Buckley et al, 2007). The strategic asset seeking motive was not part of conventional internationalization theories, but in the 1990s it became more prominent in the IB literature as a reaction to the internationalization of new multinationals (Makino et al, 2002). Opportunity seeking is mainly used by EM MNEs to catch up with early movers, in particular with DC MNEs. Opportunity seekers try to compensate for their international lateness and pursue a wide variety of opportunities that are intended to bring them closer to their competitors. These opportunities could be building reputation, avoiding home country constraints and jumping in on promising developments (Luo and Tung, 2007). The internationalization of MNEs is characterized by erratic motion.

The FDI motives of both DC and EM MNEs may change once a firm is established in a foreign country. What was once a foreign entry spurred by a host country’s resources, for instance, may become a situation in which the location is being used to exploit a firm’s efficiency (Dunning and Lundan, 2008).Location advantages then become owner advantages.

Location (where)

A firm that internationalizes crosses national boundaries. This expansion to a foreign country goes hand-in-hand with the transference of resources. The location to which these resources flow has to be selected by the firm (Andersen, 1997). The selected location is a strategic choice that is dependent on many push and pull factors. It is an indicator of future activities, as once a location is chosen many resources would be required to relocate (Kumar and Subramaniam, 1997).

The location choice of a firm has long been dominated by distance (Cyrino et al, 2010). Nearby markets would be more attractive to expand to than markets that are more distant. Advances in technology, however, have shortened the geographical distance and given rise to new opportunities. However, geographical distance is not the only distance that matters. Ghemawat (2001) is one of the most influential scholars looking at distance between countries. He developed the so-called CAGE framework, which consists of various dimensions that contribute to inter-country distance. Firms often overestimate the opportunities in foreign countries and face unforeseen costs as a result of distances with those countries from a cultural, administrative, geographical and economic perspective (CAGE). The higher this distance between the countries concerned, the fewer the opportunities there are (Ghemawat, 2001). This view is in line with concepts from traditional theories of internationalization that posit firms expand to nearby markets with regard to, for example. their ‘psychic distance’. Emerging market theories of internationalization, on the other hand, predict a more erratic expansion. This will be explained in the theories of internationalization section.

8 Entry modes (how)

The study of international entry modes refers to the manner in which companies enter foreign markets (Brouthers and Hennart, 2007). Traditional thought concerning the internationalization process of a firm is that it includes certain fixed stages of development starting with no regular export, followed by export via agents, then sales subsidiaries and finally a production plant. However, entry mode as a product of gradual learning has become less prominent in the IB literature since the rise of EM MNEs (as is explained in the section on theories of internationalization).

There are different options for firms to enter a foreign country. Those options are broadly recognized in the so-called hierarchical model of entry, which consists roughly of four entry modes: export, contractual agreements, joint ventures and wholly owned subsidiaries. These entry modes are first classified into equity- and non-equity-based entry modes (see Figure 3) (Kumar and Subramaniam, 1997; Pan and Tse, 2000).

Figure 3: Hierarchical model of entry modes. By Pan and Tse, 2000, p. 538

When a firm expands abroad, managers would not consider each entry mode separately; nonetheless, they choose between an equity-based and a non-equity-based entry mode (Pan and Tse, 2000). This is the first level of the hierarchy. At the next level, the non-equity-based modes are split into export and contractual agreements and the equity-based modes are split into joint ventures and wholly owned subsidiaries. The equity-based entry modes are seen as FDI, while the non-equity-based entry modes cannot be counted as FDI as these do not contain foreign value adding activities, as determined before. The entry modes are associated with an ascending degree of risk, return, control and integration (Kumar and Subramaniam, 1997).

Non-equity-based entry modes have the lowest level of resource commitment and thus the lowest risk and return. A firm is not actively engaged in activities abroad when it is exporting its

Choice of Entry Modes NonEquity -Based Export Direct Export Indirect Export Contractual Agreements Licensing R&D Contracts Alliances Equity-Based Joint Ventures Minority JV 50/50 JV Majority JV Wholly Owned Subsidiaries Brown-field Green-field Acquisition

9 products/services and therefore has neither control nor any kind of integration. A contractual agreement, however, requires some organizational involvement with foreign parties (Pan and Tse, 2000). This is the case when a firm is licensing a foreign firm, has R&D contracts with foreign parties, or has specific alliances such as an original equipment manufacturer (OEM) or an original design manufacturer (ODM) (Kumar and Subramaniam, 1997).

