The expansion of emerging-market MNEs into developed-market countries

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The expansion of emerging-market MNEs into

developed-market countries

By Stefan Luiken (S2331829)

Supervisor: Dr. André van Hoorn

Date: 29-06-2016

Abstract:

This thesis investigates the concept of liability of foreignness from an emerging-market MNE perspective. More specifically, we argue that emerging-market MNEs suffer from a dual liability of foreignness position, when operating in developed-market countries. In light of four theoretical perspectives, we propose several strategies that can be used to overcome the dual liability of foreignness position. Qualitative research design in combination with in-depth interviews were used to analyze the research question at hand.

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1. INTRODUCTION

On May 1st 2005, Lenovo acquired the personal computer hardware business of IBM. IBM, an American company, has been a pioneer in the field of technology since its existence in 1911. Lenovo, a much younger technology company, was founded in China in 1984. Since the aforementioned acquisition date, IBM sold several other departments to Lenovo, while Lenovo continued acquiring other originally ‘’western-oriented’’ technology companies such as Motorola. Based on this and various other examples, we can observe the contemporary gain in voice of so-called emerging-market multinational enterprises (EM MNEs), international firms which originate from emerging markets, that perform outward FDI (foreign direct investment) in one or more foreign countries (Luo and Tung, 2007).

As originally introduced by Hymer (1976), the concept of liability of foreignness (LoF) implies that enterprises incur costs of doing business abroad which local firms do not have, such as a lack of knowledge about the local environment. Zaheer (1995) built on this concept by presenting evidence that companies indeed face LoF. Since then, a considerable amount of researchers analyzed LoF, which consequently has resulted in various frameworks and strategies to overcome this phenomenon.

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Denk et al., 2012; Kalasin and Dussauge, 2011, Luo and Tung, 2007). It is important to address this theoretical gap and focus specifically on the EM MNEs perspective for several reasons.

First, the rate at which EM MNEs emerge is increasing. According to UNCTAD (2015), the total of foreign direct investment (FDI) from emerging countries reached 133 billion dollars in 2014, which was 10 times higher than what was achieved in 1990. Consequently, this is reflected in the rapid growth in internationalization of the EM MNEs of today (Luo and Tung, 2007). Second, we can observe the importance of this increasing internationalization for the countries involved and the disruptive effect that EM MNEs seem to have on local industries (Ramamurti and Singh, 2009). Third, and most important, EM MNEs typically have to compete from a different, dual liability of foreignness position, when expanding to developed-market countries. This is because EM MNEs not only incur the costs of doing business abroad (LoF), but are also typically considered as resource-poor, suffer from a country-of-origin effect and commonly originate from a weaker institutional environment when compared to DM MNEs (Barnard, 2010; Held and Berg, 2014; Gaur, Kumar, & Sarathy, 2011).

From a managerial point of view, this thesis could help EM MNEs in becoming more familiar with the potential pitfalls, they would incur when expanding to developed-market countries. Moreover, from a theoretical point of view, this research could open a whole new stream of research, focused on the EM MNEs dual liability of foreignness position.

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‘’How do emerging-market MNEs overcome their dual liability of foreignness position, when expanding to developed-market countries?’’

We used qualitative research design to assess this research question. Namely, we performed an exploratory study, based on a variety of theoretical perspectives. We conducted several in-depth interviews, interviewing executives of various EM MNEs that were involved in the internationalization strategies of their respective companies.

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2. GENERIC BACKGROUND: WHAT IS THE LIABILITY OF

FOREIGNNESS?

In order to understand whether the current, standard strategies of overcoming LoF are applicable to EM MNEs, we first have to review these standard strategies that prevail in existing literature.

This chapter starts with introducing the concept of LoF and the sources that contribute to it. Subsequently, we review the standard strategies MNEs can use to overcome LoF. More specifically, we look at five strategies drawn from four different theoretical streams.

Finally, we provide the reader with an illustrative synopsis of the theoretical perspectives and their corresponding standard strategies for overcoming LoF. This synopsis of standard strategies will, in turn, be used as a reference when comparing to the proposed EM MNE-specific strategies, as can be seen in chapter 3.

2.1. LoF: History and definition

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The work of Zaheer (1995) directed the attention to the ‘’disadvantages’’ that MNEs would incur when expanding to foreign markets. Zaheer (1995) introduced the concept of liability of foreignness as ‘’the costs of doing business abroad that result in a competitive disadvantage for a MNE subunit’’, or formulated differently: the sum of costs, a firm operating in a market overseas would be exposed to, which a local firm would not have. Foreign firms would thus incur lower profitability than local firms, all else being equal. At the time of writing her paper, Zaheer (1995) argued that at least four sources contributed to the liability of foreignness. Namely, the costs associated with spatial distance, such as travelling costs; unfamiliarity costs associated with the local environment; host country environment costs, such as economic nationalism, and; home country environment costs, such as restrictions on highly-developed technology sales.

Apart from introducing the concept of LoF, Zaheer’s (1995) empirical findings also provided primary proof of its existence. By elaborating on this evidence, Zaheer and Mosakowski (1997) extended the concept of LoF with a dynamic view, concluding that LoF and its related challenges decrease over time and thus are not static.

More recent empirical work has zoomed in on the determinants of LoF and their effect on MNEs. Calhoun (2002) identified cultural differences as contributing to LoF, while Miller and Richards (2002) found that high foreign competition led to an increased LoF. Finally, Petersen and Pedersen (2002) concluded that insufficient host-market knowledge contributed to LoF.

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2.2. Sources of LoF

According to Eden and Miller (2004), LoF can be seen as a combination of three hazards which altogether comprise the costs that affect foreign firms disproportionately, when compared to the local firms:

 Unfamiliarity hazards  Relational hazards  Discrimination hazards

First, unfamiliarity hazards reflect the lack of knowledge of the host country’s practices and culture, placing the foreign firm at a disadvantage compared to the local firms. This is reflected in the additional cost, foreign firms incur, to achieve the same level of host-market knowledge as the local firms.

Second, relational hazards result from increased internal (intra-firm) and external (inter-firm) transaction costs. More specifically, from the perspective of intra-firm relations, costs are created due to the difficulties of managing employees at a distance and from different cultures. From an inter-firm perspective, costs of trust-building are incurred as well as negotiation and monitoring costs.

