Home and Host Countries’ Variety of Capitalism
and the Regional Strategy of State-Owned
Multinational Enterprizes
State-Owned Enterprizes
Master Thesis
MSc. Business Administration – International Management Track
Supervisor:
Dr. Johan Lindeque
Second reader:
Erik Dirksen
Student:
Zino Kolja Frederik Wittmann
Student ID:
10993177
Date:
25.03.2016
Statement of Originality
This document is written by Student Zino Wittmann who declares to take full responsibility
for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources
other than those mentioned in the text and its references have been used creating it.
The Faculty of Economics and Business is responsible solely for the supervision of
completion of the work, not for the contents.
Abstract
In the course of the liberalization process of the European transport industries, multinational
enterprises in the rail industry put increasing focus on an international and especially home
regional strategy. The internationalization and ability to enter a foreign market is found to be
dependent on the variety of capitalism in the respective home and host countries. Due to a
differing and lower degree to which foreign entrants experience a liability of foreignness,
liberal market economies offer the broadest span of entry modes for foreign and private
enterprizes. A coordinated market economy offers a limited and a state market economy a
rather inaccessible entrance to a domestic market for foreign entrants. This condition varies
between business units as a result of the national importance and favors the business of the
domestic state owned and established enterprizes.
Keywords: Variety of capitalism, Liability of foreignness, state ownership, rail industry,
Acknowledgements
I would like to thank Dr. Johan Lindeque for his reliable, steady and considerate support to finalize this document. With his suggestions, he influenced and guided me through the process to organize, structure and complete this research. I wish him the best for his upcoming future and I hope that our work might conduct some additional input on his forthcoming academic research.
Table of Content
1. INTRODUCTION 8
2. THE DEVELOPMENT OF THE RAILWAY INDUSTRY WITHIN EUROPE (1990 – 2015) 11
2.1.INTEGRATION MODEL 13
2.2.HOLDING MODEL 14
2.3.SEPARATION MODEL 16
2.4.OVERVIEW OF THE EUROPEAN RAILWAY MARKET 17
2.4.1.EUROPEAN RAILWAY MARKET LIBERALIZATION AND INTEGRATION PROGRESS 17 2.4.2.BUSINESS UNIT VARIATION IN LIBERALIZATION AND INTEGRATION PROGRESS 19
3. LITERATURE REVIEW 21
3.1.SEMI-GLOBALIZATION AND THE REGIONAL NATURE OF THE MNE 21 3.2.LIABILITY OF FOREIGNNESS AND THE REGIONALIZED MNE 24
3.3.ASSET SPECIFICITY AND THE REGIONALIZATION OF THE MNE 27
3.4.NATIONAL ORGANIZATIONAL FIELDS 29
3.4.1.VARIETY OF CAPITALISM 31
3.5.CONCLUSION 36
4. METHODOLOGY 37
4.1.RESEARCH PHILOSOPHY 37
4.2.QUALITATIVE MULTIPLE CASE STUDY 37
4.2.1.CASE STUDY DESIGN FOR THIS STUDY 38
4.2.2.QUALITY CRITERIA 39
4.3.CASE SELECTION IN THE EUROPEAN RAIL INDUSTRY 39
4.4.METHOD OF DATA COLLECTION AND ANALYTICAL APPROACH 40
5. RESULTS AND CASE ANALYSIS 43
5.1.GERMAN RAILWAY MARKET 43
5.1.1.DEUTSCHE BAHN AG 47
5.2.FRENCH RAILWAY MARKET 50
5.2.1.SNCFGROUP 55
5.3.BRITISH RAILWAY MARKET 57
5.3.1.FIRSTGROUP 60
5.4.MIXED MARKETS -EUROSTAR 61
6. DISCUSSION OF RAIL OPERATOR ORGANIZATIONS INTERNATIONALIZATION 64
List of Tables
TABLE 1: IMPORTANCE OF THE HOME COUNTRY MARKET FOR HOME REGION ORIENTED ENTERPRIZES 23 TABLE 2: CHARACTERISTICS OF THE VARIETY OF CAPITALISM (VOC) 33
TABLE 3: SAMPLE AND COLLECTION OF DATA 41
TABLE 5: KEY DATA: DEUTSCHE BAHN AG 47
TABLE 6: KEY DATA: SNCF GROUP 55
TABLE 7: KEY DATA: FIRSTGROUP – RAIL DIVISION 60
TABLE 8: KEY DATA: EUROSTAR INTERNATIONAL LTD. 61
TABLE 9: MARKET OVERVIEW 68
TABLE 10: WORKING PROPOSITIONS 71
List of Figures
FIGURE 1: EU RAILWAY POLICY 11
FIGURE 2: INTEGRATION MODEL 13
FIGURE 3: HOLDING MODEL 15
FIGURE 4: SEPARATION MODEL 16
FIGURE 5: DISTRIBUTION OF OPERATED TRAIN-KM 44
Index
CME Coordinated Market Economy LME Liberal Market Economy LoF Liability of Foreignness SME State Market Economy VoC Variety of Capitalism TOC Train Operating Company Pkm Passenger Kilometer
Tkm Ton Kilometer
1. Introduction
Will there ever be an InterCity-Express of the Deutsche Bahn AG arriving regularly at London St Pancras after passing through the Channel-Tunnel from Calais to Dover and which enterprizes will dominate the European rail market in the future? These and other questions are elaborated in this study and striking answers are predicted.
A sustainable and working transport infrastructure is vital for a positive development of the European economy. As part of the overall European liberalization process, the reform of the rail industry was initiated by the European Union (EU) in 1994 to stimulate growth and efficiency in the European mobility market (EWG, 1991). By opening the market for international competition, enterprizes are offered the access to additional customers, resources and an extended knowledge interaction. However, the approach to open the national rail markets for private and foreign operators, which were traditionally controlled and operated by one national player, faces multiple difficulties. Amongst others, these are based on technological, cultural, institutional and financial differences between the national states. Therefore the situation of the rail transport markets differs across European countries.
The process represents the intensifying focus of multinational enterprizes (MNEs) on a regionalized market, positioning the firm away from one single home country market, towards an international and still manageable market environment. Based on globalization research (Porter, 1987, 1990; Bartlett & Ghoshal, 1999; Prahalad & Doz, 1989), it corresponds with the broad discussed topic of a regionalization movement within the strategy of MNE’s to internationalize away from the home country market (Rugman & Verbeke, 2004; Ghemawat, 2003, 2005; Li et al., 2010). To take advantage of the opportunities in foreign markets (Dunning, 1998), MNEs have the need to recognize and respond to the differing characteristics between economies or countries. To succeed, a lack of knowledge or unequal treatment in a foreign market, representing a liability of foreignness (LoF) (Zaheer, 1995), has to be compensated by corresponding investments to overcome these disadvantages (Eden & Miller, 2004).