Equity-based entry modes, on the other hand, require a substantial resource commitment in the foreign activity. It needs an investment and ongoing participation and has therefore also a higher return (Pan and Tse, 2000). When a firm needs specific local factors (such as labor, local management and distribution channels) that cannot be bought on the market, a joint venture with a local party could be a solution (Brouthers and Hennart, 2007). This could be a minority joint venture, an equal joint venture or a majority joint venture. This entry mode is often associated with bilateral exploratory learning, unless it comprises a majority joint venture (in which case we speak of unilateral exploratory learning). The wholly owned subsidiary has the highest level of resource commitment, risk, return and integration (Meyer et al, 2009). It is divided in a field, green-field and acquisition. A brown-field is the redevelopment of an under-utilized industrial site. A green-brown-field is the construction of something brand new from scratch, and an acquisition is the take-over of another company (Kumar and Subramaniam, 1997; Pan and Tse, 2000).

In traditional internationalization theory the entry mode was seen as a product of gradual learning. This view evolved into the current conception that entry mode should rather be perceived as a strategic instrument. For instance, a green-field is now often related with the exploitation of a firm’s knowledge and is chiefly associated with DC MNEs, whereas EM MNEs often lack this knowledge and try to overcome their backlog through contractual agreements and acquisitions. In addition, specific entry modes can be necessary to overcome particular contextual challenges. In some countries a contractual agreement must first be made with local firms before business is possible, or a specific entry mode is wanted in order to avoid political hazards. Just like location, entry mode is an important strategic decision that affects all of a company’s future activities in a specific market. Each mode of entry leads to a certain course of path dependency, whereby change to another mode of entry is difficult without losing valuable resources (Kumar and Subramaniam, 1997).

Timing (when)

The timing of an expansion could be a source of competitive advantage, especially in a rapidly changing environment such as the world is facing now (Chang and Rhee, 2011). EM MNEs are called latecomer firms; the timing of an expansion could be a way for a firm to become a first mover when jumping in on a new development or market. This is strongly connected with the opportunity seeking motive. The timing of entry could therefore be an important strategic aspect for the foreign entry of firms.

10 The timing of entry also has to do with the pace and rhythm of the expansions. Traditional internationalization theories counsel an incremental internationalization process. In contrast, the new internationalization theories recommend a more aggressive internationalization process with opportunistic expansions to compensate for a firm’s backlog (Da Silva et al, 2009). A danger of this strategy, however, is that firms will grow faster than they are able sustain to in terms of efficiency and learning, which will lead to a decrease in their performance.

This is still an unexplored topic in the IB literature and whether an aggressive or erratic internationalization strategy will increase or decrease overall performance is still relatively unknown. It depends on many company-, industry- and market-related factors (Chang and Rhee, 2011).

2.2.1.2 Theories of Internationalization (theories of foreign entry)

In this section some of the most influential traditional and emerging market theories of internationalization are discussed. These theories of internationalization strive to explain why, where, when and how firms internationalize (as Figure 2 illustrates). Following this structure will allow us to gain insights into the foreign entry strategies of both DC MNEs and EM MNEs that are elaborated within the literature. The internationalization theories, however, are not all that comprehensive that they cover all of the strategic aspects of foreign entry, next to the missing of the evolution of foreign presence.

2.2.1.2.1 Traditional Theories of Internationalization

MNEs have existed for centuries. The Dutch East India Company (founded in 1602) is considered as the first multinational. Nonetheless, it was not until the 1950s that Stephen Hymer for the first time tried to understand the character and drivers of cross-border activities from an MNE’s perspective (Guillén and Garcia-Canal, 2009). Before Hymer made the MNE the core unit of analysis in explaining international business, the leading thought was that of the economists. Their unit of analysis to explain international business was on the country level, whereby the focus lies on national competitiveness (Rugman et al, 2011). These studies of the economists are mentioned as the first stage of modern IB literature. According to this conception, international transactions occurred because of differences in factor endowments across borders (Verbeke et al, 2011). The prevailing school of thought at that time was the Heckscher-Ohlin trade theory. This theory states that each country has a fixed endowment of labor and capital and specializes in producing the products that use its endowments the most efficiently (Rugman et al, 2011). Each country has access to the same technologies, and all markets work perfectly. Countries with relatively large endowments of labor specialize in producing labor-intensive products, whereas countries with large endowments of capital specialize in producing capital intensive products. Each country exports the products in which it is specialized. In this theory there is no room for the MNE: “it is purely and simply a theory of trade” (Buckley and Casson, 2009, p. 1571). International exchange was seen as something given, without

11 many difficulties. However, when researchers noticed a technology backlog in Europe in comparison to the US in the 1960s, this was alien to the Heckscher-Ohlin trade theory (which states that technology is available to everyone). Economists who believed in perfect markets were wondering how this could be: high profits would ‘normally’ diminish this gap in technology (Buckley and Casson, 2009).

