“Internationalization Process of Maritime Shipping Companies: comparative case study”

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Master Thesis

Research

“Internationalization Process of Maritime Shipping

Companies: comparative case study”

University of Groningen

Faculty of Management and Organization

Msc International Business and Management

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Acknowledgements

I dedicate my paper as a tribute to my family with a strong maritime background for generations, namely my parents, Galyna and Gennadiy, and my grandparents, who provided me with endless love, care, support and motivation throughout my life and especially study period in the Netherlands. A word of gratitude and fascination I devote to all my relatives and family friends, who despite all the difficulties of work at sea remained positive, optimistic and supportive.

I am also very grateful to my fiancée, Eneko, who supported me, inspired and provided me with valuable information about maritime industry and Spanish maritime environment in particular.

And of course, this paper would not be complete without constant guidance and assistance of my supervisor Mr. Nathan Lillie, who provided me with sense of direction when I was writing my Master Thesis. Additional thanks, to my second supervisor, Mr. C. Dörrenbächer, for valuable remarks on my paper.

Kseniya Litvinova June 2009

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Abstract

The importance of maritime industry is tremendous, since seas and oceans take bigger part of our planet. Nowadays, maritime industry is considered the most international industry, global in fact, due to the nature of its core business – shipping cargoes and passengers on long distances. Each company develops internationally in its own and unique way, which makes it interesting to study the factors influencing internationalisation process. After thorough literature review on the topic, main research question was identified: Why Spanish companies internationalise to a lesser extent in comparison with British and Danish companies, even though all three countries have similar sea dominating and colonial past, and common present European Union environment. Current research paper presents a comparative case study of Spanish, Danish and British maritime country cases on the examples of biggest companies on national and global markets – Acciona Trasmediterranea and Empresa Naviera Elcano, Maersk, and P&O, respectively. In order to answer research questions a theoretical model based on country-specific factors influencing internationalization process was developed. The results of the research revealed that historical inheritance, national and the EU regulations regarding maritime industry shape the internationalization process of shipping companies. After having compared all three cases, both on a country and company levels showed that Spanish companies indeed exercise least progress in international operations.

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Chapter 1: Introduction

“Life itself arose from the oceans. The ocean is vast, covering 140 million square miles, some 72 per cent of the earth's surface. Climate and weather, even the quality of the air people breathe, depend in great measure on interplay between the ocean and the atmosphere in ways still not fully understood. Not only has the oceans always been a prime source of nourishment for the life

it helped generate, but from earliest recorded history it has served for trade and commerce, adventure and discovery. It has kept people apart and brought them together.” (United Nations) “What is the market for ships?...There is not one shipping market but there are

several markets differentiated by ship type, trade requirements and geographical location...”

(Helmut Sohmen, 1986)

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similarities due to the specifics of common industry and business activities. With this research I would like to establish in which way internationalization process takes place in maritime industry. Why North-Western companies like P&O and Maersk could outgrow national markets and expand globally, while domestic Spanish companies, having seemingly similar conditions did not expand globally on a similar scale? May be the answer lies in loss of colonies, or in the current regulations restraining Spanish companies to become global giants. What are the reasons for North-Western countries to be more internationally active than companies from Southern countries, even though they had similar sea dominating and colonial past? And finally, which factors and in which way influence internationalization process of companies in Southern and North-Western countries and how these effects reflect on the organizational/ business structure of a company? Existing literature unfortunately did not provide with the answers to all my questions. In this situation the real facts on the industry operations and each company background could help to create a complete picture of my case study.

In order to get the answers to all of these questions a large amount of literature material was studied. Johanson and Mattsson (1988), Madsen and Servais (1997) and Oviatt and McDougall (1997) in their works state that the level of internationalization of market and industry itself influences the companies' behavior. Hence, maritime industry implies international inclination in business operations of the firms. Moreover, political and governmental regulations shape business environment in which the company operates, by directing national companies whether towards focus on national market solely, or towards international activities (McDougall, 1989). Keeping this in mind, I developed a theoretical model based on country-specific factors, which influence the internationalization process of maritime shipping companies. In the next chapters, I will elaborate on these implications.

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of Spanish maritime companies in comparison with British and Danish ones. My main argument is that national state and respective authorities controlling maritime industry have the most influence in shaping of internationalization process of domestic firms within certain periods of time - colonial past, national environment or European Union era.

A major break through of the industry was around 1960s, when maritime shipping underwent major technological improvements and moved into the era of containerization to speed up the turnover and transportation of cargo. My interest in this particular division comes to economic importance, which is quite relevant for the business studies – possibility to transport huge amounts of heavy bulk, dry and liquid cargo, on long distances for lower prices. This way facilitation and rationalization of sea and ocean transportations took place, creating more opportunities for business. Besides economic importance for business, I chose container ship division for reasons of narrowing down to sub-industry of maritime shipping for my research.

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Chapter 2: Literature Review

The countries chosen for my case study have similar histories of strong sea and ocean dominance. Thus historical factors have certain influence on modern development of the seaborne trade and the way the companies internationalize nowadays. As indicated in the theoretical model of my research historical background, including national, colonial and EU effects on each country are influencing factors in the internationalization process of companies coming from that particular country. Reviewing the events of the past, I might find the explanation to modern events in maritime industry related to my topic.

According to the U-Model (Johanson and Vahlne, 1975) companies expand to the countries with shortest psychic distance, otherwise the necessary changes and adjustments will take place much slower. This effect is seen in the example of Spanish companies, which start their international operations by launching shipping lines to the neighboring countries. Consequently, this distance decreases naturally with increased foreign market-specific knowledge. Thus follows, that the more a company engages in international business activities it gains knowledge and experience, hence physic distance, when entering new markets, is perceived to be less challenging. Additionally, Garcia Menendez et al (2002) stated that less international trade would take place if the shipping distance is bigger and if there is poor partner infrastructure. In the same article the authors say that intra-region trade increases at a faster pace than between different regions. Again, this point is rather obvious in the case of Spanish companies that will be discussed later on. Such a difference in development process is due to language barriers, cultural and historical backgrounds of trading parties, trade facilitation and tariff structures, which also includes costs allocation. Some of these aspects will be considered in more details in further chapters of this case study. The effects of globalization on trade are as follows: more open borders create opportunities for international trade - costs go down; delivery time and reliability improve, etc.

