Internationalization Strategies of Emerging Market
Multinationals:
The Effect of National Institutional Frameworks on the
Choice of Entry Mode
University of Groningen
International Business and Management
ABSTRACT
This thesis explores the relation between national institutional frameworks and entry mode strategies of emerging market multinationals by focusing on how home country legal and political institutions affect the choice of managers from emerging market multinationals between equity- and non-equity based foreign entry modes. This is done using a multiple case study design in the Mexican and Indian building material industries. While mainstream theory downplays the importance of the role that national institutions play in entry mode choice, as well as overlooking the indigenous management concepts of EM MNEs, the case studies indicate that recent improvements in their national institutional environment helped push EM MNEs to favor equity-based entry modes. It is argued that particularly liberalization of national OFDI policies and the democratization of the home country positively influence the decision for equity-based entry modes by reducing capital constraints and sustaining liberal international financial regulation, while political instability and weakness and opacity of the home country’s legal system do not seem to positively influence this decision for equity-based entry modes. This thesis thus contributes to current internationalization theory by extending it with insights from EM MNEs.
PREFACE
This thesis forms the conclusion of my master International Business and Management at the University of Groningen. For the last six months, I have studied the effects of national legal and political institutional frameworks on the entry mode choices of emerging market multinationals. For supporting me during these months, I would like to thank a number of people.
First of all, I would like to thank my supervisor, Miriam Wilhelm, for her guidance, comments, and useful insights on the contents of my thesis. It has been a pleasure working with her.
Furthermore, my gratitude goes out to Mr. Alejandro Vares, who was kind enough to let me interview him and who gave me very interesting information that I could use for this thesis. Also, I am very grateful for the help of Mrs. Angélica Delgado Araiza, who went out of her way to put me in contact with Mr. Alejandro Vares.
Last but not least, I would like to thank my loved ones for always supporting me throughout my studies. Without their support, I would not be where I am today.
TABLE OF CONTENTS
1. INTRODUCTION ... 8
2. THEORETICAL FRAMEWORK ... 13
2.1 Institutions and Strategy ... 13
2.2 Entry Mode Decisions of MNEs ... 14
2.3 Political Framework ... 16
2.3.1 Defining political institutions ... 16
2.3.2 Types of political institutions ... 17
2.4 Effect of National Political Institutions on Entry Mode Choice ... 19
2.4.1 National policies towards OFDI ... 19
2.4.2 Political stability ... 20
2.4.3 Political ideology ... 22
2.5 Legal Institutions ... 22
2.5.1 Defining legal institutions ... 22
2.5.2 Types of legal institutions ... 23
2.6 Effect of National Legal Institutions on Entry Mode Choice ... 23
2.6.1 Type of legal system ... 24
2.7 Sensitizing Conceptual Framework ... 25
3. METHODOLOGY ... 27
3.1 Research Design ... 27
3.2 Data Collection ... 28
3.3 Analysis ... 29
4. WITHIN-CASE ANALYSIS ... 30
4.1 Cemex’s Internationalization Path ... 30
4.2 Institutional Environment of Mexico ... 32
4.3 Political Framework ... 32
4.3.1 Mexico’s policies towards OFDI ... 33
4.3.2 Political stability ... 38
4.3.3 Political ideology ... 40
4.4 Legal Framework ... 43
4.5 Tata Steel’s Internationalization Path ... 47
4.6 Institutional Environment of India ... 49
4.7 Political Framework ... 49
4.7.1 India’s policies towards OFDI ... 50
4.7.2 Political stability ... 54
4.7.3 Political ideology ... 56
4.8 Legal Framework ... 59
5. CROSS-CASE ANALYSIS ... 61
5.1 Stimulating Policies towards OFDI ... 61
5.2 Political Stable Climate ... 62
5.3 Democratic Ideology ... 62
5.4 Rule of Man Legal System ... 62
6. DISCUSSION ... 64
6.1 Working Propositions and Interpretation of the Findings ... 64
6.2 Contributions ... 67
7. CONCLUSIONS ... 68
7.1 Conclusions ... 68
7.2 Practical Implications ... 70
8. LIMITATIONS AND RECOMMENDATIONS FOR FUTURE RESEARCH ... 71
LIST OF ACRONYMS
AEC Agreement of Economic Cooperation
ALTEX (program for) Highly Exporting Companies
APEC Asia-Pacific Economic Cooperation
APTA Asia Pacific Trade Agreement
ASEAN Association of Southeast Asian Nations
BJP Bharatiya Janata Party
CECA Comprehensive Economic Cooperation Agreement
CEE Central and Eastern Europe
CEPA Comprehensive Economic Partnership Agreement
CIA Central Intelligence Agency
DC Developed Country
DTT Double Taxation Treaty
ECEX (program for) Foreign Trade Enterprises
EFTA European Free Trade Association
EM Emerging Market
FFF (Porter’s) Five Forces Framework
FRIDE Fundación para las Relaciones Internacionales y el Diálogo Exterior
FTA Free Trade Agreement
GATT General Agreement on Tariffs and Trade
GDP PPP Gross Domestic Product by Purchasing Power Parity
GSTP Global System of Trade Preferences
IB International Business
IMF International Monetary Fund
M&A Mergers & Acquisitions
MERCOSUR Mercado Común Sudamericano
MNE Multinational Enterprise
NAFTA North-American Free Trade Agreement
OECD Organization for Economic Cooperation and Development
(O)FDI (Outward) Foreign Direct Investment
PAN National Action Party
PITEX Programa de Importación Temporal para Producir Artículos de Exportación
PNR National Revolutionary Party
PRI Institutional Revolutionary Party
PROSEC Program of Sectoral Promotion
PTA Preferential Trade Agreement
RBI Reserve Bank of India
SAARC South Asian Association for Regional Cooperation
SME Small and Medium Enterprises
UAE United Arab Emirates
UoG University of Groningen
VAR Vector Autoregression Model
WOS Wholly-Owned Subsidiary
1. INTRODUCTION
The internationalization of multinationals has been a popular topic in IB literature for years (Rasmussen and Madsen, 2002). In this stream of literature, three main (Western-based) theoretical perspectives are used to clarify how MNEs expand internationally: the Uppsala Model (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977), the Eclectic Paradigm (Dunning, 1980, 1988), and the Investment Development Path (Dunning, 1981). More recently, the Born Global (Rennie, 1993), also labeled the International New Venture (Oviatt and McDougall, 1994), has been added to these internationalization theories (Rasmussen and Madsen, 2002). This dominance of Western-based theories in this field is explained by the fact that large Western MNEs have ruled the global market from the start. But quite recently, due to their growing importance in global business, the focus has shifted towards MNEs from so-called “emerging markets” (Enderwick, 2009; Mohammed et al., 2010).