In the second stage of the IB literature, the core unit of analysis shifts to the MNE. The most important work came from Hymer (1960) (Rugman et al, 2011), who shows that MNEs are institutions of production instead of institutions of exchange. The country level of analysis is replaced by the MNE level of analysis. The focus of his approach is the MNE and the firm-specific advantages (FSAs) that it exploits abroad. FSAs could be many things, including brand names, economies of scale, management skills, patents and superior marketing skills. A firm needs these advantages to offset the liability of foreignness (LOF) when operating abroad (Rugman et al, 2011). LOF is a cost that arises “[f]rom the unfamiliarity with the new environment from political, cultural and economic differences, the need for coordination across the new geographic distance and other factors” (Zaheer, 1995, p. 341). Hymer’s theory, however, is not that comprehensive in terms of strategic aspects. It has as a result been an important starting point for other studies in which FDI is an MNE’s strategy rather than a country’s investment decision (Rugman et al, 2011).

Product Life Cycle Framework

Vernon (1966), who extended the theory of national competitiveness, acknowledged the importance of the MNE in his work. He developed the product life cycle framework, which is now a leading framework within the IB literature (Ogasavara and Maseiro, 2012). This framework put the notion of a firm’s monopolistic advantages (mainly regarding innovation) in the center of explaining foreign expansion (Vernon, 1979). When applied to the US, this theory states in a nutshell that the US has CSAs that are technology-related and embedded in US-owned subsidiaries in foreign countries. These subsidiaries are similar to the parent firms in the US such that technology could be easily transferred between the parent firm and its subsidiary. This knowledge then will be exploited by the subsidiary (Rugman et al, 2011). It is not only the subsidiary that benefits from this stream of knowledge; it also flows indirectly to the host country, which can then also take advantage of it (Rugman et al, 2011). In this theory, an MNE’s decision to expand abroad is based on exploiting its knowledge and capabilities and gaining foreign ownership advantages (Rugman et al, 2011).

Internalization Theory

Another theory that has contributed to the IB literature regarding MNEs and their internationalization process is the internalization theory of Buckley and Casson (1976). Although the MNE is at the core of this approach, it does not focus on its monopolistic advantages (as is the case with Hymer’s theory),

12 but rather its efficiency advantages, based on the transaction costs theories of Coase (1937) and Williamson (1975) (Buckley and Casson, 2009). The main idea of this theory is that firms aim to maximize their profits by creating internal markets where markets for intermediate products are imperfect. “It refers to benefits of creating, transferring, deploying, recombining and exploiting FSAs internally instead of via contractual arrangements with outside parties” (Rugman et al, 2011, p. 761). Those internal markets are mostly based on intangible assets such as production knowhow and brands. Imperfections in the market could be information asymmetries and trade barriers (Rugman et al, 2011). The boundaries to which the firm expands abroad are where the costs of the further internalization of markets outweigh the benefits (Buckley, 2002).

Eclectic Paradigm

One of the most used frameworks in the IB literature incorporates internalization theory as a component: the Eclectic Paradigm (Dunning, 1977, 1988, 1998). Dunning explains FDI on both the country- and firm-level and integrates several cross-border activity theories into his framework, such as Buckley and Casson’s (1976) internalization theory (Rugman et al, 2011). The framework consists of three types of advantages that could possibly influence a firm’s FDI: Ownership advantages (OA), Location advantages (LA) and Internalization advantages (IA) (otherwise known as the OLI paradigm) (Dunning, 2000). OAs are advantages that arise from controlling the concerned foreign activities. They are divided into asset and transactional advantages. Asset advantages include tangible (such as natural endowments and capital) and intangible assets (such as managerial skills and information). Transactional advantages are specific capabilities related to coordinating the geographically dispersed activities (Rugman et al, 2011). LAs are immobile advantages at the location that the firm needs in combination with its own advantages (Dunning, 2000). These advantages, which arise from the host CSAs, could be natural resources, cheap labor, an attractive institutional environment or specific demand conditions. Dunning notes that these CSAs might differ by industry. IAs are advantages that arise from the creation of FSAs in an internal market. The foreign value-adding activities of the MNE are in this case more efficient then when the firm in question engages, for example, in a joint venture. The entry mode that a firm uses to expand is dependent of the internalization advantages – or lack thereof – for that specific location (Rugman et al, 2011). A firm would engage in a green-field when it has the desired knowhow, but would engage in a joint venture for example when it is missing.