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economical strength with transformation towards capitalism and market-business relationships. Spain experienced economic recession since the last colonies were separated, especially the maritime sector. Though Great Britain had also colonies of its own, it suffered less when the separation took place. Denmark, on the contrary had no significant colonial ties, but has reached a high level of internationalization/globalization levels in its maritime industry and companies in particular. Keeping these facts in mind the following hypothesis can be developed.

Hypothesis 1: Companies experience slowdown in their internationalization process both on a country level and organizational, due to the fact that they are coming from former colonial-power countries.

Besides internationally accepted regulations imposed by maritime legislative institutions each government imposes laws and restrictions regarding each particular business sector in each particular country. Besides laws and regulations imposed by authorities on every industry, there are also non-governmental barriers to entry when companies want to penetrate a certain market area in foreign country (Dunning, 1981). Among these barriers can be membership requirements of some professional associations such as licensing for entry into professional business services. Governments may also impose performance requirements through detailed supervision of the structure and practices of banks, insurance firms and other financial companies (UNCTC, 1988). However, in my research, I will concentrate mainly on the laws and regulations concerning maritime industry on the national and European Union levels. In the process of my research I noticed that legislative aspects play rather influential role in setting up the limits or incentives for opening of the boarders for companies' operations whether on the national level or internationally. In the early stages of my research I found that Southern regions companies, in this case Spanish companies, have narrower range of international destinations of their operations compared to their North-Western counterparts from Britain and Denmark. Some national governments provide companies with incentives to expand across borders and enter international markets. Other governments, on the contrary, limit their national companies to internationalize. In this instance the following hypothesis is drawn.

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As was predicted in the article by Lorentzen (1972) shipping industry can be nowadays recognized as one of the most internationalized industries in the world starting with international trade as the core of its business operations and finishing with multinational staff working in different business areas of a maritime company. Shipping industry is referred to a service sector and is considered to be a capital intensive industry (Contractor, Kundu, Hsu, 2003). According to Rasmussen and Madsen (2002) shipping industry can be referred to the type of born-global due to the specifics of its activities – transportations of heavy bulk and passengers on long distances. It is already implied since the foundation that there is high reach of distant markets in different countries with the shipping operations. Maritime services form a substantial part of global logistics chains. This point is also proved by the fact that maritime service components – vessels, flag registrations, class inspections, insurance, labor and transportation orders, - are acquired globally (Shashi Kumar and Jan Hoffmann, 2002). The same opinion is found in the work of Kumar and Hoffmann (2002) that confirms that maritime industry is considered to be the most globalized in the world due to the fact that transportation activities provided between two or more countries whose cargo is being shipped.

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theories on internationalization of MNEs in manufacturing industries and apply them to service industries. The revision of Dunning’s eclectic paradigm (1989) showed that “it is the interaction between the competitive advantages of service MNEs, the location advantages of potential host countries, and economies of the common governance of cross-border activities that explains the international involvement of service firms”. Even though these factors concern international production, Jiatao Li and Stephen Guisinger (1992) state that such factors as market size, oligopolistic reaction, government regulations and firm size may also affect service multinationals regarding their foreign investment decisions. When studying service industries their specific characteristics should be considered with care. Some governments impose strict controlling regulations as to foreign intrusion in service industries (Feketekuty, 1988). Additionally to this, cultural and historical background and language have to be considered when adapting products of service industries in some particular country. In my opinion these factors play rather important role in forming a company's future. In my theoretical model historical, national and regulative environments of each company from my case study will be given special attention.

According to Morash and Clinton (1997) one of the important factors of successful supply chain is well-integrated transportation system. This fact found a reflection in the P&O and Maersk companies transport operating systems. It can be seen in their rather integrated business structures, which will be viewed in more details also further on. If in some industries the emphasis on building supply chain partnerships is a relatively new trend in corporate strategy, it is not a novel concept in the maritime business, which can be proved by the evolution of the open registry concept and that of the ship management industry (Kumar and Hoffman, 2002).

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internationally accepted maritime regulations which are also embedded in the idea of European Union establishment. European Union established unified set of regulations concerning maritime industry. Higher ship registration tariffs, higher technological, environmental and security standards that are accepted and required by the maritime authorities of European Union, all are seen as a certain hurdle to international expansion for companies in countries with lower development levels and less governmental support in respective business areas. As I am trying to compare Spanish companies’ internationalization process to British and Danish companies, the third hypothesis will hopefully shed the light on why Southern companies are internationalizing slower.

Hypothesis 3: Spanish maritime companies experience slower internationalization process, which makes their business and organizational structure less internationalized when compared to British and Danish companies, because of the regulatory policies of the European Union.

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Chapter 3: Research Design

3.1. Research Questions

Companies expand in search for new opportunities and markets. However, each company does it in its own and unique way. Some companies get a chance to grow being global giants and others remain servicing national markets. The big question raised here is why it is so. What holds and what pushes companies to internationalize and to expand globally? The reasons can be various: strategy of a company, managerial policies, economical resources or certain market barriers of a particular industry. The world can be seen as one global market, or as a number of smaller markets within the boarders of each country or region. Even though the boarders of European Union are less noticeable, we still cannot deny the differences and specific regulations of each country regarding any particular industry or business. I am personally interested in Western and Southern regions of Europe. This research paper might shed the light on which particular factors influence the way and direction a company internationalizes. What are the differences in internationalization processes of maritime companies belonging to different countries within European Union?

This leads me to specifying my research questions:

1. In which way does internationalization process take place in maritime industry?

2. Why do North-European companies develop into global players and Spanish companies to a lesser extent?

3. Do country specific factors in internationalization process force organizational/ business structure of a company to be different? Which factors and in which way influence internationalization process of companies in Southern and North-Western countries?

