The dynamics of emerging economy MNEs: How the internationalization process model can guide future research

Abstract

The rapid emergence of multinational enterprises (MNEs) from emerging economies calls for a re-assessment of established theories of the MNE. We assess the usefulness of the internationalization process model (IPM), also known as the Uppsala model, to explain the recent strategies of emerging economy MNEs. We argue that popular stages models derived from the IPM are not helpful, but the underlying process of experiential learning driving steps of increased commitment is an important element in explaining the evolution of these MNEs over time. Focusing on the role of acquisitions within internationalization processes, we illustrate our arguments with six case studies of Thai MNEs. On this basis, we discuss how the IPM can inform future research on emerging economy MNEs. Specifically, the IPM suggests focusing on the internal and external factors that may induce firms to accelerate their cycle of international learning and commitment, in particular the roles of networks, acquisitions, human resources, big step commitments, the home country institutional environment, and possible managerial biases.

Appendix: Case Stories

BANPU Plc acquired Centennial Coal in Australia

The acquisition of Centennial Coal of Australia by BANPU Plc (BANPU) in 2010 was the largest in Thai history. BANPU was the industry leader in the Thai mining industry, while Centennial Coal was one of the largest coal producers listed on the Australian Stock Exchange. BANPU saw its main competitive advantage in its access to the Thai market. The acquisition of Centennial was primarily driven by resource-seeking motives: local coal reserves in Thailand had been depleted, driving BANPU to seek resources overseas. In addition, the acquisition provided access to both the Australian market, and numerous other countries where Centennial had established customer relationships, for example, power stations in Japan and Europe (Sharples, 2011).

The process of internationalization followed steps similar to the stages models. Established in 1993, BANPU started to export a few years later, followed by sales offices. Eventually, in 2001, BANPU invested internationally by FDI into Indonesia, followed by subsequent acquisitions in Indonesia, Vietnam (1991–2001), and China (2003–2006). The knowledge that BANPU gained about regulatory systems, government policies, and business practices in Indonesia, and the relationships it gradually developed with the host government, clients, and partners facilitated subsequent investments in the country. For example, our interviewee emphasized that in the mining business, “local knowledge” of government policies and regulatory systems is crucial when investing in a specific country.

BANPU’s internationalization had a distinctly regional focus motivated by its understanding of business practices and cultures in Asia. The focal acquisition in Australia took BANPU beyond its regional focus, and the CEO declared in the annual report that the “purchase of Centennial this time is such a big step that BANPU seems to break out of its comfort zone” (BANPU Plc, 2010), indicating a push further away from its Thai origins.

PTT Plc acquired Indonesian coal business from Straits Resources Ltd (SRL)

PTT Plc is Thailand’s leading energy company operating natural gas, oil, petrochemical, refining, and coal businesses, ranked 155th in the Fortune 500 in 2010. In 2009, it acquired a 60 % equity stake in Straits Bulk and Industrial Pty Ltd (SBI), a business unit of Straits Resources Ltd (SRL), a diversified Australian resource company. The main assets of SBI were a controlling stake in a coal mining business in Indonesia, as well as further assets in Brunei, Madagascar, and Mongolia.

Like BANPU’s expansion, this acquisition was motivated by the Thai demand for natural resources. Hence, PTT sought “to secure the country’s energy supply, including both new energy and alternative energy sources, through international investment” (PTT, 2011). Closely related was the strategic asset-seeking motive of obtaining industry know-how and experience in the coal business, which was a new industry for PTT at the time (Scott, 2009). Another strategic asset was the access to markets in third countries, especially SRL’s customer relationships. In particular, 32 % of sales came from Japanese power companies, of which 80–90 % were long-term contracts (PTT, 2009). Efficiency seeking was a subordinate motive: Geological and ecological conditions in Indonesia allow using the most cost efficient methods of coal mining.

PTT’s internationalization path has mainly been driven by the availability of natural resources. In Indonesia, a critical resource has been its “good government relationship.” Privatized in 2001, the Thai state still held 50 % of PTT’s equity and continued to provide active support. Hence, the relationship between PTT and the host government was embedded in the political relationship between the two nations, which was viewed positively by the Indonesian partners. After entering coal mining in Indonesia in 2009, PTT also acquired a coal mine in Australia in 2011, thus moving to a more distant location.