In fact, emerging market MNEs are becoming very important players in the global market due to their high population level, high rates of economic growth, and opportunities for low-cost production (Prestowitz, 2005; Shenkar, 2005; Enderwick, 2009). This is illustrated by the rise of FDI in- and outflows from these markets over the last few decades; in 1980, the total amount of OFDI from developing economies was US$ 3.2 billion. Almost thirty years later, in 2008, this amount reached approximately US$ 351 billion. As of 2003, FDI outflow growth rates from these markets have been roughly 82% on average (!) (Sauvant et al., 2009).
In general, emerging markets are defined as “low-income, rapid-growth countries using economic liberalization as their primary engine for growth” (Banalieva and Santaro, 2009). So far, many researchers have focused on the rise of the emerging markets itself and how this affected the international strategies of the long-established global players from Western developed countries (e.g. Arnold and Quelch, 1998; Chandra and Neelankavil, 2008).
MNEs is that existing theories used to explain internationalization strategies are likely to be insufficient to explain the internationalization strategies of EM MNEs, since they are very different from developed country multinationals (hereafter referred to as “DC MNEs”) (Mohammed et al., 2010). For example, the internationalization process of EM MNEs is often at an earlier process (partially due to the country’s state of economic development) and their internationalization strategies are often much more aggressive and high risk due to their overall “catch-up” intent or “springboarding” (Fortanier and van Tulder, 2006; Luo and Tung, 2007) as a result of being latecomers in the global market (Fortanier and van Tulder, 2006; Li, 2007; Luo and Tung, 2007; Yiu et al., 2007; Yang et al., 2009). Thus, there is currently no unified theory or perspective in IB literature that can be used to explain the motives and/or strategies of EM MNEs that wish to invest abroad (Luo and Tung, 2007; Yui et al., 2007). Having such a theory would be of great practical relevance since, as of 2008, there are over twenty-three thousand MNEs from emerging markets active in the global market (Sauvant et al., 2009).
The reason why management practices of EM MNEs are not adequately reflected by traditional “Western” management practices is that the “indigenous management” concepts of these emerging markets are often overlooked. Indigenous knowledge is defined by Warren (1991) as “knowledge that is unique to a given culture or society and is in contrast with the international knowledge system generated by universities, research institutions, and private firms”. In other words, it is the basic component of any country’s knowledge system and encompasses the skills, experiences, and insights of people and is therefore the basis of their decision-making (The World Bank Group, 2011). It is only recently that the significance of this has been fully recognized in international management research and for this reason scholars are now calling for more context-specific research to draw on indigenous thought in developing new theories that can help to better understand management practices in Emerging Markets (Holtbrügge, 1999; Meyer, 2006; Panda and Gupta, 2007). Moreover, studying indigenous management theories can also be useful for understanding the implicit assumptions of traditional Western views and in this way contributes to global management knowledge (Cappelli et al., 2010).
internationalization process for every MNE. Moreover, current theories about strategic motives for entry modes are commonly not tested in countries at different levels of development (Brouthers and Hennart, 2007). The main developed home countries from which international entry has been examined include North America (Erramilli, 1991; Agarwal and Ramaswami, 1992; Kim and Hwang, 1992; Erramilli and Rao, 1993; Shane, 1994; Brouthers, 1995; Aulakh and Kotabe, 1997; Ekeledo and Sivakumar, 2004), Japan (Hennart, 1991; Hennart and Park, 1994; Hennart and Reddy, 1997; Delios and Beamish, 1999; Delios and Henisz, 2000; Cho and Padmanabhan, 2001; Lu, 2002; Yiu and Makino, 2002), and Western Europe (Gronhaug and Kvitastein, 1993; Barkema and Vermeulen, 1997; Mutinelli and Piscitello, 1998; Brouthers et al., 1999; Palenzuela and Bobillo, 1999; Brouthers, 2002; Nakos and Brouthers, 2002). Those few studies that focus on less developed countries encompass China (Shi et al., 2001), Korea (Erramilli et al., 1997), Singapore (Rajan and Pangarkar, 2000), and South Africa and Egypt (Bhaumik and Gelb, 2005). The argument made for this trend is that the assumption is that theories of entry mode choice originally developed in developed economies tend to do a good job of explaining mode choice no matter what the origin or destination of the investment. This is questionable, however, as long as certain geographical areas remain uninvestigated (Brouthers and Hennart, 2007).
One of the major theories used in explaining entry mode decisions is institutional theory (Brouthers and Hennart, 2007). However, almost all studies in this field focus only on the role that institutions play in the host country (the country to which the FDI of the MNE is directed), but not on the role that home country institutions play in the foreign entry mode choice of MNEs. This is remarkable, since many strategic choices might be influenced by the national institutional frameworks, especially in the case of EM MNEs, who often originate from countries with weak institutions (also referred to as having an “institutional void”, Makino et al., 2004). Weak institutions are characterized by a lack of supportive exchange mechanisms causing information asymmetries. Seeking reliable information on possible (foreign) partners is hard in such an environment and thus EM MNEs are usually forced to spend more resources on this process. This makes it less likely that they want to choose for some form of collaboration with a national-, nor with a foreign partner (Meyer et al., 2009; Soh and Yu, 2010). This can probably help explain why EM MNEs seem to avoid alliances or other collaboration agreements when going abroad (Mohammed et al., 2010).
of a framework explaining the effects that home institutional frameworks have on the foreign entry mode choice of EM MNEs. To the best of my knowledge, this has not yet been done before. This leads to the following research question:
“How do national institutional frameworks in emerging markets influence the entry mode decisions of EM MNEs?”
The definition used in this thesis for “institutional framework” is: “The complex of political-, legal-, economic-, and societal institutions that broaden, mold, and restrain social-economic activity and behaviour” (Peng, 2003; Wan and Hoskisson, 2003; Hitt et al., 2004; Xia, 2009; Kim et al., 2010).
In order to answer the research question, the following sub questions are formulated:
1. What entry modes do EM MNEs generally favor?
This question needs to be answered by an extensive literature review and empirical research in order to understand exactly how different EM MNEs and DC MNEs are and thus why “Western” entry mode theories might not apply to EM MNEs. When this understanding is theoretically and empirically supported, it becomes easier to create a theoretical framework for EM MNE entry mode choice.
2. What are the relevant home institutions that matter the most for explaining the relation with foreign entry mode choice?