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heritage, such as history and background of an organization should not be neglected. Main assumption in the research of Bartlett and Ghoshal is that environmental forces shape the strategic profile of a business, while a company's administrative heritage fosters its organizational form and capabilities. On the basis of these facts I decided to research which environmental forces influence internationalization process of companies in maritime industry. In order to visualize internationalization process of a company in the shape of a final product, I will analyse it through organizational structure of the companies in my case study. Stopford and Wells (1972) established a direct relationship between strategy and structure of a business organization. This way I can establish the sequence in my logic – internationalization is a process, which is a dimension of strategy, and leads to organizational structure of a company (Welch and Luostarinen, 1988; Bartlett and Ghoshal, 1986; Stopford and Wells, 1972) that will be analysed by looking at organizational charts of company cases.

3.2. Theoretical Model

Out of preliminary research of literature material comes out that internationalization process depends on several factors. Most of the previous researches were based on manufacturing industries and only few looked into service industries (banking, insurance, etc.) though not much was found exactly on maritime industry. Nevertheless, with proper hypotheses and use of research tools these factors can be applied to maritime industry.

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(1997) and Oviatt and McDougall (1997) also argue that the degree of market and industry internationalization will influence the firm’s behavior.

Theoretical model developed in this section is meant to show in which way internationalization process of a company takes place and is reflected in the organizational/ business structure. Such an assumption is made because of the fact that the number of international ship lines, offices and subsidiaries of a company indicate how much the company is international.

What I noticed was that companies in my case study, MAERSK and P&O, have similar organizational and business structures, same as Acciona Trasmediterranea and Empresa Navierra Elcano also both have similar structures. This fact strengthened my preference to take country specific factors as main influencing factors on internationalization processes in different countries. While the literature review was conducted, I noticed that historical inheritance and EU and national regulations shape the internationalization patterns of a company in a particular European country. This means that historical backgrounds in the form of former colonial maritime powers, EU and country specific regulations force internationalization process in different countries to develop differently → thus it is reflected in difference of organizational and business structures of similar companies in different countries. These relationships are visualized in the diagram below in Figure1.

Figure 1: Country Specific Factors influencing Internationalization Process

In this case internationalization process, expressed through the Organizational structure of a company, is Dependent Variable. Consequently, colonial, national, and EU factors are Independent Variables in my research. Independent variables are mainly viewed from historical

Colonial National _EU

Internationalization

expressed through

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and regulative perspectives. This means that National and EU factors are analysed as maritime laws and regulations, Colonial factors - historical background and its influence on maritime industry in each of three countries in my case study.

Each of these variables presented in the above Figure 1 can be presented as a certain criteria for researching maritime shipping industry, and companies taken for the comparative case study.

Historical perspective: 1) company perspective - each company’s historical development

regarding expansion strategies – Mergers & Acquisitions, fleet expansion over years, etc; 2) external factors perspective – influence of colonial past of each country on national maritime industry development.

EU laws and regulations: mainly viewed from pan-European perspective – international

conventions, EU laws, flagging etc. regarding maritime shipping industry;

National laws and regulations: mainly viewed from national perspective – laws and regulations

prevailing in each country chosen for the case study, territorial law, flag registration, etc.

Organizational structure: classification by type of international organization (MNEs),

presenting the diagrams/organizational charts of each company’s structure.

Out of the theoretical model comes out that current research paper tries to establish in which way state influences companies’ internationalization process. With the help of hypotheses and country specific factors included in the model I will try to find out how each of the dimensions – colonial, national and EU, shaped internationalization process of maritime companies in Britain, Denmark and Spain by comparing all three cases.

3.3. Justification of the chosen research type

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methods. Finally, Yin (1994) defined a case study as "an empirical inquiry that: investigates a contemporary phenomenon within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident; and . . . [that] relies on multiple sources of evidence. The comparative case study is the systematic comparison of two or more data points ("cases") obtained through use of the case study method”. These last two definitions of case study are most appealing to my research and are being used as a reference point and justification criteria for choosing exactly case study research.

When conducting a case study a number of techniques for gathering information - from interviews to surveys to content analysis can be used but it is not necessary to use multiple sources or types of evidence in order to perform a case study. However due to the specifics of my research that involves several companies from different European countries - various information types are needed and multiple sources of evidence will be used. There are several types of case studies given in the literature. The article by Kaarbo and Beasley (1999) presents us with detailed explanation of existing types of case study research. Descriptive case study focuses on the case itself, mainly just general understanding. Explorative case study is when the focus is extended to examining and interpreting the case itself. Theory-developing case is about hypothesis development and building some theory. Then two more sub-groups of case studies follow: theory developing and refining cases; theory testing. And the most extensive and complicated type of case study is Comparative Case Study Research, which is going to become the research design for my particular research paper.

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an in depth illustration of certain events, it helps to follow the development process and shows how theory corresponds with practice. Which is why in order to answer the research questions posed in this paper and to prove hypotheses right or wrong; I will look into country- and companies-specific factors using real life cases.

The case study on the topic “Internationalization process of Sea& Ocean Freight Shipping Companies” that I am undertaking involves four companies belonging to the same industry however situated in different countries to show differences and similarities on the issues indicated in theoretical model (implying nationality of the company defined by situation of its headquarters). In this case I will research how internationalization process takes place in the same industry but in different parts of Europe in order to have clearer difference. The companies studied vary in size, market share and operations range, however, they were chosen according to their importance on the market and market power. Afterwards the comparative analysis will be conducted in order to identify which national/ country-specific factors have most significant influence on the internationalization process of a company and possibly the reasons why Spanish companies have much less internationalization in their business structure1.

3.4. Case Background/ Choice of companies

As I already stated, the focus of my research is to know which and how exactly country factors influence company’s organizational/ business structure and hence its internationalization process. External factors take focal place in my research and influence the direction and intensity of internationalization. In this case I decided to take companies for my case study from within European Union, and to research North-Western and Southern regions of EU. Main criteria for choosing companies for my case study research were the size of a company and strong market position. In my opinion these criteria improves applicability and generalizability of outcomes of the research and it is quite interesting to study the biggest and famous cases within a particular industry. According to theoretical model vivid maritime historical background plays important role that is why ex maritime empires Spain and Britain were chosen. Denmark was chosen due to its powerful historical maritime significance and the power of company Maersk on the world's market at present. Maritime Laws and regulations will be viewed from two perspectives - European Union as a unification of international regulations, requirements and standards, and national regulations towards maritime industry within each country included into the study.