Third, discrimination hazards occur when a foreign firm is treated unfavorably compared to the local firms. Discrimination hazards can arise from differential treatment by the general public, home or host country governments, or from consumers.

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2.3. Standard strategies for overcoming LoF

Extant literature has provided numerous strategies, drawn from various theoretical lenses, on how to overcome LoF. More specifically, Denk et al., (2012) revealed that present-day research has predominantly applied four theoretical streams to the concept of LoF, namely:

 The resource-based view  The institution-based view  Social network theory

 International expansion theory

Subsequently, each of these streams have presented their own strategies on how to overcome LoF. As a pioneer in the field of LoF, Zaheer (1995) introduced two different strategies for overcoming LoF. In light of the resource-based perspective, Zaheer found that the transfer of existing firm-specific advantages to foreign subunits, would compensate for LoF.

Moreover, and derived from the institution-based view, Zaheer argued that MNEs could overcome their LoF by mimicking the practices of successful local firms.

Next to this, an increasing amount of researchers have embarked on the strategies of entry mode choice and foreign subsidiary staffing to overcome LoF. In light of international expansion theory, it was argued that entering the host country through the most optimal entry mode, would lead to increased local learning and a reduction in LoF (Denk et al., 2012).

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A more extensive view on each of these four theoretical perspectives and their corresponding strategies can be seen in the following sections.

2.3.1. Resource-based view: Firm-specific advantages

Over the course of the past two decades, the resource-based view has become one of the most influential views within management literature, analyzing how firms achieve and sustain competitive advantage (Denk et al., 2012). The central proposition of the resource-based view is that a firm’s competitive advantage is grounded in a set of heterogeneous and immobile resources (Barney, 1991). Resource heterogeneity refers to firms that possess unique resources which competitors do not have, whereas resource immobility reflects the inability of firms to copy the resources of competitors. In order to become a sustainable firm-specific advantage (FSA), resources should satisfy the four criteria of being valuable, rare, imperfectly imitable and non-substitutable (Barney, 1991). The FSAs that satisfy these criteria, are denoted as ‘’the strengths relative to rival companies’’. Verbeke (2009) categorized FSAs in the following seven areas:

 Physical resources, including natural resources

 Financial resources, including access to equity and loan capital  Human resources, including teams and individuals

 Upstream knowledge, including sourcing knowledge

 Downstream knowledge, critical to the interface with customers

 Administrative (governance-related) knowledge, concerning the functioning of the organizational structure

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Next to this, Verbeke (2009) argued that while certain FSAs can be deployed and exploited across borders (internationally transferable FSAs), other FSAs may not be transferable (non-transferable FSAs), if the specific resources do not have the same value across borders.

Zaheer (1995) argued that in order to overcome LoF, MNEs should rely on their FSAs and transfer them to their foreign subunits. As a consequence, MNEs would be more capable of competing with the host country local firms. Zaheer (1995) analyzed this strategy by collecting data on the exit rate patterns of 24 foreign exchange trading rooms originating from New York and Japan. Although foreign exchange trading involves undifferentiated commodities, it was concluded that relying on FSAs proved to be a successful strategy in overcoming LoF.

2.3.2. International expansion theory: Acquisitions as a mode of entry

Extant literature has increasingly applied international expansion theory to the concept of LoF (Denk et al., 2012). Drawing from this theory, various researchers have analyzed entry mode choice as a strategy for overcoming LoF. According to Chang and Rosenzweig (2001), MNEs can choose various entry modes when entering the host country via foreign direct investment (FDI):

 Greenfield investments, which denotes setting up a new plant from scratch.  Acquisitions, which entails the purchase of a controlling interest in a local firm.

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There has been consensus among scholars that entering the host country via a local firm would accelerate the process of gaining local knowledge. As a consequence, this would reduce the unfamiliarity with the host country environment, and thus decrease LoF (Chang and Rosenzweig, 2001; Eden and Miller, 2004, Lorenzen and Mahnke, 2002). More specifically, Acquisitions and joint ventures would provide instant access to the knowledge and network relations of the local firm. On the contrary, in case of a greenfield investment, MNEs would gradually develop local knowledge and network relations.

Lorenzen and Mahnke (2002) analyzed entry mode choice and its influence on LoF. They conducted a case study on the expansion of five MNEs into the Danish telecommunications sector. More specifically, it was argued that local knowledge was coded, making it comprehensible to the local firms only. The local firms possessed so-called ‘’code books’’, which explained the particular ways of using this coded knowledge. While an acquisition would give full access to the ‘’code books’’, a joint venture would suffer from cognitive problems, between the partnering MNE and the local firm, in transferring the coded knowledge. Namely, differences in managerial or technical cultures between both parties, would make it costly or impossible to transfer knowledge from the local firm to the MNE. It was concluded that acquisitions were preferred over joint ventures, since acquisitions would provide instant and full access to the knowledge of the local firm.

2.3.3. Social network theory: Hiring local top executives

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Mezias (2002) stated that foreign subsidiary staffing strategies could minimize the effects of LoF. Namely, it was argued that local managers would be more familiar with the host country’s legal and cultural norms. Foreign subsidiaries with locals in charge, could thus benefit from their deeper understanding of the local environment. On the contrary, subsidiaries with expatriates in charge would miss out on these benefits, and could be at a disadvantage in identifying locally accepted practices. Furthermore, it was proposed that appointing local professionals would not be sufficient to reduce LoF, since local professionals often lack the managerial discretion to change practices within a subsidiary. Implementation of local practices would thus require the appointment of local top executives, who stand at the top of the hierarchy.

Mezias (2002) analyzed this strategy of hiring local managers to overcome LoF, by studying the behavior of 486 German, Japanese and British subsidiaries operating in the United States. It was found that, contrary to the appointment of local professionals, hiring local top executives did reduce LoF.

2.3.4. Institution-based view: Mimetic isomorphism and international experience

Institutional theory posits that organizations are influenced by the common understanding of what is appropriate and meaningful behavior (Zucker, 1983). North (1990) linked this common understanding to the concept of institutions, which he defined as ‘’the rules of the game in a society’’.

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dimension referred to the mental schemas, values and beliefs held by people in the society (DiMaggio and Powell, 1983). Finally, the normative structures referred to the legitimate means sanctioned by society, to pursue legitimate goals (Scott, 1995).