Answering this question is of importance to gain insight on the effect that national institutional frameworks have on the choice of the EM MNEs entry mode decision. At the same time, this might also help generate more insight into why managers from EM MNEs might have preferences for certain entry modes and how existing theory needs to be adapted to their needs.
3. What are the practical implications for managers from EM MNEs?
to this question is sought in order to contribute to this discussion and to give direction to managers from EM MNEs.
2. THEORETICAL FRAMEWORK
This chapter continues by explaining the role of institutional theory in entry mode decisions. This field is relatively new and dominated by research on the host country’s institutional environment. Moreover, when the home country’s institutional environment is researched, political and legal institutions are often left out. Therefore, in this chapter special attention is given to the role of these national institutions on the entry mode decisions of EM MNEs.
2.1 Institutions and Strategy
“Institutional arrangements affect strategic choices made by firms” (Hitt et al., 2004: 173) Before the formation of institutional theory, there were only two perspectives that focused on explaining firm strategy and the determinants of firm success and failure. These perspectives were the industry-based view by Porter (1980), which argues that industry conditions can – to a large extent – determine firm strategy and performance, and the other perspective was the resource-based view by Barney (1991), which suggests that firm-specific differences drive strategy and performance. However, these perspectives summed institutions to be “background conditions”. This is not surprising, because these perspectives were based on research on competition solely in the US, which has a relatively stable market-based institutional framework. However, when looking at competition around the world, other developed and less-developed economies cannot be compared to the US in terms of how competition is organized (Peng et al., 2008). A famous example of this is Porter’s Five Forces Framework (FFF). Porter (1980), had had an immense influence on the strategy field with his FFF. However, the model takes a priori assumptions about the institutional context in which it was incubated by assuming that all economies are homogeneous in this context. By now, several scholars have identified significant differences in the institutional contexts between developed and emerging economies, which may restrict the applicability of some existing, mostly Western-based, dominant strategy models such as Porter’s FFF in emerging economies (Narayanan and Fahey, 2005).
According to Peng (2003), the institutional framework is made out of three “pillars”; the regulative-, the normative-, and the cognitive pillar. The regulative pillar focuses on formal rule systems and enforcement mechanisms sanctioned by the state (i.e. political institutions). The normative pillar defines legitimate means to pursue valued ends (i.e. legal institutions). And the cognitive pillar refers to taken-for-granted beliefs and values that are imposed on, or internalized by social actors (i.e. cultural institutions). However, many others such as Hitt et al. (2004) and Xia (2009) also mention economic institutions as being part of a nation’s institutional framework. The institutional framework inherent in a country plays a very important role for local and foreign firms, since this framework is to support the effective functioning of the market mechanism by establishing a stable structure to human interaction so that firms and individuals can freely engage in market transactions without incurring unnecessary costs or risks (Peng, 2003; Meyer et al., 2009). In other words: local institutional frameworks should keep the market from being inefficient. Therefore, what is meant in this paper by “strong” institutions is local political-, legal-, economic-, and cultural institutions that support the voluntary exchange underpinning an effective market mechanism (by for example reducing information asymmetries). On the other hand, institutions are “weak” if they fail to do so or worse; if they undermine effective markets (Meyer et al., 2009).
Firms are embedded in these institutional frameworks consisting of social norms, values, and formal and informal rules of exchange as reflected in government legislation, the nature of property rights, and the presence or absence of professional and commercial norms of behaviour that define appropriate economic behaviour and influence strategic decisions (Hitt et al., 2004). In other words, institutions are the “rules of the game” (Peng, 2003; Narayanan and Fahey, 2005) and these rules affect the choices and performance of organizations within a nation in several ways, as will be discussed later on in this paper. For example, when institutions change in unpredictable ways or are weak, managers of firms operating in this environment are likely to focus on short-term decisions because of the inability to value long-term investments (Hitt et al., 2004).
2.2 Entry Mode Decisions of MNEs
considered non-equity modes. Equity-based modes are wholly owned subsidiaries, which can consist of either Greenfield investments or acquisitions, and joint ventures. However, a joint venture can be either an equity-joint venture or a non-equity joint venture. All of these modes represent varying levels of degree of control, resource commitment, and investment risk to the MNE, which makes the entry mode choice a critical element in international expansion (Tse et al., 1997; Rodriguez et al., 2005; Mohammed et al., 2010).
Traditionally, studies of foreign entry mode choices have been based mostly on transaction-cost theory, which focuses mainly on the impact of firm- and industry-specific factors on the choice of entry mode (Yui and Makino, 2002). But by the end of the 1980s, researchers became interested in evaluating the impact of companies’ institutional environment on their choice of market entry mode (Mayrhofer, 2004). In particular, Yui and Makino (2002), Hitt et al. (2004), Narayanan and Fahey (2005), and Peng et al. (2008) stated the need for future research on foreign entry mode choice based on the institutional perspective.
However, none of the studies consider the home institutional framework as an important influence on entry mode choice. This is remarkable, not in the last place since Mayrhofer (2004: 72) states clearly that: “Strategic decisions, such as the choice of market entry mode, are predominantly made by the company’s headquarters” and “Corporate strategy is likely shaped by the national environment of their (MNCs) headquarters.”
Exceptions that do focus on national institutions in this field focus mostly on the cultural environment. Kogut and Singh (1988), Shane (1994), Erramilli (1996), Barkema and Vermeulen (1997), Tse et al. (1997), Hennart and Larimo (1998), and Makino and Neupert (2000) are some of the researchers that have studied the national cultural influences on entry mode choice. The overall conclusions of the work of these researchers is that all scholars, except for Hennart and Larimo (1998), agree that the cultural characteristics of the home base and the cultural distance between the home base and the target country exert a powerful influence on the choice of entry mode.
Economical institutions are less popular in research although the strength of economic institutions is important for MNEs when it comes to financing operations (for notable exceptions see Lall and Siddharthan (1982), Porter (1990), Erramilli (1996) and Pan (2002)). However, least researched in this field are political and legal institutions. Therefore, the rest of the theoretical framework will focus on factors of the home political and legal institutions that I believe matter most for EM MNEs in their choice of foreign market entry mode. This selection is based on the fact that these institutions have been least researched in this field and is moreover necessitated due to time constraints. Although political and legal institutions are closely linked together, for the sake of analytical purposes, they are treated separately.
