In what way did the host country characteristics influence the entry
mode of the Chinese company of Huawei in the Netherlands?
Bachelor Thesis 2014
Name: Pieter van der Grinten Student number: 10171630
Date: 4/7/2014
Abstract
Since its establishment in 1988, the company of Huawei nowadays is one of the biggest telecom equipment manufacturers in the world. This literature review will focus on the rise of the company of Huawei in the Netherlands. Huawei, unlike most of the Chinese companies expanding to the Netherlands, did not engage in a merger or acquisition to enter the Dutch market. Due to the choice of this rather unexpected mode of entry compared to other Chinese companies, this paper will research the mode of entry of Huawei in the Netherlands more specifically. Because the mode of entry is subject to multiple factors, of which the host country characteristics are of significant importance, the influence these country characteristics have had on the mode of entry of Huawei will be the main research question. In order to complement the insight on the case of Huawei in the Netherlands a referential framework of other Chinese companies entering the Netherlands has been provided, to put the case in perspective. In addition, an interview with the spokesman of Huawei Technologies Netherlands B.V. will highlight the influence of the country characteristics of the Netherlands on the mode of entry of Huawei.
Table of contents
Introduction p. 4
Research question p. 6
Research design and methodology p. 6
Literature review p. 9
• Host country characteristics: political dimension p. 10 • Host country characteristics: economical dimension p. 11 • Host country characteristics: cultural dimension p. 11
• Mode of entry p. 13
• Referential framework: Recent M&A’s in the Netherlands p. 18
• The case of Huawei in the Netherlands p. 22
• Chronology of the entry of Huawei in the Netherlands p. 22
Conceptual model p. 23
Conclusion p. 25
Limitations and future research p. 28
References p. 29
Introduction
Since the year of 1979 the economic reform in China set off from a strict communistic economy to a more open economy nowadays. When China just opened their economy to the world it became popular as a host country for internationally expanding investing firms. Because the Chinese companies were not accustomed to rivalry from the more developed western companies, most of them did not survive the competition pressure from their foreign rivals and were firstly displaced. During these years the Chinese companies were primarily partners for their western rivals in breaching the Chinese market and were subject to their investments. As a result, China developed a trade imbalance with the western world and subsequently the largest foreign exchange reserves in the world. Many of their local multinational enterprises such as Haier, Lenovo and Huawei surviving at that time had significantly benefited from cooperation with foreign enterprises (Zhang &
Duysters, 2010). With all the experience and lessons learned from MNE’s operating on its home turf, China’s emphasis shifted after a few decades towards becoming stronger and growing its own global operating companies, relying on its leading economy and the world’s largest foreign exchange reserves (He & Lyles, 2008). Starting in 1999, China consolidated its ‘Go Global’ policy to promote the international operations of capable Chinese firms with the goal of enhancing their international competitiveness (Salidjanova, 2011).
Huawei was one of these companies. Founded in 1988 by Ren Zhengfei, Huawei is a high technology private company that provides customized network solutions for telecom carriers around the world. The specialization of the company lies in research and technology development. Huawei experienced their breakthrough in the telecommunications market by 1992. The company focused on the periphery of Mainland China, gradually gaining market share and making its way into the mainstream telecom market. By 1996 Huawei had reached a monopoly position in rural China and parts of urban areas. After achieving this position the scope of Huawei shifted, like many other Chinese MNE’s in the end of the 90’s, from its domestic market of China to the international marketplace. Firstly focusing on the backward countries that foreign multinationals did not
intensively penetrated. Targeting the markets of, for instance, Southeast Asia and South Africa. But the main goal of Huawei was to compete as a global player with the existing and more developed companies in the international markets. As a reference to the international expansion of Huawei: In 1999 only less than 4% of the total sales of Huawei came from foreign markets. By 2005, the contract sales of Huawei totaled 8.2 billion USD, of which, nearly 58% (4.8USD) came from foreign markets (Wu & Zhao, 2007). This kind of strategy was rarely seen before the Chinese companies extended their consumer base internationally, which were among the first expansion strategies
adopted by companies from a developing country entering a developed country. This physical and organizational expansion of Chinese firms into overseas locations funded by outward Foreign Direct Investment (FDI) can take several forms. These outward investments can, for example, take place in order to purchases overseas assets or to fund organic expansion outside China (Child & Rodrigues, 2005). As stated in the research by Child and Rodrigues (2005), the case of the Chinese
internationalization process may indicate the need for some extension of existing theory due to the reversed way of penetrating the international market, companies from developing countries that expand into developed countries. In their research it is stated that there is a lack of research on the rationale behind the entry modes of the resource-driven and capability seeking M&A’s from Chinese firms. Due to constraints in time this research solely focuses on the expansion of Huawei into the Netherlands.
Nearly half of the Chinese outward FDI is via merger and acquisition with the primary motivation of acquiring strategic assets (UNCTAD, 2011). Deng (2009) has researched the rationale of why more and more Chinese firms are investing especially in developed economies in order to acquire strategic assets typically by aggressive M&A. Because this research is focused on a broad, general area, there is room for additions in the existing literature by investigating the strategic motivation of Huawei to expand to the Netherlands. In this research the strategic intentions of Huawei in the Netherlands is investigated, and consequently their entry mode and motivation behind this entry mode.
Wu and Zhao (2007) investigated the internationalization process of Huawei and the appropriate market entry mode choice and state in their research that Huawei applied different market entry modes in different geographical markets. Their research is focused on the entry modes of Huawei in several international markets; however, the Dutch market is not among them. This constitutes a gap in the literature that is researched in this literature review.
An important aspect of the internationalization process of Huawei and their mode of entry in international markets is dependent on the host country conditions of the targeted country. In the research of Wu & Zhao (2007) the host country conditions are barely discussed, which creates the need for further in-depth research about the effect of the host country conditions of the
Netherlands on the mode of entry of Huawei.
Because Huawei is focused on technology and R&D development their acquisition of and mergers with international companies is in order to absorb and acquire technological spillovers, either from the local knowledge base or from specific firms. The research of Criscuolo et al. (2005) states that in the case of strategic asset-seeking activity of companies these firms aim to improve their existing assets, or to acquire (and internalize) or create completely new technological assets
through foreign-located R&D facilities. The assumption in such cases is that the foreign location provides access to location-specific advantages that are not easily available in the home country. In the case of Huawei, the effect of host country advantages compared to their Chinese home country conditions has never been offset regarding the acquisition and development of technological competencies. Therefore research in this area of interest could be a valuable addition to the existing literature on host and home countries (dis-)advantages for asset seeking and acquiring firms.