On the firm side, characteristics of a MNE and the industry have an impact on the internationalization strategy to be selected. Here, asset specificity can also affect the amount of available and needed investment to expand to a foreign location (Joskow, 1987).
An appropriate approach, to get to the bottom of the difference and distance between market economies, is the concept of national organizational fields and the Variety of Capitalism (VoC) theory (Hall & Soskice, 2001). The structure and coordination of industries, organizations and enterprizes is influenced by the institutional and political background (DiMaggio & Powell, 1983). The VoC frames a political-economy terrain (Hall & Soskice, 2001), which influences the microeconomics of a firm and assigns countries and economies to specific classes (Schmidt, 2009; Shonfield, 1965). Associated with a MNE’s internationalization strategy and based on the accessibility-characteristics of the host country, it affects an expanding firm’s choice of a foreign market.
For International Business, the recent development of the European rail industry is of high interest as it monitors the implementation of political requirements and a subsequent development in different organized markets at the same time. It represents a geographical, economical and ownership orientation of a growing and liberalizing market. In detail, it is possible to monitor political salience or ignorance; to identify influences on the specific market economies and to classify the ability to adapt the characteristics of different environments. Therefore, this thesis will study and elaborate the following question:
How does the given national environment, exemplified in the Variety of Capitalism (VoC) and ownership structure, influence the liability of foreignness and regional expansion strategy of an internationalizing rail operator enterprise?
To explore a firm’s strategy and accessibility to foreign markets in line with the VoC, the study concentrates on the sample of the three most relevant market economies in Europe and its main operating enterprizes. The analysis of the enterprizes is subdivided into the business units, passenger and freight. The sample contains of the German rail market and the activities of Deutsche Bahn AG,
the French rail market and the activities of SNCF, and the UK rail market with the activities of FirstGroup. Additionally, it includes the case of Eurostar, as an enterprise originating from multiple market economies.
The paper is organized in seven consecutive chapters and holds following structure. To enter the topic, the study starts with a presentation of the actual organizational structures of the rail markets of France, Germany and the United Kingdom and an overview of the recent developments in the European rail industry. Thereupon, the literature review frames the theoretical background within the concept of regionalization (Rugman & Verbeke, 2004; Ghemawat, 2003, 2005; Li et al., 2010). It integrates the study into the discussion of the LoF (Zaheer, 1995) and asset specificity (Joskow, 1987). It differentiates between the national organizational fields by presenting the VoC and assigning the respective market economies to the analyzed sample (Hall & Soskice, 2001). By combining the former theoretical approaches, research propositions are proposed. In the subsequent chapter, the research methodology will be presented in detail. Chapter 5 deals with the presentation, analysis and results of the particular cases. In chapter 6, the findings and their practical and academically significance are discussed. In the last chapter, a concluding proposition is expressed and directions for a continuative research presented.
2. The Development of the Railway Industry within Europe (1990 – 2015)
The organizational structure of the present national European rail industries differs significantly from the structures in the past. Around 1900, the rail markets consisted primarily of private enterprizes operating service(s) on their own network (Rothengatter, 2007). During the First and Second World War, all European countries nationalized the private rail enterprizes. Henceforward, the enterprizes were operated directly by the national governments. Until the early 1990’s the national rail sector was still funded and operated by national agencies. Due to monopolistic structures and fierce competition of other transport modes, the sector was unable to adapt a self financing strategy (Levy et al., 2005). Consequently the national governments were burdened with high costs (CER, 2005; Nash, 2008).
This condition was the initialization for a fundamental reform in the early 1990’s by the EU to increase the efficiency of the involved rail organizations. From the implementation of the first railway package and European Directives to liberalize the rail market, the rail industry was continuously forced to reconstruct its organizational structure (Streichfuss, 2010). It indicated the obligation for EU member states to transpose the directives into national legislations. The following figure presents the main objectives of the European railway policy and the subject of the first three railway packages.
1st Railway Package v All rail freight companies
can access Trans-European rail freight network v Separate financial accounts
of services and infrastructure
v Establish policy for capacity allocation and infrastructure charging v Independent regulator v EU wide licenses 2nd Railway Package v Cabotage in freight transportation v Harmonization of safety
standards and clear procedures for obtaining safety certificate v Market access improved
through interoperability v Coordination and harmonization by European Rail Agency 3rd Railway Package v Common approach to
certification of train drivers and rolling stock
v Codification of passengers rights
v Open access for all international passenger services
v Quality standards for rail freight sector
Main objectives of EU Railway Policy
v Increase modal share of
rail, to reduce CO2 emissions and road congestion
v Stimulate competition and
so raise efficiency and quality in the industry
v Reduce government
funding in the industry
91/440/EEC 2004/49/EC 2007/58/EC 2001/12/EC 2004/50/EC 2007/59/EC 2001/13/EC 2004/51/EC 1370/2007 2001/14/EC EC 881/2004 1371/2007
Eu-Directives
EU-Railway Policy over the last 20 years (Adapted from Streichfuss, 2010).
Figure 1: EU Railway Policy
It marked a notable change in national rail policies and the ownership structures of railway companies. The directives deliberately left space for interpretation and to a certain degree, member states adopted an organizational structure that suited best to their national situation. A national European rail sector consists of a complex composition of regulating bodies and institutions, an infrastructure and real estate management, operating companies and customers. The arrangement, regulation and importance of the single components differ across countries, shaped by the national influence of the regulating bodies and institutions (Wolff, 2011).
Subsequently, new organizational models were implemented all across Western Europe and although these are more or less unique per country, three specific models are visible: Integration, Holding and Separation model. The models include different tasks, fields or responsibilities among transport, infrastructure and governmental authority. As a consequence, the traditional integrated and state-owned rail companies disappeared in most European countries (Streichfuss, 2010).
Across all models, in almost all European countries, the national government owns the rail infrastructure and systems, but the management is outsourced to independent infrastructure managers, which are all 100 percent state-owned companies or public entities and responsible for every train operating company using the network. The service contains of the infrastructure organization and the provision of rail traffic management. The infrastructure of most of the rail networks is subsidized by the particular state. In 2012, the financial support, a major reason for political interfering, differed from 18 euro per km of track (France), 0,2 euro per km (UK) and 9,2 euro per km (Germany).
