Nowadays, following Marco Polo’s footsteps, Chinese companies are crossing the Silk Road, that, in XII Century, lead the Italian merchant to China’s unknown wonders. Since ambition and curiosity established a bridge connecting Venice to China, Chinese companies attracted by developed countries’ technologies and knowledge, are crossing it 900 years later. The phenomena registered has changed the purpose of the voyage, from a product market to a telecom connection. Mainly interested in the high skills that the Most Economically Developed Countries (MEDCs) deserve in both design, and customer’s great sophistication, Chinese companies are nowadays more than spur to tackle their business in an area that, according to their forma – mentis, it is unknown and therefore attractive.
The Chinese company analysed is Huawei. In order to have a clear understanding of the variables that affected its decision to internationalise to Europe, and pointedly to Italy, three theories will be illustrated. Starting from the Uppsala Internationalisation model (Johanson & Wiedersheim, 1975), the essay will move forward to the basic Mechanism of internationalisation (Johanson & Vahlne, 1977) ending up with the demonstration that, Driscoll & Paliwoda’s model (1997) is the most appropriate among the three, to describe the Huawei internationalisation process. The essay will also argue that, through the application of the Driscoll & Paliwoda’s theories, Huawei achieved to impose itself as one of the biggest MNEs coming from a Less Economically Developed Country (LEDCs) such as China, being capable to take the soar in Europe and astonishingly in Italy. The study will lead to the conclusion that acquisitions in foreign markets are a relatively easy target to achieve for the new wave of Chinese companies when dealing with International Strategy (IS).
Before analysing the case study in detail, it is essential to highlight the meaning of the term “Internationalisation”. Johanson & Vahlne (1977) defined it as a process in which the firm gradually increases its international involvement. Moreover, it is considered as the “final product” derived from a plethora of incremental decisions (Johanson & Valhne, 1977). According to Welch and Luostarinen (1988) the term internationalisation, describes a dynamic concept that highlights the process implemented by the company to increase its involvement in a variety of international operations. Beamish (1990) argues that internationalisation is “the process through which firms develop their awareness of the direct and indirect influences of international transactions on their future and establish and conduct transactions with other countries” (Beamish, 1990; Coviello & Munro 1997). Andersen’s definition (1997) considers internationalisation as the process through which it is possible to adapt the transaction’s modality, to intern markets. The interpretation includes entry mode strategy from one side, and international market selection from the other (Wu & Zhao, 2007).
Based on the last definition reported from the above, the case study will highlight the entry mode strategy utilized by the firm to penetrate the high – technology (IT) market in Italy. The three theoretic models are analysed as follow: the Uppsala Internationalisation model (U-M) (Johanson & Wiedersheim, 1975), the basic Mechanism of Internationalisation (Johanson & Valhne, 1977) and Driscoll & Paliwoda’s (1995).
To begin with, Johanson & Vahlne (1977) defined internationalisation both as a process in which the firm gradually increases its international involvement and as the final product derived from a plethora of incremental decisions (Johanson & Valhne, 1977). It supports the idea that internationalisation is a limited process due to the lack of and the difficulty to provide market knowledge and resources (Johanson & Vahlne, 1977, p. 29). It is based on a behavioural approach (Andersen, 1993) and lingered on four sequential stages which include irregular export activities, export via independent representatives (agents), overseas sales subsidiary establishment and production/manufacturing units (Johanson & Wiedersheim, 1975). Because the model describes internationalisation as a process based on a “stage” approach, (Wu & Zhao, 2007) it received different critics. Turnbull (1987) argued that the model is not able to explain the process of all firms whereas Bell (1995) criticised that the relevance of the “stage” theories should be questioned, in relation to the internationalisation of both high technology and service firms.
Johanson and Vahlne (1977) aiming to develop a more dynamic model, modified the previous one. The model, entitled: “The basic Mechanism of Internationalisation” is based on how both state and changing aspects smooth the decision taken in International sphere (Johanson & Vahlne, 1977, pp. 26). The state aspects, are the resource commitment to the foreign markets and the knowledge regarding foreign markets and operations. The change aspects, instead, are the decisions to perform current business activities and commit resources (Johnson & Vahlne, 1977, pp.26). Market knowledge and market commitment, are thought to influenced both commitment decisions and the way activities are performed (Johnson & Vahlne, 1977). Moreover, the model is based on the assumption that “the outcome of one decision, or more generally, one cycle of events, constitutes the input of the next” (Johanson & Vahlne, 1977, pp. 26). Even if changes have been made, the model still describes internationalisation as a process based on a “stage” approach. Furthermore, Andersen (1993), based on the assumption of the theory evaluation, argued that model discrepancies between the theoretical and operational level exist in both the 1975 & 1977’s.