The goal of this literature review is to add information and gain insight into the international expansion drift and the motives behind that drift for the Chinese company of Huawei, specifically for the country of the Netherlands. The constructs that are highly applicable for the company Huawei expanding into the Netherlands are the main focus of this research. An important feature that is of concern when expanding internationally are the host country conditions, and the way in which companies base their strategic decisions on these conditions to render the most appreciated
outcome. The effect that host country characteristics have on the mode of entry of Huawei is not yet researched for the country of the Netherlands. Because Huawei applied different entry modes for different countries, the entry mode of Huawei in the Netherlands is investigated to gain a more profound insight into the strategic choices of the company. This link can be a valuable addition to the existing literature due to the connection between host country characteristics and the entry mode chosen of the Chinese company of Huawei. These constructs under investigation lead to the main research question.
Research question:
In what way did the host country characteristics influence the entry mode of the Chinese company Huawei in the Netherlands?
Research design and methodology
An effective literature review creates a firm foundation for advancing knowledge. It
facilitates theory development, closes areas where a plethora of research exists, and uncovers areas where research is needed (Webster & Watson, 2002). Due to the existing gap in the literature regarding the specific method and motivation of Huawei expanding in the Netherlands this literature review focuses on articles concerning topics that are in line with the constructs that are applicable to the case of Huawei. Several academic scholars have investigated these constructs, the host country characteristics and the entry modes of MNE’s. This ensures access to literature needed to sufficiently answer the research question. Because the two separate constructs are mature topics in academic literature the goal of this literature review is to conduct a thorough review of this literature and then
propose a conceptual model that synthesizes and extends existing research (Webster & Watson, 2002). The scope of the relevant literature will be funneled down from a broad perspective on Chinese companies engaging in cross-border M&A to a smaller, and more applicable perspective in order to specify the strategic motivation and rationale of the mode of entry of Huawei for expanding into the Netherlands.
The first construct that is important in the case of Huawei expanding to the Netherlands are the host country circumstances that either attract or repel a company to invest in the certain country. Because Huawei already set foot in the Netherlands the host country circumstances must be predominantly positive in order to install subsidiaries in the country. These host country characteristics are probably to a great extend influencing the way of entry and the chosen strategy behind the outward FDI of Huawei. In order to derive the strategy chosen by Huawei by expanding to the Netherlands this construct will have to be investigated following the existing literature on this topic. The broad literature base will be scanned, specified in order of importance, and then applied to the case of Huawei in order to derive the strategic motives of the company expanding to the Netherlands. The construct and literature regarding the host country characteristics of the Netherlands is the first element on which this literature review is based (Toracco, 2005).
The other construct that attributes to extended insight on the expansion of Huawei to the Netherlands is that of the modes of entry used. In order to gain insight and information about entry modes in outward FDI, the underlying literature has to be reviewed. Entry modes are a common subject in academic literature and thus there should be sufficient articles that cover this topic. After the underlying literature has been investigated it is necessary to compare the existing literature to the chronology of the entry of Huawei in the Netherlands in order to investigate the linkages between the existing literature and the case of Huawei. After reviewing these comparisons and linkages between theories, the research creates an inter-theory conceptual framework that is applicable to the company of Huawei in the Netherlands. This second construct regarding the mode of entry summarizes the basis of this literature review in order to describe the influence of the first construct on the second construct (Toracco, 2005).
In order to put the literature found on host country characteristics and the mode of entry of international companies in perspective, the modes of entry of other Chinese MNE’s to the
Netherlands is summarized. This referential framework ensures that the effect the host country characteristics of the Netherlands could have had on the mode of entry of Huawei is compared to companies that come from the same home country as Huawei. The similarities and differences between the modes of entry of these companies and Huawei are then set out to complete the referential framework and complement the conceptual framework.
Another addition on this literature review that complements the conceptual model is an interview with the Manager Communications and Public Affairs of Huawei Technologies Netherlands B.V.: Richard Spaans. This interview provides additional in-depth information about the entry mode of Huawei in the Netherlands, the current state of the company’s internationalization process, and the influence of the home country characteristics on their mode of entry.
Given the time schedule for this literature research it is not possible to investigate all the available literature. Therefore decisions have been made regarding the importance of literature. One way this is done is by selecting sources from well-known journals. These so called A-journals have been cited numerous times and therefore have a high degree of validity. The major additions on the existing theory are therefore likely to be in the leading journals (Webster & Watson, 2002).
However, due to the narrow subject it is irrational to only use these journals. Thus, there are also other journals that can add value to the literature review. These journals may not be the most valid, but could have derived interesting conclusions or applicable theories that address the subject, which in turn describe the importance these journals can have for this research. The basic criterion to achieve a high level of validity of the literature sources used are the valuation of the journals and the number of times the articles are cited by other authors. This adds to the concept-centered nature of this literature review (Webster & Watson, 2002).
As stated in the introduction, the level of activity of Chinese companies expanding
internationally has increased significantly since the beginning of the 21st century. The estimated time
span for relevant literature is therefore set from the year 1990 onwards. This is in order that the reviewed literature captures the most influential aspects of the Chinese outward FDI (Toracco, 2005). Since the year 2001 the Chinese government announced the ‘Go Global’ strategy, which had the objective to encourage the outward FDI in order to ensure the international competitiveness of Chinese MNE’s. This strategy, among other factors, had a big impact on the international expansion of Chinese firms. Therefore, including the literature on the expansion of the Chinese MNE’s from the year 1990 onwards includes this important policy and the outcome this policy has had on the strategic motivation of Chinese companies, with among them Huawei.
In order to successfully conduct a literature review on this topic, the feasibility of the proposed research should be evaluated. The research question is derived from a broad subject, namely, the strategic motivation behind the mode of entry of Chinese firms engaging in cross-border investments. In order to make valuable contributions to the existing literature on this topic, the existing theories and linkages between these theories are set out in a broader perspective and from there funneled down to the relevant constructs (Toracco, 2005). Due to the extensive research on
these broad constructs it is feasible to extend the existing literature, because of the specific nature of the research question.
The research design will be focused on a narrative review. This is because the topic is rather narrow; therefore it is irrational to think that there are many academic articles that are to the same extent as specific compared to the topic of this research. In order to ensure that there are sufficient academic articles that support the constructs that are researched the range of the articles have to be subjectively selected in order for them to be relevant. The key issue in a narrative review is to ensure that the quality and rigor of the research is demonstrated and the link is made apparent from beginning to end (Webster & Watson, 2002).
There are, however, some limitations to the narrative review of the literature that may be subjected to author biases. First, the method does not follow strict systematic guidelines to locate and synthesize articles. This makes this kind of research prone to biases. Because the articles are selectively chosen, it may be so that authors select articles that support their hypotheses and exclude those that do not. Secondly, because of the own opinion of the author, it is possible that articles that do not support the subjective viewpoint of the author on the topic may be overlooked. Thus, it would be possible for the author to give an erroneous representation of the literature. This would constitute in author biases and a lower academic value of the research (Webster & Watson, 2002). These disadvantages of the narrative review are stated here in order to increase the reliability of the literature review.