Kostova (1996) elaborated on these three pillars, by linking them to the concept of institutional distance. Namely, Kostova defined the institutional distance as the differences in institutional (cognitive, normative and regulative) context, firms would face when operating in a foreign country. The higher the institutional distance, the more uncertainty and information asymmetry foreign entrants would incur, which would consequently increase LoF (Salomon and Wu, 2015). In order to overcome this uncertainty, it was argued that firms could engage in isomorphic behavior (Salomon and Wu, 2015).

DiMaggio and Powell (1983) introduced three forms of isomorphism, processes that would force a unit in a certain population to resemble the other units, that faced the same set of environmental conditions:

 Normative isomorphism, which is the conformance to normative standards established by external institutions.

 Coercive isomorphism, which concerns formal pressure from other organizations.

 Mimetic isomorphism, which entails the imitation of structures by other organizations in response to pressure.

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strategies could be successful in the local environment. This would subsequently reduce uncertainty and help the foreign entrants in filling knowledge gaps and identifying profit-maximizing strategies.

Salomon and Wu (2015) analyzed the strategy of using mimetic isomorphism to overcome LoF, by studying a dataset of 80 foreign banks from 25 countries operating in the United States. It was found that foreign entrants, from institutionally distant countries, would benefit from using an imitation strategy, as it would mitigate the effects of LoF.

Moreover, scholars have argued that apart from using the strategy of mimetic isomorphism, international experience could be used to overcome institutional distance and thus LoF (Li, Poppo, & Zhou, 2010; Petersen and Pedersen, 2002). More specifically, Li., et al (2010) argued that with additional operating experience in the host country, firms would acquire an increased, often tacit understanding of the local market. In this way, MNEs would learn about suppliers, consumer preferences, competitors and other institutional stakeholders. As a consequence, firms would face less uncertainty, while feeling more comfortable with operating in the host market.

Based on the behavior of 494 firms from Sweden, Denmark and New Zealand, Petersen and Pedersen (2002) concluded that while firms learnt and gained experience in the host country, their LoF declined over time.

2.4. Synopsis of the theoretical perspectives and their corresponding standard strategies to overcome LoF

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It is important to note here that current LoF literature does not distinguish between the different categories of MNEs, assuming that these standard strategies apply universally strong to all categories of MNEs.

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3. LOF FROM AN EM MNE PERSPECTIVE: THE DUAL

LIABILITY OF FOREIGNNESS POSITION

In this chapter, we zoom in on EM MNEs, and how the concept of LoF applies to this category of MNEs.

We start with addressing the importance of analyzing LoF from an EM MNE perspective and indicating that EM MNEs typically have to compete from a dual liability of foreignness position, when expanding to developed-market countries.

Second, we zoom in on the dual liability of foreignness position and the sources that contribute to it.

Third, we propose several strategies, EM MNEs could use to overcome this position. More specifically, we present five strategies drawn from the resource-based view, the institution-based view, social network theory and international expansion theory.

Finally, we provide the reader with an integrated framework of EM MNE-specific strategies to overcome the dual liability of foreignness position.

3.1. The importance of viewing LoF from an EM MNE perspective

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An increasing wave of researchers have analyzed the internationalization process of DM MNEs. Yet, current literature does not explain how EM MNEs ended up expanding into developed-market countries (Denk et al. 2012; Kalasin and Dussauge, 2011). It is of great importance to address this gap and focus specifically on the EM MNE perspective for a variety of reasons.

First, a noticeable increase in outward FDI from Asian countries began in the 1980s. This led to a total outward FDI stock, from emerging economies, of $1600 billion in 2006, a considerably higher amount compared to the $150 billion from 1990 (UNCTAD, 2008). According to the UNCTAD 2014 World Investment Report (2015), this trend continued which led to a record of outward FDI stock that equaled 39% of global FDI outflows, compared to the 12% at the beginning of millennium. Consequently, EM MNEs have progressively been obtaining more prominent positions in the area of global business. In accordance with Ramamurti and Singh (2009), we view the rise of EM MNEs as a long-term trend, and not only as a contemporary phenomenon, which started in the early 2000s. More specifically, we have observed EM MNEs being capable of becoming global giants in various industries.

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turmoil in the United States. Due to Huawei’s former linkages with the Chinese military, many US senators raised objection to a telecom contract between Huawei and Sprint (Gaur et al., 2011).

Finally, and most important, it is essential to focus on EM MNEs since they are characterized to compete from a different, dual liability of foreignness position, when compared to DM MNEs.

3.2. The dual liability of foreignness position: Sources

When EM MNEs enter developed-market countries, they commonly do this from a so-called dual liability of foreignness position. More specifically, EM MNEs would not only incur unfamiliarity hazards, relational hazards and discrimination hazards, which together compose LoF. They would also have to compete from a generally weaker resource base position, suffer from a country-of-origin effect and be accustomed to operate in a weaker institutional environment, when compared to DM MNEs (Barnard, 2010; Held and Berg, 2014; Gaur et al., 2011).

3.2.1. A weaker resource base position

Apart from coping with LoF, it is argued that EM MNEs commonly compete from a relatively weaker resource base position when compared to DM MNEs (Barnard, 2010). Namely, EM MNEs typically have a relatively weaker asset base to draw from, which challenges their freedom to operate. According to UNCTAD (2008), the average assets of the top 100 EM MNEs totaled around 15 percent of the assets held by the top 100 DM MNEs.

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emerging-market environments, these may typically not be transferable to developed-emerging-market countries (Barnard, 2010). Moreover, it is argued that the capabilities of EM MNEs are commonly not at the technological frontier, since they have been developed in countries which are technologically and economically less advanced than developed-market countries, suggesting that those capabilities may not be particularly useful in the developed-market countries (Barnard, 2010). Finally, since emerging-market countries are characterized as latecomers in the global economy, due to relatively late liberalization of their markets, they are commonly not as globally experienced as their DM MNE counterparts (Held and Berg, 2014).

3.2.2. Being accustomed to a weaker home-country institutional environment

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3.2.3. Country image and country-of-origin effects

Apart from a weaker resource base and being accustomed to a weaker institutional environment, it is argued that EM MNEs are more likely to possess a negative image and less legitimacy, when compared to DM MNEs (Kalasin, Dussauge, & Rivera-Santos, 2014). More specifically, EM MNEs suffer from a country-of-origin effect in the sense that developed-market country nationals negatively associate EM MNEs with home country characteristics such as inadequate legal rights, infrastructure bottlenecks and poorer economic development (Chang, Mellahi, & Wilkinson, 2009). This is for instance reflected in applicants’ lower attraction towards EM MNEs as future employers (Alkire and Avey, 2013). Moreover, it is argued that consumers favor services and products from DM MNEs over those from EM MNEs (Held and Berg, 2014). Namely, consumers tend to rely on country images when evaluating the reliability and quality of a product. Thus, consumers associate products from DM MNEs as superior, since these are derived from stable and wealthy environments (Martin and Eroglu, 1993).

