Motives and strategies of Dutch companies
in Sub-Saharan Africa
The development of a model including four approaches:
Home sweet home, One size fits all, Do as the Romans do and
Best of both worlds
University of Groningen
MSc International Business & Management
MSc Thesis – Public version
Supervisor: dr. B. Pennink
Co-assessor: dr. F. de Poel
23-08-2011
L.J. van der Veen, MA
Pastoor van Nuenenhof 4
3511 RL Utrecht
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Abstract
Increasingly international consultancy firms report on business opportunities in Africa. This thesis is part of a study of consultancy firm Berenschot and answers the question why and how Dutch companies do business in Sub-Saharan Africa by developing the Why, How, What and So what model
of Dutch business activities in Sub-Saharan Africa (WHWS model). Four concepts from the WHWS
model – motives, approaches, performance and the influence of the Sub-Saharan African context –
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List of figures
Figure 2.1. GDP percent change 1980-2011 9
Figure 2.2. Real GDP growth rates 10
Figure 2.3. Members of the Netherlands African Business Council (NABC) divided by sector 14
Figure 2.4. Opportunity within a challenging environment 15
Figure 3.1. Summary of important concepts from internationalization models 22
Figure 3.2: Summary of export and FDI motives 24
Figure 3.3. CSR approach linked with attitude, internationalization strategy and entry mode 30
Figure 3.4. Risk for foreign companies in Sub-Saharan Africa 33
Figure 3.5. Results from the literature review combined 34
Figure 4.1. The WHWS model 35
Figure 4.2: The star model 40
Figure 4.3. The adjusted star model 40
Figure 6.1. General characteristics of the survey respondents 58
Figure 6.2. Type of motive 59
Figure 6.3. Motives in categories 59
Figure 6.4. Results attitude and internationalization strategy 61
Figure 6.5. Results entry mode strategies 61
Figure 6.6. Results CSR strategies 63
Figure 6.7. Results performance 62
Figure 6.8. Results social and financial performance 62
Figure 6.9. Results barriers for doing business in Sub-Saharan Africa 64
Figure 6.10. The adjusted WHWS model of Dutch firms doing business in Sub-Saharan Africa 76
List of tables
Table 3.1. A classification of export motives 22
Table 3.2. Four typical CSR approaches 26
Table 3.3. Classification of entry modes 27
Table 3.4. Expected entry mode based on attitude and internationalization strategy 30
Table 3.5. Risks to agribusiness investment in Sub-Saharan Africa 32
Table 4.1. Summary of approaches 38
Table 5.1. Expected approach of case study companies 50
Table 5.2. Company D sales in Sub-Saharan Africa 51
Table 6.1. Motives of Dutch companies active in Sub-Saharan Africa 59
Table 6.2. Main results case studies Company B and Company A 66
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Table of content
1. Introduction 6
1.1 Two trends 6
1.2 Research question 7
2. Doing business in Sub-Saharan Africa 9
2.1 The great African takeoff 9
2.2 Challenges when doing business in Sub-Saharan Africa 11
2.2.1 Business culture 12
2.3 Dutch companies in Sub-Saharan Africa 13
2.4 Conclusion 15
3. Literature review 17
3.1 Generic internationalization models 17 3.2 Doing business in emerging markets 19
3.2.1 Emerging market business models 19
3.2.2 Inclusive business 20
3.3 Applicability of internationalization models to this study 22
3.4 Internationalization motives 23
3.4.1 Motives for expanding into Africa 24
3.5 Strategies 26
3.5.1 Internationalization strategies 26
3.5.2 Corporate Social Responsibility (CSR) strategies 26
3.5.3 Market entry strategies 28
3.5.4 Entry modes in emerging markets and Sub-Saharan Africa 29
3.5.5 Linking the strategy frameworks and conclusion 30
3.6 Risk 31
3.6.1 Risk in emerging markets and Sub-Saharan Africa 32
3.6.2 Conclusion 33
3.7 Conclusion 34
4. Conceptual model 36
4.1 The WHWS model of Dutch business activities in Sub-Saharan Africa 36
4.2 Why? A response to an opportunity 38
4.3 How? Approach 38
4.3.1 Influence of context on approach 39
4.4 What? Behavior 40
4.5 So what? Evaluation of performance 41
4.6 Learning curve 42
4.7 Host country context 43
4.8.1 The influence of opportunity on approach 45
4.8.2 From approach to organizational design 45
4.8.3 From behavior to performance 46
4.8 Conclusion 46
5. Methodology 48
5.1 Aim and sub-questions 48
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5.3 Research methods 49
5.3.1 Interviews with experts 49
5.3.2 Survey 49
5.3.3 Case studies 50
5.4 Case study company profiles 51
5.4.1 Company D 51
5.4.2 Company B 52
5.4.3 Company A 53
5.4.4 Company C 54
6. Results and discussion 56
6.1 Results from explorative interviews with experts 56
6.1.1 Why? Opportunities for Dutch companies 56
6.1.2 How? Strategies of Dutch companies 56
6.1.3 The host country context. Risks when doing business in Sub-Saharan Africa 56
6.1.4 Conclusion 58
6.2 Results of survey 58
6.2.1 General characteristics of the survey companies 58
6.2.2 Why? Responses to opportunities 58
6.2.3 How? Approach 59
6.2.4 So what? Performance 61
6.2.5 Host country context 61
6.2.6 Conclusion 62
6.3 Results of case study interviews 63
6.4 Discussion of results 67
6.4.1 Discussion of opportunities and motives 67
6.4.2 Discussion of approaches 68
6.4.3 Discussion of performance indicators 71
6.4.4 Discussion of influence host country context 71
6.4.5 Implications for the WHWS model 72
6.4.6 Managerial implications 75
7. Conclusion 76
7.1 The research questions answered 77
7.2 Limitations and contributions 77
References 79
Appendix A - List of interviewees 90
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1. Introduction
‘It is well-known that non-Western markets offer ample opportunities for business expansion. Latin American, Asian and in particular African markets have high untapped potential in terms of consumer demand and local production’ (Berenschot, 2011).
In the last decades the world‘s economies have become increasingly integrated. This irreversible process of globalization changed international business markedly. Multinational companies (MNCs) from developed countries derive fewer profits from developed markets and therefore turn their eyes to emerging markets. Emerging economies present opportunities: they provide cheap labor and abundant resources (Zhang, Zhang and Liu, 2007), and are increasingly seen as high potential consumer markets (Prahalad, 2005).