Literature review
In order to extensively analyze the literature regarding the effect host country characteristics can have on the mode of entry of Huawei expanding to the Netherlands, the literature on host country characteristics was reviewed. After reviewing the literature on this topic the literature on the modes of entry for internationally expanding companies was reviewed. After the existing literature on these constructs is reviewed the linkages between these two constructs are examined in order to
complement the existing literature and develop the conceptual framework.
First, the theory on the effects of host country characteristics on outward FDI is reviewed. During the last decades firms have increasingly committed themselves to global markets. However, despite the high total value of the investments that crosses national borders, our understanding of the
determinants and driving forces of the decisions underlying these investments and the hazards that they face is still limited (Henisz, 2000). In general the reason why a company expands to foreign markets is so they can access sources of cheap labor, (technological) resources, access to foreign markets and other advantages. However, this is not a straightforward process. When a firm crosses
its national borders it has to adjust to the national and corporate culture of the host country. Over time, when a company gains experience in expanding into foreign markets and countries they can reduce the barriers that prevent them from tapping into the advantageous features of these foreign nations (Barkema, Bell & Pennings, 1996). The characteristics of host countries can be defined through a political, economic and cultural framework, which will be the basis for the literature review on this topic. After the topic of host country circumstances is discussed, the literature on the different modes of entry is reviewed.
Host country characteristics: political dimension
The political dimension of this framework is related to the laws, regulations and level of interference of the host country’s government. The effect of political hazards on the choice of market entry mode varies across multinational firms based on the extent to which they face, for example, expropriation hazards from their potential partners in the host country. This can be the result of the level of contractual hazards. As political hazards increase, the multinational faces an increasing threat of opportunistic expropriation by the government (Henisz, 2000). However, as contractual hazards increase, the potential benefit to a joint-venture partner manipulating the political system for it’s own benefit at the expense of the multinational increases as well, thereby diminishing the hazard-mitigating benefit of forming a joint venture. This is one example of the political hazards a
multinational company can potentially face when expanding internationally (Henisz, 2000). The political characteristics of a host country is defined by Henisz (2000) as ‘the feasibility of policy change by the host country government which either directly (seizure of assets), or indirectly (adverse changes in taxes, regulations or other agreements) diminishes the multinational
enterprise’s expected return on assets. Political hazards differ across firms based on the structure of the firms and, for instance, their asset portfolio. The multinational company’s perception of hazards in a given country, based on the national-level political, economic and policy variables, determine their investment intentions (Henisz, 2000).
Therefore, the location of a multinational’s cross-border activities can be an important source for potential political hazards and the political system of the respective country is thus of great importance. Because the national government itself, given its monopoly power on legal coercion and its implicit presence in the background of every economic transaction, poses a threat to multinational corporations either through policy shifts in taxation or regulation or through outright expropriation (Henisz, 2000). In order to counter political hazards of a country, a
multinational firm can reduce the degree of risk by forming a relationship with host country partners or the host country government. Regarding the example of expropriation, in the case that the host
country partner or governmental agency would also suffer in the event of expropriation of the subsidiary’s assets, it creates a more stable environment for the foreign company and reduces its risk. The investment climate in the perspective of the foreign MNE consists primarily of the country’s general attitude towards FDI, including corporate tax rates and regulations, and industrial incentives and disincentives. Therefore, host country political and industrial characteristics as well as the interplay between both sets of characteristics have a significant effect on the growth impact of FDI (Nunnenkamp & Spatz, 2003).
Host country characteristics: economic dimension
The economic conditions of a country are, for example, explained by the economic openness of the country, the degree of economic growth and international trade. Another variable of this dimension is the average wage level of the workforce. The economical circumstances that characterize a nation are most commonly based on the productivity and prosperity of the country (Nunnenkamp & Spatz, 2003). In addition, the national industry characteristics are also of importance. These characteristics are composed of factors as technology intensity, factor requirements, linkages to local and foreign markets, and the degree of vertical integration of the foreign affiliates. These factors are likely to shape a positive growth of FDI (Nunnenkamp & Spatz, 2003). The prosperity of a location rests not solely on the industries in which its firms compete but rather on how they compete. Thus, there is a difference between strategic asset exploiting organizations, which compete in countries and industries exploiting their own (technological) assets based on their competitive advantage. In contrast, when a country has a higher degree of strategic (technological) assets compared to foreign MNE’s, it will attract strategic asset-seeking organizations. When this is the case, due to the high economic standard of a country or industry, the foreign location provides access to locational specific advantages that are not easily available in the organizations’ home country (Crisuolo et al., 2007).
Host country characteristics: cultural dimension
Culture is a very broad concept and the exact definition of the word is still difficult to explain. Lee (2001) described culture as one of the most difficult words in the English language. Edward B. Taylor (1889) was one of the first to describe culture as ‘the complex set of knowledge, religion, art, morale, law, habits and all the other capabilities obtained in a society’. In this literature review culture has two meanings, namely the organizational- and the national culture. Therefore it is necessary to make a distinction between the two forms of culture.
Organizational culture is the set of values, beliefs, symbols and rituals that are being shared among members of a specific organization and that define the way in which a firm conducts its business (Barney, 1986). The organizational culture entails the intentions of the organization and creates a feeling of belonging to the employees of the organization, also reflecting the mission and vision of the firm.
National culture can be described as the way that people communicate with each other, their shared norms, values and attitudes towards life (Doney, Cannon & Mullen, 1998). When comparing these two definitions the resemblances are obvious. However, the main difference between the two definitions is the level on which they are of effect. National cultural values are being taught on a very young age, are deeply rooted and are subject of little change over the years. Organizational culture however is more of a broad guideline that can be taught to employees during work-related activities (Hofstede, 1980). These two kinds of cultures cannot be summarized as one concept nor can they be separated from each other. In general they can complement each other and will come in conflict in organizations and in the M&A’s of organizations (Gerhart, 2009). In this literature review the focus will be primarily on national culture. The term national culture is not completely valid because even in countries there can be different cultures (Baskerville, 2002). The culture in cities is, in Amsterdam for instance, different than on the countryside of Friesland. When these differences in cultures exist in the small country of the Netherlands, imagine the differences in national culture between the country of China and the Netherlands. These differences will be emphasized in the remainder of this literature review. For addressing the phenomenon of national culture the cultural dimensions of Hofstede (1980) is the most commonly used tool. The goal of Hofstede’s (1980) cultural dimensions is ‘collectively programming the mind in order to distinguish one group from another’.