As long as EM MNEs do not gain social acceptance, credibility and support from the developed-market country nationals, they will stay in a disadvantageous position compared to the DM MNEs (Held and Berg, 2014).

3.3. A need for EM MNE-specific strategies

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Gaur et al., (2011) stated that not all firms entering a foreign market would experience the same level of LoF. More specifically, they argued that the magnitude of LoF would be determined by firm-specific characteristics, and both the home and host country environments. They claimed that EM MNEs and DM MNEs not only differ in terms of environmental conditions such as institutions, but also in terms of resources and capabilities. It was concluded that EM MNEs would face a higher LoF when entering developed-market countries, than DM MNEs would have incurred, as can be seen in figure 2:

Figure 2

We elaborate on Gaur et al., (2011) by emphasizing that, compared to DM MNEs, EM MNEs typically compete from a dual liability of foreignness position, when entering developed-market countries. We contend that, in order to overcome their unique dual liability of foreignness position, EM MNEs should rely on EM MNE-specific strategies, which requires theorizing beyond the standard strategies that currently prevail in literature. Therefore, we propose several strategies, EM MNEs could use to overcome this position, as can be seen in the next section.

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3.4. EM MNE-specific strategies for overcoming the dual liability of foreignness position In this section we propose several strategies, EM MNEs could use to overcome their dual liability of foreignness position. More specifically, we present five EM MNE-specific strategies drawn from the resource-based view, the institution-based view, social network theory and international expansion theory.

3.4.1. Resource-based view: Strategic resource seeking

According to existing literature and figure 1, MNEs can transfer FSAs to their foreign subunits to overcome LoF. Nevertheless, we noted that EM MNEs typically have to compete from a weaker resource base position when compared to DM MNEs. Namely, EM MNEs’ FSAs may not be particularly useful in developed-market countries, since they have been adjusted to economically and technologically less developed countries (Barnard, 2010). Moreover, Barnard (2010) argued that when EM MNEs do possess strong FSAs, these may not be transferable since these have typically been developed based on their home country environments, such as access to cheap labor.

In order to overcome their relatively weaker resource base position, we propose that EM MNEs could engage in a strategic resource seeking strategy, when entering developed-market countries.

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 Natural resource seeking, which entails the search for physical, financial and human resources in the host country.

 Market seeking, which reflects the search for a presence of customers willing and able to purchase the firm’s products.

 Efficiency seeking, when it is a firm’s desire to capitalize on environmental changes that make specific locations in the MNE’s international network of operations more attractive than before, for the concentration of specific activities. This would allow for greater economies of scope and scale.

 Strategic resource seeking, which is the desire to gain access to advanced resources in the sphere of upstream and downstream knowledge, administrative knowledge or reputational knowledge.

The desire to gain access to local advanced resources emphasizes the importance of so-called munificent environments (Barnard, 2010). According to Kuemmerle (1999), we can characterize munificent locations by a strong economic base, which can relate to scientific capabilities, size of the market, or the income level of the population (Kuemmerle, 1999). Held and Berg (2014) elaborated on this by stating that developed-market countries are characterized by their operations at the technological frontier and a high quality of education (Held and Berg, 2014).

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2010). Moreover, since these developed-market country employees commonly have experience with technologically advanced firms that operate at the technological frontier, they could contribute to upgrading the EM MNEs resources in the sphere of upstream and downstream knowledge.

Thus, in order to compensate for their relatively weaker resource base, EM MNEs could engage in strategic resource seeking by acquiring the highly strategic knowledge of local skilled employees. Accordingly, we formulated the following proposition:

Proposition 1. EM MNEs will engage in strategic resource seeking to compensate for their relatively weaker resource base.

3.4.2. International expansion theory: Joint ventures as a mode of entry

In line with extant literature and figure 1, MNEs should engage in acquisitions as a mode of entry since it would provide instant and full access to the knowledge of the local firm. Consequently, this would reduce unfamiliarity with the local environment and thus decrease LoF. Contrary to this standard strategy, we propose that EM MNEs should engage in joint ventures to overcome their dual liability of foreignness position.

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acquisitions should be avoided in situations when the acquiring company would not have sufficient financial resources (Harzing, 2002).

By engaging in joint ventures, EM MNEs could still have access to the knowledge and network relations of the local firm, which would decrease the unfamiliarity with the host country environment. Yet, there would be no necessity to pay a high premium or incur costs of integration, which is important due to the EM MNEs’ generally weaker resource base. More specifically, and in line with Yamakawa (2008), we argue that partnering with a DM MNE would result in learning from their capabilities and sharing of risks, which is crucial due to the more advanced infrastructure, more demanding customer base and more intense competition in developed-market countries. Moreover, EM MNEs could draw on their partners’ existing contacts which would facilitate the integration into local networks within the developed-market countries.

Finally, we argue that by engaging in a joint venture with a DM MNE, EM MNEs could gain legitimacy in the developed-market countries. Consequently, this could be used to overcome country-of-origin effects. Namely, by the creation of a separate entity together with a DM MNE, host country nationals would no longer associate EM MNEs’ with their home country characteristics such as poorer economic development (Held and Berg, 2014). Given these arguments, we formulated the second proposition:

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3.4.3. Social network theory: Bilateral ties

According to existing literature and figure 1, MNEs can hire local top executives to minimize the unfamiliarity with the host country environment. Namely, local top executives are more familiar with the local environment. Moreover, since they stand at the top of the hierarchy, they have the power to implement local practices within the hiring company.

Nevertheless, we noted that EM MNEs’ weaker resource base limits their freedom to operate and invest. Frydman and Jenter (2010) stated that executive compensation in developed-market countries has risen rapidly over the past years. Moreover, they argued that the exorbitantly high executive payments, of top managers in developed-market countries, have resulted from their power in determining their own pay. Apart from being limited by a weaker resource base, we also noted that EM MNEs suffer from a country-of-origin effect. Namely, and in accordance with Alkire and Avey (2013), we argue that when EM MNEs expand to developed-market countries, EM MNEs would suffer from the developed-market country nationals’ low attraction for EM MNEs, as their future employers. More specifically, local top executives would associate EM MNEs with their home country characteristics, such as inadequate legal rights. Instead, they would prefer to work for DM MNEs, since DM MNEs are associated with higher pay, a more stable environment, and better career opportunities (Alkire and Avey, 2013).