Rail transport is provided by train operating companies (TOC) which buy the right to provide service on the tracks. These are responsible for train service, staff management and allocation of travel information and ticket sales. A TOC can provide both, passenger and freight services. The composition of rail transport differs significantly between the models. In most countries the original incumbent operator takes care of a large share of transport operations. In freight transport and to a limited degree in passenger transport, operators compete directly on similar open access connections.
By integrating the representative components into the national rail markets, the different models are presented and linked to an exemplified market economy (France, Germany and UK). These
describe the firm-level organizational field within the policy making developments of the national rail industry.
2.1. Integration Model
The Integration model typically contains one vertically integrated rail company, which dominates the national rail sector. Infrastructure management, transport operations and management of the rolling stock is all organized by internal business units of the integrated rail company.
Public bodies, next to the integrated rail company and national authorities, execute rail related functions, such as regulating, licensing and monitoring competition. The tasks and responsibilities of competition authorities in the integrated model remain limited. Generally, the integration model is likely to conflict with current European regulations since a separation between the accounting of the infrastructure and the transport operations is not guaranteed. European countries that have an organizational structure resembling the integrated organization model are: France, Lithuania, or Switzerland. To exemplify the model, figure 2 illustrates the organizational model of France.
Authority
Infrastructure Transport
Ministry o f Ecology, Energy, Sustainable Develo pment and Planning (national) Authorité de
Régulatio n des Activités Ferroviaires
(ARAF)
Etablissement Pub lic de Secu rité Ferroviaire
(EPSF) Mission de contrôle des activités ferro viaires Conseils Régional (Regional)
Réseau Ferré de Fran ce (RFF) Infrastructure Manager Établissement Pub lic à charactère
Industriel et Co mmercial (EPIC)
SNCF Groupe
Établissement Pub lic à charactère Industriel et Commercial (EPIC)
Cahier des Charges, (Social)-Fare obligations
Subsidies + specification service levels for regional rail transport
Determines network lay-out Approval major infrastructure work Regulatory Issues
Private TOC’s (Cargo)
SNCF Infra
SNCF Gares & Conn exions
SNCF Voyages (Long Distance + High Sp eed
Passenger Transp ort) SNCF Proximités (Urb an,
commu ter + regional Passenger transp ort
Direction de la Circulatio n Ferroviaire
SNCF Geo dis Cargo Transp ort + Rollin g Stock
man agement for cargo stock
Contracts management & construction to SNCF Infra
Joint task: Capacity allocation
France
Organizational setup of an Integration Model, illustrated by the structure in France, adapted from D.M. van de Velde & E.F. Röntgen, 2008.
Figure 2: Integration Model
The organizational setup of the integration model in France identifies clear boundaries between politics and the operating state-owned enterprise SNCF. SNCF resembles a typical integrated rail company. The entire market is integrated into one enterprise, which is completely controlled by the French state. The government can take direct influence on the developments in the rail market and the business of the state owned operator. The top management is selected by the French Federal Ministry of Transport. Although France separated the infrastructure management into an independent institution (Réseau Ferré de France, RFF), there are still very strong, integrated bonds between SNCF and RFF. RFF awards all infrastructure construction and maintenance tasks to the SNCF infrastructure department. For this reason, although RFF is institutionally separated from SNCF, France is still assessed as the country that resembles the integration model closest.
2.2. Holding Model
The Holding model is identified by the initiation of a Holding company that remains a 100 percent state-owned or public institution, but the management is officially detached from the government. It functions as an umbrella to cover multiple subsidiaries taking care of the tasks in the specific business areas (e.g. infrastructure management or transport operations).
Although the Holding model might at first glance resemble an integration model regarding the overall structure; the most important and fundamental difference is the transition of internal business units to subsidiaries inside the Holding company. These subsidiaries are usually independent limited companies, conducting independent financial accounting and experiencing a certain degree of entrepreneurial freedom. The Holding model is a “transition” model that is situated between a vertically integrated and separated rail sector. It separates financial accounts and organizational structure between infrastructure management and transport operations. Furthermore, it meets EU regulations and is frequently used throughout Europe. To exemplify the model, figure 3 illustrates the organizational structure of the German rail sector.
Authority Infrastructure Transport Bundesministerium für Verkehr, Bau un d Stadtentwicklun g (Nation al) Bundeskartellamt Bundes Eisenbahn Vermögen Eisenbahnbund esamt Regional Institutions Länder (Provinces) Transp ort auth orities
Deutsche Bahn AG (100% state owned)
Regional Contributions
Contract TOC’s for regional rail transport
Infrastructure Performance Contract
Regulatory Issues
DB Netze Fahrweg AG
SNCF Voyages (Long Distance + High Speed
Passenger Transport)
DB Netz AG Rail Traffic Management +
Network development DB Mobility Logistics (DB ML) AG Bundesnetzagentur DB RegioNetz Infrastruktur AG Infrastructure management „RegioNetze“ DB Fahrwegdienste GmbH Logistics + Infra Maintenance
DB Netze Personenbahnhöfe AG
DB Station & Service AG Station management
DB Netze Energie A G
DB Energie GmbH Energy management
Eisenbahninfrastrukturunternehmen (EIU’s) Mostly p rivate an d separate
infrastructure companies
Private TOC’s (Passenger + Freight) with own
infrastrucuture Private TOC’s (Passengers + Freight) without own infrastrucure DB Regio AG Regional Passenger Transp ort DB Fernverkehr AG Long Distance + Int. Passenger Transport DB Arriva AG Rail Transport in foreign countries DB Schenker AG Cargo Transp ort DB Dienstleistungen Maintenance Germany
Organizational setup of an Holding Model, illustrated by the structure in Germany, adapted from D.M. van de Velde & E.F. Röntgen, 2008.
Figure 3: Holding Model
Source: Adapted from Van de Velde & Röntgen (2008)
The German rail sector reflects an organizational structure with indirect dependencies between rail transport, infrastructure and authorities without a clear separation between the responsibilities of infrastructure and transport operations. Besides national government and regulating agencies, regional authorities have a large influence in ordering and contracting regional rail transport. The German rail market and its incumbent state-owned operator, Deutsche Bahn AG (DB), are currently organized as a holding structure with numerous subsidiaries. By dividing the company in multiple subsidiaries, DB AG separates the transport and infrastructure operations in a substructure, but remains in an overall connected organization. It gives the government the opportunity to indirectly interact with its state owned enterprise. Besides DB AG, other operating companies are active on the market, some are in possession of its own infrastructure, but most use the infrastructure of DB Netze Fahrweg, a subsidiary of DB AG.