In contrast to many emerging economies in Asia and South-America, Sub-Saharan Africa was generally less considered as an attractive environment for international business. In 2000 The Economist labeled Africa ‗the hopeless continent‘ (The Economist, 2000). According to Versi (2010), Sub-Saharan Africa was more often regarded as a destination for development aid than foreign direct investments (FDI). However, Versi (2010) argues that Africa is far from hopeless: until the global crisis
starting in 2007, Africa on average grew with 6% a year. During the crisis, Africa‘s GDP continued to
grow with 2%, signaling the robustness of economic development (Versi, 2010). According to Perry (2009), Africa has been in transition the last few years and now has huge potential: it offers the world‘s highest rates of return on investment. Moreover, FDI have grown immensely and started to diversify both in destination (besides natural resources a broad range of goods and services) and sources (South Africa was the initial source, increasingly Asian countries also invest in Africa; Ramanchandran, Gelb and Shah, 2009).
The consultancy firm Berenschot, headquartered in Utrecht, agrees with these authors. Berenschot believes there are many business opportunities for Dutch firms in Sub-Saharan Africa. Berenschot‘s hypothesis is that Dutch companies are trailing behind, not only compared to China, but also to companies from other European countries. The goal of a publication (forthcoming spring 2012) of Berenschot, in cooperation with the Rotterdam School of Management and the Netherlands African Business Council, is to identify factors of success for doing business in this region. My Master thesis will be part of the research for the publication and aims to explain why and how Dutch companies do business in Sub-Saharan Africa.
1.1 Two trends
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business opportunities (Perry, 2010). One of the main initiators of this trend was Prahalad‘s Bottom of the Pyramid (BoP) model (Prahalad, 2005). Prahalad urges companies to look at the consumer market in developing countries. According to Prahalad there is an invisible market of five billion people waiting. These people live on less than $2 a day and are therefore called the Bottom of the Pyramid (BoP). Firms should take advantage of this huge market by developing new business models. Examples are the sale of single-serve packages, or innovative ways to extend credit at low cost to the poor, thereby enabling consumer to buy their products (Prahalad, 2004). Prahalad therefore gives his opinion about why firms should do business in Sub-Saharan Africa. However, little empirical academic studies can be found that research the motives of firms doing business in this region. An exception is the study of Kolk and Lenfant (2010), showing that MNCs active in West and Central Africa were mostly triggered by resource-seeking motives instead of market-seeking motives. Because of the lack of further empirical evidence, it is important to study why Dutch firms do business in Sub-Saharan Africa.
The second trend was instigated by the revolutions in transport, communication and information technologies. This facilitated an increased public awareness about the effects of business activities of foreign companies in developing countries, especially with regard to labor conditions and the environment. The Shell scandal in Nigeria in the previous decade let to global media attention and great reputation damage for the firm. A few years later, Shell‘s African Vice President explains that CSR is a prerequisite to do business in Africa (Hulm, 2007). This example shows international enterprises are ever more held responsible for upholding ethical standards (Kline, 2005). Furthermore, companies increasingly look for ways to move beyond CSR by embedding sustainability within their core operations. MNCs seem to realize that short term CSR cannot address the growing amount of issues. This realization has been intensified by the global economic crisis starting in 2008, which showed that the short term business models employed in the financial sector could do great damage to society. Many CSR issues are interconnected and need to be dealt with in an overall strategy. This trend is called sustainable business (Confino and Drummond, 2010) and shows it is not only important to ask why companies do business in Africa, but also how they do this.
The common element in the two trends is a changing relationship between foreign (especially Western) countries and companies and Sub-Saharan Africa: from dependence and inequality to interdependence and equality. When both trends are embodied, the commercial opportunities seem to be attractive for both foreign firms and the people of Sub-Saharan African countries.
1.2 Research question
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their operations. Although there has been increasing attention to the business opportunities in third world countries following the BoP model of Prahalad (2005), exploratory research is needed because there is not much empirical evidence about motives and business strategies in Sub-Saharan Africa. To my knowledge, no research has been dedicated to the activities of Dutch companies in the region. From an academic viewpoint, it is important to fill this knowledge gap. From a practical perspective, it is crucial to understand why and how firms do business in Sub-Saharan Africa because only then policy can be made to ensure business takes place in a desired way. Moreover, only by knowing the experiences of firms in Sub-Saharan Africa, consultancy firms will be able to advice companies about their strategy. Therefore the main research question to be answered in this study is:
Why and how do Dutch companies do business in Sub-Saharan Africa?
Because of the open nature of this question, the research is exploratory, analyzing various Dutch companies which already established business activities in Sub-Saharan Africa. To be able to analyze the empirical evidence in a consistent way, a model will be developed. This model will be based upon an extensive literature review.
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2. Doing business in Sub-Saharan Africa
This research aims to answer the question why and how Dutch companies establish business activities in Sub-Saharan Africa. Therefore it is useful to first introduce the main aspects of doing business in this region. The first paragraph presents various opportunities in Sub-Saharan Africa; the second paragraph some main challenges. The aim is not to describe all aspects of importance –
Sub-Saharan Africa consists of 49 countries, so this will be impossible in a few pages – but it will explain
some common elements across the region. Third, shortly the current business involvement of the Netherlands in Sub-Saharan Africa is summarized, as well as the literature about companies from the Netherlands in Sub-Saharan Africa. The goal is to establish what has already been written about the topic and what aspects are important when analyzing this subject.
2.1 The great African takeoff
Since the mid-1990s, Sub-Saharan Africa has experienced broad-based economic growth. From 1995 to 2009, GDP more than doubled in the fastest growing countries in Africa (IMF, 2010). As shown in figure 2.1, GDP growth in the 1980s was volatile and sometimes even negative in the region. However, since the mid-1990s growth was steady, even during the latest worldwide economic crisis when the economies of the EU and the USA contracted with 4 and 2.6%, respectively (figure 2.2).
Figure 2.1. GDP percent change 1980-2011. Source: own design, based on IMF WEO database (2011).
The main reasons for the economic growth in the last decade were a rising global and domestic demand and higher prices of primary commodities, including oil. Moreover, Africa reaped the benefits of better macroeconomic management, which resulted in the consolidation of fiscal balances and lower inflation rates (AFDB 2008).