Despite the fact that EM MNEs have to cope with the challenges of a weaker resource base and a country-of-origin effect, we contend that an EM MNE can still reduce unfamiliarity with the host country environment. Namely, by expanding to developed-market countries, with which the EM MNE’s home country already shares bilateral ties.

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Consequently, this could accelerate the process of establishing connections with the local business communities. The embeddedness within the local networks could, in turn, lead to an accumulation of local knowledge. Finally, this accumulated local knowledge could be used to reduce the uncertainty, EM MNEs would face in developed-market countries. Based on this rationale, we formulated the following proposition:

Proposition 3. EM MNEs will expand to developed-market countries, with which the EM MNEs’ home countries share bilateral ties, to facilitate the process of local networking.

3.4.4. Institution-based view: Coercive isomorphism and international experience

The higher the institutional distance between home and host markets, the more challenging it is for foreign MNEs to enter and become accepted in the host country (Held and Berg, 2014). According to current literature and figure 1, MNEs could overcome this institutional distance by engaging in mimetic isomorphic behavior.

Nevertheless, since EM MNEs commonly originate from a weaker home-country institutional environment compared to DM MNEs, EM MNEs will face a relatively higher institutional distance when expanding to developed-market countries. As a consequence, EM MNEs will face legitimacy problems, since developed-market country nationals perceive EM MNEs to be unable to cope with the sophisticated developed-market country institutions (Held and Berg, 2014).

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2000). On the contrary, developed-market countries have sophisticated regulatory institutions that, for instance, sanction a firm’s corrupt actions, as reflected by the transparency of business practices (Eden and Miller, 2004). While stakeholders from the emerging-market countries may attach less importance to transparency in business practices, host country nationals from developed-market countries do demand transparent reporting policies (Held and Berg, 2014). Moreover, EM MNEs are perceived to be confronted with corrupt practices on a daily basis, and are expected to have experience with following illegal business practices, to gain competitive advantages in foreign markets (Held and Berg, 2014). Consequently, developed-market country locals are more likely to label EM MNEs as untrustworthy compared to DM MNEs (Held and Berg, 2014).

In order to overcome these country-of-origin effects, we propose that EM MNEs can gain legitimacy by complying with the coercive pressures they experience in the developed-market countries.

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Proposition 4. EM MNEs compliance with coercive pressures from developed-market countries will allow them to gain legitimacy.

Moreover, extant literature and figure 1 have indicated that MNEs can use their international experience to become more flexible in adapting to new institutional environments. Nevertheless, we argue that EM MNEs’ international experience with expanding to developed-market countries could also lead to increased legitimacy.

Namely, while EM MNEs commonly have experience in managing the institutional voids which are present in their home countries, DM MNEs are typically more experienced in coping with the competitive environments and sophisticated consumers from developed-market countries (Held and Berg, 2014). As a consequence, developed-market country nationals may question EM MNEs lack of developed-market country experience and subsequently their ability to compete successfully with DM MNEs.

We propose that by gaining experience in developed-market countries, EM MNEs could convince the developed-market country nationals that they are able to compete with DM MNEs, which consequently would create legitimacy. As a result, this increased legitimacy could be used to overcome country-of-origin effects:

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3.5. Theoretical synopsis: An integrated framework of EM MNE-specific strategies to overcome the dual liability of foreignness position

All in all, we have observed that EM MNEs typically have to compete from a dual liability of foreignness position. Compared to the standard strategies provided in figure 1, we argued that EM MNEs should rely on, different, EM MNE-specific strategies to overcome their dual liability of foreignness position. Subsequently, we proposed several strategies unique to EM MNEs, from which a synopsis can be found in figure 3:

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4. METHOD

In this chapter, we describe the methods used to answer our research question. More specifically, we start with introducing the research design. Subsequently, we elaborate on the process of data collection. Finally, we describe the method used to analyze the data.

4.1. Research design

Qualitative research is concerned with why phenomena occur and the influences and forces that drive their occurrence (Ritchie, 2003). It allows us to have an in-depth understanding of the social world and commonly results in very detailed, rich and extensive information, which is needed to explain emerging issues. In order to analyze our research question we opted for a qualitative exploratory study. This is because we needed to explore how the reasons for different strategies and consequences would vary between groups (Ritchie, 2003). Furthermore, it allowed us to identify associations in people’s thinking or acting (Ritchie, 2003). We used the developed theoretical propositions, as mentioned in chapter 3, to point out the key themes within this study. Based on our research question and propositions, we clarified the boundaries of our study in the sense that:

 We are examining EM MNEs.

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 We focus on five EM MNE-specific strategies, derived from four theoretical perspectives, to explain how EM MNEs can overcome their dual liability of foreignness position, when expanding to developed-market countries.

In order to analyse the research question at hand, we chose to collect ‘’generated data’’. Generated data gives insight into people’s own interpretation of their behaviour and an understanding of the meaning they attach to it (Ritchie, 2003).

Conducting individual interviews is the most widely used method of using generated data. They provide an opportunity for in-depth understanding of responses to complex processes, because of the depth of focus and the opportunity they offer for detailed understanding and clarification (Legard, Keegan and Ward, 2003). The information derived from interviews is insightful, because it focuses on the in-depth understanding of the personal context within which the research phenomenon is located, and allows for a very detailed subject coverage. More specifically, we opted for the implementation of in-depth interviews, for various reasons.

First, it combines structure with flexibility (Legard, Keegan and Ward, 2003). Thus, it provided us with a clear set of instructions, while there was still the opportunity for identifying new ways of understanding the topic at hand. Second, it allowed for the usage of probes and other techniques to achieve depth in terms of penetration, exploration and explanation (Legard, keegan and Ward, 2003). While initial responses are often at the ‘’surface level’’, we used follow-up questions to obtain a deeper and fuller understanding of the participants’ meaning. Third, it allowed us to generate new knowledge on topics that were not explored before (Legan, Keegan, and Ward, 2003).