2.3. Separation Model
The separation model is the most far reaching liberalization model in Europe present today. It places a clear distinction between regulatory tasks, infrastructure management and transport operations. In a Separation model, ministerial departments and semi-independent public bodies are solely responsible for regulating the rail sector; determining transport policy, issuing and monitoring safety regulation and guaranteeing a fair level playing field. Thereby, the market access is not politically influenced and opened for free market competition. It is accepted throughout Europe and countries like Denmark, Spain, the Netherlands and the United Kingdom currently have an organizational setup in place that resembles the separation model closest: The following figure resembles the organizational setup in the UK. Authority Infrastructure Transport Passenger Transport Department for Transport (National) Office of fair trading
Rail safety and standards board
Office of Rail regulation
Passenger Transport Executives (Large agglomerations, e.g. London)
Network Rail ltd Limited company, that is being
run as plc company. Directly accountable to members of the public and industrial partners. No
shares.
Freight Transport High Level Output Specification
+ Statement of Funds available Regulatory Issues
Rolling Stock Companies 100% Privately owned Open Access TOC’s 100%
Privately owned TOC’s operating to franchises 100% Privately owned Freight TOC’s 100% Privately owned Transport Scotland Agency Scottish government Rail Accident Investigation Branch Network Licence Concessions (7-15 years)
Leasing of Rolling Stock Cooperation (Network Code)
United Kingdom
Organizational setup of an Separation Model, illustrated by the structure in the United Kingdom, adapted from D.M. van de Velde & E.F. Röntgen, 2008.
Figure 4: Separation Model
The UK implemented the separation model in the most pure form. The government influences the developments in the market only through safety and security regulations, but not through an interfering on market competition. A separate, official entity ‘Network Rail’ manages the railway network. For the maintenance and construction of the infrastructure, it contracts private construction companies. At the beginning, the infrastructure management was also privatized, but Network Rail, a public entity, was established after the private enterprise went bankrupt. A number of regulatory institutions are active and responsible for putting operating franchises up for tender and for licensing rolling stock and operators.
A vast amount of operators offer passenger services throughout the country based on concessions, which are typically tendered every 10 to 15 years. Freight transport is offered by a diversified, but relatively small amount of operating companies. Only the UK has separate private rolling stock companies in place, which own and lease rolling stock equipment to various operating companies, for the duration of a franchise. As there is no former state-owned railway company present, the UK is the only country that has privatized the entire passenger operations. The freight rail transport is almost completely out of the hands of the British government.
2.4. Overview of the European Railway Market
Whereas the road and air transport sectors offer a market based competition, the improvements of market liberalization and degree of competition in the rail transport sector still lag behind. Compared to its intermodal competitors, rail transport still struggles with the problems resulting from the protracted refusal of a clear European rail transport policy.
2.4.1. European Railway Market Liberalization and Integration Progress
From a technological and administrative perspective, the European rail system is fragmented. The control technologies and the rolling stocks are often not compatible across borders. Some national regulatory authorities slow down the performance of rail transport intentionally by discriminating foreign and private service providers. Thus, the demarcation of states and managements, not only
reduces the speed of the operating performance; it also causes high additional costs and benefits intermodal competitors.
Based on the legal situation, the administrative practice of regulatory authorities and the willingness of the state to induce the European requirements, the national rail economies in Europe differ substantially in their degree to liberalize their national rail markets (IBM, 2011).
A group of countries has implemented the European directives at an earlier date in time or to an extended degree than required by the original injunction (UK, Sweden, Germany). Additionally, there is a large group of countries, which implements the essential liberalization directives to an adequate degree, but less complete or at a later point in time (e.g. France, Switzerland).
The poor performance of some countries is due to the political unwillingness or administrative failing to implicate agreed guidelines. In 2011, the majority of implementations of EU directives (68 percent) limp behind. Whereas the fulfillment of technical reforms is classified on an advanced level, the political and market competitive reforms are running behind.
To understand the comparativeness of the European rail market, it is informative to look at the degree of competition within the European national rail markets. Based on quantifiable data, such as market share and number of competitors, differences in the intensity of rail transport competition are identifiable. The UK ranks best, because it managed to split the former state railway in many competing companies without a dominant operator. Germany ranks relatively high with a considerable degree of competition. France exemplifies a market with a low intensity of competition.
In 2010, 40 percent of the European domestic passenger transport was open for new operators and it is planned to open the entire European passenger market by 2019. Despite an improved competition, the number of enterprise consolidations in Europe increase, and lead to a decreasing number of bidding participants. Especially smaller operators, because of complex and costly tendering processes, have to focus on fewer deals. Only the large former state railways seem to be able to bid for multiple deals parallel.
2.4.2. Business Unit Variation in Liberalization and Integration Progress
The European rail market includes services for passenger and freight transport. Since the start of the liberalization in 1995, the European passenger rail transport increased steadily from 350 billion passenger km (pkm) to about 424 billion pkm in 2013. It dominates the European rail network, as it accounts for 78 percent of all transported operations. Over the past years, the intermodal share of passenger rail transport remained stable between 6 and 7 percent. One half of the pkm is operated in a local or regional radius and the other half in a long distance range (2014). The cross border passenger transport, officially liberalized in 2010, is covering for about 6 percent and the domestic passenger market accounts for 94 percent of all passenger rail transport. There is still no legal obligation to open the domestic passenger market (SWD, 2014), therefore some domestic markets remain protected from foreign or private operators.
The freight rail transport market is much more liberalized, competitive and international than the former discussed passenger transport. Whereas passenger transport is often classified as a public service, coming along with political protectionism, freight transport is assigned to free market competition.The entire market was mandatory opened by EU law in 2007, which led to an increase in cross border activity and a greater diversity of operators. Across all member states, new operators, often former state railways from other countries enter foreign markets and grew their market share up to 28 percent (2012) (IRG, 2013). The level of competition is higher in freight than in passenger transport across most EU member states.
The annual volume of the transported freight between 1995 and 2014 remained at a constant level between 350 and 450 billion ton km (tkm). In 2011, 47 percent of all transported goods were transported internationally and yet 9 percent crossed another country before entering the final market.
In the long run, the liberalization process leads to positive developments in efficiency and a pan-European freight rail network. Nonetheless, by only growing 5 percent between 1995 and 2015, the European freight rail transport underachieved the expectations. While the accumulated volume of all freight transport increased by 22 percent, the intermodal share of rail freight decreased from 12,6 percent in 1995 to 11,7 percent in 2013 (SWD, 2014).