Leaving behind the “stage” theories previously considered, Driscoll & Paliwoda (1997) internationalisation model, identifies a number of exogenous factors that could “bear each firm’s decision to enter a foreign market” (Driscoll & Paliwoda, 1977, pp. 60). Export, contractual and investment entry modes are considered in this essay. Firstly, the export entry mode suggests that firm’s products are manufactured in the domestic market or a third country, and afterwards transferred either directly or indirectly to the host market. Secondly, the contractual entry mode, includes not only a mixture of arrangements yet also acquisitions, joint venture and start – up investments (Driscoll & Paliwoda, 1997). They generally take place when firms that possess any competitive advantage, are unable to exploit them being able, however, to transfer the advantage to another party (Driscoll & Paliwoda, 1997). Thirdly, investment entry modes typically include some form of ownership and control by the firm of production facilities in the host market (Driscoll & Paliwoda, 1997). The study will essentially cover the export, contractual and investment entry modes in Europe and in Italy of the chosen firm.
The firm is a multinational telecommunication equipment and service company headquartered in Guangdong, China (Statista.com, 2018). When the company was founded, in 1987, it was only creating phone switches. Afterwards, it started building telecommunication network and manufacturing communication devices (Statista.com, 2018). Thanks to the revenues generated in the first six months of 2018 (325.7 billion yuan), and thanks to the 2017 year – end exchange rates ($92.5), Huawei is nowadays considered the most valuable telecom infrastructure brand worldwide with an estimated brand value of more than 38 billion U.S. dollars (Statista.com, 2018). The increase, has been driven by a tenacious performance in a variety of businesses, specifically in the consumer division (Statista.com, 2018; cnbc.com, 2018). Huawei is now the second-largest smartphone maker by market share in the world as a whole, ahead of Apple (cnbc.com, 2018). In Italy, instead, it is the third largest smartphone maker by market share ahead of Samsung and Apple respectively (statcounter.com, 2018).
Before entering the Italian market, Huawei’s market control focused on the regional expansion, entering similar or nearby markets before moving to more developed ones. The strategy was implemented in order to overcome the absence of import policies in China (Chong, 2013). In late 1990s, as competition grew more intense within the Chinese mainland, Huawei had to look abroad (Chong, 2013). In such a challenging environment, Huawei internationalisation control began in 1996 when it opened its doors to HK providing customized design of “number portability service” for the Hutchison Telecoms (Wu & Zhao, 2007). Following the export, contractual and investment entry modes, above analysed and encouraged by the first successful step, Huawei decided to take the second one and enter the Russian market. Considering it the most similar market compared to the Chinese mainland’s, in terms of both infrastructure and developing potentiality, the firm decided to enter the neighbour’s country and start its business, joining a joint venture with Russian Beto Konzern and Russia Telecom. Investing in the new alliance, Huawei had the authority to own and control the production of the host market – investment entry mode (Driscoll & Paliwoda, 1997). Once entering South America, & Africa, aiming to overcome geographical distance and local market conditions, the firm set up branches and service centres adopting the export entry mode. Through high flexibility, low resources commitment and low dissemination risk (Wu & Zhao, 2007), the firm was able to increase its notoriety in those two continents. In January 2017, 95% of the population in Colombia was aware about the existence of Huawei, followed by Peru, Chile, Argentina & Costa Rica (Statista.com, 2018). The third step taken by Huawei was to enter North America, West Europe & Other countries, choosing the contractual entry mode. Contracts included franchising, co – research, co – production and co sales (Wu & Zhao, 2007). Applying the contractual entry mode allowed the firm to manage less resource commitment bearing the foreign market’s cost of serving. The entry mode choice applied, allowed Huawei to expand itself worldwide, achieving an unexpected outcome. In 2017, Huawei totalised 603.6 billion ¥ in revenue Worldwide (Statista.com, 2018). An amount of 305.09 billion ¥ was gained within the Chinese market going up to 41.0% year – on – year (Huawei.com, 2016). Similarly, 298.5 billion ¥ was the sum totalised internationally with 163.85 billion ¥ reached by EMEA; up to 22.5% year – on – year (Huawei.com, 2016). The data analysed are the results of how much Huawei value collective wisdom, partnerships and collaboration. It is something the firm is constantly looking at whether it is at a product or at a partnership with cultural bodies’ level. Those features make the biggest difference within the countries the firm operates (Huawei.com, 2018).