By using four distinct dimensions Hofstede (1980) was able to effectively map the differences in national cultures. These dimensions, which are measured for the different countries, can relatively easily make distinctions between countries. Hofstede’s (1980) four dimensions are:
• Power distance: this refers to differences in the way societies deal with human inequality. Prestige, wealth, and power are of crucial importance to social relationships in some societies and are less important in others
• Individualism: this pattern contrasts the relationship of the individual in respect to the collective. In some cultures people emphasize the individual needs and desires against the needs and desires of the collective, in other cultures this is the opposite.
• Masculinity: this is the contrast between the dimensions Hofstede (1980) labels masculine and feminine. Female emancipation plays a considerable role in this dimension.
• Uncertainty avoidance: uncertainty is a basic fact of human existence. One of the ways to deal with it is to develop clear norms, rules, and rituals. People in some cultures avoid uncertainty by using many rules, organizing their lives so as to emphasize stability. In other cultures peoples are less concerned with rules, they engage in activities with uncertain outcomes and nevertheless feel less stress.
Hofstede and Bond (1988) have added one extra dimension on the primary model, called the ‘confusion dynamism’.
• Long/short term thinking: The difference between the two dimensions is that thinking on the long-term is paired with patience regarding future results, and short-term thinking is impatience regarding future results and thus wanting to see quick results.
Another research that was focused on distinguishing national cultures is the index of Kogut and Singh (1988). This index is created to reflect the cultural distance between countries. In order to measure and define this cultural distance between different countries Kogut and Singh (1988) used the dimensions of Hofstede (1980) to derive the cultural distance. In many researches on cultural distances the researches of Hofstede (1980) and Kogut and Singh (1988) are being used together as a referential framework. A final research in national culture is that of Ronen and Shenkar (1985). These writers have divided the world in eight different clusters. Each cluster consists of countries that are similar in culture. Their research is also based on the cultural dimensions of Hofstede (1980). A low score in the measurements of Ronen and Shenkar (1985) means that a cultural cluster exists and the country characteristics of the two nations are close to each other. Due to the explicit presence of the dimensions of Hofstede (1980) in nearly all articles related to cultural distance, his five dimensions are the primary measure of national culture in this literature review. The index of Kogut and Singh (1988) and the one of Ronen & Shenkar (1985) are used as an additional reference source for the distinction of national cultures.
However, in order for MNE’s to enter a foreign market successfully and efficiently, first their mode of entry should be adapted to the country characteristics of the host country, after which the company can develop its organizational learning process (Henisz, 2000).
Entry modes
Due to the differences between target countries and the markets that a firm wishes to penetrate, a firm first has to do research on the mode of entry that is most effective for the company’s strategy. The targeted countries, the consumers, the environmental factors of the host country, and the strategies of the companies entering these countries are all different to some extent. Therefore
there are several modes of entry to choose from to reach the intended goals of the given company. Agarwal and Ramaswami (1992) state that the four most common modes of foreign market entry are exporting, licensing, joint ventures and sole venture. Exporting is solely transferring end products to a different country than the company’s home country. Licensing is defined as a business
arrangement in which one company gives another company permission to manufacture its product for a specified payment. One form of joint venture is the acquisition of another company, which refers to the purchase of stock in an already existing company to an extent that is sufficient to confer control. In general, a joint venture is the pooling of assets in a common and separate organization by two or more firms who share joint ownership and control over the use and fruits of these assets. Sole ventures, or Greenfield investments, are the establishment of a subsidiary in a foreign country. However, because these entry modes options all involve commitment of resources, firms’ initial choices of a particular mode of entry are difficult to change without considerable loss of time and money (Agarwal and Ramaswami, 1992). The four methods to enter a foreign market discussed by Agarwal and Ramaswami (1992) are based on the framework of Dunning (1980). Dunning (1980) proposed a framework where the choice of entry of a company is dependent on three determinants. These determinants are the ownership advantages a firm has, the locational advantages of a market or country, and the internalization advantages of integrating transactions within the firm.
Another model that addresses the stages of internationalization that companies follow is the Uppsala Internationalization model (Johanson & Vahlne, 2009). The article of Johanson and Vahlne (2009) states that there are four different modes of entering an international market:
• No regular export activities
• Export via independent representatives (agents) • Establishment of overseas sales subsidiary • Overseas production/manufacturing units
These phases of internationalization increase in degree of internationalization, meaning the establishment of overseas production/manufacturing units is the highest level of
internationalization. Another scholar that has developed a model on the topic of entry mode is Bradley (1995). Bradley stated that there usually are three stages of foreign market entry strategies. These sequential stages in his research are: Exporting Competitive alliance Acquisition/Foreign direct investment.
Another model that is used to review the mode of entry of Huawei in the Netherlands is the entry mode choice framework of Driscoll and Paliwoda (1997). In this framework, Driscoll and Paliwoda (1997) describe three modes of entry into a foreign market; export entry modes,
contractual entry modes, and investments modes. The model of Agarwal and Ramaswami (1992) and the model of Johanson and Vahlne (2009) are used as the theoretical basis for the investigation of the mode of entry of the company of Huawei in the Netherlands. The models of Bradley (1995) and Driscoll and Paliwoda (1997) are used as additional referential literature.
The strategic choice of the initial mode of entry of a MNE in a foreign country is highly important for avoiding considerable loss in time and costs, as stated by Agarwal and Ramaswami (1992), and is affected by multiple factors. This strategic choice and the linkages between the host country environment and the mode of entry is therefore of great importance to the company and the success of that company in the respective host country. Therefore, in the following paragraphs the relationship between these constructs is addressed.
Literature reviews have suggested that comprehensive, in-depth studies of the process of market entry mode selection in relation to the designated country selected have been rare. This review also shows that the strategic choice of the mode of entry is context dependent. Using the empirical evidence obtained from some countries may lead to an insufficient basis on which to seek enhancement of entry mode selection (Koch, 2001).
A firm seeking to enter a foreign market must make an important strategic decision on which entry mode to use for a specific market. Every mode of entry of a MNE into a foreign market involves committing resources and shows that MNE’s initial choice of a particular entry mode is difficult to change without considerable loss of time and money. The mode of entry is therefore a critical strategic decision for a MNE (Agarwal & Ramaswami, 1992). Koch (2001) describes the link between the (cultural) characteristics of the host country and the mode of entry that a company has to choose to penetrate the host countries’ market most effectively regarding their strategic goals. The market and entry mode selection process occurs when a MNE’s wishes to expand internationally and investigates in which targeted market and how in this market the mode of entry will be most effective to their company. However, companies that have an international business perspective choose contradictable ways of selecting foreign markets (Koch, 2001). These methods involve the systematic screening of most of the host country characteristics and intensively evaluating the most promising markets. This analysis consists of product-specific market trends and indicators,
evaluation of market and sales potentials and trends, estimation of anticipated profitability of individual entry modes and ends with the selection or rejection decision (Koch, 2001). This analysis of the host country environmental factors thus includes the economic, political and cultural dimensions discussed earlier.