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analyst and consultancy firms advice companies from all over the world to take advantage of the growing markets in Sub-Saharan Africa. McKinsey (2010) identified four high-opportunity sectors which will be worth $2.6 trillion by 2020: infrastructure-related industries, consumer-facing industries (such as retails, telecommunications, banking), agriculture and resources.
Figure 2.2. Real GDP growth rates. Source: own design, based on www.indexmundi.com, Grol (2010) and IMF (2010).
There are some large differences between the countries in the region, however. The five largest economies (South Africa, Nigeria, Angola, Ethiopia, and Kenya) produce two-thirds of the regions‘ output while inhabiting not even half of its population. In five countries GDP fell between 2007 and 2009, namely Botswana, Chad, Eritrea, Seychelles, and Zimbabwe. Except for Botswana, the main reason for the bad economic performance in these countries was poor economic policy. Furthermore, these countries suffered from the global economic crisis (IMF, 2010).
An important trend in Sub-Saharan Africa is the increasing involvement of other developing countries, mainly China and India. Historically, Africa traded almost exclusively with developed countries, mostly in Europe and North America. In recent years non-African developing countries take on an increasing share of Africa‘s trade (UNCTAD, 2010). This trend is confirmed by a study of Price Waterhouse Coopers (PWC; 2011). PWC (2011) calculated that between 2000 and 2009 bilateral trade between China and Africa rose from US$8 billion to US$73 billion. Moreover, they expect this trend to continue, forecasting the trade flow between Africa and China to grow with 800% from 2010 to 2030. China has been particularly proactive in the oil industry in Nigeria, Sudan, Angola and Algeria, in copper and agriculture investments in Zambia, and mining in South Africa. Moreover, China invested heavily in transport infrastructure in the region (e.g. Kenya). Trade flows from China to Africa mainly consist of Chinese consumer goods.
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outsourcing and back-office services in Ghana, Kenya and Tanzania. Broadman believes that, in order not to miss out on opportunities and to gain from first mover advantages, MNCs from Europe and the US should drop their wait-and-see attitude and adopt a strategy suitable for the dynamic Sub-Saharan African environment.
This paragraph showed the economic development of Sub-Saharan Africa has been very promising in the last decades, creating opportunities for firms from all over the world. However, when doing business in this region companies are confronted with major challenges. The next paragraph gives a short overview of the main challenges.
2.2 Challenges when doing business in Sub-Saharan Africa
Despite the positive economic growth in Sub-Saharan Africa in recent years, the region is still very poor. Average real GDP per capita was US$ 679. The lowest income country was Burundi, with a GDP of US$ 115. The region is severely underdeveloped in infrastructure, health and education. A few figures to illustrate this:
Sub-Saharan Africa accounts for one-fifth of the world‘s children but half of childhood mortality (World Bank and IMF, 2010).
UNAIDS estimates that 2.5 million children globally have HIV, 92% of them living in Sub-Saharan Africa (UNESCO, 2010).
Only 62% of adults in Sub-Saharan Africa can read and write (UNESCO, 2010).
In Sub-Saharan Africa the many risks associated with poverty, pose large challenges for companies wanting to do business. The inadequate infrastructure and burdensome regulations obstruct the development of the private sector. Research among local firms in Sub-Saharan Africa shows that the lack of electricity, access to finance, macroeconomic instability, corruption, and crime are rated as the main obstacles when doing business in the region (Ramanchandran et al., 2009).
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Rodrigues (2010) states many Sub-Saharan African countries have both a low level of
governmental stability and institutional consistency1
. The weak institutions cannot effectively implement policy programs to attract certain types of companies, and fail to control corruption. In this setting firms are tempted to shape rules by bribing officials and using political influence, a situation called ‗state capture‘ (Soreide, 2009). Often public officials own firms, which leads to particularistic government-firm relations. Thus, economic relations are deeply embedded in social relations which are often shaped by personal or tribal interests. Channels of influence on policy are personal and secret (Rodrigues, 2010).
Henisz and Zelner‘s (2010) article in Harvard Business Review underlines Rodrigues claim. These authors state that influencing policy is important for foreign companies established in emerging markets because hedging political risk by traditional hedging methods is problematic. They advise companies to ‗master the art of political spin‘, in order to influence policy in their own interest and create goodwill. This can be done by identifying and engaging in the local politician‘s power bases, which are located in networks. To be able to engage successfully in local networks, knowing the business culture in Sub-Saharan Africa is important.
2.2.1 Business culture
Fafchamps (1999) agrees with Henisz and Zelner (2010) and Rodrigues (2010) that networks are important in Sub-Saharan Africa. He has a more positive way of looking at these networks than these authors do, however. According to Fafchamps (1999), many markets in Sub-Saharan Africa can be seen as consisting of core networks of trade relationships that are fairly stable over time. Trust is an important mechanism for security in these networks, as a substitute to formal laws and the enforcement of those laws. Relationships perform many functions, for example for the circulation of information about prices and market conditions, the provision of trade credit, the prevention and handling of contractual difficulties, the regularity of trade flows, and the mitigation of risk. In contrast to Rodrigues (2010), Fafchamps (1999) claims these networks are not primarily determined by traditional tribal affiliations. Instead foreign ethnic groups play a large role here. In West Africa, most business in the hands of ethnic Lebanese and Syrians and in East Africa, people from South Asian origin dominate several sectors, amongst them the import/export sector. Contrary to what is generally believed, trade with family and friends is rare and kinship does not play a large role in the formation of business networks. Instead business networks primarily result from business interaction themselves.
Besides the role of networks in African business life, several general features of African business culture can be distinguished. Sub-Saharan African countries share common cultural characteristics, assumedly because of their shared history. The history of the region is marked by early hunter-gatherer groups, ethnical and tribal loyalties, slave trade, colonial dominance and the exploitation of
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natural resources, followed by independence and self-governance (Wanasika, Howell, Littrell and Dorfman, 2011). An example of a cultural similarity is the concept of time, which is interpreted very differently in Sub-Saharan Africa than in the Western world. For the African, the time is expressed in events; little or no attention is paid to time itself. The future is virtually absent because events which lie in it have not yet taken place and may not constitute time. This difference in the meaning of time often leads to friction between Westerners and Africans: Westerners would think ‗Africans waste their time by just sitting idle, […] when the African may simply be waiting for the event on which he is to spend time‘ (Ukpadi, 1990, p. 20).