1

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For the North-Western Europe my choice stopped on A. P. Moller-Maersk, to be more precise on one of its divisions, which operates in bulk container shipping industry, Maersk Line. My second company representing North-Western Europe is P&O. With respect to recent events Maersk acquired P&O in the year 2005, this way enlarging Maersk shipping division and giving it a new name – Maersk Line. Hence, I will consider P&O since its foundation and only until the year of its existence as a separate business entity – year 2005. This acquisition made Maersk the biggest company in the world in the area of maritime shipping. The names of these companies speak for themselves. These global giants when combined together make up 16 percent of global maritime market.

In Southern region of EU I decided to focus on Spain and to include two more companies into my case study, mainly two Spanish maritime shipping companies: Acciona-Trasmediterranea Ltd and Empresa Naviera Elcano S. A. Among Spanish maritime shipping companies I could not find a match to MAERSK and P&O according to the size of the company, revenues, and international expansion for comparative analysis. Thus, the decision was made to choose biggest and strongest companies on the national market regarding their sustainability and home market share, and the ones, of course, that operate internationally. This way, I have a great opportunity of studying the differences and the reasons fostering and preventing internationalization of a company in a particular country.

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subsidiaries in Spain, Portugal, Brazil, Argentina and some other countries. According to the characteristics of both Spanish companies listed above I consider them to be sufficiently acceptable for the comparative case study together with Maersk and P&O.

3.5. Data Collection

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Chapter 4: Country Specific Factors

4.1. Historical / National Factors

Spain

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reduction of a fleet in Spain was due to strict legislation, competitive environment, decreased governmental help, which led to wide use of cheaper open registration of the ships under the flags of Panama, Bahamas, Cyprus, Malta, Liberia, etc. The administrative sector responsible for management of shipbuilding, fishing, taxation, ports, docking, etc., was rather decentralized and deregulated by numerous Ministries. The lack of coordinated management made it more difficult to focus in one direction of the development process of the maritime industry as a whole. Such lack of state unity fails to support on different levels of internationalization of the industry: investment-wise, sense of direction during the expansion stage and domestic policies. Spain concentrated even more on internal aspects rather than global expansion after the creation of the State of Autonomous Regions in 1977 and its sovereignty after joining European Union in 1986. The latter event weakened maritime sector and put in a vulnerable position regarding international relations. Thus sovereignty is a rather important issue for Spain due to the fact that it obtains approximately one million square meters of marine territory to protect. It places Spain amongst twenty nations concerning the size of exclusive economic zones (Vivero and Mateos, 2002). As stated in the article previously quoted in this section, Spain faced challenge of combining two processes of nationalization of marine industry and desired internationalization after the decolonization took place.

Britain

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The decade of 1950s-1960s reflected the emergence of international trade for Britain. Though internally Britain was a little torn by race disputes, almost happened civil war in Northern Ireland and nationalist movements in Scotland and Wales, but to a lesser extent. All these events, as stated by the historians, meant that Britain has lost its 'sense of direction' (Tomlinson, 2003). According to Cain and Hopkins model, who investigated the ties between businesses and government in decolonization process, there was just little unity within those institutions (Nicholas J. White, 2000). Britain is well-known to an exporter of wool and leather (William l. Garrison, 2003). The goods trade is directly connected with maritime shipping industry indicating a high level of activity of this business area of Britain. The advancement of transportation system is always influenced by social environments and markets, similar to technology development (Garrison, 2003). British maritime industry flourished when the steamships were introduced in 1700s after the successful usage of steam engines on the railroad (Garrison, 2003). These technological advancements gave the opportunity to grow for the national and international trade, allowing large volumes of bulk being transported at low cost. Technological revolution supported by the British government created a particular culture directed at growth and development of the nation's wealth. Open-minded thinking and openness helped to dissolve hurdles to internationalization process. The maritime trade was ruled by Britain until 1890s when competition from other countries represented a serious threat. Until then, Britain held half of the shipping transportation operations (Garrison, 2003). Britain's biggest trading partners already in 1800s were the USA and Australia, together with European countries such as Portugal. In Britain prevailed 'entrepreneurial capitalism', where firms' private contracting was widely applied though controlled by governmental rules represented by tariffs and subsidies (Garrison, 2003). Even though, government provided substantial help to the ship-owners, strong competition from other countries offering open registries, excessive credits with combination of overvalued asset prices followed by the financial crisis of 1970s gave a slowdown to British maritime industry (Gardner et al, 1996).

Denmark

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Denmark felt a need in expansion of its maritime importance internationally; this is reflected by its vast international expansion overseas. Maritime culture of Denmark comes long time ago since the Viking’s era, the sea trade and fisheries from Middle Ages (Worm, 1998). Major colonies of Denmark were located in Nordic region and were not contributing to the welfare that much. Main source of wealth for the country was international trade and remains like this up till now (Roland Ruppenthal, 1943). So the decolonization, the last phase of which was in 1953 when Greenland was separated from Denmark as a colony, did not bring any significant effects on the country's economy. Militarily Denmark depended on Germany, and economically – on Britain at the beginning – mid of twentieth century, and not the colonies (Bent Rying, 1981).

Another very important issue describes high level of internationalization of Denmark, and its companies in particular. Bellak and Cantwell (1998) in their article suggest that firms from small open economies (SMOPECs) tend to demonstrate a higher propensity to internationalize their operations than those companies that are from larger home economies. In a way it explains the fact that Danish Maersk is a huge global company, compared to smaller P&O and even smaller Spanish companies – Acciona and Elcano. Another research study proved that one of the most obvious factors in this case is market size, and the tendency for SMOPEC firms to venture to foreign markets, which is often seen as a constraint. (Gabriel R. G.. Benito, Jorma Larimo, Rajneesh Narula, and Torben Pedersen, 2000). ’Small nations are becoming more dependent on their MNEs, yet find themselves in an exceedingly vulnerable position.’ (Benito et al, 2000). The size and international orientation of each company in my case study in a way corresponds in proportion to the size of each country’s home economy and market size.