Characteristics of host countries and their national culture have frequently been claimed to influence the selection of entry modes. Should there be a striking difference among countries
regarding their propensities by acquisition versus other entry modes? Previous research on the link between host country characteristics and the mode of entry suggest that the differences between modes of entry in different countries are a consequence of the either institutional and/or cultural context (Kogut & Singh, 1988). For instance, when a country is politically instable, which bears the risk of institutional hazards occurring, a company should hesitate to invest in a sole venture in that country. When a company makes an investment the top management of the company wants to know how risky this investment is, and in a highly uncertain environment this investment could be deteriorated or lost, increasing the risk a company experiences (Koch, 2001).
The decision whether or not to invest in a certain host country is preceded by the decision process and risk assessment of this investment. According to the model of Johansson (1997), this decision process consists of four stages.
1. Country identification 2. Preliminary screening 3. In-depth screening 4. Final selection
As the four stages of the model indicates, companies do serious research before making the decision whether or not to invest in a certain country. The first stage, country identification, starts with reviewing the statistics like for instance the population demographics, the GNP, the growth rates and so on. After the country is identified the preliminary screening starts with examining the political stability, geographic distance and assessment of the economic development of the host country. The in-depth screening is more specifically targeting the product market of the country, the market potential, entry barriers and company resources constraints. In the final selection of the host country the company objectives are brought to bear for a match, and forecast sales revenues and costs are compared to find the country market which best leverages the resources available (Koch, 2001). The strategic objectives of the foreign MNE in combination with the host country
characteristics determine the mode of entry that is selected, using screening tests as the one of Johansson (1997) as a reference point. This indicates the direct link that host country characteristics have on the determination of which host country to select and which market to penetrate. Host country characteristics therefore can have a substantial effect on the mode of entry of a MNE (Koch, 2001).
In previous literature it is stated that differences in national cultures have been shown to result in different organizational and administrative practices and employee expectations (Kogut & Singh, 1988). Therefore it is in the line of expectation that the more culturally distant two countries
are; the more distance there is, on average, between their organizational cultures. When the cultural factors of the host country influence the real or perceived costs and uncertainty of the mode of entry, country patterns in the propensity of firms that engage in the same sort of entry modes should exist, opposed to other modes of entry (Kogut & Singh, 1988). Cultural differences are likely to lead to difficulties in integrating foreign management organizations, especially when a foreign firm, due to the already existing management, acquires these organizations. The integration of a foreign management into a newly acquired organization can possibly lead to large post-acquisition costs as a result of the differences between organizational fit. Organizational fit is defined as ‘the match between administrative practices, cultural practices, and personal characteristics of the target and parent firm’ (Kogut & Singh, 1988). In contrast to the post-acquisition integration costs of a foreign management, a joint venture has a different effect. A joint venture usually assigns managerial tasks to local partners who are more capable to manage the local relationships with suppliers, or the local labor force, buyers, and the host country’s governmental institutions. This type of M&A can thus prevent high integration costs and resolve the host country problems for the foreign partner ensuing from cultural factors. The price for resolving these host country cultural problems is that the foreign MNE in this type of M&A has to share ownership and control. A foreign company can also choose to invest in a wholly owned Greenfield investment that avoids both the costs of integration and conflict over sharing proprietary assets. The company can use the Greenfield investment to impose their own managing style on the start-up while preserving full ownership (Kogut & Singh, 1988). However, the costs associated with Greenfield investments can, for example, be much higher than the foreign management integration costs and can possibly bear more risk than the joint venture entry mode.
The conceptual framework that is the result of the literature review on the effect of host country characteristics on the mode of entry is applicable to all organizations that expand
internationally. For some organizations, cross border expansion is not the criteria for this conceptual framework to be valuable because the cultural distance between some countries is not substantial. For instance, the cultural difference between the US and Canada may not be as influential as the cultural distance between the US and China. Therefore this theoretical framework can give some indication of the effect of the host country circumstances on the mode of entry between two significantly different countries like the Netherlands and the home country of Huawei, China. In academic literature of recent years, there has been evidence that significant investments occurred in the last decade of overseas subsidiaries in order to absorb and acquire technological spillovers, either from the local knowledge base or from specific firms (Crisuolo et al., 2007).
Another example of the value that this conceptual framework can have is for governments that are a target market for international investments. Due to the existence of this framework consisting of the effect host country characteristics can have on the mode of entry the government of the host country can improve on their host country characteristics. This could result in a more attractive climate for international investments in that specific country, and consequently improving the welfare level among their population and business environment.
In the previous paragraph the applicability of the literature review and the conceptual
framework was addressed according to the kind of organization or host country. Another dimension that creates a boundary to the applicability of the conceptual framework is the geographic distance between the home and host country of the MNE. When the distance between the home and host country is small, the cultural differences between the countries usually is not as significant as when this distance is large. In order for the host country characteristics to have a substantial influence on the mode of entry of a MNE the differences in country characteristics between the countries should be high enough to influence the mode of entry.
The estimated temporal boundary for the conceptual framework following this literature review is set for the years since 1990. This is because the business environment, as the businesses
themselves, have been different in the earlier years of the 20th century compared to the past
decades. Also, the level of expansion of Chinese companies into the international marketplace has taken place after the year 2001 and thus this theoretical framework is most applicable after this period. These are the reasons why there should be made an estimate of the time span for which the conceptual model is applicable.
Referential framework: recent Chinese M&A’s in the Netherlands
In order to specify the influence that the country characteristics of the Netherlands could have had on the mode of entry of Huawei the following section summarizes the modes of entry of other Chinese MNE’s in the Netherlands. This referential framework of the modes of entry of these other Chinese companies gives an indication of the influence of the country characteristics of the
Netherlands on their modes of entry. Since the ‘Go Global’ policy of the Chinese government in the year 2001, as stated in the introduction of this paper, the intensity and value of international M&A’s by Chinese MNE’s has increased significantly. Because the focus of this paper is on the influence of the country characteristics of the Netherlands, it is valuable for the context of these M&A’s to look at other Chinese companies that have invested in the Netherlands through M&A’s in recent years. The time span for the referential framework of the Chinese M&A’s is from the beginning of the ‘Go
Global’ policy in 2001. After the summation of the M&A’s from the Chinese MNE’s in the following table, four M&A’s are described more specifically.
Year Company (NL) Company (PRC) Amount (in
millions) Type of M&A Reason 2014 Royal Nedschroef Holding B.V. China’s Shanghai Prime Machinery Corporation (PMC)
EUR 325 Acquisition Technological
resources/Market entry
2014 Nidera B.V. COFCO USD 1200 Acquisition Technological
resources/Managerial expertise/Market entry 2013 AVR Afvalverwerking B.V. Cheung Kong Holdings Ltd.