Other examples of cultural similarities are the search for harmony between human beings and the supernatural, and a strong power distance based on gender, age and status (Wanasika et al., 2011). Mbigi (2002) formulated five core values of ubuntu, a philosophy that governs African social relations: respect for the dignity of others, group solidarity, teamwork, service to others, and harmony and interdependence. However, the history of cultural dominance has invoked a culture of corruption, poverty, tribalism and violence. These features can be related to leadership styles in Sub-Saharan Africa, which are characterized by a high Power Distance, Assertiveness and In-group Collectivism2 (Wanasika et al., 2011).
In contrast, the Netherlands has a history of strong institutions. In the cultural dimensions model, the Netherlands scores high on Individualism and low on Power Distance and Masculinity. This indicates a society with relatively loose bonds with others, where people are self-reliant and look out for themselves and close family members, and where people are treated equally (Hofstede, http://www.geert-hofstede.com/hofstede_netherlands.shtml). At first sight large differences in culture can therefore be expected between the Dutch and African societies. Therefore, Dutch companies probably have to approach this market differently from what they are used to in their home market.
2.3 Dutch companies in Sub-Saharan Africa
Since the topic of this study is Dutch entrepreneurship in Sub-Saharan Africa, in this paragraph the main features of the trade between the Netherlands and this region will be introduced. Moreover, the academic literature about the topic is reviewed.
Total direct investments (excluding BFI3
) of the Netherlands in Sub-Saharan Africa have increased from € 3.8 billion in 2003 to € 9.7 billion in 2008. In 2009 the total amount of FDI decreased to € 8.5 billion euros. The major part (about 90%) of the Dutch investments is directed to two
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The Global Leadership and Organizational Effectiveness (GLOBE) project uses the following definitions: Power Distance is the extent to which society accepts and endorses authority, power differences and status privileges. Assertiveness is the degree to which individuals are assertive, tough, dominant and aggressive in social relations. In-Group Collectivism is the degree to which individuals express pride, loyalty or cohesiveness in their
organizations and families (Wanasika et al., 2011).
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countries: Nigeria and South Africa. Similar to FDI, bilateral trade increased heavily. Dutch exports to Sub-Saharan Africa grew from € 2.3 billion in 2000 to € 3.8 billion in 2005 and € 8.2 billion in 2010. Imports rose from € 1.9 billion in 2000 to € 3.5 billion in 2005 and € 6.8 billion in 2010. The lion share of these exports and imports are traded with Nigeria and South Africa, followed by Ghana, Kenya, Angola, Cameroon and Benin (De Nederlandsche Bank (DNB), 2011).
Figure 2.3. Members of the Netherlands African Business Council (NABC) divided by sector. Source: own design, based on member list NABC, 2011.
Except for these figures, not much is known about which Dutch companies are involved in business in Africa. No list exists with all Dutch companies active in the continent. However, the member list of the Netherlands African Business Council (NABC) gives an indication. As can be seen in figure 2.3, the 190 members are involved in quiet a lot of sectors. The largest sectors are business services (including banks and (financial) consultancy firms), followed by agriculture and transport & logistics.
The academic literature about business activities of Dutch companies in Sub-Sahara Africa is limited. No articles were found dealing with this topic as a whole, although research has been done into specific Dutch companies (mainly MNCs) in certain Sub-Saharan African countries. For example the case study of Frynas (1998) concerning how Shell dealt with political instability in Nigeria and of Hulm (2007) about Shell and CSR. Smith (2007) interviewed Mr. Ohiwerei, Former Chairman of Nigerian Breweries (part of Company C Nigeria), about success factors in Africa. The main success factor according to Mr. Ohiwerei is to become familiar with the African environment, which is very different from others continents, and to adjust products to local tastes and needs. Besides, a case study by Hoogenboom, Bannink and Trommel (2010) showed the influence of globalization on the Dutch textile company Vlisco, which sells cloth for the West African consumer market.
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The questions why and how Dutch companies establish business activities in the region have not been addressed yet.
2.4 Conclusion
In conclusion, this chapter gave a short summary of major developments in Sub-Saharan Africa. It highlighted opportunities, but also major challenges which have to be taken into account when doing business in Sub-Saharan Africa. First, most countries in the region have embarked upon a track of fast economic growth, creating opportunities in fast-growing industries for companies from all over the world. Second, Chinese and Indian firms account for an increasing share of trade with African countries, and this trend is likely to continue in the next decades. Third, some major challenges and risks associated with doing business in the region are identified. The region is still very poor and many countries are characterized by a fragile government and weak institutions. Moreover, the business culture is characterized by the importance of networks and personal relationships, as well as group solidarity and power distance, and at first sight differs substantially from the Netherlands. Because of the challenges and differences, difficulties can be expected when Dutch companies start business in Sub-Saharan Africa. This situation is graphically presented in figure 2.4. The inner circle represents the opportunity for the Dutch company in the Sub-Saharan African market. This is the reason why the company wants to expand to this region. The opportunity is surrounded by risks, depicted as the outer circle.
The next chapter will review the relevant academic literature about foreign companies doing business in Sub-Saharan Africa (with a focus on Dutch companies) showing that the current academic literature does not answer the main question in this study. Because of the research gap, there is a
need to study what the reasons are of Dutch companies ‗going to Africa‘ and how these companies
deal with risks.
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3. Literature review
When trying to understand why and how Dutch companies establish business activities in Sub-Saharan Africa, it is useful to look at the results of previous research. The field of International Business (IB) has paid attention to the nature, characteristics and determinants of the internationalization strategies of large enterprises (Fortanier and Van Tulder, n.d). In this paragraph the main internationalization models in IB literature will be shortly reviewed in order to determine their applicability and usefulness for this thesis. First, general internationalization models are dealt with. Subsequently, business models developed for emerging markets and more specifically Sub-Saharan Africa are reviewed. For all models it will be determined to what extent they answer why and / or how Dutch companies establish business activities in Sub-Saharan Africa. Subsequently, important concepts described in IB literature related to the topic in this study will be dealt with: internationalization motives, risk and strategies.
3.1 Generic internationalization models
The internationalization models developed in IB literature can be divided into two streams: the economic perspective and behavioral perspective. The models of the economic perspective focus on transaction costs, resources and firm-specific advantages, while the behavioral perspective studies the timing and mode of internationalization (Rodrigues, 2010). As shown below, both types of models are not sufficient to address the research question in this paper.
