Uppsala haier Can Uppsala Model Explain the Internationalisation Process of Emerging economy Firms? The Case of Haier China

EAMSA 2015 Track Interactive Session S Zhao et al 1 Can Uppsala Model Explain the Internationalisation Process of Emerging economy Firms? The Case of Haier China Shasha Zhao, Middlesex University Hui.

EAMSA 2015 Track: Interactive Session S.Zhao et al Can Uppsala Model Explain the Internationalisation Process of Emerging-economy Firms? The Case of Haier China Shasha Zhao, Middlesex University Hui Tan, Royal Holloway College Marina Papanastassiou, Middlesex University Lynne Butel, Plymouth University Abstract Topic on advance-economy firm internationalisation is well researched while little is empirically known of how emerging-economy firms internationalise Internationalisation process of Uppsala Model argues that firms from small economies (e.g EU) characterised by limited locational and internal resources tend to internationalise incrementally (both in terms of psychic distance and entry modes) which is different from firms from large economies characterised by rich resources (e.g USA) and keen makers of large foreign direct investments (irregular patterns) This study extends current understanding of Uppsala Model by examining its power of interpretation of a detailed historical case study of a firm from China – Haier Corporation This study finds that the Model does not only explain the detailed process a small-economy firm goes through when internationalise as we know it, but can largely apply the process to the emerging-economy context Furthermore, this study finds that, based on data collected so far, the emerging-economy as the home location to be a unique context in the sense that emerging-economy firms tend to lack significant amount of management resources for handling more effective and fast-pace direct foreign investments like the America firms in the old days Hence, the incremental and careful risk-averse steps taken by Haier can be best explained by the model This model is further appropriated by the fact that Haier case reveals factors of psychic distance and availability of experiential knowledge are important for emerging-economy firms in the process, in terms of both location and entry mode choices, i.e from nearby to distant regions, and from irregular exports to establishment of own subsidiaries EAMSA 2015 Track: Interactive Session S.Zhao et al Introduction Firm internationalisation has been a long-discussed topic in the area of international business research Partly due to the rapid technological and transportation developments, the speed of globalization has fastened Advance-economy firms have benefited from this phenomenon in the way of internationalising their target markets and organizational operations for the reason of global competitiveness In capturing this development, a number of scholars conducted relevant studies (e.g Vernon 1966, Johanson and Vahlne 1977, Dunning 2000) Among them is the well-established Uppsala Model (UM) which explains the internationalisation process of firms from small advance economies The Model was first developed by Johanson and Vahlne in a longitudinal study of four Swedish firms in the 1970s The resulted Model made two sets of propositions to explain the process: one, location choices - firms tended to start the internationalisation process by first entering neighbouring countries with minimum psychic distance, i.e similar national cultures and business systems, then gradually moving to more distant locations as experiential knowledge of the firm accumulates; two, entry mode choices – firms tended to enter a selected foreign market in the form of lowest investment possible to minimise risks, e.g irregular exports, to gradually deepen their involvement to the ultimate establishment of subsidiaries (Johanson and Vahlne 1977) Over the past few decades, international business witnessed a surge in the outward flows of investments from advance economies made by firms for strategic and operational purposes, such as global production and innovation (Vernon 1965, Ronstadt 1977, Porter 1989, Pearce and Papanastassiou 1997, Buckley 2014) In recent time, while the global stage is seen to be largely dominated by Multinational Enterprises from advanced economies (MNEs), many are witnessing the emergence of a new group of firms coming onto the stage, i.e the internationalisation of emerging-economy firms with home markets such as Brazil, Russia, India, and China (EMNEs) This is evidenced in a recent World Investment Report published by United Nations Conference on Trade and Development (2006) which suggests that Foreign Direct Investments (FDIs) from the ‘South’ (i.e emerging economies) surged to $133 billion by 2005 and represents 17% of world outward flows These statistics largely question our traditional view of MNE FDIs Hence, for the first time, it is fair to argue that international business is no longer limited to global investors from the ‘North’ (i.e advance economies), but opening up to new players from the ‘South’ (emerging economies) This recent phenomenon invites questions on how EMNEs really internationalise Yet, despite the significance of this international business development, research interests and detailed studies exploring and/or explaining it have been extremely scarce to date The purpose of this study is to conduct an in-depth study of the internationalisation of an EMNE More specifically, it attempts to take a historical case-study approach to review, analyse, and discuss the internationalisation process undertaken by