2.3 Political Framework
2.3.1 Defining political institutions
the decision-makers by an array of institutional provisions. Variations in these provisions lead to different policy choices and, indirectly, to different economic outcomes. In other words, when political institutions are weak, decision-makers are free to shape decisive or corrupt policies and indirectly negative economic outcomes. But when political institutions are strong, they guide the political decision-making process towards effective policies by protecting the political interest of society from the self-interest of the political decision-makers (e.g. limiting governments in their abilities to expropriate rents, reversing policy reforms and abolishing property rights), which usually constitutes to a good economic outcome (Börner, 2005). Thus, the most general definition of political institutions is: “All formal and informal provisions, rules, and norms that guide the political decision-making process by constraining the set of feasible choices of the decision-makers” (Börner, 2005: 9). However, the causality of political institutions and economic outcomes should not be seen as a one-way street; as economic institutions influence the sets of choices of individuals, they determine their political interests as well. This causality is possibly the reason why most studies focusing on institutions do not clearly distinguish political from economic institutions. Börner (2005) does explain this distinction: political institutions grant de jure political power. Therefore, decisions on current economic institutions and future political institutions are made by political institutions. However, economic institutions determine the new distribution of resources that convey this political power.
2.3.2 Types of political institutions
Political institutions are usually defined in literature either as being democratic or autocratic, according to how much “coordination” is believed to be needed (Henisz, 2004). This is mostly determined by the dominant political ideology inherent in a country. However, these are just two extremes of political ideologies, as is illustrated by Figure 1.
A political ideology is defined as ”The system of ideas that express the goals, theories, and
aims of a sociopolitical program, thereby stipulating how society ought to function and outlining the methods by which it will work.” (Daniels et al., 2008: 88).
Autocracy and totalitarianism are related concepts, but as can be derived from the figure authoritarianism falls under totalitarianism, just like liberalism falls under the democratic ideology. So, in fact, the two extremes mentioned in literature exist of democratic vs. totalitarian political institutions. The defining feature of these two is freedom or degree of coordination. A democracy stands for all citizens being politically and legally equal; all are equally entitled to freedom of thought, opinion, believe, speech and association, and all equally enjoy sovereign power over legislators and officials. Therefore, a democracy is a political system that grants voters the power to alter the laws and structures of government, and to participate directly in elections. These principles enable a democracy to institutionalize political freedoms that emphasize the role of individuals over the collective state. Therefore, democratic countries are often associated with an individualistic culture. On the other hand, a totalitarian system subordinates the individual to the interest of the collective (collectivism). It tolerates no ideas, interests, or activities that run counter to the ideology of the state. Totalitarianism consolidates power in a single agent who then controls political, economic, and social activities of the country. There is thus little to no freedom as the government allows minimal to no exercise of political rights, relies on the rule of man as the basis of law, severely constrains religious and social freedoms, and controls most (if not all) business activity (Daniels et al., 2008).
2.4 Effect of National Political Institutions on Entry Mode Choice
Clearly, the dominant political ideology in a country determines for a large part how the local political institutions are filled in (e.g. Do people get to choose who they want to give power to? Do entrepreneurs get to do what they think is best for their business or is business activity controlled and restricted by the government?). In the existing literature on entry mode choice, it is a known fact that the host country’s political environment can thus have an important effect on the MNE’s choice of entry mode. For example, researchers like Brouthers et al. (2002), Luo and Tung (2007), and Demirbag et al. (2009) all agree that if the perceived political risk of the host country is high (for example if the chance is high that a local government will expropriate the foreign subsidiary), MNEs tend to choose for non-equity modes of entry. However, unfortunately, a lot less is known about how the home country’s political environment affects this strategic decision. Authors like Mardanov (2004), Ekeledo (2008), and Cui and Jiang (2010) made a start on this topic by theoretically exploring the relation between certain factors of national political frameworks and entry mode choice, but the geographical area of this stream of research needs to be broadened by looking at different institutional settings in order to extent the generalizability of their findings.
For analytical purposes, the rest of this section is divided in three sub sections, all looking into a part of the national political institutional environment and its effect on the global entry strategies of national MNEs. These sections are: national policies towards OFDI, political ideology, and political stability. This selection is based on the most quoted indicators of political institutions in research on strategy and the institutional environment (see Murtha and Lenway, 1994; La Porta et al., 1999; Beck et al., 2000; Quinn, 2000; Henisz, 2004; Duncan, 2008; Ekeledo, 2008; Hiatt and Sine, 2008; Demirbag et al., 2009; Klomp and de Haan, 2009; Pereira et al., 2011).
2.4.1 National policies towards OFDI
(Mardanov, 2004). An example of this is given by Cui and Jiang (2010). They interviewed several Chinese MNEs on issues such as the role of the Chinese government on their outward FDI. They found that the Chinese government has a strong influence on all outward FDI projects since all these projects are subject to government approval and annual reporting of overseas operational matters is mandatory. The Chinese government may favor or discourage certain types of outward FDI based on its short- and long-term economic agenda and Chinese MNEs in their turn have to adjust their outward FDI strategies (and thus also their entry strategies) to comply with their home country political institutions. Logically, stimulating national policies towards foreign market expansion thus encourage MNEs to make high-resource investments (Mardanov, 2004). For example, Cui and Jiang (2010) report from interview data that managers from Chinese MNEs received financial support from the government, and therefore did not have to rely on foreign firm’s capital resources. For that reason, they were more inclined to choose foreign acquisitions and WOS as a way to enter foreign markets instead of, for example, choosing for export (see also Aulakh and Kotabe, 1997; Madhok, 1998; Ekeledo, 2008). Of course, this works the other way around as well: governments are not always supportive of outward FDI and may even work against it by creating policies that restrict outward FDI. Logically, when a MNE cannot get enough support due to restricting government policies they are likely to have more capital constraints and higher uncertainties. This makes them less likely to choose for wholly-owned operations as a means to enter a foreign market, since this imposes high costs and risks on a firm (Cui and Jiang, 2010). This is illustrated by Ekeledo (2008), who states that firms from India had to deal with strict home government restrictions on outward FDI and as a result many pre-2003 foreign market entries by Indian firms were through exporting. However, after 2003 there was a reduction in these barriers to FDI outflows which enabled MNEs from India to employ entry modes such as acquisitions, which currently appears to be one of the most favored entry modes used by Indian firms.
2.4.2 Political stability
nation’s government can be compromised by threats against it, which impede the ability to govern and also undermine peaceful changes of government (Wrong et al., 2009). What is often discussed in literature focusing on political stability is that it results in economic volatility as well. However, the empirical evidence of this is mixed (Klomp and de Haan, 2009). Researchers also do not agree about what causes political instability or stability. Some social scientists have followed Aristotle’s view that political instability is generally the result of a situation in which the distribution of wealth fails to correspond with the distribution of political power and that the more stable type of political system is thus one based on a large middle class. Others have adopted Marxist theories of economic determinism that view all political change as the result of changes in the mode of production. On the other hand, there are also those that believe that governing elites and their composition form the prime cause of revolutions and other forms of violent political change (Heslop, 2006).