One of the most famous models in the economic perspective is the ownership, location and internalization (OLI) model of Dunning (1980), which assumes that internationalization is motivated by the desire to exploit existing ownership advantages. That is, firms want to transfer the advantages developed in the home market to build a competitive position in the foreign market. This view is criticized by Rodrigues (2010), because it does not address firms going abroad in search for assets. It is well known that many European and North-American companies started activities in Sub-Saharan Africa to extract oil or other minerals, which is missing in the economic perspective.
Furthermore, the economic view is informed by neo-classical thinking which assumes that ‗markets are free to operate autonomously, in environments friendly to the strategic intent of players‘ (Rodrigues 2010, p.14). In this way it foregoes the reality of all kinds of restrictions that firms face when doing business (Rodrigues, 2010). Especially in Sub-Saharan Africa, an environment in which basic necessities such as infrastructure and electricity are not self-evident, these restrictions have to be taken into account. As a result, the models developed in the economic view are not particularly well suited for this research. In sum, the contribution of the economic perspective for this study is that it addresses the ‗why and when‘ questions, but only gives one option as the answer and thereby misses important other internationalization motives. Moreover, it does not address how companies internationalize.
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perceptions of the difficulties and uncertainties associated with foreign markets (Johanson and Vahlne, 1977, in Kuada and Sørensen, 2000). The concept of ‗psychic distance‘ has been developed to describe the bounded rationality of managers deciding which markets to enter. Through gradually enhancing their commitment to chosen markets, firms gain experience and learn to cope with uncertainties. Therefore firms will first go to psychically close markets, before entering markets which are more distant. Additionally, the concept of psychic distance has led to the network perspective, in which relations are emphasized. Because the foreign environment comprises both objective and subjective dimensions, relationships play a role in modifying initial perceptions. Relationships can also be a source of new information. According to the Uppsala version of the network approach, a company‘s internationalization depends on its own position in the network and the degree of internationalization of the industry and market (Johanson and Mattson, 1988, in Kuada and Sørensen, 2000).
The Uppsala stages model of internationalization has been criticized by scholars, claiming that it is too deterministic and that it oversimplifies a complex process. By contending that some firms internationalize right from the start, the Born Global model also criticizes the stages model (Chetty and Campbell-Hunt, 2004). According to Oviatt and McDougall (1994, p. 49), a born global is ―a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries.‖ This shows that the Uppsala model cannot explain the internationalization of all firms.
In order to answer the main research question of why and how Dutch companies establish activities in Sub-Saharan Africa, the Uppsala stages model is partially applicable. Because of its focus on the internationalization process, it is suitable to answer the question how some Dutch companies establish activities. The Uppsala model would predict that, when assuming a large psychic distance between the Netherlands and Sub-Saharan Africa, only firms with a large amount of internationalization experience would start doing business in this continent. The network perspective would add that firms with a network in the host country would sooner start activities. Moreover, firms would at first commit to only limited responsibilities (for example exports via agents), thereby learning by doing and preparing itself for the next stage (Kuada and Sørensen, 2000).
On the other hand, the born global model shows that the Uppsala model cannot explain the internationalization of all companies. Besides, because of the focus on the various internationalization stages the Uppsala model is very deterministic. By focusing on exports as the initial stage it does not take into account resource-extraction activities, which is of importance in Sub-Saharan Africa. Additionally, the Uppsala model does not ask why companies would start international activities. Therefore the Uppsala model is not completely suitable for an explorative research like the present study.
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behavioral perspective is not applicable to many foreign companies in Sub-Saharan Africa because of the deterministic focus on exports as the initial phase of internationalization. Moreover, it does not address the question why companies would expand to Africa. One explanation for the lack of applicability of these models might be that Sub-Saharan Africa is an emerging market, for which the traditional theories are only partly applicable. Therefore, in the next paragraph emerging market business models will be reviewed in order to determine their usefulness for this study.
3.2 Doing business in emerging markets
The review of generic internationalization models showed none of the existing models address both the why and how questions which are central in the study. Since Sub-Saharan Africa can be regarded as an emerging market, it is important to review what has been written about doing business in emerging markets. This will be done in this paragraph.
3.2.1 Emerging market business models
In the last decade scholars and companies have increasingly looked at opportunities in the huge consumer markets in developing countries. Several models have been developed accordingly, which will be explained below. These are general models for emerging markets. To my knowledge, no theoretical models have been developed yet that deal exclusively with (Sub-Saharan) Africa.
One of the most famous theoretical business models developed in this period is the Bottom of the Pyramid (BoP) model. Prahalad (2004) was one of the first to point to the Bottom of the Pyramid: an invisible market of 5 billion people living on less than $2 a day. Prahalad urged companies to develop new business models in order to take advantage of this huge market. An example is the sale of single-serve packages of shampoos, detergents, tea, ketchup, etc., which are already commonly sold in India, China and other countries. Another example is Casas Bahia, a Brazilian retailer which has built a profitable chain in city slums by extending credit at low cost to the poor. It thereby enables consumers to buy their products. Besides profitability, Prahalad (2004) contends developing markets offer the best opportunity for global firms to discover what is likely to be the next best practice. Moreover, it pushes firms to decreases their costs, thereby improving their competitive advantage compared to competitors (Prahalad, 2004). The BoP model thus partly answers why global companies would want to establish activities in developing countries (tapping into the consumer market) and how: develop new business models. However, other motives for companies to expand to developing countries are not taken into account.
The model of Prahalad can be related to the general Blue Oceans Strategy of Kim and Mauborgne (1997 and 2005), in which the why-question is also answered. According to this model managers should focus at creating new, uncontested markets. In contrast to ‗red oceans‘, markets in
which the competition is fierce and competitors weaken each other, in ‗blue oceans‘ the focus is on
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Stuart Hart (2007) elaborated on the BoP model to argue that the private sector is the solution for a sustainable development of the poor, while at the same time presenting enormous business opportunities for global MNCs. Successful BoP business models are adapted to the needs and situation of the poor, thereby creating profits and driving innovation. MNCs already active in the BoP market, such as Hindustan Lever (the Indian subsidiary of Company C), use small scale, high volume and low margin business models. Important strategies are to remove constraints that prevent the poor from taking control of their own futures, to increase the earning power of the poor, and to create new potential by improving distribution systems and communication links. However, only regarding the poor as consumers might further imperialism and inequality. Therefore Hart argues for a BoP 2.0, in which communities are truly engaged to build social capital, by placing human values at the core of the system. Moreover, ‗fringe stakeholders‘, such as the weak, illiterate, adversarial and nonhuman should be included in a two-way dialogue, thereby facilitating disruptive change and creating competitive imagination (Hart, 2007). This BoP 2.0 model thereby further elaborates on the how-question in order to ensure that companies expanding to developing countries do this in a sustainable way. Moreover, it shows that because of poverty and other challenges in developing countries, new strategies have to be developed, including all kinds of stakeholders.