Haier China since its establishment in 1984 Whilst our understanding of the internationalisation process of MNEs from different home countries is well-established, in comparison, we know much less about the process which EMNEs have taken to internationalise, considering the different home and global markets they are presented with Without empirical evidence, it is inappropriate to EAMSA 2015 Track: Interactive Session S.Zhao et al assume that EMNEs go through the same or different process as most established theories or models developed to explain firm internationalisation are in the context of advance economies (Dunning 2000, Johansson and Vahlne 1977) Hence, the recent phenomenon of emerging-economy firm internationalisation needs to be better understood Against this background, the paper aims to make valuable and timely contributions by addressing three key research questions: How is the internationalisation process of Haier developed across a number of key global regions? Whether and how can the Uppsala Model explain the case of Haier China? What are the practical lessons which can be learned from the case of Haier? The structure of this proposal is as follows: first, a theoretical review of the existing literature on firm internationalisation, which is followed by a description of research methodology Then, some pilot interview data collected to date is presented and discussed A theoretical review of the internationalisation process UM has been widely recognised as a strong ‘explanator’ of firm internationalisation process Not only that the Model was developed based on solid empirical data from a longitudinal study of four Swedish companies in the 1970s, its applicability to similar home contexts (i.e small advanced economies from Europe) was generally supported It is generally found that the Model explains the internationalisation process in two related ways (i.e location and entry mode choices) and based on two organisational conditions (i.e level of overseas experiential knowledge and psychic distance between home and overseas) (Johanson and Valhne 1977) The proposition of the Model is that when a domestic firm with no or limited experiential knowledge, decision makers tend to opt for nearby locations where psychic distance is the shortest, and least costly investments – exports – as the favoured entry mode for risk minimisation As time passes, accumulated experiential knowledge of the nearby market enables the firm to further its internationalisation in two directions: one, follow-on investments shift towards more committed and intensive activities to sales office, production site, and finally to fully-operational subsidiaries; two, expansion to more psychically distant locations becomes less of a challenging task comparing to previously and this expansion continues to ever more distant locations An illustrative figure is presented below EAMSA 2015 Track: Interactive Session S.Zhao et al Step 1: location choice Step 5: operational subsidiary experiential knowledge Step 4: production site Step 2: (irregular) export Step 3: sales office Against the proposition of the UM, a number of studies observed many American MNEs to be less of a follower of this pattern; instead, the pattern of MNE internationalisation has been long debated by various researchers for its diverse nature Some studies have noted MNEs to have expanded in either very rapid or slow pace to diverse geographical locations, depending on their internal and external factors (Hutzschenreuter, Voll, and Verbeke 2011; Penrose 1959), instead of going through the predictable stages as per the UM The various causes for differing patterns of internationalisation process are discussed in details next Modes of entry For a variety of reasons such as abundant resources, new markets and technologies, and governmental policies, the international business sphere has witnessed the emergence, development, and success of many EMNEs in recent time (Ghauri and Santangelo 2012) Research interests on how they have become so globalised have grown rapidly over the past few decades (Chuan and Orr 2009; Luo and Tung 2007; Parmentola 2011; Zahra, Abdelgawad, and Tsang 2011) As extensive studies have been conducted on various aspects regarding their developments, one research stream has played a particularly important role in contributing to the understanding of MNEs, i.e firms’ choices of modes of expansion into foreign markets In international business literature, there are a number of foreign market entry modes a MNE can choose from when internationalising their presence from their home countries Successful examples include service provider Starbucks, finance provider Citi Group, manufacturer General Motors, and many more Many of these MNEs have adapted a selection of entry modes in different or the same foreign markets whilst others have chosen to focus on one mode in particular In general, there are three main types of expansion modes: export, hybrid, and wholly-owned subsidiaries (Ahsan and Musteen 2011; Kogut and Singh 1988) Terminologically, export refers to basic trading to another country without much resource commitments, and can be on an more ad hoc basis; hybrid refers to longer-term EAMSA 2015 Track: Interactive Session S.Zhao et al partnerships such as alliance and joint ventures; and wholly-owned subsidiaries are direct investments in building a more complete operation which is legally held by parent company (Ahsan and Musteen 2011; Kogut and Singh 1988) Each of these types entails a different level of resource commitment, managerial governance, risk