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4.2. Laws and Regulations

Spain and EU regulations

After the accession to European Union Spanish policy came under influence of EU regulations. Thus the country gained market access to other EU countries easily and the right to participate in policy making process. Some of the customs tariffs were changed allowing international trade and giving new opportunities to shipping companies (OECD, 2000). However, Spain has a peculiar feature of having a rather protectionist policy and the subordination of maritime policy to shipping construction policy as stated in the work of Coto-Millan and Sarabia (1993). The consequence of such policy was the prohibition of Spanish ship-owners to get their vessels into the international market. Another disadvantage was the higher costs of ships built by national dockyards of Spain, which offered ships of lower quality than other countries. However, the government saw the necessity in changing such a situation if they wanted Spanish maritime industry to develop. First step to improvement was the provision by the Banco de Credito

Industrial (Industrial credit Bank) of loans to the shipping companies that were partially financed

by grants given by Spanish authorities (Pablo Coto-Millan, 1996).

Spanish maritime industry was rather underdeveloped and was lacking cost of economies, e.g. economies of scale, scope, product and density, etc. Another reason for that were the effects of economic crises of 1973-1974 and 1978-1989 (Coto-Millan, 1996). Yet additional reasons for the slowdown were the cargo reservation, protected freights and aid to any particular traffic – these all are the effects of protectionist regulations, which did not allow international development. The idea behind this was the desired boost of maritime industry within national borders concentrating on purchases of only nationally produced ships, hiring of national crews and contracting national insurances (Coto-Millan, 1996).

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liberalized and open to trade between EU member states and also outside the borders of EU (Pablo Coto-Millan, 1996).Thus a new flag registration institution was created in the Canary Islands.

The Registro Especial de Buques y de Empresas de Canarias (Canarian Special Register of Ships) was established in 1992 by the Ley de Puertos de1 Estado y de la Marina Mercante (State Ports and Merchant Fleet Act). Main idea behind was advantageous conditions of this registration that gave the possibility of hiring small crews of different nationalities and, of course, the tax benefits (Pablo Coto-Millan, 1996). The benefits were in: 1) Tax exemption with respect to the Impuesto sobre Transmisiones Patrimoniales and Actos Juridicos Documentados (transfer tax and stamp duty); 2) A bonus of 15 percent of the work output of the members of the crew for ships registered in the Registro Especial; 3) A bonus of 35 percent of the Company Tax of the proportional use of the ships registered in the Registro Especial; 4) A bonus of 50 percent of the social security quota of the company. The policies in late 90s were all directed on internationalization of maritime industry, aid to companies’ development and increase of Spanish fleet.

Britain and EU maritime legislation

Since 1970s, when the Conservatives party came to power, maritime industry received fiscal support from government by having non-interventionist approaches. This way maritime industry was controlled by the market forces (B. M. Gardner, S. J. Pettit and H. A. Thanopoulou, 1996). Also, after 1964 there was a Shipbuilding Credit Act introduced, which eased the financing for maritime industry and assisted growth and development of the industry. However, the financial subsidies were not as successful as expected due to the occurrence of financial crises in 1970s. First of all, it caused all the assets to go down in value, which made it rather difficult for ship-owners to pay their credits. Secondly, there was a certain level of decline in the numbers of British maritime fleet after the Second World War. The major decline occurred after the first oil crises, when Britain lost 50 percent of its world share and within twenty years British flag registration went down to only 10 percent of world's tonnage, in comparison with previous flag dominance (Gardner et al, 1996).

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was signed by Britain, it adjusted its maritime legislation with respect to the UN terms. The Convention itself was adopted in 1982 by the United Nations and represents the most significant achievements in the international law. Each country’s government implements terms and conditions established by the Convention of Law of the Sea, using their own methods. For example, some countries give the Convention the direct force of Law under their constitution; others introduce new laws in conjunction with the Convention. Britain, on the other hand, established its own methods by adjusting each term and condition of the Convention to each specific situation with existing maritime legislation (Anderson, 1996).

Denmark and EU regulations

“Denmark joined the EU as the first Nordic country in 1972 and the membership of EU has since then been the main gateway for the integration of the Danish economy into the global marketplace” (Benito et al, 2000). Danish government provides its maritime industry with a substantial support, though it is stated to be non-interventionist in its nature (OECD, 2000). For instance, in 2005 a Danish Maritime Trust Fund was established to provide with financial support and certain measures to facilitate development of maritime clusters (Mogens Schröder Bech, 2006, in Wijnolst, 2006). Danish shipping is on the second place of export earnings in the world's list after Japan. This fact signifies that Denmark is a strong global maritime player as a country, implying the idea that its maritime companies are rather strong and internationally active (Mogens Schröder Bech, 2006, in Wijnolst, 2006). By deadweight tonnage estimates Danish shipping operates in high-value markets, and makes up 10 per cent of the total turnover from global maritime goods transport. These percentages are referred to Danish-owned or controlled ships (Mogens Schröder Bech, 2006, in Wijnolst, 2006).

As to the administrative structure of Denmark's maritime authority – it is a part of the Danish Ministry of Economics and Business Affairs. In order to facilitated sufficient work of Maritime industry there was a certain separation and creation of a separate Committee in order to eliminate administrative burden and to improve international competitiveness by concentrating efforts exactly on maritime sector.

EU maritime legislation

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trade it accounts for ninety per cent, and about thirty per cent of the intra-community trade, which is all carried by sea. As to the ownership and control of the ships they comprise forty per cent of Europe’s external trade that are strictly European (Haralambides, 1996). Even though the EU maritime legislation is not a direct country-specific factor, it is still related to the whole European community in which companies of my case study (Maersk, P&O, Acciona and Elcano) are operating. European Union imposes laws and regulation on all country members, including maritime industry. That is why it is included in the section on laws and regulations that unite all three country cases of current research paper.

According to United Nations Division for Oceans Affairs and the Law of the Sea for many years the laws and regulations regarding seas and oceans have been attempted to be united into a single convention. The idea behind that was to have one unified code of law that would be acceptable for all the nations in the world. Eventually, in 1982 Convention on the Law of the Sea was adopted, though universal acceptance was gained only on 16th of November, 1994. The essence of this convention was and is in the creation and adoption of universal legal framework for the rational management of marine sources and their conservation for future generations (United Nations). The main provisions of this convention were: Setting Limits, Navigation, Exclusive Economic Zone, Continental Shelf, Deep Seabed Mining, The Exploitation Regime, Technological Prospects, and The Question of Universal Participation in the Convention, Pioneer Investors, and Protection of the Marine Environment, Marine Scientific Research, and Settlement of Disputes.