Overall, the most general idea is that political stability mainly depends on the rule of law, a high degree of autocracy or democracy, and the amount of trade the country engages in. Political stability gets stronger when the rule of law increases since this is an indicator of how well the executive does its job. Political stability also increases with a high degree of democracy or autocracy since, as long as they are strong, they are best equipped to withstand shifts in the political order. Finally, a lack of trade suggests that there is a lack of political stability, because political stability is only possible with economic stability since people are only encouraged to invest and trade when they are confident in the future (Georg, 2008; Pereira et al., 2011).
2.4.3 Political ideology
As discussed, the government’s political ideology shapes its view on FDI (both inward and outward), and in turn the government’s view on outward FDI can have a positive, as well as a negative, effect on certain foreign market entry mode choices. The question now is: which type of political ideology (democratic vs. totalitarian) is more likely to have a positive view on outward FDI and thus on supporting national MNEs in their foreign entry? Quinn (2000) provides and answer to this question by examining the degree of democratization of a nation and its degree of openness or restrictiveness in the laws governing international financial transactions, which is obviously a political choice. He argues that democracies sustain liberal international financial regulation (especially foreign direct investment) while autocracies (e.g. totalitarian ideologies) are more likely to be characterized by inconsistent international financial regulatory policies.
2.5 Legal Institutions
2.5.1 Defining legal institutions
Legal institutions specify the rules that regulate behavior of individuals and companies, the processes by which the laws of a country are enforced, and the procedures to resolve disputes. Therefore, legal institutions are defined as: “The mechanisms or systems for creating,
interpreting, and enforcing the laws in a specified jurisdiction in order to govern commercial relationships between different agents of the society, i.e. firms, households, and government. ”
investor protection (Ruiter, 1997; Beck and Levine, 2003; Daniels et al., 2008; Haw et al., 2010).
2.5.2 Types of legal institutions
Just like with political ideologies, there are in essence two extremes when talking about the type of legal institution or system employed in a country. These extremes are “the rule of man” and “the rule of law”. The rule of man is usually a feature of a totalitarian country. It means that all power resides in the government, even though it might be unfair or unjust. In other words, the government can invoke the means necessary to suppress threats to, or reward support for state authority. This type of environment logically causes uncertainty about the nature of law and thus can create complex situations for managers of firms inhibited in these countries characterized by the rule of man. In contrast, the rule of law usually persists in democratic countries. The rule of law stands for governmental authority being legitimately exercised only in accordance with written, publicly disclosed laws that have been adopted and are enforced in accordance with established procedure and such nobody, including public officials, stand above the law. This way the legal system guarantees the enforceability of commercial contracts and business transactions and safeguards personal property and individual freedom. In countries characterized by the rule of law, managers can rely on a consistent and systematic application of legal rules without any uncertainty (Daniels et al., 2008).
Of course, it is not always the one extreme or the other when looking at the type of legal system inherent in a country. There are in fact five types of legal systems: common law, civil law, theocratic law, customary law, and the mixed system (for a detailed explanation of these systems I refer to Daniels et al., 2008). As mentioned, the type of legal system in a country determines the conduct of business transactions and thus is it important for managers to understand the nuances of each legal system.
2.6 Effect of National Legal Institutions on Entry Mode Choice
foreign entry mode. For example, Schwens et al. (2011) explain that firms are challenged to adapt its business to insufficiently functioning legal host institutions because, without sufficient legal protection, a firm’s property rights and tacit knowledge are exposed. Therefore, if the host legal environment is weak, and the most important goal is to safeguard internal know-how, MNEs are likely to choose an equity based mode of entry. On the other hand, in the same situation non-equity entry modes may be preferred when MNEs assign high strategic importance to a foreign market entry. However, little is known about how the home country’s legal environment affects the entry mode choice of MNEs. Authors like Lewin and Kim (2004) made a start on this topic by developing a theoretical framework of how national institutional frameworks influence managerial practices in Japan, Germany, and the US, but the geographical area of this stream of research needs to be broadened in order to test some of the existing work in different institutional settings. Therefore, in order to test the effect of the home country’s legal environment on the entry mode choice of MNEs in a different institutional setting, the following section elaborates on the role that a home country’s type of legal system plays in a multinational’s decision for foreign entry. This indicator, just like the ones for the political part, is not arbitrarily chosen; many researchers such as la Porta et al. (1999), Beck and Levine (2003), Ramall and Zurbruegg (2006), Beck (2010), and Haw et al. (2010) consider a country’s type of legal system as an important determinant of the performance of a country’s legal institutional environment. These researchers further stress the importance of the strength and transparency of the legal system.
2.6.1 Type of legal system
problems even bigger due to a lack of information disclosure (Beck and Levine, 2003; Lewin and Kim, 2004; Daniels et al., 2008; Haw et al., 2010). The same applies to the strength of the legal system. As discussed, a legal regime is strong when rules are set out clearly and, not unimportantly, acted upon (typically the case in rule of law legal systems). When laws and procedures are not codified into detailed regulations and procedures (which is usually the case in rule of man legal systems), the government can issue private rulings and guidelines for conducting business, or establish regulations as pleased. And even if the rules are set out clearly, but they are not enforced, this logically still makes a business environment very uncertain since this is unsupportive of private property rights, private contracting, and investor protection, making it hard to plan-, invest-, and run your operations. (Lewin and Kim, 2004; Huang and Sternquist, 2007; Daniels et al., 2008).
Considering the information above, it seems logical that, in a legal system characterized by opacity and uncertainty (usually the rule of man legal system), foreign entry modes involving relative high resource commitments such as Greenfield investments are favoured in order to avoid dealing with the home country’s legal environment directly, but forming strategic alliances or joint ventures with a previously unknown transaction partner will prove to be more difficult due to higher agency costs.
2.7 Sensitizing Conceptual Framework
3. METHODOLOGY 3.1 Research Design
The purpose of this research is to extent a theory of internationalization strategies of Emerging Market MNEs. When theory building is the aim of a research, case studies are often employed since this is one of the best bridges from rich qualitative evidence to mainstream deductive research (Eisenhardt and Graebner, 2007). Yin (1984: 23) defines a case study as: “An empirical inquiry that investigates a contemporary phenomenon in depth and within its real-life, especially when the boundaries between phenomenon and context are not clearly evident.” Building theory from cases is likely to produce theory that is accurate, interesting, and testable, which is desirable when the aim of the research is theory building (Eisenhardt and Graebner, 2007). Building theory from case studies involves using one or more cases to create theoretical constructs, propositions, and/or midrange theory from case-based, empirical evidence (Eisenhardt and Graebner, 2007). For this research the multiple-case design has been chosen over the single-case design since theory building from multiple cases typically yields more robust, generalizable, and testable theory than single-case research and thus enhances external validity (Eisenhardt and Graebner, 2007). When using the multiple-case design, proper theoretical sampling is important since the choice is based less on the uniqueness of a given case, and more on the contribution to theory development within the set of cases (Eisenhardt and Graebner, 2007).