EUR 943,7 Acquisition Technological resources 2013 Agenturen en
Handelsmij Scheepers B.V.
Meisheng Cultural & Creative Corp. Ltd. EUR 10.63 Acquisition Technological resources/Managerial expertise
2013 GE TIP Trailer Services HNA Group Ltd. Undisclosed Acquisition Techonological resources/Managerial expertise/Market entry 2013 LNG Europe B.V. ENN Energy Holdings
Ltd.
Undisclosed Acquisition Technological resources 2012 Airblast B.V. Shandong Kaitai
Group Co. Ltd.
USD 14.05 Acquisition Technological
resources/Market entry 2012 Scheuten Solar Aikosolar Undisclosed Acquisition Technological
resources/(Synergy) 2012 GINAF Trucks Nederland
B.V.
China Hi-Tech Group Corp.
EUR 9 Acquisition Market entry 2012 Spyker N.V. Zhejiang Youngman
Lotus Automobile Co. Ltd.
EUR 235 Joint-venture
Market entry
2011 Royal DSM N.V. Sinochem Group EUR 210 Joint-venture
Technological
resources/Market entry 2011 Inalfa Roof Systems
Group B.V.
Beijing Hainachuan Automotive Parts Co.
USD 373 Acquisition Technological
2011 Mapscape B.V. NavInfo Co. Ltd. USD 9.32 Acquisition Technological resources 2009 Darwind B.V. Hunan Hara XEMC
Windpower Co. Ltd
Undisclosed Acquisition Technological
resources/Market entry 2007 Royal Philips Electronics
(remaining mobile phone activities)
China Electronics Corporation
Undisclosed Acquisition Technological
resources/Market entry 2006 Burg Industries B.V. China International
Marine Containers Group Co. Ltd.
EUR 110 Acquisition Market entry
2002 Kruidvat A.S. Watson EUR 1.300 Acquisition Market entry
On May the 28th China’s Shanghai Prime Machinery Corporation (PMC) has bought the Dutch
company of the Royal Nedschroef Holding B.V. The Chinese company, one of the largest fasteners exporters in China, has signed an agreement to acquire 100% of the ownership of the company for EUR 325 million. In terms this is therefore an aggressive form of M&A due to the fact that the Shanghai PMC went from no presence in the Dutch market to the highest form of
internationalization, according to Agarwal and Ramaswami (1992), by buying a manufacturing and production plant. A spokesman of Shanghai PMC stated: “With the addition of Nedschroef, its excellent people, the technological expertise and the relationships with the major car manufacturers in Europe, we will be able to make a step change in our fasteners business. We will leverage their cutting edge expertise and Nedschroef will immediately benefit from our strong Asian footprint” (Nedschroef press release, 2014). From this statement of the Shanghai PMC’s spokesman it is
possible to derive the strategic intentions of the Chinese company. The section: “with the addition of their technological expertise” clearly refers to the technological know-how that Shanghai PMC has acquired. Another section: “their relationships with the major car manufacturers in Europe”, clearly refers to the penetration of the Chinese company in the West European market. The acquisition of the Dutch Royal Nedschroef is therefore an example of a Chinese company that, due to their financial supremacy, was able to buy their way into the European market and simultaneously acquire the technological know-how of the company of Royal Nedschroef Holding B.V..
On the 28th of February 2014 the Chinese company of COFCO corporation (COFCO), the largest grain,
oil and foodstuff company in China, and Nidera, a global commodity trader from the Netherlands signed an agreement regarding the acquisition between the two companies. In the deal, COFCO will
acquire 51% of Nidera to establish a strategic partnership with this major player in the agricultural market with an annual turnover in excess of USD 17 billion (Nidera press release, 2014). This M&A, in the form of a joint venture, will provide a win-win situation for both companies. The transaction provides the Dutch company of Nidera access to the Asian market while COFCO gains access to Nidera’s global origination and trading network, including their strong origination platform in Brazil, Argentina and Central Europe. A COFCO’s spokesman pointed out that COFCO: “is fully committed to supporting Nidera’s future development through COFCO’s competitive edge in trading, processing, branding and distribution” (Nidera press release, 2014). In this M&A it is clear that both companies profit from the international access and distribution network of the other company. Another
important aspect that is emphasized by the spokesman of COFCO is that Nidera can profit from their branding experience. This M&A is in effect a joint venture between two global players in the food industry, with split ownership.
On the 10th October 2013, the Hong Kong based firm HNA Group Company Limited (HNA), which is
active in diversified services and integrated operations, announced that they have agreed to acquire GE Capital’s wholly owned subsidiary of TIP Trailer Services (TIP)(TIP Trailer press release, 2014). The company of TIP is based in Amsterdam and is a market-leading provider of transport equipment leasing, rental and service solutions. This acquisition diversifies the business of the mother company of HNA and expands their presence in the international market, which points the motive of HNA of a strategic takeover. Another important aspect of HNA’s motive for acquiring TIP is because the Chinese company gains the expertise of the management team of TIP trailer services. Two reasons for the HNA group to buy the Dutch company were to acquire the technological and managerial know-how of the company. As a consequence, in order for the Chinese company to successfully implement the companies’ managerial and technological know-how, it will have to engage in cultural adaptation and consolidation.
On the 17 June of 2013, the Cheung Kong Holding Limited of the Chinese billionaire Li Ka-Shing and partners agreed to acquire to Dutch waste processing company of AVR Afvalverwerking from the Van Gansewinkel Groep B.V. for EUR 934 million. The acquisition provided Ka Shing with a company that has evolved from a traditional waste processor to a supplier of durable energy (AVR Press release, 2013). Because the issue of waste treatment is imminent in most countries of the world, there is substantial growth potential in the business. Due to this aggressive take-over, the
their portfolio. The main motivation for this acquisition is therefore to gain technological know-how and to establish a foothold in the Dutch waste industry.
The case of Huawei in the Netherlands
In order to research and conceptualize the effect the host country characteristics of the Netherland could have had on the mode of entry of Huawei, this review is supported by the existing data on the entry of Huawei in the Netherlands. After the existing data on the company of Huawei in the Netherlands is reviewed, the concept of host country characteristics is added to make a conceptual model about the effect of host country characteristics on the mode of entry of Huawei in the Netherlands. These topics are addressed in the following paragraphs. The following text is a supporting quote of the international expansion policy of Huawei by its founder and the CEO of Huawei, Ren Zhengfei:
“We should not wait to expand abroad until everything is ready. Instead we will get familiar with the markets, and then conquer them in the process of learning from our international competitors. When domestic markets will eventually get saturated, Huawei will die unless we can build an international team in three to five years. Of course, we must realize that we have no competitive advantage, and that we can only gain the market through advanced technology, reliable quality, and superb service.”(N. Ahrens, 2013).