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maritime industries in all three country cases of my research – Spain, Britain and Denmark.

There is one important procedure that maritime companies employ in order to use in their benefit the effects of globalization. Flagging-out is widely used method of cheap labor usage and to avoid high level tax payments. Flagging-out is defined as “an operational decision of certain ship-owners aimed at streamlining operating costs and other conditions to those prevailing in competing third countries” (Haralambides, 1996). One of main requirements though in this situation is that the countries offering open registry facilities should comply in accordance with international regulations concerning safety and the protection of the marine environment. The upside-down effect is that EU economies are undermined by reduced employment, loss of revenues, etc. Unfortunately, as European Commission studies state flagging-out accelerates in EU, thus decreasing the number of European flag registrations (Haralambides, 1996). The application of international conventions developed by the International Maritime Organization (IMO) establishes compulsory regulations relating, inter alia, to construction, operation, maintenance, training, safety management and pollution prevention, which must be applied by all Flag States. Their ships must undergo strict inspection and certification controls, either through their own officials or through especially recognized organizations for this purpose. Likewise, ships are subject to other controls by, for example, classification societies for the attainment and maintenance of class certification, and especially by Port States, exercised on foreign ships calling into ports of another country (Montero Llacer, 2003). Although the terms ‘‘open register’’ or ‘‘flag of convenience’’ have been profusely used since 1950, the use of FOCs dates back to several centuries. In the 16th century, British ships improperly used the Spanish flag in order to overcome the existing restrictions about trade in the West Indies. Moreover, they used the French flag on fishing ships from Newfoundland during the 17th century to avoid the imposed restrictions by their own country (Montero Llacer, 2003). In this way, it became a traditional practice for ship-owners to register their ships under a foreign flag so as to overcome obstacles or restrictions of a political or economic nature which affected their own country. Besides, avoiding penalty due to technical condition of ships and cutting costs, registration under foreign flags may have political implications. In case of Elcano company, for example, in order to launch shipping lines in Brazil, authorities required to register ships of Spanish company under the Brazilian flags.

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policies that protect and promote open trade and free competition on a fair, non-discriminatory, and commercial basis in international shipping, regardless of flag of registration. This objective should be supported by the Union’s compliance with international rules and standards according to the Convention concerning safety, environment and working conditions on board of the ships. Ships that are registered with a flag of convenience (FOC) are normally old ones (more than twenty years old), which do not correspond to high level of standards that International Laws require in Europe and are called “substandard ships” (F. Piniella, J. C. Rasero, and J. Aragones, 2005). The most common “flag of convenience” registrations are the ones provided by Panama, Liberia and Bahamas that constitute almost twenty per cent of the world’s ships (ANAVE, 2000). Such registrations eliminate costs involved with the crew and insurance for the ship owners. Unfortunately these ships are in threatening condition as to safety and technological characteristics of the ships in general and pose concerns for EU authorities demanded in International Conventions (Piniella et al, 2005). According to the ANAVE report on world's maritime business, in 2006 for example, 23,4 percent of world's fleet was registered in the EU; and 67,9 percent of ships under foreign flags in total. The same year Britain experience national flag registration by 7,5 percent and Denmark – 7,1 percent; Spain experienced decrease of 3 percent. According to the Lloyd's Register Statistical Tables, Spain holds the 35 world ranking

position. Container-ships under Spanish flag comprise only 13,7 percent out of total national

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Chapter 5: Companies' Profiles

5.1. Maersk

Maersk Line is a part of Maersk Group that has a market share of world’s industry 12 percent and represents a big association of maritime related companies. There are three major divisions: 1) A. P. Moller-Maersk, which deals besides shipping with exploration and production of oil and gas (Maersk Line and Maersk Logistics are part of this big company); 2) Maersk Line is a main figure of my case study research, provides its customers with worldwide network of vessels, containers, feeder vessels and supporting truck and train communication in a door-to-door international business; 3) Maersk Logistics provides its customers with supply chain solutions: warehousing and distribution or multi-mode transportation. Maersk Line is the core liner shipping activity of the general company A.P. Moller – Maersk Group, and it is the leading container shipping company in the whole world.

Such global company has about 22000 employees, it also has representation in about 325 offices all over the world, which are located in 125 countries, and its total fleet comprises 470 vessels. A.P. Moller-Maersk is organized according to Business Areas – Container Shipping and Related Activities; Tankers, Offshore and other Shipping Activities; Terminal Activities; Oil& Gas Activities; Retail and other Activities. Each of these business areas consist of several independent companies, each of them functioning as a complete organization and has its own international offices and subsidiaries. Container Shipping is composed of Maersk Line, Maersk Logistics, Damco, APM Terminals, Maersk Container Industry and Safmarine. All of them report to the Head Quarters in Copenhagen, Denmark, which shows central management combined with independent business functioning of each company.

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Figure 2: A. P. Moller-Maersk Chart

(Source: www.maersk.com)

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The initial company development traces back into the 19th century when in 1886 the first ship Laura was launched by the Peter Maersk Moller. The first company was established in 1904 in Svensborg. Then in 1912 the second Steamship Company Dampskibsselskabet was established in Copenhagen with six own-built ships constituting its fleet. Such a rapid expansion took place during the first decade of the company existence, which indicated determination to growth. Maersk was and is very active in shipbuilding, so the company founded its own shipyards: in 1917 in Odensk, Steel Shipyard; then in 1957-1959 when the capacity of its shipyard was not enough for Maersk, a new shipyard in Lindo was built. Since the wide use of containers, Maersk started building its own containers in 1991.