This multiple-case study consists of two cases: Tata Steel from India and Cemex from Mexico. The reason that these two cases are chosen comes from the “literal replication logic”; literal replication consists of repeating a case expecting that it shows similar results (Yin, 2003). By choosing two cases from two – relatively unexplored – emerging markets, it can be tested if certain findings can be duplicated and thus can be considered robust (Eisenhardt, 1989; Yin, 2003).
and foreign to total employment1 (Miroux et al., 2009). Because of the high similarity of the cases, several factors such as industry, firm size, firm age, and degree of multinationality which can be of possible influence to the research results can be controlled for. Furthermore, their legal- and political institutional environments are quite comparable as well. For example, the latest published data on these countries’ governance indicators by the World Bank show that the difference in the overall assessment of their environments is not very significant (please see Appendix A). Although both countries have made a lot of progress compared to a decade ago, they both still score low in areas like political stability, constraining their firms in their competitiveness. Therefore, for both countries the biggest challenge is modernizing its government by making it easier to propose, approve, and implement laws and other policies (Hessel, 2004).
3.2 Data Collection
For this thesis I relied on two main data sources: primary and secondary data. The secondary data was collected from different data sources. The table below gives an overview of the sources used.
TABLE 1: Secondary Data Sources
Source Data Type of Data
Business Source Premier and LexisNexis (Via the UoG website)
Academic Articles, Newspaper Articles Databases of Organizations
(WTO, CIA, The World Bank Group)
Country Data Reports Company Homepages
(Cemex and Tata Steel)
Annual Reports, Articles, Press Releases, Other
Google Working Papers, Research Papers, Articles,
Publications, Case Studies, Other
Books Other
(Author’s construction)
In addition, primary data was collected by means of telephone interviews. Face-to-face interviews are most preferable in the field of qualitative research, but as the interviewees were geographically remote, this method was chosen in order to ensure the answers would still be of a qualitative nature. I contacted decision makers in functions dealing with foreign affairs as these persons were believed to be the most knowledgeable on the subject. My approach was to contact the headquarters which could put me in contact with the right persons. The design
of the interviews was characterized by open questions to avoid “yes or no” answers. This also enabled the interviewee to reflect over the questions and develop thoughts and opinions on the subject so that the answers would be detailed and informative. A total of nine questions were asked in order to keep the interview duration limited and avoid that the interviewees would get distracted. On the side of Cemex, the planning director of the headquarters’ department of “Strategic Planning and New Business Development” participated in the interview. This interview had a duration of approximately twenty minutes and was conducted in English. The answers of my interview partner were recorded on paper and can be found in Appendix D. Unfortunately, despite several attempts, no-one from Tata Steel was found willing to participate in the interview.
3.3 Analysis
“Analyzing data is the heart of building theory from case studies, but it is both the most difficult and the least codified part of the process.”
(Eisenhardt, 1989: 539)
4. WITHIN-CASE ANALYSIS
The following two chapters will continue with discussing the findings from the empirical research on the case studies. By applying the literature to the cases I contribute to current international management knowledge by trying to give insight into the effects of the home institutional environment on resulting indigenous management practices of emerging market multinationals. This is achieved by exploring the home country political- and legal climate of Cemex and Tata Steel and comparing these climates to their foreign activities so that possible patterns can be detected. Both primary and secondary data is used in this process. The period under research is 1990-2010, as this is the period that both companies started to become important players in the global market and in the same period many important changes were made in the political- and legal framework of their home countries. However, if information is available, this time period might be expanded a bit when relevant.
4.1 Cemex’s Internationalization Path
Cemex 2011 de C.V. (Cemex) is a Mexican company headquartered in Monterrey that produces, distributes, and markets cement, ready-mix concrete, aggregates, and related building materials. Its roots go back a long way; the company was founded in 1906 with the opening of the Cementos Hidalgo plant near Monterrey. Soon after that, Cementos Portland Monterrey was established and in 1931 the two merged forming Cementos Mexicanos, which is now known as Cemex (Cemex, 2011a).
Today, Cemex is one of the biggest building materials companies in the cement sector worldwide. It has an annual production capacity of over ninety-seven million metric tons of cement, their annual sales rise up to US$ 14 billion, it is present in over fifty countries in several regions such as America, Europe, Africa, the Middle East, Asia, and Australia, and it employs over forty-six thousand people worldwide (Cemex, 2011b). According to Casanova et al. (2009), Cemex is now the seventh largest corporation from Latin America and the most global enterprise of the region.
eventually listed on the Mexican stock exchange in 1976. It was in that same decade that Cemex slowly began exporting to the US (Cemex, 2011a).
When a severe economic crisis hit Mexico in 1982, the Mexican government was forced to liberalize its protective foreign trade policy to attract necessary foreign investment. Cemex responded by entering into its first foreign joint venture with the American firm Southdown Inc. in 1986 (Cemex, 2011a). But it was not until 1992 that Cemex broadened its geographic reach by acquiring two of Spain’s biggest cement companies: Valenciana and Sansón. It was a great success: after Cemex merged the two companies together their profit margins went up from 7% to 21% (Casanova et al., 2009).
As of that moment, Cemex completed over forty operations of overseas acquisitions of under-performing cement companies in high growth markets around the world like Venezuela, Indonesia, Costa Rica, the Philippines, Panama, the Dominican Republic, Egypt, Colombia and Indonesia (Cemex, 2011b). Targeting high growth markets (emerging markets) was a deliberate internationalization strategy as high growth is accompanied by infrastructure investment and residential construction. In addition, cement is being sold as a branded product in emerging markets. Some thought the chaotic environment of these markets would be a threat to Cemex, but in fact it was an advantage as the company was already very experienced in dealing with chaotic environments at home (Casanova et al., 2009).
The company remained focused on emerging markets until the late 1990s. But in 2000, it directed its attention to developed markets and acquired US Southdown, instantly making Cemex the biggest cement producer of North America. This acquisition was followed by several other large acquisitions in developed countries such as the UK and Australia (Casanova et al., 2009). Turning to developed markets reduced Cemex’s dependence on the volatile emerging markets: unlike emerging markets, the cement markets in developed countries are expected to grow continuously, even if the economy slows down. These acquisitions made Cemex what it is today: a truly global company which is active in almost every region in the world (Casanova et al., 2009).