exposure, and performance expectations (Anderson and Gatignon 1986; Buckley and Casson 1998) These different levels have been categorised into ‘low VS high control’, ‘equity VS non-equity, or ‘shared VS full control’ (Ahsan and Musteen 2011; Anderson and Gatignon 1986; Datta, Herrmann, and Rasheed 2002) Drawing on the view of transaction cost economies, MNEs’ decisions to choose a particular mode are seen as the result of assessment of these categories, with the key intention to minimise any potential transaction costs involved Previous studies argue that what fundamentally influences MNEs’ assessment to choose one mode over the other is influenced by a number of internal and external factors Among these factors, the level of culture distance between home and host locations is seen as one of the more influential and critical considerations (Cheong et al 2009; Datta, Herrmann, and Rasheed 2002; Kogut and Singh 1988) Culture distance Successful foreign market entry has always been a critical topic in the field of international business (Anderson and Gatignon 1986; Kogut and Singh 1988; Tsai and Cheng 2002) How a firm decides to enter a foreign market is determined by a range of factors and amongst which culture distance has long been recognised as a key one In other words, ‘culture effect’ plays a significant role in influencing MNEs’ foreign market developments (Cheong et al 2009; Kogut and Singh 1988) Most of previous studies and scholarly interests laid in the context of western or advanced economy MNEs and much less attention has been paid to the growing MNEs from emerging or less advanced economies, such as China On the other hand, recent rise of those new MNEs on the world stage calls for urgent attention in understanding how they have achieved such success so far – in particular, what role ‘culture effect’ plays in relation to their decision-making to enter foreign markets has attracted little research interests (Cheong et al 2009; Farrell and Xiaohua 2011; Luo and Tung 2007) While there has been a long and common consensus and extensive findings suggesting that culture distance can have significant effect on Western MNEs’ decisions to internationalise, there is yet detailed convincing empirical evidence to suggest the same for emerging-market MNEs (Rugman 1996, Ghauri and Santangelo 2012) This identified knowledge gap is made even more important by Rugman (1996) who stated that the international expansion of emerging market firms challenges the validity of the traditional theories of the MNE Cultural distance and psychic distance are often referred interchangeably in international business literature and both are generally used to describe the level of national differences in terms of a variety of factors including language, work ethics, values and social structures between the home and host country (Ahsan and Musteen 2011) There is extensive literature on culture distance but in a fairly fragmented and vague manner of existence Xxxx EAMSA 2015 Track: Interactive Session S.Zhao et al was one of the first to establish a systematic view of culture distance by providing a more valid and integrated definition There has been two conflicting set of past empirical findings whereby one set suggests that the greater the culture distance between home and host, the more likely that the firm would choose wholly-owned subsidiaries as a means to achieve greater control and another set argues that the greater the culture distance, the more likely that the firm would choose least investments, e.g export, as a means to avoid costs and risks associated with high uncertainly Specifically, Kogut and Singh (1988) explored the relationship between culture distance and choices of entry modes in a systematic and empirical manner They claim that characteristics and therefore distance of national cultures perceived by MNEs have direct effect on their decisions Findings of their study suggest that due to the difficulty to integrate an already existing foreign management, culture differences are especially important in the case of hybrid modes of entry This is due to the fact that post-acquisition costs are often substantial and influenced by the organisational fit of the two firms In contrary, they find that a joint venture often serves the purpose of assigning management tasks to local partners who are better at managing the local workforce and relationships with local counterparts Therefore, they argue that this mode of entry eliminates many of the problems caused by cultural factors, though at the cost of sharing governance and ownership The explanation for the argument is that while joint ventures are affected by cultural distance between partners, such conflicts not obscure the original intention to choose this mode because the alternative mode of acquisition is more disruptive than delegating management tasks to a local partner The most ideal modes which avoid the issue of sharing in joint venture or costly acquisitions are either export or wholly owned subsidiaries On a similar note, Hill, Hwang and Kim (1990), Tsai and Cheng (2002), and Ahsan and Musteen (2011) have found supporting evidence showing that when a MNE perceives a target foreign market to be high in cultural distance in relation to their own, to reduce transaction costs involved, they tend to opt for either exports or joint ventures rather than wholly-owned subsidiaries This is because high culture distance is perceived as a huge uncertainty for MNEs Hence, their desire to make high levels of resource commitment is reduced Instead, export mode is much more straightforward