Uppsala Model

Scandinavian scholars Johanson and Vahlne (1977) developed another framework that would lead to the most used framework in the IB literature, namely the Uppsala Model (Ogasavara and Maseiro, 2012). In this model, internationalization is a process in which the lack of knowledge about international markets is the main barrier to foreign activities. This knowledge could gradually be acquired by an evolutionary process of foreign commitment (Ogasavara and Maseiro, 2012). The

13 Uppsala Model (also referred to as the Scandinavian Model) states that internationalization is a process of path dependency. The extent to which a firm internationalizes depends on its prior international experience (Johanson and Vahlne, 1977). A company that is lacking international experience enters a foreign market by exporting. After gaining knowledge about the foreign market, a firm then establishes a sales subsidiary, followed by investing with the goal of producing there, as is explained in the paragraph above labeled ‘Entry modes (how)’. This gradual internationalization process is characterized by ‘experiential market knowledge’(Johanson and Vahlne, 1977).

In addition, Johanson and Vahlne (1977) introduced the concept of ‘psychic distance’. Psychic distance is the extent to which a company is unfamiliar with a foreign market. Within a psychic distance perspective, companies internationalize in an incremental way where they first enter markets that they are relatively familiar with in terms of culture, institutions and geography. MNEs rely on the knowledge they gained from exporting/investing in other markets and will eventually expand to more distant markets when they gain experience with foreign operations (Rugman et al, 2011). The timing and location of foreign expansion is characterized by a gradual internationalization. This model suggests “an incremental approach to international involvement, ‘deepening involvement’ or ‘creeping incrementalism’ as the firm is pulled by market (or cost) attraction and pushed by executive interest and learning” (Buckley, 2002, p. 367) and “Internationalization is the product of a series of incremental decisions” (Johanson and Vahlne, 1977, p. 23).

2.2.1.2.2 Transition to Emerging Market Internationalization Theories

The previous frameworks and models have been – and continue to be – of great influence within the IB literature. However, international business has evolved, as has the IB literature. In the traditional view, subsidiaries were solely seen as tools to ‘market access’ and recipients of the parent company’s technology (Birkinshaw et al, 1998). Subsequently the importance of subsidiaries as active participants in the MNE network came under the scrutiny of different scholars: “International subsidiaries shouldn’t just be pipelines to move products. Their own special strengths can help build competitive advantage” (Bartlett and Ghoshal, 1986, p. 89). Subsidiaries have become a strategic instrument of multinationals, although they remain distant-dependent.

The IB literature evolved further when scholars noticed another development: the rise of MNEs from emerging markets on the global stage. Ongoing debates about the relevance of the traditional internationalization theories in explaining the new kind of internationalization are diverse (Ramamurti and Singh, 2009). Some scholars argue that the conventional models are enough to explain this new phenomenon while others insist on new insights and adaptations (Matthews, 2002; Luo and Tung, 2007; Li, 2010; Ramamurti, 2012). Some of the most influential models have been adapted over time to adjust to this new kind of multinationals (Cuervo-Azurra, 2008). Johanson and Vahlne (1977) revised their gradual learning idea to opportunity development instead of risk avoidance (Li, 2010). Moreover, Dunning changed his OLI paradigm (1977) in 2001 and 2006 to

14 incorporate developments such as the asset seeking motive (Li, 2010). However, these adaptations are not path-breaking, but path-dependent. To really gain a deeper understanding about the internationalization of EM MNEs, more research is needed (Bonaglia et al, 2007; Ramamurti and Singh, 2009; Ramamurti, 2012).

EM MNEs lack the competitive advantages (such as advanced technology) that DC MNEs have (Rodrigues, 2010; Ramamurti, 2012). Their strengths are mainly based on CSAs, including natural resources and cheap labor. These advantages, however, are freely available for every firm, including foreign MNEs. Thus, some scholars view the internationalization of EM MNEs as an unsustainable phenomenon that will eventually amend itself (Ramamurti, 2012). Nonetheless, this contradicts with the increasing presence and impact of EM MNEs on the global platform. Their internationalization strategies seem to work. Some of the prevailing theories may partially explain the why, where, how and when of these companies’ entry strategies, as shown below.