In terms of operation modes, PTT started in Indonesia with the large commitment of a partial acquisition of a fairly large organization. However, PTT systematically built its knowledge base to enter the coal industry. Ahead of the acquisition, PTT specifically recruited individuals with knowledge of thermal coal in Indonesia and with expertise of cross-border M&As. On that basis, the acquisition of SRL then provided access to broader competences in the coal mining industry.

Thai Union Frozen Products Plc acquired French MW Brands

Thai Union Frozen Products Plc (TUF) is Thailand’s largest canned and frozen seafood processor with subsidiaries in the US, France, Indonesia, Vietnam, Japan, and India. In the second-biggest overseas investment in Thai history, TUF acquired MW Brands Holding, a French manufacturer and distributer of canned seafood that was market leader for tuna and other seafood products in France, the UK, Ireland, the Netherlands, and Italy (Lewis, 2010).

TUF’s international growth had primarily been based on its low processing cost arising from two sources: First, Thailand provides lower cost of skilled labor and access to seafood, TUF’s raw material found off the Thai coast. Second, the company’s product diversification enables TUF to fully exploit the raw seafood. The main part of fish or shrimp is processed for top-end food products, while the residual is used for other products, such as pet foods. This optimizes raw material utilization, and reduces total cost of production.

The purchase of MW Brands was primarily motivated by market-seeking motives as it increased Europe’s contribution to TUF’s total sales from 11 % to more than one-third, thus reducing its dependence on the US market that previously had accounted for over half of TUF’s sales. The brands owned by MW Brands represented a strategic asset that could be exploited in further European markets. In addition, the acquisition also supported efficiency-seeking motives by adding four processing plants in France, Portugal, Seychelles, and Ghana to its five existing facilities (in Thailand, Indonesia, Vietnam, and the US), and by increasing the fishing fleets from four to nine vessels. This expansion made TUF one of the largest canned tuna producers in the world (Murray & Setthasiriphaiboon, 2010).

TUF’s internationalization started with export to Japan and the US in 1988. In Japan, a JV with a local trading partner soon followed. In the US, exports were followed by sales offices and in 1997, TUF purchased 50 % of Chicken of the Sea, which was increased to full ownership in 2006. In 2003, TUF also acquired Empress International Ltd to improve its distribution networks in the US. Hence, the commitment of TUF in the US increased step-wise. Similarly, in Europe, TUF moved from exports and sales offices to FDI, while in markets such as Indonesia, Vietnam, or India, it has been exporting for many years before making both greenfield investments and cross-border acquisitions.

However, the country sequence did not follow the psychic distance pattern. TUF started investing in Japan, then the US, before entering Indonesia, Vietnam, and India. Thus, despite the greater distance in terms of geography, culture, regulations, and business practices, investment in the US preceded investments in neighboring countries.

Thai Beverage Plc acquired Yunnan Yulinquan Liquor in China

Thai Beverage Plc (ThaiBev) was established in 2003 by merging the liquor businesses owned by Mr. Charoen Sirivadhanabhakdi. In 2011, ThaiBev operated 18 distilleries in Thailand, 5 Scotch whisky distilleries in Scotland, and 3 breweries in Thailand (Thai Beverage Plc, 2011). The acquisition of Yunnan Yulinquan Liquor Co. Ltd (YLQ) added a white spirits distillery in the Chinese province of Yunnan. ThaiBev’s strategy focused on building and exploiting brand names such as Sangsom Rum, Mekhong and Chang Beer that gradually gained brand recognition outside Thailand. For example, Chang Beer had been a known sponsor of Premier League football club Everton since 2008. The brand portfolio was also the primary motive of the earlier acquisition of Pacific Spirits UK.

The YLQ acquisition was primarily motivated by access to the alcoholic beverages market in China. After entering the white spirits market with the YLQ brand, ThaiBev expected to tap into the beer business in China by exporting its Chang Beer from Thailand to Yunnan (Rungfapaisarn, 2009). Moreover, ThaiBev aimed to use Yunnan as a gateway to expand into other areas in China as well as Myanmar and the northern part of Laos. The geographic proximity enabled ThaiBev to distribute its products by truck from Thailand into Yunnan (Thai Beverage Plc, 2009). Our interviewee explained that a local partner in China was essential for ThaiBev to deal with the country’s government and public sector, while pursuing its market objectives.