The persistence of problems should not obscure the fact that liberalization and competition in the rail sector have made great progress. Today, the European rail market is better connected than ever before. Owed to reform efforts, barriers are overcome and have lead to a pan-European freight and improved passenger network. The recent and prospective rail directives will carry on establishing one common European rail market. These include technical improvements for the interoperability between member states and the institutional enforcement of a European Railway Agency to certificate future traffic flows.
3. Literature Review
Consecutive to the diversifying developments of the particular national European rail industries, the third chapter builds a theoretical framework to elaborate, conceptualize and identify reasons and influencing factors in the MNE’s national environment, ownership structure and capacities on the internationalization strategies. The European rail market depends substantially on the economic model of the home and host country (Pflieger, 2014). A related evolution of industry or rather firm level factors and an institutional context can be identified. The nature and scope of European regulation, the sectorial requirements and the handling of environmental externalities influence the national organizational fields of the enterprizes.
The literature review is subdivided into four parts. The first part positions the study within an international oriented business context, with a focus on the actual state of semi-globalization (Ghemawat, 2003). The second part shows the origin and consequences of institutional differences between national environments for expanding firms by introducing and explaining the LoF (Rugman and Verbeke, 2007; Zaheer & Venkatraman, 1995). The third part focuses on the asset specificity of firms, the interaction of country and firm specific advantages, and differing acceptance of business units (Joskow, 1987; Rugman, 1981; Rugman & Oh, 2008). The fourth and final part conceptualizes the different national organizational fields using the VoC literature (Amable, 2003), to explain market developments and internationalization strategies, including takeover potential for enterprizes with various degrees of state ownership (De Jong, 1991; Joskow, 2008). To finalize the literature review and span a bow to the following chapter, working propositions for the study are presented.
3.1. Semi-Globalization and the Regional Nature of the MNE
In times of a globalized economy, in which MNEs try to include multiple countries and markets into their value chain (Rugman & Verbeke, 2008b), two major facts can be identified. First, the majority of cross-border operating firms are focusing on the business environment within their home region
(Rugman and Verbeke, 2004). Second, although MNEs internationalize towards foreign countries, the home country market remains relevant.
The following review is based on the globalization research of Porter (1987, 1990), Bartlett & Ghoshal (1999) and Prahalad & Doz (1987) to define a geographical scope, interactive factors and a firm’s background along with the question on how to integrate into foreign markets, by responding in a balanced and optimal way.
The global economy is divided into an extended triad of regions (Asia & Pacific, North-America and Europe) representing most of the worldwide business activities and significantly differing economic structures (Rugman & Verbeke, 2007). The subject is in line with Ghemawat (2003, 2005), discussing the conflict of either a fragmentation or integration strategy of internationalizing MNEs in a semi-globalized business environment, and Li et al. (2010) focusing on the importance of a concentration towards the home region markets. The focus of MNEs towards home region markets is related to the present structures of institutions, culture and economic development. These are supposed to be more homogenous compared to markets in differing regions (Rugman & Verbeke 2005; Ghemawat, 2005). Based on Ghemawat’s (2001) distances, Rugman (2005) argues, that linking or melding investments are easier to arrange inside rather than outside of the home region and the transaction costs arise as the distance increases (Rugman & Verbeke, 2007). A high distance usually correlates with a substantial investment and thereby high costs; hence a low distance might be of a higher importance than location specific advantages. Furthermore, a broad geographic scope also increases the uncertainty of bounded rationality and can thereby create additional costs (Rugman & Verbeke, 2008b). Oh (2009) identifies a general focus of European MNEs on their home region market rather than a global market. Supplementary, Rugman and Oh (2013) point out a decrease of domestic activities towards an increase in the home region activities, consistent across sales, assets and subsidiary measures. International expansion and early innovation is generally better sustained by locating close to headquarters and home country markets (Hedge & Hicks, 2005). As the intra-regional distance decreases, due to reducing trade and investment barriers, an increasing industry competition on regional rather than on national levels emerges and subsequently leads to a
common classification to combine home country and home region methods (Qian et al., 2013). This process is exemplified in the integration process of the EU, with MNEs becoming less bounded by national borders and distances decrease on multiple levels through the regional integration project. Geographic distance due to improved transport and logistics system. Institutional distance based on political and institutional integration and economic distance due to simultaneous product implementations.
Nevertheless, in a home region environment, the home country market remains highly relevant for MNEs. An elaboration of the 500 biggest global operating companies of the Global Fortune 500 List of 2012 by Lindeque (2013), reflecting the original work of Rugman and Verbeke (2004), and a focus on the geographic orientation shows the significance of the country of origin for home region oriented enterprizes. A large share of the home region oriented enterprizes, have their main sales market in their home country. Table 1 illustrates an applicable image of twelve top ranked home region oriented MNEs and the degree of their home country focus.
Rank Firm Sector
Home Region Home Country Home Country Sales (percent of all)
Home Country Sales (percent of home region)
12 Volkswagen Automotive Europe Germany 19,6 32,7 38 Hitachi Electronics
Asia
Pacific Japan 57 73
39 Carrefour Food Europe France 46,02 62,87
46
Bank of
America Banks
North
America USA 85,73 99,56
52 Enel Utilities Europe Italy 39,53 45,97
59 Tesco Food Europe UK 65,74 80,64
61
Cardinal
Health Health care
North
America USA 97,81 97,81
62 BASF Chemicals Europe Germany 41,56 71,65
66 Panasonic Electronics
Asia
Pacific Japan 53 67,95
67
Société
Générale Banks Europe France 42,56 52,38
179 DB AG Railroads Europe Germany 57,88 65,99
219 SNCF Railroads Europe France NA NA
Table 1: Importance of the home country market for home region oriented enterprizes Source: Adapted from Lindeque (2013)
The selected MNEs represent an extract of the biggest home region focused enterprizes, with accessible annual reports from 2012. At the bottom of the table, the Deutsche Bahn (No. 179) and SNCF (No. 219) are present to show the importance of the rail industry within the top 500. All displayed examples, from differing industries and triad-regions, have a dominant home country market. Most of the time, it even outperforms all foreign sales all together. The significant degree of the MNE’s business in the home country market and the importance to the MNE is referred to as the home country effect. It identifies the dependency and the persuasibility of the enterprizes by the home country politics and interference (Krugman, 1980; Hejazi, 2007). The home country environment plays an important role in building and sustaining firm-specific advantages and geographic tendencies (Erramilli et al., 1997). A firm depends on the organizational field and political protection of the home country environment in relation to competing MNEs from foreign host countries. Often, firms follow standard internationalization patterns of the industry or home country (Asmussen, 2009).