Despite the fame the BoP model has gained, Eyring, Johnson and Nair (2011) recently claimed in
Harvard Business Review that Western MNCs continue to struggle in emerging markets, because they
fail to adapt their business models. Although MNCs often do try to cut costs, by relying on cheap labor and resources, their fundamental profit formulas and operating models remain unchanged. As a result Western MNC only target the population with the highest incomes. In most emerging countries this group is not large enough to derive sufficient turnover. Eyring et al. (2011) propose the formulation of new business models in three steps: 1) identify an important unmet need of a target customer; 2) develop a model which is profitable for the company and affordable for the consumer; and 3) implement and adjust the model by learning by doing. With these steps, Eyring et al. (2011) further elaborate on how foreign companies can enter emerging markets. However they do not address internationalization motives beyond the consumer market.
In sum, the emerging market business models show the importance for Western MNCs of adjusting strategies and business models when entering an emerging market. The BoP and Blue Oceans Strategy models focus on one motive why companies would want to establish business activities in a developing country, namely tapping into the consumer market. Hart (2007) and Eyring et
al. (2011) elaborate on the question how companies should do this is. However, these models do no
address other motives companies might have to expand to Sub-Saharan Africa, and therefore lack answers on the why-question central in this study.
3.2.2 Inclusive business
This paragraph shows that the why-question has been addressed in literature dealing with developing countries. However, more from a development angle than from a business perspective.
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involvement is crucial in the reduction of poverty because they facilitate local businesses‘ access to markets, credit and technology, and because of their ability to institute efficient and sustainable change. In this regard, the concepts of ‗inclusive growth‘ and ‗inclusive business‘ have been reintroduced by multilateral organizations to facilitate the involvement of business in pro-poor growth strategies (Van Tulder, 2010). While the BoP strategy involves the poor primarily as consumers, an inclusive business strategy wants to include them both as consumers and producers. The World Business Council for Sustainable Development (WBCSD) states inclusive business is doing business with the poor in ways that benefit both the poor and the company (WBCSD, 2010).
Although the inclusive business research area originates in a development perspective, the advantages for companies to engage in ‗business with the poor‘ are emphasized in order to stimulate the involvement of the private sector. The UNDP initiated the ‗Growing Inclusive Markets‘ platform, with the goal of facilitating the exchange of information among inclusive business case studies. Advantages for companies include generating profits, developing new markets, driving innovation by developing inclusive business models, expanding the labor pool and lowering risk by strengthening value chains (UNDP, 2008). By emphasizing the advantages for companies, the inclusive business research presents motives for Dutch companies willing to do business in Sub-Saharan Africa and this can be used to investigate the why-question in this study.
Moreover, inclusive business research also partly addresses the question how companies should engage in business with the poor. In emerging countries, companies must include the risks and challenges in those markets within their strategies and business models. The UNDP Growing Inclusive Markets strategy links five main constraints in emerging markets to five strategies that firms can use to cope with the constraints. The five strategies are: adapt products and processes, invest in removing market constraints, leverage the strengths of the poor, combine resources and capabilities with others, and engage in policy dialogue with government. The fourth strategy, cooperation with other partners (for example public-private partnerships), is used most often in the 50 cases researched, followed by the adaptation of products and processes (UNDP, 2008). This shows that companies have to adapt their business models to the challenges and risks within Sub-Sahara Africa.
Additionally, Van Tulder (2010) holds that in order to achieve a sustainable pro-poor strategy at both the strategic and the operational level, the macro problems of inclusive growth have to be linked to the micro problems of inclusive business. An example of such a business model is developed by Nobel Price winner Muhammad Yunus in his book ‗Creating a World without Poverty‘ (Yunus and Weber, 2007, in Jones 2010). Yunus does not view the poor as a liability, but focuses on the ability of the lowest income groups to make productive contributions to their own position and society. The advancing of microcredit by the Grameen Bank (founded by Yunus), is a successful example.
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empirical practice. With regard to the topic of this paper, Dutch business practices in Sub-Saharan Africa, it is not clear to what extent Dutch companies actually use these inclusive business models. But if the advantages to both business and the poor are as great as the UNDP (2008) claims, it will be worthwhile investigating whether Dutch companies use these inclusive business models.
In sum, the various emerging market models highlight multiple aspects which are of importance for this research. The BoP model and Blue Oceans strategy show market opportunities might be important internationalization motives. Inclusive business models present other advantages for companies when engaging in pro-poor business. Eyring et al. (2011) show expanding to emerging markets might be difficult unless a proper strategy is formulated, specifically designed for the emerging market. Therefore studying how companies establish their activities is important. Several strategies focused at development issues are defined, such as public-private partnerships, inclusive business and pro-poor strategies. However, none of the models presented in this paragraph can answer both the questions
why and how Dutch companies would want to establish business activities in Sub-Saharan Africa.
3.3 Applicability of internationalization models to this study
Paragraphs 3.1 and 3.2 have reviewed theories and business models, in order to determine their applicability to the present study. Several concepts which seem to be of importance can derived from the review. These are graphically presented in figure 3.1. First, the economic perspective drew attention to a reason why some firms might decide to internationalize. Second, the Uppsala model shows the importance of including psychic distance and risks, and answers how some companies internationalize. The emerging market models mainly focused on one internationalization motive, the consumer market. The BoP 2.0 model addressed the challenge of including fringe stakeholders of the firm in its strategies. Emerging market models present solutions how to enter these markets, and underline the importance of appropriate strategies. Inclusive business models present an answer to the why-question, although from a development perspective, and added a focus on responsible business practices (how).
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Figure 3.1. Summary of important concepts from internationalization models. Source: own design.