2.1.1.2.3 Emerging Market Theories of Internationalization Latecomer Perspective

EM MNEs are also called ‘MNE latecomers’. According to Luo and Tung (2007): “This term refers to those firms from the emerging economies that have started internationalization very late and suffer from competitive disadvantages relative to DC MNE early-movers” (Li, 2010, p. 43). Early movers achieved the so-called first mover advantages. The conventional IB literature emphasizes these first mover advantages and the ability to sustain this competitive advantage from the perspective of the companies that already possess these advantages, instead of the creation of such advantages by those who do not have them (Matthews, 2002). The most readily attainable first mover advantages are technological leadership, pre-emption of assets and the creation of buyer switching costs (Lieberman and Montgomery, 1988). Firms that enter the market or industry at a later stage suffer from various costs and other disadvantages that are difficult to overcome due to barriers to entry (Kerin et al, 1992). According to Mathews (2002), a typical latecomer firm meets four conditions: it is a late entrant in an industry, it has few advanced resources, it follows a strategy that is based on catching up and it has few competitive advantages that it can leverage in the specific industry (which are mostly based on low costs) (Mathews, 2002).

Nonetheless, latecomer firms can overcome these disadvantages. This is emphasized by the latecomer perspective of Mathews (2002), which posits latecomer firms “turn disadvantages into sources of advantages” (Mathews, 2002, p. 470), by using the LLL framework for example. By linking with advanced companies through various contracts, agreements or joint ventures, the latecomer firm must be able to attract resources such as knowledge. The latecomer firm has to leverage the resources it gathers through these links; then, in a process combined with learning, it is able to rapidly overcome the latecomer disadvantage and transform it into an advantage (Mathews, 2002). The process of

15

linking, leveraging and learning makes it possible for latecomer firms to have an accelerated internationalization. The resources they gather are already advanced, which means they do not need to go through the same development stages that traditional DC MNEs had to and can leapfrog certain steps (Mathews, 2006). Corresponding entry modes are contractual agreements and joint ventures.

Springboard Perspective

The springboard perspective of Luo and Tung (2007) closely relates to the latecomer perspective. In this theory EM MNEs also use leapfrog trajectories to engage in an accelerated internationalization process (Luo and Tung, 2007). Springboarding, however, goes further than just ‘making an advantage of their disadvantages’. The springboard perspective states that EM MNEs systematically and recursively use international expansion as a spring-board to acquire specific resources to increase their global competitiveness, to arm themselves against foreign rivals in their home country, to reduce their home country constraints and to overcome their latecomer disadvantage (Luo and Tung, 2007). It is a grand plan for firm growth and building competitive advantage. The latecomer perspective, on the other hand, is much more focused on overcoming latecomer disadvantages. The internationalization strategy of the latecomer perspective is not as deliberate as that of the springboard perspective (Luo and Tung, 2007).

Springboard behavior is a strategy for long-term competitiveness and firm growth. Just like latecomer firms, springboard MNEs are in search of strategic assets and other resources. However, springboards EM MNEs are distinguished by an even more aggressive expansion in this search (Luo and Tung, 2007). Large springboard EM MNEs are expanding abroad via a series of aggressive, risk-taking and high control entry modes such as acquisitions (Luo and Tung, 2007). They are aiming for advanced companies in order to acquire their knowhow, instead of following the linking approach of the LLL framework. Apart from overcoming their latecomer disadvantage, springboard EM MNEs have additional reasons for engaging in an accelerated internationalization process: they also link their international expansion to their home country activities (Luo and Tung, 2007). To meet the global demand, springboard EM MNEs adjust their home country supply after acquiring new knowhow. As a result, their global success is dependent on their home country performance. As these home markets are often full of opportunities that also attract DC MNEs, this is part of their strategy. Additionally, springboard EM MNEs have a huge advantage in comparison to DC MNEs as they do not face any LOF in their home country market.

Springboard internationalization differs from the internationalization of conventional DC MNEs that exploit their ownership advantages in foreign countries rather than searching for those advantages abroad (Luo and Tung, 2007). The expansion of springboard EM MNEs is not based on path dependency and on gradual learning. The entry modes and entry locations are opportunistic and subject to various pressures, including late mover position, constraints in the home country, sudden changes in technology and the presence of competitors (Luo and Tung, 2007). The extent of foreign

16 expansion, however, is dependent on the home government’s encouragement and the integration of the global economy. The success of taking over strategic assets is dependent on the foreign firm’s willingness to sell its knowhow to EM MNEs (Child and Rodrigues, 2005). The rapid internationalization pattern of these EM MNEs does not adhere to the Uppsala Model of Johanson and Vahlne (1977), where internationalization is an incremental process. Many EM MNEs become large during their internationalization process, using international expansion for growth. This is the reverse of the conventional internationalization theories, which note that firms grow slowly as they gain more knowledge about other markets (Bonaglia et al, 2007).