3.2. Liability of Foreignness and the Regionalized MNE
Expanding towards foreign countries offers a wide span of economical or social opportunities for firms, ranging from opening new resources to developing new business markets (Dunning, 1998). However, it also includes costs originating from a differing comprehension, qualification and investment in a foreign business environment (Eden & Miller, 2004). A MNE’s lack of knowledge or home country origin in a foreign environment is defined as the liability of foreignness (LoF). The disadvantage compared to domestic firm operations in the foreign market can lead to additional costs for a succeeding business abroad (Zaheer, 1995; Zaheer and Mosakowski, 1997).
The LoF originates in the differing institutional environments between the home and host country (Eden & Miller, 2004). It expresses a lack of information networks and political influence in the host country as well as the inability to reach nationalistic consumers. Therefore, a spatial distance or differing restrictions of a home and host country can lead to operational complications and increase the costs in host country operations (Ghemawat, 2001).
Initially, the LoF was seen as a phenomenon that occurs on a country level, but as a result of integration efforts and converging institutional characteristics within regions, it appears to become a circumstance which mainly differs across regions. As a matter of fact, it appears to have different effects within and across regions (Rugman & Verbeke, 2004). Rugman and Verbeke (2007) conclude that “the additional costs of doing business abroad are often much higher when venturing into other regions of the world than when expanding intra-regionally, in the home triad region”, and thereby define two levels of LoF, intra- and inter-regional LoF. The experienced disadvantages are suggested to be lower on intra- than on inter-regional activities.
The LoF in foreign countries for a MNE can be of a discriminatory and/or incidental nature (Zaheer & Venkatraman, 1995).
The discriminatory LoF of MNEs is affected by the host country proceedings towards foreign firms and describes a status quo which, at least in the beginning, is given for the expanding firm. It is characterized by prejudiced disadvantages of host country firms compared to home country firms, induced by host country institutions or market actors. It comprises regulations of home country institution targeting foreign MNEs and their subsidiaries, in order to benefit indigenous, home country firms. A MNE may be directly affected by state sector opportunism, implicit prejudices and industrial patriotism (Henisz & Williamson, 1999; Sethi & Judge, 2009). An exemplified governmental action could be the prohibition or interference for foreign subsidiaries to enter into sensitive, political salient sectors for legitimate economic, social or security reasons. Political salient sectors primarily include infrastructure sectors such as transport, telecommunication or energy.
Discriminatory LoF can have a compelling impact on the relationship between a MNE, a host country partner and stakeholders (government, consumer and other firms) (Eden & Miller, 2004). For instance, it could encourage a host country partner to become more opportunistic in the dealings with a foreign MNE (Henisz & Williamson, 1999). Consequently, it also strengthens the effect of asset specificity on internationalization strategies as it increases the MNEs concerns about local partners’ opportunism, as a discriminatory LoF reduces the usefulness of accumulated knowledge and it hinders the transfer of managerial practices to the local subsidiaries (Brouthers et al., 2008; Xu & Shenkar,
2002). In host countries with a high discriminatory LoF and the accompanied high bargaining power, local partners are more likely to receive a share of equity ownership in the MNE’s subsidiary (Aggarwal & Ramaswami, 1992; Brouther, 1995; Gatignon & Anderson, 1988; Goodnow & Hansz, 1972; Kogut & Singh, 1988). Nevertheless, in recent years, many states have eased regulations targeting foreign MNEs and hence discriminatory LoF is reducing progressively (Sethi & Judge, 2009).
Additional to the former described context affecting LoF, the incidental LoF belongs to the expanding MNE’s scope of duties. It reflects a lack of host country knowledge or experience by comparing foreign with domestic firms. The incidental LoF includes non-discriminatory costs to learn, adapt and cope with the unfamiliar or absent roots in the host country environment (Sethi & Judge, 2009).
The LoF strengthens the effect of asset specificity on internationalization strategies as it results from MNE managers bounded rationality problems. A MNE can neither imagine nor articulate all possible contingencies that should go into the contract. It is important to distinguish between different kinds of assets or business units, for example property rights of assets are more sensitive to regulatory distance because they are anchored in legal provisions (Xu & Shenkar, 2002), whereas a knowledge transfer is not bounded to a specific location. Nevertheless, a high degree of asset specificity is not always advantageous for MNEs. Broad geographic scope choices create additional costs, in the sense that it increases an MNE’s concern about appropriation of quasi rents through bounded rationality and opportunism. There will be more or less quasi rents available to the local partner as a result of institutional distance which is driven by either opportunism through the presence of discriminatory LoF or bounded rationality through the presence of incidental LoF.
Besides the contribution of particular firm-level attributes to the degree of the LoF, such as parent reputation or length of service in the host country, foreign enterprizes can induce mechanisms to overcome the LoF to implement successful internationalization strategies in host countries (Miller & Richards, 2002). Defensive mechanisms generally avoid a high level of LoF through reducing a MNE’s dependence on the host country resources and markets by minimizing its susceptibility to a
host country’s economical and institutional environment. This includes contract protection, parental control, parental service, and output standardization.
In contrast, offensive mechanisms mitigate the LoF by improving an MNE’s ability to adapt the dynamics of indigenous environments and by maximizing the localization of production and legitimacy factors. It includes the local commitment of the entire value chain (Luo et al., 2002).
An approach for MNEs to overcome a high degree of LoF is to team up with a local partner and to use its knowledge and identity. Dependent on the institutional environment, political manipulation can also be a possible solution (Peng & Heath, 1996; Zhou & Poppo, 2010). However a host country partner can also take advantage of knowledge spillovers and opportunistically approach the government with a request to take actions that have the effect of favoring them at the expense of the MNE. The former represents similar dynamics to the obsolescing bargain model of Vernon (1971) describing a MNE’s interaction with a host country government after establishing a reasonable amount of fixed assets. The possession of unique knowledge or techniques gives a MNE a strong bargaining position during negotiations with a host country. Unfortunately, this strategic edge can turn into a head wind when considerable investments are settled at the foreign location (Henisz & Williamson, 1999).