3.4 Internationalization motives
In the field of International Marketing and International Business, research has been dedicated to the drivers of firm internationalization. Since this study aims to research why a Dutch company would want to establish business activities in Sub-Saharan Africa, it is important to look at this literature. This paragraph will zoom in on the ‗why?-balloon‘ in figure 3.1.
Albaum, Strandskov, Duerr, and Dowd (1994) give a classification of export motives. They divide export motives into reactive and proactive responses to either internal or external motivational factors. Passive responses to internal motivational factors include risk diversification and utilization of excess capacity. Proactive responses are managerial urge, growth and profit goals, economies of scale and marketing advantages. Examples of an external motivation with a reactive response are unsolicited orders and a small or stagnant home market. Finally, proactive responses to external motivational factors include foreign market opportunities and promotional efforts to promote exports by governments (Kuada and Sørensen, 2000).
Table 3.1. A classification of export motives. Source: Albaum et al. (1994), p.31.
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skills, and knowhow that cannot be transferred easily or without cost, and that constitutes its resources and capabilities. These assets are the main sources of firm success and growth and therefore constitute the basis of its strategy and competitive advantage (Grant, 1991). To overcome the liability of foreignness, transaction costs theory and the already mentioned ‗eclectic view‘ of Dunning (1980) stress that firms have to equip their overseas subsidiaries with certain firm-specific advantages. The RBV specifies these advantages. This type of research approaches internationalization from a top-down perspective: headquarters provide capabilities to subsidiaries. More recent literature in the RBV strand established how subsidiaries could be a source of advantage for HQs (Peng, 2001). In this view, the motive to expand to foreign markets is not only pushed by capabilities of the firm, but also pulled by the target firm abroad that may help the MNC to develop new capabilities (Shan and Song, 1997). In the table above, this could be classified as a proactive response to an internal motivation.
Other reasons for a firm to establish itself in a certain country might be government policy such as investment incentives and taxes. Moreover, institutional factors like property rights, government quality and agglomeration effects are additions to the more traditional FDI motives (Fortanier and Van Tulder). These motives would be included in the category external proactive responses.
In sum, the internationalization motives of companies vary. In a useful classification of export motives, Albaum et al. (1994) distinguish reactive and proactive firm behavior. This classification was extended to the other main form of internationalization, namely FDI. FDI requires a more proactive firm attitude than exports, because it involves investments and higher risk for the company. In the next paragraph, the literature about internationalization motives of foreign firms in Sub-Saharan Africa will be reviewed.
3.4.1 Motives for expanding into Africa
A study by the United Nations Development Programme (UNDP; 2008) into strategies for companies in emerging markets identified five main opportunities in developing country markets: generating higher yields of return than ventures in developed countries, developing new markets (BoP), driving innovations by the development of inclusive business models, expanding the labor pool and strengthening value chains to expand supply and lower risk. In a survey among 115 Dutch companies in developing countries (also countries outside Sub-Saharan Africa), the main motives indicated by these companies for expanding to the developing countries were increasing revenues, opportunities in a growth market, the size of the market, and increasing the distribution network (Business in Development Survey, 2004). Interestingly, the availability of natural resources and low production and labour costs were mentioned less frequently. 60% of both small and larger companies indicated they believe it to be very important that their activities contribute to the local community because it is a condition to long term success, creates goodwill locally, and increases the reputation internationally (Business in Development Survey, 2004). This indicates that not only ‗hard‘ business motives are important, but also ‗soft‘ factors such as development of the local community.
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(2005) urged companies to look at the huge opportunities in the consumer markets. However, a study of Kolk and Lenfant (2010) into 54 of the worlds‘ largest MNCs operating in West and Central Africa shows that consumer market motives are still of less importance than traditional motives. The article shows that the main reasons mentioned by these companies for investing in Africa are growth, consolidating their presence, the quality of mining products, the opportunity to extract at low cost and high margins / return on investment. Moreover, penetrating new markets, being closer to customers, strategic advantage by extracting untapped rich resources, and risk spreading across sectors and countries are mentioned. The motives are dominated by natural resource-seeking and efficiency-seeking reasons. Market-efficiency-seeking motives are mentioned as well, but seem to be less important. This can be explained by the sample in this study: 64% operated in extractive industries, mainly oil & gas and mining. This study confirms that the largest foreign operations in Africa (which are primarily owned by European and North-American companies) are still dominated by resource-seeking companies.
It would be interesting to research whether market-seeking motives play a larger role in the firms studied in this research, because the market-seeking motive implies a more equal relationship between Western companies and Africa than solely resource extraction (which is a natural resource-seeking motive) or cheap production (efficiency-resource-seeking motive). In the classification of Albaum et al. (1994; table 1), both consumer market motives and the extraction of resources would be classified as external proactive firm behavior.
Figure 3.2: Summary of export and FDI motives. Source: own design, based on Albaum et al. (1994); Fortanier and Van Tulder; Kolk and Lenfant (2010); Shan and Song (1997).
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companies conduct business in Sub-Saharan Africa and whether Prahalad‘s model is already being put into practice, one should certainly look at their motives.
3.5 Strategies
The second important concept identified in the business model literature was strategy. This deals with
how companies will internationalize (see figure 3.1). This paragraph therefore reviews the relevant
literature about strategies that Dutch companies might develop when expanding to Sub-Saharan Africa. At the end of the paragraph, the impact of this literature on the model developed in figure 3.1 will be explained. The goal is to show which concepts the literature identified as being important, and how these concepts relate to this study.
3.5.1 Internationalization strategies
Bartlett and Ghoshal (1987) argued that MNCs on the one hand have to standardize their operations due to the advantages of global economies of scale and scope (which is called global integration), while at the same time more nationally differentiated products increased in value (which is called national responsiveness). These issues are important in the choice of the internationalization strategy of a company. In the literature five internationalization strategies can be distinguished (Van Tulder, forthcoming). The first is export orientation. The second is the multi-domestic strategy, in which the company adjusted the products to host country tastes and needs. The globalization strategy is the opposite, because it aims to standardize the products globally. The transnational strategy tries to cope with the opposing issues of global integration and national responsiveness simultaneously. The final strategy, regionalism, is a combination of integration on a regional scale while being responsive to differences between regions (Van Tulder, forthcoming).