Chronology of the mode of entry of Huawei in the Netherlands
In 2004 Huawei received its first major sales order in Europe from the Netherlands. The company sold their wireless station products in the Netherlands, which enabled multiple communication standards to be run, and upgrades were done by software rather than hardware (www.huawei.com). This product was a good example of cost innovation in that it provided advanced features at low cost, while saving the carrier money on hardware. Huawei was selected by the Dutch mobile phone operator Telfort to deliver and install a nationwide UMTS (Universal Mobile Telecommunications System) network in the Netherlands (www.telfort.nl). The UMTS contract was signed on 8 December 2004 in The Hague in the presence of the Prime Minister of the Netherlands and the Premier of China, underlining the importance of the deal for both countries. The UMTS contract with Telfort was the first major success for the company of Huawei with its UMTS technology in Europe. In succession of this deal Telfort assigned a following deal to Huawei, namely the development of mobile data in the Dutch market. As a result, Huawei established an R&D center in 2005 in Amsterdam that was designed to focus on end user services (www.huawei.com).
In 2013 Huawei made a deal to open a new office in Voorburg, The Netherlands. Because of the favorable investing climate and liberate political characteristics the company was assisted in this event by the Netherlands Foreign Investment Agency (NFIA). This agency is a part of the Ministry of Economic Affairs and works closely with other organizations to helps MNE’s to access the potential strategic location of the Netherlands and to expand into the rest of Europe (www.huawei.com).
Partially due to the continuous success that Huawei has had in the Netherlands, as of May 2014, Huawei has signed a contract with the international renowned football club AFC Ajax to provide the home stadium of Ajax with a Wi-Fi network (www.ajax.nl). Rumors were spreading that Huawei would become the shirt sponsor of the club from the capital, but these rumors appeared untrue. Nevertheless the official sponsor contract that Huawei signed with Ajax will last for three years, starting in 2014. The contract includes the brand name of Huawei to be visible during home games of Ajax and also in the online and offline media of the club (www.ajax.nl). Due to the sponsor agreement Huawei has signed with the popular football club, it can significantly increase its brand familiarity among the Dutch population, addressing the problem that the Chinese company has with poor consumer brand recognition. On the 17 June of 2014 Huawei closed an agreement in
cooperation with the University of Amsterdam for the ‘Telecom Seeds for the Future’ student program. This program provides students with the possibility to expand their competencies in the IT branch (www.uva.nl). This ensures the company of Huawei of a training program with the highest performing technology students of the university. These partnerships point out that Huawei is adapting a branding strategy to gain influence in the Dutch mobile communications network and technological student potential. Also, these partnerships make the company more visible to the Dutch consumers, engaging the low brand recognition that it experiences outside China.
The first sales that Huawei made in the Netherlands were based on only exporting their products. After their initial success in the Netherlands, and consequently in Europe, the company has expanded their presence in the Netherlands by building their first subsidiary in the form of an R&D center in Amsterdam (www.huawei.com).
Conceptual model
As shown in the literature review of the host country characteristics and the mode of entry of companies in cross-border M&A, there are multiple options for foreign MNE’s to expand
internationally. In general, Chinese companies have been expanding to the Netherlands primarily through M&A’s, as showed in the referential framework on Chinese M&A’s in the Netherlands. This expansion of the Chinese MNE’s has been the result of the ‘Go Global’ policy of the Chinese
M&A value since 2001 (UNCTAD, 2011). The motive for these M&A’s with Dutch companies or in the Netherlands can stem from the availability of technological know-how and managerial expertise in Western (business) culture and the access to the (European) market. As stated by the research of Wu and Zhao (2007), it is found that industrial characteristics and targeted home country
technological reputation affect to a great extent the internationalization path of Huawei. The largest part of the Chinese expansion into the Netherlands has been through the acquisition of Dutch companies, and some by joint venture between Dutch and Chinese companies, as seen in the table of Chinese M&A’s.
The influence of the host country characteristics of the Netherlands on this phenomenon can be explained through the three dimensions that express the host country characteristics:
political, economical, and cultural. The Netherlands is located on a favorable strategic position in the northwestern part of Europe. This is considered a natural advantage for companies trying to access the European continent. Another advantageous characteristic of the Netherlands is the country’s extensive infrastructure, which provides high quality transportation over sea, air, road and rail connections (CBS, 2012). The country is politically and economically amongst the most stable countries in the world, currently on the eighth position out of 142 countries in the World Economic Forum index of most competitive economies (Schwab & Sala-i-Martin, 2013). Another characteristic of the Netherlands is that the country has a favorable tax climate for foreign MNE’s. A feature of this tax climate is that the Dutch government and tax authorities are open to discussing appropriate tax regulation with individual companies. This can result in binding agreements that give companies clarity and certainty about their business prospects. In addition, the Dutch corporate tax rates are lower than the tax rates of most of the other European countries (CBS, 2012). The risk of political hazards, for instance expropriation of assets, is minimal. The Netherlands has put an emphasis on a knowledge-based economy, prioritizing innovation and R&D. Illustrative for this policy is the amount spent on R&D, in 2011 the Netherlands invested 2% (USD 1.8 billion) of their gross domestic product on innovation and R&D. The government plans to increase these R&D expenditures to USD 2.5 billion in 2015 (CBS, 2013).
The Netherlands has been dependent, since its rise in the 16th century, on international
trade. In effect, this dependence led the Dutch people to have an open-minded attitude towards international trade. This attitude has also been part of the Dutch national culture, with a tradition of individual thinking, a high level of uncertainty avoidance due to their extensive regulatory systems and a general small power distance. These cultural characteristics are in line with the innovative capacities of the country. In combination with the positive economic and political environment, this has resulted in a qualified, flexible and high-educated workforce, which is highly attractive for
foreign organizations expanding to the Netherlands. In addition, the country’s inhabitants are among the most multilingual in the world (Extra & Gorter, 2008).
Almost all the Chinese companies that have entered the Netherlands have entered the market by either acquiring or merging with a Dutch company. The reason for this kind of entry is because the Chinese MNE’s are resource driven and capability seeking (Crisuolo, Narula &
Verspagen, 2005). There are many Chinese companies that have entered the Dutch market by only exporting their products, but few have established production- or sales subsidiaries in the
Netherlands. Because the Netherlands have a favorable investment climate, it is relatively easy for the Chinese companies to go from primarily exporting their products to establishing a production or R&D center in the Netherlands. Therefore, in order to permanently enter the Dutch- and
subsequently European markets, Chinese MNE’s have engaged in these M&A’s. The reasons for these modes of entry were usually to either gain managerial expertise, technological know-how or entry to the European market.
Interview with Richard Spaans, Manager Communications & Public Affairs Huawei Technologies Netherlands B.V see Appendix for complete interview.