2.1.1.2.4 Strategy-Based Views Resource-Based View

The resource-based view (RBV) is a theory that became popular in the 1990s. It originated in the field of strategy, but it is applicable to IB issues as well. In the search for answers, the RBV could be of value for explaining the foreign activities of both DC MNEs and EM MNEs. The RBV states that companies that want to be competitive need to grow or have to find ways to be more efficient. EM MNEs often lack technological skills as well as skilled human capital. This makes internal growth almost impossible and means these firms must turn to the outside to develop such resources; they have to grow externally (Peng, 2001). In contrast, DC MNEs do have the resources to grow internally. The RBV is concerned with on the one hand a firm’s resources and on the other hand its performance. The differences in resources between firms explain the extent of their corresponding competitive advantages.

Resources are a broad concept that also reflect a firm’s capabilities and competencies (which are also called FSAs) (Barney, 1991). Barney states that resources must satisfy four conditions before they can contribute to sustainable competitive advantage: a resource must be valuable, rare, inimitable and non-substitutable. As mentioned above, EM MNEs often lack resources such as technological skills and brands. They rely mostly on natural resources and labor, but as these resources are available for everyone it is hard for these firms to create a sustained competitive advantage. They have to grow externally to achieve the resources they need in order to be competitive.

The RBV seems to oppose the latecomer perspective. The latecomer perspective states that a firm must seek opportunities to overcome its resource deficiencies and make this its advantage, while the RBV looks at exploiting its own resources. However, when a firm lacks the necessary resources (which is the case for many EM MNEs), the RBV and the latecomer perspective show similarities as they both state that a firm must look for external opportunities for gathering those resources.

17 Exploration and Exploitation

Another strategy-based view that is useful for our understanding of the internationalization process of MNEs lies in the field of organizational learning. It concerns a duality that firms often face. This duality consists of a firm’s reliance on existing certainties (i.e., exploitation) versus the creation of new possibilities (i.e., exploration) (Roza, 2011). March (1991) defines exploration with terms such as: “search, variation, risk taking, experimentation, play, flexibility, discovery, innovation; exploitation is described with words such as “refinement, choice, production, efficiency, selection, implementation and execution” (March, 1991, p. 71). The balance of relying on old certainties versus creating new possibilities is difficult for companies to achieve or maintain. The exploration of new opportunities reduces the speed in which existing skills may be improved. This might hurt the overall performance of a company: “Overall are returns from exploration compared to exploitation systematically less certain, more remote in time, and organizationally more distant from the locus of action and adaption” (March, 1991, p. 73). On the other hand, however, a firm that lacks exploration in one period of time may be excluded from exploratory areas in the future as it does not have the specific knowhow or resources (Benner and Tushman, 2003). Exploitation connects cause and results much quicker than exploration does. Therefore, firms with an exploitation strategy have a higher adaptability to changing developments (March, 1991).

The literature predicts that a balance between exploration and exploitation would contribute to firm performance. As these types of learning are in opposition, however, such a balance is difficult to achieve (Roza, 2011). When studying the learning trajectories of firms, one should bear in mind that firms go through life cycle stages of growth (including survival, expansion and maturity). These life cycle stages could be valuable in understanding a company’s strategy. In each specific stage, firms need new or other resources for further growth (March, 1991).

Learning-Based View

The learning-based view (LBV) developed by Li (2010) combines traditional theories and emerging market internationalization theories into one framework (Li, 2010). The learning trajectories of both DC and EM MNEs based on the exploitive and explorative nature form the basis of this model. Although exploratory learning is shared by both types of MNEs, exploratory learning is more closely associated with EM MNEs (which are characterized by a backlog in knowhow that they are trying to overcome). On the other hand, exploitative learning is mainly associated with DC MNEs, as these firms exploit the knowledge they have as opposed to searching for it (Li, 2010). The LBV implies that DC MNEs exploit the ex ante stock of knowledge while EM MNEs explore the ex post flow of knowledge (Li, 2010). Traditional models are therefore better for explaining activities based on exploitative learning, while new internationalization theories are better for explaining exploratory learning activities (Li, 2010).