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 The objectives and purpose of the study  How the findings would be used

 Conditions for anonymity and confidentiality

Additionally, we provided a translation of the interview questions in Bahasa Indonesia (see appendix) to a selection of the interviewees on request, for extra guidance during the interview. Finally, the interviews were recorded (with permission) and transcribed accordingly. An interview guide provided us with consistency and guidance during the interviews.

4.2. Data collection

The collection of data followed a homogeneous purposive sampling strategy (Ritchie, Lewis, & Elam, 2003), which entails that we filtered the population on similar characteristics, enabling a rich understanding of the topic at hand. More specifically, we limited ourselves to the analysis of Indonesian MNEs, with the requirement that they were active and performed outward FDI in one or more developed-market countries. Within the boundaries of the homogeneous sample units, we attempted to create diversity by interviewing several different representatives of companies from different industries. This diversity allowed us to identify the full range of factors associated with how EM MNEs could overcome their dual liability of foreignness position in developed-market countries.

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emerging-market countries. As can be read in the ASEAN Economic Blueprint 2025 (2015), the objective is to become leaders in global value chains and to strengthen their presence in developed-market countries. Second, by focusing specifically on Indonesia, as part of the ASEAN community, we focus on a country which aims to be one of the world’s developed-market countries by 2025, according to ASEAN’s Masterplan for Acceleration and Expansion of Indonesia’s Development (2011). Consequently, this requires expansion to developed-market countries (ASEAN, 2015). Third, Indonesia is included in the latest MSCI Emerging Market Index published by Morgan Stanley Capital International and next to this, Indonesia is taken into consideration in various papers about how emerging economy firms expand into developed-market countries, such as the paper written by Kalasin and Dussauge (2011).

After the Indonesian Chamber of Commerce and Industry informed us that there is no existing database which includes Indonesian companies that expanded to developed-market countries, we decided to consult several different sample frames that included Indonesian companies, to draw our sample from. More specifically, we approached companies that satisfied our requirements, and that were listed on the IDX (Indonesia Stock Exchange – Bursa Efek Indonesia), Forbes top 50 best Indonesian companies of 2014 (Forbes, 2015) and the database of ‘’Indonesia Investments’’ (Indonesia Investments, 2016), which is comprised of publicly traded, state-owned and privately held Indonesian companies. Next to this, we searched for and approached individual companies that satisfied our criteria via LinkedIn Indonesia.

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We conducted a total of 10 in-depth interviews, as can be seen in table 1, with companies from the consumer goods sector, financial sector, technology sector, industrial goods sector and basic materials sector. Given the sensitivity of the data provided, we agreed with all interviewees that neither the company’s name nor the name of the interviewee would be mentioned. Table 1 thus only displays non-identifiable information. For descriptive purposes, we filtered the companies on their size. By using the OECD definition of business size (OECD, 2016), we considered a company with 10 to 49 employees as small, with 50 to 249 employees as medium-sized and with more than 250 employees as large.

Table 1

Company 1 Small Company 6 Large

Company 2 Large Company 7 Large

Company 3 Medium Company 8 Small

Company 4 Large Company 9 Medium

Company 5 Small Company 10 Large

The interviews were conducted in three different cities, in Indonesia, between April 2016 and June 2016. The interviewees decided on the venue of the interviews. The duration of the interviews ranged from 45 minutes to 2 hours. Unclear answers were clarified through phone or mail contact. Although all interviews were conducted in English, a translator was present during all interviews to overcome any possible language difficulties.

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extremely important to use triangulation of multiple sources, to check the integrity of, or extend, inferences drawn from data. Thus, multiple data sources were used including three complementary interviews with experts on the topics of Indonesian law and regulations, and the behaviour of Indonesian companies in general. Moreover, we used documentation as a source of additional evidence. Namely, we made use of the email correspondence we had with various organizations as well as various mass media articles, that involved either our interviewees or their respective companies.

4.3. Data analysis

In order to produce compelling analytic conclusions, we relied on our theoretical propositions in analyzing the data. More specifically, we used content analysis to analyze the generated evidence. We identified key themes and focused on how the themes were presented and the frequency of their occurrence. By identifying an overall structure within the data and by subsuming the rich data under individual themes, we were able to reduce our qualitative data to their core meanings. In order to analyze the evidence and gain an overview of the data in a consistent manner, we applied the concept of the analytic hierarchy throughout the analysis (Ritchie, Spencer, & O’Connor, 2003). NVIVO 11 computer-assisted qualitative data analysis software was used to apply the steps of the analytic hierarchy to our data, for the following three reasons:

 The software allowed us to handle large amounts of textual data with consistency.  It assisted with the conceptualisation of the data.

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The analytic hierarchy is composed of 7 stages (Ritchie, Spencer, & O’Connor, 2003). After we collected our highly detailed data, we started to identify initial themes and concepts. This process of familiarisation, can be seen as one of the most important activities at the start of analysis. We structured the data to be reviewed, based on the theoretical propositions of our study. Subsequently, an index was created, in which we grouped all the data into four main substantive headings. We used these four main headings consecutively for presenting the results, as can be seen in the results section.

At the second stage of our analysis, we labelled and tagged the data. Thus, we linked the occurring themes within the transcripts to the main four headings. As a follow up, we sorted all the raw data by themes. This allowed us to focus on each subject in turn, which was needed to uncover the details and distinctions per individual theme.

Fourth, we summarized and reduced the data to a more manageable level, which can be seen as the start of uncovering the essence of the gathered data.

Fifth, we analyzed the summarized data again from the perspective of each of the four headings, to mark the set of behaviors that had been labelled as part of those headings.

Sixth, we analyzed the linkages and connections that repeatedly occurred within our data, to achieve a deeper understanding of the subject under review. This step can be referred to as performing matched set linkages, which can be found by looking across the range of different phenomena across all the cases.

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the interviewees’ responses. Concerning the situational explanations, we compared the patterns found with the theories that drove our theoretical propositions.

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5. RESULTS

The findings gathered during the in-depth interviews proved to be rich in nature. In this chapter, we present the most important findings. We structured the findings in accordance with our theoretical framework of EM MNE-specific strategies, which can be seen in figure 3.

5.1. Resource-based view: Strategic resource seeking

There was consistency among the respondents that EM MNEs typically compete from a weaker resource base, compared to DM MNEs. The respondents noted that among their resources, their human resources and reputational resources proved to be issues.