and joint ventures allow contribution from local partner to manage some of the operations as they are much more familiar with local business practices, languages, and values, which in turn reduces transaction costs involved in comparison to acquisition or greenfield, which come with extensive learning On contrast, when a foreign market’s culture is perceived to be similar to the MNE’s home country, low uncertainty and therefore low transaction costs tend to create opportunities for investing in wholly-owned subsidiaries This is because high transaction costs and uncertainty associated with two firms with highly diverse national culture backgrounds not exist in large in the context of low culture-distance countries MNEs’ desire and ability to retain more management power in a foreign market is facilitated by their familiarity with the market in terms of language, value, and practice Hence, in this case, the mode of wholly-owned subsidiary is perceived to be much more attractive to MNEs EAMSA 2015 Track: Interactive Session S.Zhao et al Research methodology Research design For research in general, there are two approaches to choose from: Qualitative and Quantitative For the purpose of this paper which is to investigate the emerging trend of EMNE internationalisation, a qualitative approach is chosen for a number of reasons: One, as literature shows research in the area of EMNE internationalisation is still at a very early stage, existing knowledge on the topic is not sufficient to provide any viable theoretical frameworks for quantitative examination Instead, there lacks more exploratory studies at this stage, which should better capture the topic in a more systematic, holistic and revealing way to triangulate and enrich existing understanding Against this background, qualitative research approach is more appropriate for this study as the research question is specifically concerned with ‘how’ This type of questions cannot be fully captured by quantitative approach using statistical data More importantly, given that firm internationalisation is a real life event which takes place over a number of years rather than a one-off incident, the whole process must be fully captured Hence, a longitudinal approach must be called for Data collection methods For the purpose of this study, case study method is chosen as it “allows investigators to retain the holistic and meaningful characteristics of real life events” (Yin 2003) Two sources of case data will be collected, both primary and secondary In terms of the former, this study uses face-to-face interview as the primary channel while using documents as a complimentary In terms of the former, semi-structure interview format and guideline are used This helps to put the interviewer and interviewee in the right direction whilst allowing for open responses and capturing potential new data (Denscombe, 2000) The design of the guideline and formation of questions are based on previous studies of Ahsan and Musteen (2011), Buckely and Casson (1998), and Caves and Mehra (1986), and adjusted slightly for the purpose of this study Documents are provided by the respondents containing information relevant to the company, its strategy, developments etc In terms of the latter, while interviews allow researchers to obtain primary information about one’s experience and knowledge relating to matters concerning the investigation (Creswell 2007; Ghauri and Gronhaug 2003), they somewhat have some limitations as firm internationalisation is generally considered an on-going development which spans across a number of years, as per the study by Johanson and Vahlne (1977) Hence, short-lived interviews cannot fully capture the developmental process over a longer period of time; rather, this method can only generate data to reveal partial of the internationalisation process (Yin 2009) Therefore, related publications are considered to complement interviews for two important reasons: One, secondary publications can be more comprehensive in terms of historical information covering the internationalisation process concerned, enabling the EAMSA 2015 Track: Interactive Session S.Zhao et al subsequent analysis to be specific and holistic; two, information from these publications are factual and bias-free, providing objectivity and credibility to the analysis In terms of sampling to obtain representative information, there are two matters to consider: first, China is chosen as the emerging economy context to focus on as the World Investment Report noted the country as having the largest outward FDIs in comparison to any other emerging economies; second, Haier Corporation is chosen as the case sample The reason behind choosing this case is not simply due to the fact that the company is widely recognised worldwide as one of the most successful Chinese MNEs in modern time, according to Forbes (www.forbes.com [accessed 10/07/2012]), but the fact that while many state-owned MNEs have internationalised successfully, such as Geely Group from China, who acquired Volvo, these firms represent a different group of firm characteristics in comparison to the privately-owned EMNE For the purpose of examining UM, Haier, being the first privately-owned Chinese company to internationalise and therefore has the longest history in terms of overseas operations (Liu and Li 2002, Bouyoucef and Chung 2015), is selected as the more appropriate case The group was founded in China in 1984 to produce and sell consumer appliances Now, the group is made of more than 70,000 employees with worldwide reach of 24 key markets including