18 The duality between exploitative and exploratory learning is the first dimension of the LBV. The second dimension consists of the duality between uni- and bilateral learning trajectories. Companies that gain their knowledge internally or passively via other parties engage in a unilateral learning trajectory. Passive knowledge gain occurs when only one party is active in obtaining the knowledge (such as is the case with an acquisition or a licensing). When firms learn interactively with other firms and all are actively engaged in the process, a bilateral learning trajectory such as equal joint ventures is followed (Li, 2010). These dimensions together constitute Li’s (2010) LBV framework and could offer insights into the foreign entry strategies of both DC and EM MNEs.

Unilateral exploitative learning is mostly associated with DC MNEs. The strategy is also closely related to developing both brown- and green-fields. These entry modes enable a company to exploit existing knowhow in new markets – mainly in developing countries – and to grow internally (Guillén and Garcia-Canal, 2009). On the other hand, bilateral exploitative learning is more salient to EM MNEs (in the form of OEM and ODM). These entry modes are chiefly implemented in developed countries. Unilateral exploratory learning is also mainly associated with EM MNEs. This strategy enables a firm to grow externally. The related entry mode is acquisitions (mostly in developed countries) and it is characterized by an accelerated internationalization process. Bilateral exploratory learning could be applied to both DC and EM MNEs, although it is more common among EM MNEs. The most used entry mode is contractual agreements (Li, 2010).

Although the LBV is comprehensive, it does not cover all aspects of traditional and emerging market internationalization theories regarding foreign entry and its strategic aspects. Table 1 summarizes the most important differences between DC and EM MNEs in the strategic aspects of foreign entry, as emphasized in this section.

Table 1: Strategic aspects of foreign entry compared by traditional and emerging market internationalization theories

Strategic Aspects Traditional theories of

internationalization

Emerging market theories of

internationalization

Motives Resource seeking, market seeking and

efficiency seeking

Strategic asset seeking, opportunity seeking

Location Incremental expansion to markets with

low psychic distance, location in developing markets

Erratic expansion to markets with high psychic distance, location in both developed and developing markets

Entry Modes Internal growth through green-field

investments

External growth through contractual agreements, joint-ventures and acquisitions

19 2.2.2 Evolution of Foreign Presence

The theories of internationalization mainly explain the entry strategies and process of firms’ internationalization; indeed, this is the basis of internationalization. However, these theories are not intended to really explain the evolution of foreign presence. When studying the internationalization trajectory of a firm, the entry or expansion to other countries is only one part of the story; the other is the evolution of foreign presence over time. Just as a firm evolves, so do its foreign commitments (which may decrease or increase). This phenomenon has seldom been studied within the IB literature (Santangelo and Meyer, 2011).

When a firm’s intended foreign strategy differs from the results, the company might want to change its commitment (Santangelo and Meyer, 2011). When business results are even better than the upfront prognosis or the firm foresees opportunities for the future, it might want to increase its commitment, whereas disappointing results and uncertainty could lead to a declining commitment. The Uppsala Model could be applied to this issue, as it predicts an incremental learning process whereby the experience of previous activities develops the future business (Santangelo and Meyer, 2011). However, as traditional internationalization theories do not explain the internationalization process of EM MNEs very well, the question of whether DC and EM MNEs differ in terms of the evolution of their foreign presence remains.

Kogut (1991) also studied the changing commitment of foreign activities. Instead of attributing this changing commitment to a disparity between an intended strategy and its outcome, he determined that it is an intended purpose. He states, for example, that joint ventures are constructed as real options in response to future developments in industries and markets. The exercise of the real option is connected with the acquisition of the whole joint venture and turning it into a wholly owned subsidiary. On the other hand, selling the stake is interpreted as a withdrawal (Kogut, 1991).

There are various market and non-market factors that could lead to an outcome that differs from the one intended by the applied strategy. This paper studies in particular the market drivers.

2.3 Market Drivers

A firm’s internationalization trajectory is influenced by market drivers (which include things such as advances in technology and infrastructure, which are not examined within the scope of this paper). Two market drivers have affected the global mining industry in particular in the past decade: variations in China’s economic growth and commodity prices (PWC, 2013). These two drivers have had – and still have – a substantial impact on the strategies of global mining companies. They operate on such an international scale that they equally affect mining companies worldwide.