3.3. Asset Specificity and the Regionalization of the MNE
In the next section, the already mentioned asset specificity of MNEs is addressed. It is defined as the extent to which the investments made to support a particular transaction, have a higher value to the MNE’s business, than they would have if they were redeployed for any other purpose (McGuinness, 1994). The subject is part of Williamson’s (1975) and Crook’s (2005) definitions of transaction costs, amplified by the presence of state borders and institutional differences (Rugman, 2005; Henisz & Williamson, 1999).
In general, some assets are sticky and hard to move, some are tangible, and some are influenced by the rules of their location (Kogut & Zander, 1993; Szulanski, 1996). Hart (1988) categorizes asset specificity into four dimensions, which give a general idea of a firm’s or location’s favorable assets and characteristics. First, site specificity, dedicates assets to specific locations
(Joskow, 1987; Dyer, 1996; Clark & Fujimoto, 1991). For instance, a building ties a firm to an investment within a particular area and locks MNEs and local representatives in bilateral relationships (Joskow, 1987). Second, human or knowledge asset specificity (Dibbern et al., 2005) exemplifies unique knowledge, rare technical skills,its interaction and difficult exchangeability (Lamminmaki, 2005; Joskow, 1987; John & Weitz, 1988; Walker & Poppo, 1991). Third, physical asset specificity (Joskow, 1987) represents specialized equipment or the need of a unique physical facility to distribute certain products. Last, dedicated asset specificity represents a discrete investment in a plant that cannot be put to work yet (Joskow, 1987).
Asset specificity is reflected in the combination of Firm Specific advantages (FSA) and country specific advantages (CSA) and can differ across business units. Every MNE holds a specific set of FSA’s to achieve a competitive advantage relative to its competitors (Rugman, 1981). A FSA is a capability or knowhow, which is unavailable, or only possible to duplicate in a long run at high costs, for another firm (Rugman et al. 2011). It is subdivided into location and non-location bound (Rugman & Verbeke, 1992) The former expresses a MNE’s strengths to exploit and deploy profitably only within particular locations (Rugman et al., 2011). The latter describes strengths transferable across locations at low costs, mostly in little need for local adaptation and expressed in benefits in scale, scope or exploitation of national differences. Many FSAs are developed in foreign locations and can be totally different from the one’s at home (Rugman & Verbeke, 2007).
CSAs on the other hand are unique characteristics offered by the circumstances within a specific country. They can be based on natural resource endowments, labor force, physical infrastructure, innovatory system, educational facilities or cultural factors (Rugman & Oh, 2008). FSAs and CSAs can influence a firm’s upstream- or downstream-performance (Rugman & Verbeke, 2008a). The upstream performance includes business activities concerning raw material extraction or production and is associated with a lower risk level (Rugman & Verbeke, 2007). The downstream performance deals with supply chain sections close to the consumer (e.g. refineries, marketing). It is a one sided commitment with a higher risk of failure. The flexibility of a MNE to adapt upstream or
downstream FSAs, determines the level of internationalization (Rugman & Verbeke 2008a). For instance, firms, focusing on downstream FSAs are especially home-region oriented.
Reflecting the foreign direct investment motives of Dunning (1998), the economic success of internationalization depends on the ability to deploy a firm's FSAs in the circumstances of the foreign location. Therefore a firm’s FSAs and a location’s CSAs have to go hand in hand, the market size or other given characteristics cannot guarantee a successful expansion towards foreign markets (Rugman & Oh, 2008), location specific investments may need to be done and the geographic scope is limited to a certain degree (Rugman & Verbeke; 2001, Verbeke, 2009).
The following working propositions are based on the literature presented in the two former sections.
WP1a: The opportunity for entering home region host countries is affected by the perceived asset specific political salience of the subsector by the host country government.
WP1b: The effect will be greater for passenger than for freight rail operations, resulting in different internationalization levels and patterns.
3.4. National Organizational Fields
By referring back to the description of the development of the European rail industry in chapter 2, it is identified, that the idea to liberalize the European rail market led to differing national organizational structures of the rail industries across Europe. The implementation was put into action by the EU, but interfered by the governments and institutions of the particular national organizational fields, due to the broad definition of the European directives. Consequently, the following section deals with the different national organizational fields and the relationship between market-economy-stakeholders and the political state. It further turns attention to the influence of the different VoC in shaping the institutional environment, and the influence on the development of state-owned enterprizes.
An organizational field reflects a construct of aggregated organizations that constitute a recognized area of institutional life; composed by key suppliers, resource and product consumers,
regulatory agencies, or other organizations that produce similar services or product. Due to a national leveling, the state and institutions construct different national organizational fields (DiMaggio & Powell, 1983).
The institutional environment, as part of the organizational field, is characterized by the composition of requirements and rules that individual organizations need to conform in order to receive legitimacy and support (Martin & Scott, 1998). Basically, it consists of two levels, the formal and informal. The formal level consists of defined constitutions, laws or property rights. In contrast, the informal stands for everything in-between. The unwritten and intangible characteristics incarnated by sanctions, taboos, customs, traditions and norms (North, 1991). The status quo and the development of the institutional environment play an important role. A lack of established institutions and reliable business information systems for business activities can increase the LoF and destabilizes the ability of MNE’s to absorb, process and act upon complex situations (Khanna & Palepu, 1997; Verbeke, 2009; Verbeke & Kenworthy, 2008). For instance, MNEs in less regulatory settings, lack sufficient support from market monitoring mechanisms (Boisot and Child, 1996; Keister, 2009).
Institutional change depends on the interaction of corporate governance, industrial relations and the effects of single institutions. The similarities or dissimilarities of the regulatory environments influence the institutional distance between a firm’s home and host country (Xu & Shenkar, 2002; Yiu & Makino, 2002). A high level of institutional distance equals a high LoF (Eden & Miller, 2004) and consequently higher cost for foreign firms (Hymer, 1976). Generally, MNEs favor a low level of institutional distance, but in some cases, it is also negative correlated. It implies a low probability of host country partners to achieve a change of current regulations towards an increase in efficiency and is often accompanied by the redistribution of returns between the local partner and the MNE (Henisz & Williamson, 1999).
The development of the institutional environment can be influenced by the actors in the market, either if they are private, governmental or public. A MNE itself must always renew its institutional mechanisms to determine the prospective context and ensure to build an environment which suits the firm’s requirements best (Dunning, 2009). Elkins et al. (2006) indicate the significant
role of the government. Besides the regulating influence, contracts between states or state influenced companies can implicate the interests of the home country in a different manner than a private owned company would. Additionally, Hall & Thelen (2008) identify politics as a major gateway for firms and other interest groups to change the school of thought of institutions.