4.2 Institutional Environment of Mexico
The United Mexican States is a federal republic consisting of thirty-one states in which the main language is Spanish. Mexico is the most populous Spanish-speaking country in the world and the second most populous country in Latin America after Brazil. The capital of Mexico, Mexico-City, is one of the biggest cities of the world with over one hundred-eleven million inhabitants. The GDP PPP of Mexico in 2010 was US$ 1.56 trillion, ranking the country 12th of the world. Most of the GDP value comes from the services sector (62.5% in 2010). However, the GDP PPP per capita in the same year was only US$ 13,800 (roughly one-third of that of the US), ranking Mexico as 85th of the world. The income distribution in Mexico is highly unequal: the top 10% of the population accounts for approximately 36% of all income, while the bottom 10% of the population only accounts for approximately 2% of all income. Due to this inequality, around half of the population is below the asset-based poverty line set by the World Factbook of the Central Intelligence Agency (CIA). Fortunately, with 18.2% this percentage is a lot lower for the food-based definition of poverty (CIA Factbook, 2011a). Since the 1990s, several Free Trade Agreements (FTAs) such as the NAFTA have put more than 90% of Mexico’s trade under these agreements, making Mexico’s trade policy amongst the most open in the world. In 2010, Mexican exports accounted for roughly US$ 303 billion and imports for US$ 306 billion. The US is by far Mexico’s most important trading partner, followed by China. Mexico mainly exports manufactured goods, oil and oil products, silver, fruits, vegetables, coffee, and cotton, and mainly imports metalworking machines, steel mill products, agricultural machinery, electrical equipment, car parts for assembly, repair parts for motor vehicles, aircrafts, and aircraft parts (CIA Factbook, 2011a).
4.3 Political Framework
After Mexico achieved independence from the Spanish in 1821, the political environment was dominated by many divisive and autocratic influences. Ongoing unrest eventually led to the Mexican Revolution, which lasted from 1910 to 1920. The main goal of the revolution was to turn Mexico into a democracy. When the Constitution of 1917 was introduced, Mexico came a step closer to this goal (Storrs, 2006).
ruling parties ever. In the new millennium, the National Action Party (PAN) took over control, and it still rules Mexico today (Storrs, 2006).
4.3.1 Mexico’s policies towards OFDI
Traditionally, Mexico’s foreign policies were best described as leftist, pro-revolutionary, and nationalistic. Just like other large Latin American countries, Mexico had adopted an inward-looking pattern during most of the five decades prior to the 1980s. The country’s trade regime was characterized by widespread protection of local producers through tariffs, official import reference prices, and import licenses (100% of all imports being covered by licenses). However, according to Mexican officials in charge of foreign trade policy, this protectionism resulted in high costs upon the country’s economy, as would become apparent in 1981 (Núñez, 1990).
Trade liberalization in Mexico officially started after 1983, but before that time, president José Lopez-Portillo already made some attempts to liberalize Mexico’s trade. However, due to circumstances such as influential people benefiting from the government’s revenues made by keeping an independent oil policy (Mexico’s most important source of income at the time), he did not succeed (Roberts, 2001).
But, to the misfortune of Mexico, the world oil prices collapsed in 1981 and Mexico’s government deficits soon rose from 5.5% in 1978, to 16.2% in 1982 as a proportion of its GDP. Bank lending dried out and Mexico could no longer service its debt commitments. Because of this event, the financial fragility of the economy based on oil exports and suboptimal investment decisions became apparent. Lopez-Portillo was forced to step down and the new administration led by Miguel De La Madrid had to rethink policies to create a more open economy (Roberts, 2001).
TABLE 2: Mexico’s Trade Liberalization Process
Phases Description
Phase one (1983-1985) In the first phase of the trade liberalization program of Mexico, the administration of Miguel De La Madrid decided to loosen the restrictive import regime to address the country’s debt and balance of payment crisis. A bilateral trade agreement with the US was signed, establishing further commitments of trade liberalization. Import licenses were reduced from 100% to 83% and 44% of the controls of non-oil exports were relaxed.
Phase two (1985-1988) Mexico accelerates its liberalization program by announcing a new four-step tariff reduction program with tariffs ranging between 0% and 30%. This is a result of Mexico entering the GATT in 1986, and thus committing itself to getting rid of all the official prices for imports and exports. Furthermore, in 1987 Mexico puts into practice the Economic Solidarity Pact which includes a lower tariff target range (0%-20%) designed to promote external competition. Finally, in that same year, Mexico and the US sign an agreement that includes a broader legal framework than the previous one.
Phase three (1988-1992) In 1988, most of the liberalization in the manufacturing sector had been completed, but the agricultural and service sectors remained closed. In this period, the government focused mainly on fine-tuning the liberalization and liberalizing the service sectors. The fine-tuning consisted mostly of reducing the tariffs for goods that were still showing unusually high prices. In 1992, Mexico signed its first Free Trade Agreement (FTA) with Chile which resulted in a sevenfold increase in trade for Mexico; from US$ 188 million in 1991 to US$ 1.49 billion in 1998. Because of this success, both countries later decided to replace this FTA with a new FTA modeled after the NAFTA.
Phase four (1992-current) This phase is referred to as the post-NAFTA period. In 1992,
Nowadays, Mexico is often called one of the most open economies in the world in terms of their trade policy (Villarreal, 2010). According to the latest WTO report on Mexico’s trade policy, the Mexican government now provides several promotion instruments for investing abroad. The most important ones are Maquila, PITEX, ECEX, ALTEX, and PROSECs. In addition, Mexico also provides ways to finance exporting by means of the National Foreign Trade Bank. However, these arrangements are mainly meant for maquiladora firms2, exporting companies, or SMEs (WTO Trade Policy Review, 2008). According to the same report, the external trade policy of Mexico is still focused on deepening open trade practices through unilateral liberalization measures and participation in the multilateral trading system, new trade negotiations with strategic partners, greater promotion of exports, attraction of investment, and defense of the country’s commercial interests under bilateral and multilateral instruments. Mexico’s preferential trading partners are therefore those with which the government has signed FTAs and Double Taxation Treaties (DTTs) (for an overview of Mexico’s trade agreements, please see Appendix C). These treaties are especially beneficial for Mexican firms exporting to foreign markets (WTO Trade Policy Review, 2008). This is clearly reflected in Mexico’s policies towards OFDI. For example, exports are subject to the customs processing fee unless they are going to a country that is party to a FTA with Mexico. When exports are directed to non-FTA countries, around US$ 18 is charged per transaction. Some exports such as petroleum products require prior licensing, but this is not the case for cement (WTO Trade Policy Review, 2008). Furthermore, there are still several other restrictions placed on foreign trade, but these are mostly focused on protecting “sensitive” industries such as nuclear energy and airports against inward FDI (WTO Trade Policy Review, 2008).