ThaiBev started to export in 2006, and then the internationalization process advanced rapidly. Exports to the UK started in 2006, and in the same year ThaiBev acquired Pacific Spirit UK, which gave it a portfolio of brands, distribution networks, and sales offices in Europe, North America, and Hong Kong. The knowledge acquired from the British company enabled accelerated internationalization, including the acquisition of YLQ. In this process, the sequence of countries did not follow the psychic distance pattern as ThaiBev’s investment in China occurred after the one in the UK.

Sahaviriya Steel Industries Plc acquired Teesside Cast Products (TCP) in the UK

Sahaviriya Steel Industries Plc (SSI) is the largest steel sheet producer in Southeast Asia, yet its acquisition of Teeside Cast Products (TCP) in the UK was its first foreign expansion. TCP had been part of British Steel Plc, which was privatized in 1988, and acquired by the Tata group in 2007. However, TCP was loss making and was earmarked for closure with the loss of 1,600 jobs (Reuters, 2011). Hence, SSI’s take-over of TCP was celebrated in local newspapers as the rescue of a “troubled” company (White, 2011).

With TCP, SSI acquired a firm previously in its supplier network, thus increasing control over its value chain through backward integration. In the first stage of cold rolled steel manufacturing, iron ore and coke coal are combined to produce slab. Slab is used to produce hot rolled steel which is further processed into cold rolled steel, a key input to the automotive, furniture, and construction industry. Due to the lack of technology and machinery, SSI had previously purchased slab from TCP and other suppliers worldwide for its operation in Thailand (Hotter & Maylie, 2011). The acquisition enabled SSI to produce the slab itself in the UK and ship it back to Thailand. This backward integration made SSI a fully integrated steel producer with both primary steelmaking and rolling facilities (White, 2011).

The acquisition of TCP was driven by strategic asset-seeking motives. SSI acquired technology and expertise for making construction-grade steel. In addition, SSI was seeking organizational capabilities, such as supplier relationships and TCP’s existing business network. A secondary motive was efficiency seeking as vertical integration enabled synergies, estimated to be around USD17.8 million (SCB Securities, 2011). According to our interviewee, SSI experienced considerable increases and fluctuations in the price of slab. An internal supply was both more stable and cheaper, while reducing the need for working capital due to the reduction in inventory levels.

The internationalization process of SSI appears to contradict stages models as it had no prior commercial activities in the UK, and no other foreign investments anywhere. SSI pursued this cross-border acquisition after failing to implement a major domestic investment project due to environmental concerns.⁵ It could not draw on experience or accumulated learning prior to this acquisition, having mainly produced for domestic consumption with exports to neighboring countries (less than 5 % of sales) being unrelated to the expansion to the UK.

SCG Paper Plc acquired Alcamax Packaging in Vietnam

SCG Paper, member of the Siam Cement Group, is the largest integrated pulp, paper, and packaging producer in Thailand with subsidiaries in the Philippines, Malaysia, Singapore, and Vietnam. It acquired Alcamax Packaging (Vietnam), one of Vietnam’s leading producers and distributors of corrugated boxes in 2011. SCG Paper’s core competences lay in the reputation of its “Elephant” brand for quality paper and box products in Thailand. Although the brand was not yet well-known in Vietnam, SCG Paper expected to extend the brand to the new market, benefitting from a positive image of Thai products in Vietnam.

The acquisition was motivated primarily by market-seeking motives. Southeast Asia plays a critical role in many global supply chains as products manufactured in this region are shipped around the world. This generates demand for boxes for packaging and shipping. Vietnam was expected to continue to attract foreign investment into such export-oriented manufacturing, suggesting a rising need for corrugated boxes. The acquisition of Alcamax provided SCG Paper not only a leading market share in Vietnam, but was seen as stepping stone for further expansion in Vietnam (SCG Paper Plc, 2010b).

The case illustrates the step-wise deepening of commitment to a market. SCG Paper started to export in 1997. Vietnam became one of its largest overseas markets, which led to the establishment of a sales office. The company gradually learnt about Vietnamese culture, business practices as well as the political and regulatory systems. Based on this knowledge, and recognizing the scale of the Vietnamese market, SCG Paper invested in paper mills in Vietnam in 2006 followed by the box manufacturing plants in 2011. Also other investments by SCG Paper focus on Southeast Asia, including the Philippines (2003), Singapore (2005), and Malaysia (2005) as SCG Paper pursued a regional strategy expressed in its vision “To be a world-class paper company with strong presence in ASEAN” (SCG Paper Plc, 2010a).