Although there was consensus about their relatively weaker resource base, we found several different motives for expansion to munificent developed-market countries. More specifically, the interviewed companies expanded for market seeking and strategic resource seeking motives.

First, several of our respondents reported that they acquired hard-to-access resources to develop capabilities beyond what could have been developed in their home countries. Namely, these companies engaged in strategic resource seeking motives to obtain resources in the sphere of upstream knowledge, downstream knowledge and reputational resources.

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‘’For Europe, we expand there since they have much more advanced technology than Indonesia. … The technology, products, the new innovations, we still have to learn from that. Because of that we cannot go everywhere, so what we did was we hired workers from there. We hired workers from there with a specific skill. For example, we recruited people from a specific developed country, who were good in logistics. We also send people over there but for studying only.’’

Second, concerning downstream knowledge, we observed that companies acquired skilled personnel within the developed-market countries, or from the local competitors, since they had in-depth knowledge about the local markets:

‘’To get more familiar with the market, we hire the specialist. It’s a person experienced in sales of the product there, and we can hire them from the local companies over there.’’

Finally, we found that the availability of reputational resources proved to be an important reason for expansion. Namely, in order to overcome their own lack of reputational resources, companies expanded to developed-market countries. Consequently, this resulted in increased legitimacy. The EM MNEs not only benefitted from this in the developed-market countries, but also in other markets and at home:

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Although several companies engaged in strategic resource seeking motives, we were explained that benefitting from a larger target group in the developed-market countries, was another important locational advantage for the interviewed EM MNEs. Namely, it was argued that the developed-market countries not only proved to be attractive due to achieving a higher reach of consumers, it was also argued that the developed-market countries possessed characteristics that were not present in the home country, such as a middle class population with high incomes:

‘’ When comparing Indonesia to the United States, the first thing I noticed was the following: I was in Miami Beach and you can see four Starbucks shops. People over there, they can afford Starbucks, but in Indonesia, say if you go to another city than Jakarta like Semarang, Starbucks is way over their budget. So from that itself I can see there is a very strong basic middle class people over there. Size of the market is just really important.’’

As a third, more exceptional motive for expansion, we were pointed towards the role of economies of scale. Still, efficiency seeking played a minor role, as this was only found in combination with market seeking purposes, as illustrated by the following respondent:

‘’Demand is the first motivation to go there. But there is more. There was a time when we felt that the market size of Indonesia was monopolized, still we felt that we could have produced more and have more capacity, we couldn’t just sell to Indonesia. The market size is over there, so that’s why we expanded to other countries.’’

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in building stronger resources in terms of upstream knowledge, downstream knowledge and reputational resources, it was found that market seeking motives played an important role.

5.2. International expansion theory: Joint ventures as a mode of entry

During the interviews we found recurring evidence that entry mode proved to be a crucial choice, in making the expansion to developed-market countries successful. There was a commonly held preference for entering via a joint venture, while a preference for acquisitions was less commonly found. Nevertheless, while expanding to developed-market countries, EM MNEs tended to use both entry mode forms. As a reason for entering with an acquisition, one respondent explained that retaining full control over the sales was the key to success:

‘’We do not do joint ventures, if there is a big demand, we need an office over there. We only use export agents or acquisition strategies. If necessary we acquire, but most of the times, we use our team over there. One of our strategies, is to keep control over the sales of the products. It’s a principle of the owner of our company. It is said that we need to be the biggest, if we are not the biggest, then we can’t sell in the market. If we can own the business, why would we do a joint venture? In order to get the local contacts we hire the local player to work for us. We make the office over there, and we hire them.’’

Another respondent also emphasized the need for full control, but also admitted that choosing for an acquisition would pose for a bigger challenge:

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The joint venture mode of entry was generally chosen as the solely preferred entry mode, among our respondents. More specifically, these respondents explained that engaging in a joint venture in developed-market countries led to increased learning opportunities, access to the local

networks and sharing of risks:

‘’We do collaborations with partners, because our sector is a completely different game, it’s a multimillion dollar business, we can’t do it ourselves. We have to be partners with somebody who has more experience and someone who has built connections, someone who has been in the industry, we are looking for that type of partner when we venture in the developed market. We learnt a lot of stuff from the developed market companies. The way how I see partnership is, they give us a chance to learn, we are young people who are enthusiastic and willing to learn and it is not easy to find these people at this age with such skills.’’

Another interviewee emphasized that entry mode choice can be dependent on the sector a company works in. However, it was argued that collaboration with local partners brings the benefits of having local relations and a better understanding of the local culture:

‘’It’s an endorsement that you will always be there, you get special privileges when engaging with a local partner. I believe very much you need a local partner, because you need local expertise. But it depends on the sector. The key point is that you have to understand the culture and have the right people to advice you.’’

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‘’For internal the employee will also be proud of being in a big company since we have big joint ventures abroad, reputation is an important part of our expansion abroad. If we have a better reputation, with better internal local capacity more companies are willing to engage in joint ventures with us.’’

Moreover, one respondent explained that although acquisitions could work, it would be a second option due to its high costs, moreover it was argued that a greenfield investment would be the last option:

‘’We could acquire, but first we are targeting for a joint venture, the very last option would be building ourselves. … We do partnering with the prominent companies. It will be very difficult and costly to build from scratch. We will only do that in Indonesia. The costs will be too much if we do that out there.’’

Few respondents explained that once the joint venture proved to be successful, they would consider acquiring the partner. However, other respondents argued that acquisitions were not considered at all, even after a successful joint venture:

‘’It’s not our goal to acquire, why should we do that? We look at this as a partnership, let them do what they do best, which is something we cannot do yet as a company. We can’t compete with that, we use their network at this moment to speed up the distribution. We focus on product equity.’’

Finally, one company explained that while they engaged in joint ventures when entering

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‘’ We also look at the strength of our partners. We have a distribution strategy and guidelines that specify why we should do a joint venture. They have to meet standards, they for instance need to have a head-office there, etcetera. They also have to dedicate sales people to us, etcetera. Moreover, they already need to have a strong local network, a good track record and those steps should be there. We already have the standard before we go.’’

All in all, we have observed how certain EM MNEs preferred to enter developed-market countries via acquisitions, to keep total control. Moreover, it was found that top executives played important roles in opting for the acquisition mode. We found that the joint venture entry mode was more common. More specifically, companies preferred this form for its lower costs, the increase in legitimacy, and sharing of risks, while still having access to local knowledge and local networks.