UK, USA, UAE, Germany and Japan (www.haier.com [accessed 10/07/2012]) Pilot study As this study is still at its developmental stage, the first two-hour pilot personal interview was conducted with the subsidiary’s manager who has been with the company for a number of years, a number of interview questions were discussed where the respondent who was able to provide some initial information on the topic investigated To pilot, the respondent was able to ask for clarification of each interview question before providing appropriate answer This minimised any potential issues relating to validity of collected data The internationalisation of Haier: a regional perspective The internationalisation process of Haier will be examined by three world regions: Asia, Middle East and Africa, and Europea and America As data collection is at an early stage, some example findings from the pilot study conducted recently with the UK manager are summarised below: Perception on China-UK culture distance The manager commented, when asked about the company’s view on the culture distance between China and UK before coming to the UK, that: “China and UK cultural difference is highly significant where corporate brand has to be rebuilt with a European-centric approach.” EAMSA 2015 Track: Interactive Session S.Zhao et al This comment is in line with the suggestion of Ahsan and Musteen (2011) Interview further reveals that the specific cultural aspects of language difference, values, work ethics, and social structures were viewed differently in terms of their importance For example, work ethics was ranked as the most important consideration for the company, while values and social structures are equally important in the second place, and language was the least of their concern This could be interpreted as the group itself is highly English-language centred and majority of employees and managers chosen to be located overseas are English-competent On the other hand, work ethics was a key issue due to the significant difference between the countries, and the manager revealed: “It is because we have worked with UK partners for ten years previously when exporting that now we are able to manage this issue better Otherwise, we would have had many more problems And hence, we have recruited a number of British employees.” Culture distance and choice of market entry modes When the manager was asked about what are the key concerns the company had when choosing among different modes to enter the UK, findings supported suggestion made by Johanson and Vahlne (1977) and Buckely and Casson (1998) on perceived level of uncertainty, management control/ownership, resource commitment, risk exposure, future performance expectations, to be managerial concerns in choosing entry modes The manager recalled that irregular exports were the only mode used by the company for the UK market Following a number of years of initial export operations, the firm started to establish a sales subsidiary in the country since 2010, this could be explained by further response from the manager: “Culture is not really an issue for us then because we already felt we were already partly in the UK through exporting” Emerging economies, such as China, Brazil, and India, each represents highly unique national cultures EMNEs from these countries can find many foreign markets to be highly culturally distant from their own For instance, when a target market is a developed Western country such as the U.K., EMNEs from China will find language, value, and business practices to be extremely unfamiliar to them This can create uncertainty in their perception of this destination Hence, in order to internationally expand, they are likely to choose exports or joint venture depending on whether a suitable partner is available and local governmental policies permit This is because unfamiliarity with the foreign culture leads to the perception of high uncertainty, in spite of the different characteristics of EMNEs and MNEs Hence, to avoid potential high transaction costs involved as a result of acquisition and greenfield investments, EMNEs are mostly likely to opt for the less resource-committed and safer modes This conceptual argument is in line with the studies of Hill, Hwang and Kim (1990), Tsai and Cheng (2002), and Ahsan and Musteen (2011) In spite of the fact that EMNEs and EAMSA 2015 Track: Interactive Session S.Zhao et al MNEs are potentially two groups of firms representing distinctive characteristics, the effect of culture distance on EMNEs’ choices of foreign market entry modes remains largely the same to MNEs (Further data collection continues) 10 EAMSA 2015 Track: Interactive Session S.Zhao et al Reference Ahsan, Mujtaba and Martina Musteen (2011), "Multinational enterprises' entry mode strategies and uncertainty: A review and extension," International Journal of Management Reviews, 13 (4), 376-392 Anderson, Erin and Hubert Gatignon (1986), "Modes of foreign entry: A transaction cost analysis and propositions," Journal of International Business Studies, 17, 26 Anwar, Syed Tariq (2012), "Fdi regimes, investment screening process, and institutional frameworks: China versus others in global business," Journal of World Trade, 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Whether and how can the Uppsala Model explain the case of Haier China? What are the practical lessons which can be learned... perspective," Journal of Management Studies, 48 (2), 305-329 Johanson, J and J E Vahlne (2009), "The uppsala internationalization process model revisited - from liability of foreignness to liability