2.3.1 Variations in China’s Economic Growth

China’s demand has become a major economic force that has shaped the world economy in the last two decades and will maintain its influence (UNCTAD, 2014). The Chinese economy will not grow as

20 fast as it did in past decades, yet it will remain of great importance while continuing to be the center of global demand within the mining industry (PWC, 2013). In addition to being a huge consumer, China also has major influence on commodity prices and will remain one of the main commodity price drivers of commodity prices, especially in relation to base metals (World Bank, 2006; International Monetary Fund (IMF), 2012). The IMF has calculated that China consumed about 40% of all mineral products worldwide in 2013 (PWC, 2013). When China’s economy slows down, the direct demand for base metals is harmed and commodity prices are affected.

2.3.2 Commodity Prices

Commodities are commonly used items that are homogeneous, such as base metals (e.g., iron ore, copper), energy commodities (e.g., gas, oil) and agricultural commodities (e.g., grain). The opportunities for differentiation are negligible. The supply and demand of commodities are part of a universal market that is subject to volatility. Base metal stocks are more volatile than broader stocks (PWC, 2013). As such, mining companies are more sensitive to relevant commodity prices then other companies dealing with commodities. Moreover, the higher a firm’s dependence on commodity prices for international activity, the more affected it is by its price volatility.

Commodity prices affect the strategies of mining companies (PWC, 2013). Global mining companies are therefore influenced by the commodity prices in relation to their internationalization trajectory. Commodity price pressures have already changed the global mining industry. Maximizing value can no longer be achieved by increasing the scale of production. A firm’s strategy must be modified and should reflect new solutions such as improving efficiencies (PWC, 2013). There could as a result be other strategies. When the largest mining companies ‘work together’, they should be able to have some influence on the commodity prices within their sector. As Bloomberg (2013) notes: “It’s much better for BHP, Vale and Rio to preserve the current pricing environment and keep prices high rather than invest billions and billions of dollars of capital expenditures simply to chase price downwards.” (Bloomberg, 2013).

Commodity prices are also subject to China’s influence. China’s economical and political impact plays a large role in commodity prices, especially in relation to base metals (World Bank, 2006; IMF, 2012). Commodity prices will be determined by China even more in the years to come. Trying to understand how these prices will evolve as a result of China’s development remains a challenge for the future (IMF, 2012).

This paper studies the internationalization trajectories of a DC MNE and an EM MNE that are active in the global mining industry. These companies will be investigated on market drivers that particularly have affected the mining industry as a whole during the time span of this study. This study

21

Figure 4: Framework

Market Drivers

• Motives

• Location

• Mode

• Timing

• Evolution of Foreign Presence

Foreign Entry

+

Foreign Presence

Internationalization

Trajectory

22

3. Methodology

Bearing the framework presented in Figure 4 in mind, the research question is proposed again:

How do the internationalization trajectories of a DC MNE and an EM MNE differ over time under the same market drivers?

Most studies are cross-sectional. To really understand how DC and EM MNEs differ in their internationalization trajectories, one needs to compare them over a span of time. This comparative case study analyses two cases over a period of twelve years (2002-2013). The methods used for conducting this study are explained in the following sections, which consist of: case selection, data collection and data analysis

3.1 Case Selection

It is a challenge to select the right cases for a study. According to Kaarbo and Beasly (1999), there are three urgent conditions for case selection that must be met for a rigorous research design: the cases must be comparable, they must differ on the basis of the dependent variable and they have to be across population subgroups (Kaarbo and Beasly, 1999).

Defining what the case is results in the units of analysis. In this study these are a multinational from a ‘traditional’ developed country and a multinational from an emerging country. The dependent variable is their internationalization trajectories over time. To rigidly ‘examine’ these firms’ internationalization trajectories, the firms must be comparable. The most important difference must be their origin, namely a multinational from a developed country versus a multinational from an emerging market country. Other features such as size, scale and scope have to be comparable as well, so that their internationalization trajectories can be related to their origin. There are limitations regarding these units of analysis. The companies’ contexts could never be exactly the same and this raises questions as to the extent to which the results are purely causal related to the companies’ origin. However, as derived from the literature, the country of origin seems to have a substantial impact. When other features are more or less the same, there might be a good reason to believe that the differences in internationalization trajectory could be directly ascribed to firms’ origins (namely, traditional versus emerging countries). Further research is needed to make such generalizations, also within different contexts. Another difficulty is the possible difference in the stage of life cycle of the units of analysis. EM MNEs are additionally characterized by their latecomer features (which are not shared with DC MNEs). The chance that the firms are in different stages of the life cycle process is therefore even larger than when firms from the same country are compared. However, this possible difference is inevitable when comparing an early mover with a latecomer firm. Another limitation is