In conclusion, looking at the Mexican government’s policies towards OFDI, it is clear that their dominant method is to establish FTAs with preferred trade partners and promote trade through exports with these partners, while demoting foreign trade with non-FTA countries.
2 Maquiladoras are in-bond companies that operate under a maquila program approved by the Mexican
There are some promotion and financing programs for investing abroad, but these are limited and do not apply for every firm. Mexico is therefore till this day quite a restrictive country in terms of foreign trade policy. However, due to the trade liberalization program in the past two decades, the overall environment for Mexican entrepreneurs wanting to participate in the global economy has clearly become less restricted. For example, since the trade liberalization, Mexico’s exports to all countries increased an astounding 465% between 1993 and 2008, from US$ 51.8 billion to US$ 292.6 billion. Due to the global crisis in 2009, this number declined to US$ 229.6 billion (Villarreal, 2010).
However, the question is whether the liberalization of Mexican policies towards OFDI had a significant effect on the foreign entry strategies of Cemex. This can be answered by comparing Mexico’s trade liberalization process with the internationalization strategies of Cemex over the past two decades. This comparison is shown in Figure 3.
This deviation from the analysis could have several explanations. Of course, Cemex’s actions in that year could be a coincidence, but it is more likely that my interview partner downplayed the importance of the trade liberalization efforts of the Mexican government for the company, since Cemex never had tight bonds with the Mexican government. It could also well be that he is simply not aware of the impact that the trade liberalization had on Cemex’s internationalization process. All in all, the results from Figure 3 seem to prove a relation between national policies towards OFDI and an EM MNE’s foreign entry mode choice, but the results for Tata Steel need to be reviewed as well before drawing any conclusions. However, first the political stability of Mexico is assessed to see if this had any effect on Cemex’s foreign entry strategies.
4.3.2 Political stability
As discussed in the literature review, the effect of the home country’s level of political stability on the foreign entry mode choice of EM MNEs is unclear. All what is known in current literature on political stability and IB strategy is the overall suggestion that, the more unstable the home political environment is, the more eager MNEs are to go abroad (Mardanov, 2004; Pereira et al., 2011). Below, the foreign activities of Cemex are compared to the political stability of Mexico as measured by the World Bank. Global operations as well as exports are included to represent equity and non-equity entry modes. The left vertical axis represents the amount of global operations or foreign exports. The right vertical axis represents the country’s political stability percentile rank compared to all countries in the world. Zero corresponds to the lowest rank and hundred corresponds to the highest percentile rank. A score above fifty is considered above average (The World Bank Group, 2010). Unfortunately, the World Bank has no information about Mexico’s political stability before 1996. What is however generally agreed upon is that Mexico’s political environment, although not always equally effective for economic growth over the years, has been remarkably stable. This is largely due to the same party (the PRI) controlling the government for 71 years, until the year 2000, which is a great contrast with the rest of the political developments in Latin America. Mexico has therefore often been called the “perfect dictatorship” (Cothran, 1994).
FIGURE 4: Political Stability Mexico and Global Operations Cemexª
(Author’s construction. Sources: Cemex, 1997-2010; The World Bank Group, 2010)
ª Excluding operations in Mexico and excluding aggregate quarries as these are not always mentioned in the annual report
FIGURE 5: Political Stability Mexico and Foreign Export Sales Cemexª
(Author’s construction. Sources: Cemex, 1997-2010; The World Bank Group, 2010)
ª Excluding the export sales after 2006, as these are consolidated in the net sales after 2006
overall suggestion made in current literature on political stability and IB strategy is true and indeed the more unstable the home political environment is, the more eager EM MNEs are to go abroad (in other words the MNEs seek to set up their operations in more stable environments by means of direct investment). The other explanation is that there is no relation between a home country’s political stability and the EM MNE’s choice of foreign entry mode. I asked the planning director at Cemex how he thinks the political stability of Mexico affected the foreign market entry strategies of Cemex in the period under analysis. He responded as follows: “I would not talk in terms of stable or unstable when discussing this. Mexico, at the moment, is a young democracy, which is still in the process of learning. Political stability in Mexico is not specifically important for our businesses abroad, it is more so that when you get to a certain point of market share, and you have the opportunity to go to other markets, you go, and entry by acquiring is part of our sound business model.”
Thus, the evidence for politically unstable home environments leading to equity entry modes is weak. In addition to the information from my interview partner, this suggests that the second explanation might be more logical, namely that home country political stability does not affect the foreign entry mode choices of EM MNEs. However, this should not be concluded right away, as managers sometimes downplay the importance of certain external factors. This is also known as “managerial blindspots” (Zajac and Bazerman, 1991). The influence of these managerial blindspots will be further discussed after the results of Tata Steel are presented.
During the interview, the interview partner of Cemex mentioned another political factor that was important in their foreign entry mode choice. This factor was the democratization of Mexico, which will be discussed below.
4.3.3 Political ideology
pooled- and cross-section time-series models and summarized VAR models, which showed that democracies indeed are more conductive to foreign direct investment, both inward and outward. The democratization process of Mexico is reviewed below, to see if Quinn’s findings are also true for Cemex.
For a long time, the Mexican political system could not be considered democratic. It has operated largely as a centralized, corporatist, one-party state with an extremely powerful presidency and subordinate legislative and judiciary branches of power. This system was enabled because the ruling party, the PRI, had always been both party and judge in the Mexican elections. Even though there was growing discontent among Mexican citizens, the PRI managed to ensure victory by, for example, adding an additional number of seats assigned in proportion to the total vote regardless of those obtained by majority in the constituencies (Heredia, 1994). But despite these practices, Mexico has been working towards democracy for quite a while. Changes started to be made to electoral rules and mechanisms for as far back as the presidency of José López Portillo in 1976. The one-party dominant political system slowly began to exhibit signs of change in the 1980s, with isolated opposition party victories at the local level, and a growing voice of civil society. As mentioned, Mexico’s trade liberalization program started in 1983, and Mexican residents were given the right to directly elect the head of government by popular vote in 1997, which was another major step towards democracy. But true democracy was finally realized in the year 2000, with the election of Vicente Fox, the first president who did not represent the PRI and who was fairly elected by the Mexican people (FRIDE, 2002).