The main mode of expansion, peculiar to most companies in maritime industry, is the mergers and acquistions, due to large amounts of capital involved. In this section on internationalization and globalization I will go through the company's most important milestones of expansion illustrating the theory on mergers and acquisition expansion mode. In 1985 Norfolk Line was acquired by Maersk. In 1987 Maersk Line took over Chargeurs Réunis’ in Franco-Belgian Services. Then in 1993 Maersk took over of the EAC’s liner routes, liner vessels and containers as well as certain activities and organizations in the Far East and Australia. In 1999, A.P. Moller Group acquired the international container business of Sea-Land Service Inc. The business was integrated with the A.P. Moller Group companies. As part of the integration Maersk Line changed name to Maersk Sealand, but with the acquisition of Royal P&O Nedlloyd in 2006 it was changed back to Maersk Line. Also in 1999 acquisition of Safmarine Container Lines (SCL) took place and its related liner activities from South African Marine Corporation Limited (Safmarine), though new company was joined as a separate business entity, Safmarine, SCL, CMBT and Safbank etc. – and represented by its own agency network. Later in 2002 A/S Dampskibsselskabet TORM sold its liner division, TORM Lines, to the A.P. Moller Group. The activities included liner service between ports on the American east coast and the Mexican Gulf to ports in West Africa and were immediately integrated with the liner activities of Maersk Sealand, now Maersk Line, and Safmarine. These facts show that Maersk tried to capture global scope by its acquisitions every time targeting container shipping area with supporting services.

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was operating, connecting Asia and the United States of America. In 1985 the major shipping transportation lines were between Great Britain and the Netherlands, Germany and Belgium. During the German Occupation majority of Maersk vessels were employed abroad. In co-operation with other Danish ship-owner representatives in the USA, Mærsk Mc-Kinney Møller attempted to employ the Danish vessels, until the American Government took command of them in June 1941. Another aspect to show international scope of Maersk was the establishment of new ship brokering agency in the United Kingdom in 1951. And yet another activity was the establishment of the first terminal, built exclusively for Maersk Line, named Pier 51 at Port Newark, New Jersey in 1976.

Though other business areas except for shipping are not valuable aspects for my research paper it is still worth mentioning in order to indicate the scale and scope of Maersk's magnitude. Since 1960s and on A.P.Moller-Maersk started its diversification strategy, which involved exploration and production of oil and gas, then a supermarkte group was acquired, production of disposable medical goods made of plastic, introduction of supply chain solutions, etc.

5.2. P&O (The Peninsular and Oriental Steam Navigation Company)

The company dates with its history back in 1830s. It started up directly as international company linking Britain with Portugal and Spain. The name Peninsular and Oriental is known due to the Imperial mail services lines connecting Britain, India, China and Australia up till the Second World War. Like many other companies P&O diversified its activities and entered such business areas as construction management, property investment and development, and a variety of service businesses including exhibition and conference centers, but it lasted only until March 1999 when the company decided to concentrate on its core maritime and transport operations. These facts show that P&O started out as a global shipping company from the very beginning of its foundation.

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Already in 1840 the company was building ships and extending their shipping line to Calcutta/ Suez. By 1845 they reached Hong Kong and Singapore, and in 1852 – Sydney. The company implemented the most common expansion mode – acquisitions. Between 1914 and 1946 P&O acquired more than ten other shipping companies substantially increasing its scope of operations and fleet. In 1904 the company diversified its services and became the first cruising company. In 1960s the company proceeded with diversification. In 1970s with new developments of the maritime industry and on the market, P&O engaged in the container shipping activities. After the Second World War the company concentrated on bulk transportations by investing in cargo ships - conventional and refrigerated cargo liners, tramps, bulk carriers, tankers, liquefied gas carriers and especially container ships. In the postwar period the company experienced considerable increase in shipbuilding costs and heightened overseas competition. Also during this time was the end of the British Empire because India recovered its independence in 1947, leading to a sudden fall in the number of regular passengers including civil servants, soldiers and their families. P&O dealt with the new circumstance by redirecting its engagements on cargo. Here we can see direct effect of decolonization on company's operations.

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Figure 3: P&O Group Chart

(Source: www.ponl.com)

In the decade of 1980s P&O undertook a number of acquisitions. It bought out its partners in Overseas Containers in 1986, purchased ferry, property and harbor group European Ferries in 1987, and doubled the size of Princess Cruises with the acquisition of the cruise line Sitmar in 1988. Then it bought most of the Cunard Ellerman container shipping interests from Trafalgar House in 1991. Natural company growth and strategic acquisitions allowed P&O to expand globally, capturing 6 percent of the world's market share. Current company P&O Nedlloyd specializing only in container shipping appeared as a result of a merger of P&O and Nedlloyd in 1996. It operates as a separate division within a P&O group, each responsible for different type of maritime industry business activities. In any case, P&O was dealing with containers for many decades, only after the merger it created a separate business division for the container shipments and thus strengthened its position and increased its market share. As was stated in the Journal of Commerce, by 1999 P&O was the third world's largest maritime carrier. That was the most significant and essential expansion of all - involvement in containerization, which was one of the key modernizations of maritime shipping industry in the twentieth century. P&O became a leader in the containerization movement together with the development of Overseas Containers Ltd..

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with the Dutch company Nedlloyd Lines at the end of 1996 to form P&O Nedlloyd, which became one of the three largest container shipping companies in the world. Same business entity was enlarged by the acquisition of Blue Star Line in1998. P&O has 70 established trade lanes connected to 250 main ports, served 120 countries worldwide, with a fleet comprised of 148 ships. However, in 2005, P&O was entirely bought by AP Moeller-Maersk. The latest event ceased the existence of P&O as a self-standing maritime shipping company. In March 2006 P&O and all its assets were bought by DP World one of the world's fastest growing marine terminal operators.

P&O has similar organizational structure as Maersk. It is composed of a group of companies, each of them operating independently in separate business areas. According to the framework used to classify each company by type of MNE, P&O relates to Global Functional Organization. The difference with Maersk is that Container shipping division is responsible only for one type of respective operations, and the rest of related businesses are organized as separate business divisions. Each of the company in the group is rather independent and responsible only for the products/ services it provides, has its own value chain and its own international offices/subsidiaries. Thus the reporting system is centralized, which creates disadvantageous situation with lack of cooperation between business units.