Conclusion
In the theoretical framework the effect that the host country characteristics can have on the mode of entry of a company is addressed. As stated in the conceptual model of this literature review the Netherlands have favorable political, economic, and cultural characteristics for foreign companies to invest in the country. However, most of the Chinese companies that either have production- or R&D facilities in the Netherlands have acquired these facilities via M&A’s. The company of Huawei did not engage in M&A in the Netherlands. After receiving their sales order in 2004 of Telfort, the company made the first step in the internationalization process by solely exporting their product to the Netherlands (www.huawei.com). This was the first major sales order that Huawei received in Europe. This initial activity on the Dutch market was followed by their second major sales activity, which could still be described as the first phase of the internationalization process according to the model by Agarwal and Ramaswami (1992). But as a result of this second sales order, Huawei decided to establish an R&D center in Amsterdam, followed by a second office in 2013 in Voorburg
(www.huawei.com). These establishments symbolize the next and the most developed
internationalization phase, namely establishing an overseas sole venture or Greenfield investment (Agarwal and Ramaswami 1992).
The decision whether or not to invest is subject to evaluation of the political, economic and cultural characteristics of the host country and the risk assessment of the specific investment in the
host country. This implies that after using a host country risk assessment model of, for instance Johansson (1997), the Netherlands received a positive score. Consequently Huawei evaluated the Dutch host country characteristics as sufficiently positive to establish their first R&D center of Europe in the Netherlands. The significant impact of the chosen mode of entry and the substantial costs associated with this kind of entry, a sole venture according to the model of Kogut & Singh (1988), suggests that the host country has several competitive locational advantages according to the model of Driscoll and Paliwoda (1997). The question remains what country characteristics had a major impact on Huawei’s decision to invest and choose this kind of entry mode in the Netherlands and not in a neighboring country, that has similar scores on the model of Hofstede (1980) and Kogut and Singh (1988).
Political
The Dutch government has actively helped Huawei in reviewing locations where the company could establish their subsidiary. The Netherlands Foreign Investment Agency (NFIA), an agency of the Ministery of Economic Affairs that assists foreign companies with establishments of their company in the Netherlands, advised Huawei on the location of their new office (www.huawei.com). The Dutch government also provides innovative companies like Huawei with industrial incentives in order to commit these kinds of companies to their country (CBS, 2012). These, among other initiatives by the Dutch government, can be seen as a significant pull-factor for Huawei to invest in the Netherlands. These political originated characteristics contribute to the favorable investment climate of the Netherlands. Subsequently, governmental support is also an example of the Dutch open-minded business culture, because Huawei also experienced foreign governments that were not pleased to welcome the Chinese telecom giant in their country.
Economic
Another characteristic of the Netherlands that has influenced the choice of Amsterdam as the location of their European headquarters is the vast amount of European and global headquarters that is present in the region (www.huawei.com). This provides the company with a large potential customer base ‘around the corner’. As discussed in the previous section, another feature that attributed to the locational advantages of the Netherlands is their accessibility. Due to the high level of infrastructure in the country, like for instance the airport of Schiphol, the headquarters of Huawei has an excellent accessibility for their employees or international customers. Before a company can set up an R&D center in a country there has to be an offer of employees that can cope with the level of the requested work activity. This is another feature where the positive country characteristics of the Netherlands have played a role in the decision of Huawei to establish their R&D center in the
Netherlands. The country has a well-educated workforce, as stated in the discussion section, and among the most multilingual population in the world. This characteristic most certainly has had a major impact on the decision to expand to the Netherlands.
Cultural
The Dutch national culture has several positive elements that make the country and consequently their culture attractive to foreign companies. The model of Hofstede (1980) is the referential base on which to reflect the Dutch cultural characteristics. The Netherlands has a low score of the dimension of power distance, which means that the use of power should be legitimate and is subject to criteria of good and evil. As a result, corruption is rare, the income distribution in the society is rather equal, and it provides the country with a stable (business) climate (Hofstede, 2011). The country has a strong individualistic perspective on society. This creates a distinct emphasis on independent individuals that speak what is on their mind, ventilating their personal opinion’s and in which the purpose of education is to educate oneself. This contributes to general innovation and therefore the Netherlands are global leaders in areas as for instance water works, greenhouse technology and IT. This contributes to the favorable circumstance that a Hi-Tech company as Huawei is looking for when expanding internationally. The Netherlands does not have a distinct score on the dimension of uncertainty avoidance. However, in contrast with China, the Netherlands has a tradition of clarity and structure in their laws and regulations. This means that in contrast with China, which is used to a relationship based business culture, the Netherlands have a regulations-based business culture. Due to these clear regulations foreign companies know what they can expect when entering the Dutch market (Hofstede, 2011). While this dimension probably did not have a significant impact on the mode of entry of Huawei, the dimension of short- versus long-term orientation could have had a more substantial influence on their mode of entry. The high score on the long-term orientation of the Dutch in practice means that the population is highly adaptive to changed circumstances, they try to learn from other countries, and have a thrift and perseverance for important goals. Because of this long-term orientation the country has experienced continuous economic growth leading to their current level of prosperity and funds available for innovation and investments (Hofstede, 2011). This attitude towards learning and adaptation to changing circumstances made the Dutch population an attractive workforce for a company that is looking to establish an R&D center in Europe. This can be considered another cultural pull factor of the Netherlands towards the company of Huawei.
In conclusion, the Netherlands has several favorable host country characteristics that make the country attractive for foreign MNE’s. These characteristics have influenced the mode of entry of Huawei in such a way that the company, compared to other Chinese MNE’s expanding to the
Netherlands, did not engage in a M&A. Instead, due to the favorable political, economic and cultural characteristics of the country, Huawei decided to follow a different internationalization process than the other Chinese companies. After initially solely exporting their product Huawei engaged in a sole venture by establishing an R&D center in Amsterdam. As shown in this conceptual model this investment decision can be linked to the favorable circumstances that are present in the Netherlands, therefore greatly affecting the mode of entry of Huawei.
Limitations and future research
Due to the extensive nature of the constructs that are applicable to the research question, it was not possible in this literature review to delve very deep in the selected constructs. This was the case due to time and length restrictions in this literature review. Therefor this review, and the following conceptual model, lacks a more profound in-depth analysis of the given constructs. However, due to the extent of the constructs that are being reviewed, this literature review provides the reader with a more general insight in the different dimensions that are the applicable for a successful mode of entry. This is therefore the weakness but also the strength of this literature review.
In order to gain a more profound insight in the influence that the separate host country characteristics have had on the mode of entry of companies, a suggestion for future research would be to do a quantitative analysis on the effect of these different characteristics on the mode of entry. This would constitute in a more developed, in-depth, model that describes the separate effect these characteristics have on the mode of entry.