5.3. Social network theory: Bilateral ties

Based on the responses of the interviewees we observed that bilateral ties can help EM MNEs in becoming more familiar with the developed-market countries. The interviewed EM MNEs found it especially hard to gain access to information and relational assets in the developed-market countries since the high institutional distance made it very difficult to engage in relationships with locals:

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countries. Now the problem is, the more distance from Indonesia, the harder it is to find those people, and it is not easy to trust somebody completely.’’

Although internet did not prove to be sufficient in uncovering all relevant information concerning the developed-market countries, it did pave the way for several companies to successfully enter developed-market countries:

‘’Digitalization makes the distribution of information more egalitarian, everybody can know everything. Now in this digital era, we can already know the needs of the consumers from the other side of the world.’’

Although it was argued that especially governmental ties could help EM MNEs in entering developed-market countries, it was also argued that the advantage of this particular tie would only be temporarily. One of the respondents explained:

‘’The government has helped the company to be introduced abroad. But they organized one exhibition. After that, the government didn’t support it anymore. Therefore, we developed a policy. We see the introduction as a trial. We learn first as a trial, then we do distribution to the whole country, and check responses from the customer. If they accept and purchase the product again, at that stage we start to think about how to promote over there and then we think about what kind of budget we want to use. We don’t spend too much money in advance.’’

Another respondent acknowledged that governmental ties could be of help, albeit

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relationships, companies were able to attain local valuable knowledge. Although very valuable, this was not seen as costly:

‘’Relationships is a business that doesn’t need money, and its related to knowing the right people. … The Embassy can help us. They give a template for

everybody. That’s why creating a relationship is super important. It’s not about making a decision yet, we need to know the right people first via this template, and then go for functions they are offering and make friends. When we enter the market with a good relation, we have a hand to hold, if things go bad, we still have support and time is not wasted. Knowing those people through a friend, is worth the investment. I choose my advisors through friends, we all know each other. Relationships is all about who introduces you to the certain person.’’

While several respondents explained how governmental ties helped them in entering developed-market countries, other respondents did not know about the existence of so-called promotion centers which have the function of facilitating the expansion of the Indonesian companies abroad.

Although the importance of governmental bilateral ties was emphasized, we also observed that certain companies did not make use of any bilateral ties in doing business with developed-market countries.

We found recurring evidence that the hiring of local employees was important for the EM MNEs to gain access to local knowledge. One respondent explained how the hiring of a local employee could create a whole network of linkages:

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network is the first step. But there should be already demand, there should be an opportunity. When the business is over there, then we make an office, to develop the sales over there.’’

All in all, although it was argued that bilateral ties could help EM MNEs in entering developed-market countries, this was only helpful during the start-up phase. However, especially this start-up phase proved to be important to find and engage in trust-building with host country nationals, to eventually gain local knowledge. Yet, not all companies made use of these bilateral ties.

5.4. Institution-based view: Coercive isomorphism and international experience

Several of our interviewees confirmed the existence of a country-of-origin effect. Namely, it was argued that companies would suffer from showing the origins of the product:

‘’In the developed countries, we allow to remove the ‘made in Indonesia’ thing, so that the end-consumer cannot directly see where it comes from. OEM’s regularly ask us to remove the ‘made in Indonesia’ tag. We only do this when dealing with developed markets. It’s a customer request. If we say this is bad, we won’t make business anymore in developed markets. If our owner decides to put ‘’made in Indonesia’’ on all packaging, we will lose revenue.’’

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‘’From our Indonesian side, we also learn that multinationals are very strict with the business processes and regulations. But in Indonesia we are more flexible, when solving something. So both sides have to learn that. Maybe it will be a situational case, the multinational has to learn from us. If we want to go overseas, we really have to comply, we have to comply with them. When we went to the European market, we had to pass all the certifications. Since we are going global, it’s really important for us to comply with the regulations.‘’

From the findings, we concluded that compliance with the local coercive pressures was found to be crucial in order to gain legitimacy and be successful in the long term:

‘’Respect the regulations and don’t try to make cheap fast money, it’s all for the reputation! If you want to be sustainable and reputable you have to follow the regulations.’’

Another respondent emphasized that compliance with the local institutions would result in increased legitimacy:

‘’We went to this developed-market, because we want to be different. It’s about how we brand it, it’s a value proposition. Our customers love it, it’s a big advantage for us. The perception that other countries have, is that, if you comply in this specific developed country, then you can comply everywhere.’’

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‘’It is easy for emerging market country investors to go to for instance Europe or the US, because the law regulations, everything is transparent already. But at the same time the fund for the investment is really, really, high and changes in management structures can be needed. This can make it very expensive.’’

Apart from complying with coercive norms, we were explained that several companies studied the local competitor’s products, to overcome the high institutional distance. Subsequently, they used this gained knowledge to create a product that would satisfy the high standards that developed-market consumers have:

‘’We study and compare ourselves with the competitors’ products. We buy the best-seller product in the country, then we analyze and map the market and then we decide what product to enter with. … If you just copy your own product, the local educated people will not accept the product. That’s why we have to modify the product. The consumers are really sensitive not only on price but they ask themselves: why do I need to buy this product? What does it add? Even with a lower price, they won’t accept it because they will ask themselves, what does it add? This is a difference with expanding to developing countries.

One respondent explained that they acquired workers from local competitors to understand what the competitors were doing:

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Finally, it was found that having international experience, with being active in developed-market countries, helped EM MNEs in consecutively entering other developed-market countries. More specifically, we were told that the entry into a developed-market country would give a good idea, of what to expect, when entering other developed-market countries. Next to this, we were told that promotional investments targeted at a certain developed-market country, could subsequently be used in other developed-market countries:

‘’Of course you will have a benchmark. Next to this, you have learnings and experience on how to set up something there. In the end, from a marketing point of view, it will also be cheaper. We can use, let’s say the advertisement spots on the television, and recycle that for other developed countries as well. That will, at the end of the day make it easier.’’

We observed how international experience was used to create legitimacy. Namely, we were explained that having experience with local respected companies, would lead to an increase of legitimacy:

‘’We are not made in China, but who are we? We engage ourselves with institutions that have strong respect in the country we want to enter. We worked together with a well-respected local company, and the regulators don’t even ask me about my compliance. That’s how we put ourselves in that position.’’

The expansion of emerging-market MNEs into developed-market countries