5.3. Acciona Trasmediterranea

Acciona Company is one of the biggest national state companies of Spain, which has several business divisions each representing separate business companies: Infrastructures, Energy, Water, Real Estate, Environmental and Urban Services, Logistic and Transport Services (Acciona Trasmediterranea is a part of this business division), Project References. Acciona as a whole has retained its position as industry leader in the Dow Jones Sustainability World Index (DJSI World) and Dow Jones STOXX Sustainability Index (DJSI STOXX) this year. These indices are world-leading benchmarks in sustainability and socially-responsible investing, which are important indicators of Acciona’s importance on the national market. The company also scored the highest in the environmental and social dimensions and obtained the highest score in its industry.

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value-added businesses and prioritized profitability over size. Standardization also enables the company to draw synergy from the various divisions and enables it to profit from investments in strategic businesses.

The company starts its existence in 1917 after the merger of Entrecanales & Tavora and Cubiertas & MZOV. It was founded by Juan Jose Domine, Vincente Ferrer, Joaquin Tintore and Enrique Garcia. It had its HQ in Barcelona and had a fleet of 45 ships.

Further on the company develops its shipping activities, which are the core of Acciona's business. In 1978 company became a State-owned and company’s fleet was renovated, which last till 1986. In 1980 fast ships were launched with incorporation of Jet Foil in the Canary Islands. This event served as a renewal of traffic between Peninsula and the Canary islands through the updating of cargo ships to cover these lines. And at the same time the launch of new line illustrates the diversification of a business, which in its way represents expansion of business activities of the company. As was already mentioned in the Historical Factors section of this research paper, Spanish State mainly concentrated on cabotage operations. So expansion of Acciona's activities was done through the increase of the fleet and its diversification. In 1989-1990 the company bought two new Jet Foils and three new cargo Ro-Ro ships set on the line to the Canary Islands. The company's fleet kept on growing continuously with new Jet Foil ships and also High Speed fleet was introduced with two new ferries in 1995-1996. As one the expansion modes indicated in the case of Maersk Company, Acciona expanded by establishing new Maritime Stations in Barcelona and in Las Palmas and Gran Canaria in 1997 and 1998, respectively. Rapid and continuous enlargement of the company’s fleet took place during the years 1998-2001.

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Peninsula and Balearic Islands, the Canary Islands and Ceuta and Melilla. Internationally wise, the company continues to expand. The operations already stretched to Marocco, Tangiers, Nador, Algeria, Italy and France (Vigo - Saint Nazaire line). The structure of the company is illustrated below in the organizational chart. When studying the chart it comes quite obvious that Acciona company has a strictly hierarchical structure, consisting of departments responsible for certain business activities like marketing, finance, etc., and not for business areas like it was established in Maersk and P&O.

Figure 4: Acciona Group Chart

(Source: Acciona Trasmeditteranea Corporate Structure Report)

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of its own value chain; the control of technology and management systems are tackled centrally, as well as knowledge flows from the centre to each subsidiary, or in this case to operational agents abroad. This statement finds reflection in the organizational chart of Acciona Trasmediterranea. It is well seen that the company is managed strictly centrally and the division is done on the basis of functions of each department. As described in the corporate structure of the company, it has international agents, which are under control of Head Quarters rather than independent subsidiaries. The company started in 1917 as a national operator and with years became international by launching shipping operations to France, countries of North Africa, Portugal, etc.

5.4. Empresa Naviera Elcano

And finally the last company taken for my case study research is a Spanish Empresa Naviera Elcano S.A., based in Madrid. It is engaged in the shipping of bulk products, both solid (coal, ores, grain, etc.) and liquid (LNG, LPG, oil, oil products and chemical products). Empresa Naviera Elcano S.A. is a part of Elcano Group, which consists of Lauria Shipping S. A. Madeira, it also has an office in Portugal in Lisboa; in Argentina there is an office of a daughter company in Buenos Aires - Empresa Naviera Petrolera Atlantica S. A. (Enpasa); Brazilian daughter company is located in Rio De Janeiro - Empresa Navegacao Elcano S.A.; also Elcano Product Tankers 1, S.A. and Elcano Product Tankers 2, S.A. EGT located in Las Palmas de Gran Canarias, Spain; and Head Quarters are in Madrid, as was already indicated. From the composition of the company and list of its daughter companies it can be seen that it is rather internationalized organization involved in diversified shipping transporting operations of all types of goods.

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sector until 1997, when it was entirely privatized. Since then, the company launched the program of diversification, expansion and growth, through which, apart from consolidating the company, it has doubled its fleet and operates in different countries, particularly in Brazil and Argentina. Over its 65-year history, Elcano has owned and operated more than 230 vessels of all types: cargo carriers, cable ships, timber carriers, bulk carriers, reefers, oil and product tankers, chemical tankers, LPG, LNG, etc, and has, over the years, acquired great prestige as a ship-owner and operator and an excellent reputation as a shipping company. Figure 4 below shows the composition of the company.

Figure 4: Elcano International Group Chart

(Source: www.navieraelcano.com)

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with its national counterparts. Looking at the corporate structure and organizational chart of the company, it can be stated that it is, together with Acciona Trasmediterranea company, in the classification related to the International model by Bartlett and Ghoshal (1987). This is due to the fact that, according to the definition of the framework and company facts, the company is being managed centrally based on home country leadership strategies. Though the structure reflects national companies retaining most of its own value chain; the control of technology and management systems are tackled centrally, as well as knowledge flows from the centre to each subsidiary.

In comparison with Acciona Trasmediterranea, Elcano Company is more active internationally wise has more complex structure. To be more precise, Elcano can be classified as Area or Geographic Organization, where it is divided into business areas and not into the departments as it was established in Acciona. Moreover, the company founded several self-sustaining daughter companies in Argentina and Brazil. The priority is given to regional geography, whereas divisions come down from central unit into regions and then to separate countries. However, regional level of control is missing which makes subsidiaries report directly to home country CEO, thus creating inefficiency in cross-country and cross-region learning and strategic coordination. On the other hand, local market responsiveness is rather high while each subsidiary works individually with regional units supervising the next layer of the organization.

“Internationalization Process of Maritime Shipping Companies: comparative case study”

Master Thesis

Research