Referring to the globalization process of the last decades, an emerging institutional and political integration on European levels is identified (Kriesi et al., 2008). It shows a growing cross-border interaction of politics, law making processes, industries and impact on national cultures. Nevertheless, significant policymaking-differences still remain between the converging European markets (Schmitter & Grote, 1997). These will be captured through the lens of the VoC discussed in the next section.
3.4.1. Variety of Capitalism
In this section, the Variety of Capitalism (VoC) and its effects on the different national organizational fields in Europe is addressed. The theory is a highly relevant political-economic approach to understand and explain differences and interdependencies of market economies and institutions. It involves perspectives on a broad set of topics, spanning from legal system, social policy development, innovation issues and corporate strategy to a state’s stance in international negotiations (Hall & Soskice, 2001). The approach deals with a political economy terrain, which is influenced by multiple actors who rationally seek their interests in strategic interaction with others (Scharpf, 1997). These actors can be individuals, firms, producer groups or governments, whereas the firm takes the main role in this political and capitalist economy (Hall & Soskice, 2001).
The VoC influences the degree of liberalization as it promotes or hinders the developments of a process within countries or industries (Kolk & Pinkse, 2008; Li & Li, 2007; Rugman & Verbeke, 2008a). In his book, Amable (2003) discusses the interdependency of VoC, institutions, politics and firms in a macro and micro economical linked context. The different VoC are defined as specific architectures of complementary institutions. Macro level institutions determine the structure of organizations on a microeconomic firm level. The internal management of investment decisions or
public interventions (e.g. tax policy) originates to a significant extent in the macro level institutional background. The existing VoC goes along the entire process of institutional development. The adjustment and finally implementation in the organizational model of a firm or industry and the economic outcomes are likely to depend on national institutional configurations and their characteristics. The VoC can be separated into a state and an economic division. Thereby, it is possible to assign countries to specific classes of capitalism (Schmidt, 2009; Shonfield, 1965).
The literature discusses a large number of VoC. However, we focus on those relevant for an analysis of economies in Western Europe, which are namely the approaches of a Liberal Market Economy (LME), a Coordinated Market Economy (CME) and a State-influenced Market Economy (SME) (Schmidt, 2009). The LME approach is defined as the most liberal approach with the fewest state or government interventions. A government is able to settle conflicts or create rules and laws for the market. Typical characteristics are a market–driven system, an arm’s length relationship among firms and to be highly innovative (Hall & Soskice, 2001). The CME approach is defined as a system within which the strategic coordination among firms is valued high. The state is able to act as a coequal to influence the economy. CMEs are typically associated with incremental innovations (Hall & Soskice, 2001). Lastly, the SME approach, is defined as a system with a state or government able to mediate or intervene in important situations (Schmidt, 2009; Shonfield, 1965), and thus having the ability to actively make direction guiding decisions (Tiberghien, 2007).
Dependent on the home country industry, the particular organizational fields assess and facilitate different degrees of foreign direct investment leading to different governmental approaches on economic-political decisions. It is promoted in LMEs, accepted in CMEs and partially refused in SMEs (Soskice, 1999).
WP2a: Based on different degrees of political interfering, the potential for foreign enterprizes to expand towards a host country market economy differs between the VoC.
WP2b: The accessibility of an economical entry for foreign enterprizes to a host country market will be greatest in a LME.
To better understand the differences between the named market economies, the following table gives an overview of characteristics of the different traditional VoC.
Liberal Market economy (LME) Coordinated market economy (CME) State market economy (SME)
Business relations Market driven Non-market managed State organized
Interfirm relations Individual, contractual, competitive,
Mutually reinforcing Network-based
State mediated, Competitive
Industry-finance Distant Close State mediated
Investment Short-term view Long-term view Medium-term view
State relations Arm’s length Negotiated State directed
State Intervention in economic sphere
Liberal arbiter Enabling facilitator Interventionist leader
Wage-bargaining Market reliant Coordinated State controlled
State role in wage- bargaining
Bystander Coequal or bystander State imposed
Level of innovation High Incremental Moderate
Takeover possibilities
Shareholders decision Conversion difficult due to Stakeholder influence, but legally possible
High interference due to family and state-owned enterprizes
Promoted ownership related to other VoC
Private State or mixed owned State-owned
Table 2: Characteristics of the Variety of Capitalism (VoC)
Source: Adapted and extended from Amable (2003) and Schmidt (2000)
The differing characteristics of the VoC draw a clear line between the particular market economies. In the last decades, the internationalization of financial markets and trade has affected the models of capitalism and the structure of business relations. It has pushed all countries’ economic management systems towards market capitalism. A loss of extreme characteristics and a sharing of attributes of the different models is identified (Schmidt, 2002).Notwithstanding a trend towards convergence, the short term future of corporate governance in Europe will remain multiple peaked as the differences between EU members will remain stable (Cernat, 2004). Despite the fact that no country fits entirely to one of the ideal types, some countries come closer than others. In Europe, the
UK is most common with a LME, Germany is assigned to a CME and France is the typical example of a SME.
The major difference between the orientation of a country and a firm is the path dependency towards an economic system. Due to reasonable inter- and independence from other market actors, a firm is able to change practices within the sector or industry and therefore adapt a system which suits best their dominating economy. In recent years, large MNEs mainly adopt LME practices, which has shifted bargaining power towards the business side and reduced the dependence from government interference. It is due to an increase in autonomy, mobility, size and internationality of business in combination with a simultaneous government deregulation and privatization (Schmidt, 2000). A LME benefits enterprizes due to institutional advantages like a high degree of flexibility, a short-term financing and a hire and fire system of employment protection (Soskice, 1999; Hoepner, 2005).
WP3: The absence of political commitment of regional operating enterprizes from LMEs towards the home country market enables those to choose profitable businesses and perform best in host country markets.
To achieve a good performance and/or a high market share, the possibility of a takeover in the national organizational fields has to be considered. However, originating in the institutional and governmental backgrounds, different degrees of political or legal takeover prevention across countries and time exist. The motivation for home industry protection is based on major state interests: political power, aggregate national income, economic growth and social stability. The way in which each of these goals is affected by the degree of openness depends upon the potential economic power of the state as defined by its relative size and level of development (Krasner, 1976). The protection of the home industry can be divided into direct and indirect actions and the specific forms, mechanisms, and motives vary considerably across nations and industries (Brahm, 1995). Direct protection policies include tariffs, taxes, quotas, local content requirements and industry-specific licensing restrictions.