The decision to invest in Italy is usually part of a broader European Strategy (Pietrobelli et al., 2014), however, attractive market features lead the Chinese giant telecom firm to enter it. The Mediterranean country market, shares common features with the Chinese counterpart including a strong presence of small & medium enterprises (SMEs) and a specialisation in “traditional industries”. Moreover, the size and the potential of the market (Iacovone, 2017) considered friendly, open and transparent (auraree.com, 2018) influenced Chinese companies to enter & invest in the peninsula. Aiming to search for new markets & other trade – related activities together with endeavour strategic assets (Pietrobelli et. al, 2014), the analysed Chinese FDI entered the Italian market, aiming to acquire advanced skills and technological capabilities in the design – intensive manufacturing activities field (cnbc.com, 2015). Applying the contractual entry mode as for Europe, Huawei established three subsidiaries in Italy: in Rome, Milan and Turin (Pietrobelli et al., 2014). From the research centre based in Turin, it conducts research and product development (R&D) activities aimed to enrich life and develop the country (martinroll.com, 2018). E.g..: In September 2018, Huawei helped Italian operators TIM and Fastweb to launch the first 3GPP Standard 5G Commercial Base Station in Bari & Matera (cities situated in the South of Italy) with the objective to improve digital services (Huawei.com, 2018). Even if Italy faced a breakdown during the 2008 crisis, it still represents a fundamental market for foreign investors, as it is a member of the European Union, ranked 3rd among the largest national economy and the 8th largest by nominal GDP in the world (imf.org, 2018). It also boasts one of the highest rates of mobile penetration in the European telecommunication sector with, in 2021, a share of monthly active smartphone users forecast to reach 64.80 % of the total population (Statista.com, 2018). Because of the attractiveness of the market, with a 15% of the total profits gained from the R&D, Huawei is planning to open a new R&D store in the centre of Milan focusing on fashion and design as distinctive elements of Made in Italy (auraree.com, 2018). The decision, will lead the company to staff more employees apart from the 850 already hired between Milan and Rome, with a turnover of 1.5 billion, 50% of which will derive from the consumer segment, while the remnants will be split between enterprise products and carrier solutions (auraree.com). Reporting Luigi de Vecchis words: “research, investments in the territory and collaboration with the partner ecosystem are at the base of the Huawei’s philosophy” (Huawei.com, 2018).
The analysis, shows that the internationalization of Huawei is consistent with the Driscoll & Paliwoda’s entry mode choice framework. Nevertheless, Huawei’s internationalization process, also presents some characteristics that belong to hi-tech firms. Firstly, industry’s features are to be taken into consideration. Since Huawei is a company based on information and communication technology (ICT), its internationalisation strategy is affected by the so called “network effect”. It implies that the ICT products “have no or a minimum value itself, yet they generate great profits when combined with others” (Wu & Zhao, 2007). In other words, the more a product is used, the more it is valuable. In order to encourage the first sales, Huawei took the shortcut of implementing high commission policy on its products (Wu & Zhao, 2007). In addition, in order to ensure that the network effect would have not disturbed its internationalisation strategy, Huawei utilized different entry method according to the market. As a result, it is clear that Huawei’s entry mode selection is not primarily based on firm factors, yet it depends more on the industry features/ products and the host market environmental aspects (Wu & Zhao, 2007). Secondly, high – technology products coming from a developing country such as China, generally face extra boundaries when entering the international market due to the negative perception that the "made in China” has (martinroll.com, 2018).
Huawei’s internationalisation case study has shown that the U – I model is not adequately applicable when analysing the internationalisation features of a hi-technology firm. If from one side, hi – tech firms do not strictly follow the “stage” theory proposed by Johanson & Vahlne’ s model (1977), on the other side, they are almost consistent with the one analysed by Driscoll & Paliwoda’s (1997). When dealing with companies coming from a developing country, it is also necessary to take into consideration that home countries’ technological level and reputation influence the firms’ internationalization (Wu & Zhao, 2007). Huawei, in order to avoid negative influences, entered the developing countries’ market before moving to the developed countries’ one. In order to facilitate its entrance into the western market, it decided to implement the contractual entry mode analysed within the Driscoll & Paliwoda’s model enabling the firm to take the soar in both Europe and Italy. As a strategy, Huawei also chose to set up various R&D departments in the Mediterranean country aiming to develop an international market share. Even if the R&D represent the company’s warhorse, complacency on them is insufficient. If Huawei would continue to “Build a Better Connected World”, it must seek to satisfy and create future consumer needs (martinroll.com, 2018).