These strategies can be related to Perlmutters (1969) classic classification of MNC attitudes: ethnocentric (home-country orientation), polycentric (host-country orientation) or geocentric (world-orientation). For example, a multi-domestic strategy will often coincide with a host-country attitude, and a geocentric attitude with a transnational strategy. These concepts from IB literature suggest the internationalization strategy is influenced by the attitude of the company. This is important because the internationalization strategy and attitude of the company might also influence the way it copes with the challenges in Sub-Saharan Africa. This will be explained in the next paragraph.
3.5.2 Corporate Social Responsibility (CSR) strategies
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According to Visser (2008), CSR manifests itself in four distinct responsibilities. First, the main responsibility of foreign firms in developing countries is the economic responsibility, because of the lack of investment, high unemployment and poverty issues. Governments and communities value ‗economic multipliers‘, such as investments in human capital, the establishment of local business linkages, the spreading of international business standards, the transfer of technology and the construction of infrastructure. The second responsibility is philanthropy. Because socio-economic problems are so large in developing countries, philanthropic activities have become an expected norm. Moreover, firms cannot succeed in a society that fails and therefore it is in their own interest to establish philanthropic activities, such as providing health care to employees. The third is the legal responsibility, however this is of far less importance than in the developed world. Since the legal system is underdeveloped in many developing countries, tax avoidance is common, despite companies‘ CSR codes of good conduct (Christensen and Murphy, 2004). The final and least important responsibility of foreign companies in developing countries is ethical, such as not engaging in bribery and corruption (Visser, 2008).
Table 3.2. Confidential. Available upon request.
Table 3.2. Four typical CSR approaches. Source: Van Tulder (forthcoming).
Van Tulder (forthcoming) has classified the International Corporate Responsibility (ICR)4
strategies of companies into four typical CSR approaches: inactive, re-active, active and pro/interactive (table 3.2). These four CSR approaches are linked to the internationalization strategies and attitudes described in 3.5.1. First, the inactive approach is applicable to companies with an ethnocentric attitude, primarily focused towards exports. The issue orientation of these companies is relatively narrow, which leads to an indifferent attitude towards CSR issues. In terms of Visser (2008), these companies solely assume the economic responsibility. Second, the reactive approach is also called International Corporate Responsiveness, because of the focus on not making mistakes in the international arena. These companies engage in context-focused philanthropy (Van Tulder, forthcoming) and would primarily ensure they comply with laws and regulations (the legal responsibility of Visser (2008)). Because of the strategy of global standardization, in the worst case global corporate citizenship will lead to ‗ethical imperialism‘ (Van Tulder, forthcoming).
Third, the active approach arises when companies need a more integrative approach because home and host country norms conflict. The company will ‗adopt a number of hyper norms that create a minimum level of morality in its international operations‘ (Van Tulder, forthcoming, p. 5). This is most
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compatible with Vissers‘ (2008) ethical responsibility. Finally, the pro- or interactive approach is particularly appropriate to address border-crossing issues, which require a broad approach in terms of including stakeholders from the home and host countries. The strategy will be the result from the dialogue with stakeholders. In this approach all responsibilities mentioned by Visser (2008) are included.
In sum, in this paragraph internationalization strategies and firm attitudes were related to CSR approaches. These strategies are also related to market entry strategies: the inactive approach is associated with an export orientation, the pro-active approach with partnerships. However, Van Tulder (forthcoming) does not relate the re-active and active approaches with entry modes. To elaborate on this topic and expand the framework of Van Tulder, we will now research market entry strategies in further depth.
3.5.3 Market entry strategies
Besides literature about general internationalization strategies, there are extensive studies in the field of IB about how companies enter foreign markets. This stream of research can be classified as market entry strategy literature (Morschett, Schramm-Klein and Swoboda, 2010). The choice of entry mode has significant influence on performance, it determines whether the firm has to share control with a partner, and is difficult to change once established. Given the importance of international entry modes, the subject is the third most researched field in International Management (Morschett et al., 2010).
Level of involvement Type of entry mode
No ownership
Full ownership
Indirect exporting
Direct exporting via host country intermediaries
Direct exporting via company-owned channels
Strategic alliances Joint ventures (JV)
Acquisitions / Greenfields (wholly owned subsidiaries (WOS))
Table 3.3. Classification of entry modes. Source: own design, based on Sharma and Erramilli (2004).
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3.5.4 Entry modes in emerging markets and Sub-Saharan Africa
Because entry modes are a widely researched topic, it is impossible to review all literature. Therefore in this paragraph the relevant literature with regard to this study will be reviewed. First, the importance of the influence of the external environment on entry modes in emerging markets will be established. Second, the literature about entry modes in Sub-Saharan Africa will be reviewed.
Zhang et al. (2007) test two opposing propositions predicting the type of entry modes that MNCs choose when investing in emerging markets. The first is drawn from the internationalization process model, first established by Johanson and Vahlne (1977). In this view the firm operates in an imperfect market and is short-term oriented and risk-averse. The dominant constraints faced by MNCs entering new markets are the lack of foreign business knowledge and institutional knowledge (Zhang et al., 2007). When MNCs lack this knowledge, they will always prefer an entry mode with low resource commitment (Tse et al., 1997; in Zhang et al., 2007). Differences between the home and host country increase the psychic distance and the costs of entry (Tihanyi et al., 2005, in Zhang et al., 2007). The main implications for entry mode choice are that firms will gradually increase their presence and investments in foreign markets (so first exports, than FDI) and avoid commitments with other firms because this requires long-term commitments and resources (Sharma and Erramilli, 2004). In emerging markets, the ‗liabilities of foreignness‘ are magnified due to ambiguous property rights, government interference and policy uncertainty. Joint ventures reduce the MNCs exposure to environmental uncertainties because it can provide it with local knowledge and reduces the capital commitment by an MNC, and will be therefore be preferred over greenfield investments or acquisitions.
The opposing proposition is derived from the market failure paradigm and argues that there are two alternative modes to perform an economic function: markets and hierarchies. The choice is based upon efficiency; when markets are failing, a firm is better off internalizing the functions. Internalization theory, Eclectic theory and Transaction Cost theory are part of this paradigm (Sharma and Erramilli, 2004). The proposition tested by Zhang et al. (2007) holds that firms will prefer greenfield entry modes over JVs and acquisitions because in this way problems of opportunism of the local partner can be avoided, and it minimizes the costs of transferring the competitive advantages. The testing of these two theories in China proved favorably to the internationalization process models: JVs were the preferred entry mode of MNCs.
