Motivations for Internationalisation Case-study: Telefónica
With the increased importance of multinational enterprise in modern industry there has been pressure on telecommunication organisations to follow the trend in foreign direct investment (FDI). Telefónica S.A. currently ranks fourth globally in terms of profit and second in terms of number of customers with operations spanning over five continents. This report investigates Telefónica’s motivations for FDI, applying conceptual frameworks developed by leading management theorists. We will focus briefly on the motivations firms face to move away from a home market and then expand on the pull factors, drawing firms to new countries and markets.
Home Market Push Factors
Telefónica sought international investment due to various home country factors that were beginning to affect their competitiveness. The European Union’s policy to fully deregulate the telecommunications industry within the fifteen member states by 1998 (Ungerer 1995), prompted the Spanish government to sell its stock in Telefónica in 1997 (Telefónica) and to open its telecommunication industry to competition. Telefónica was forced to concede market share prompting them to partake in foreign direct investment in order to maintain the growth of the company. Telefónica was also the source of much controversy after it used its dominant position to prevent competition in the broadband access market within Spain (Kroes 2007). It was fined over one hundred and fifty million euros (Kroes 2007) and lost valuable customer loyalty in Spain. The expenditure meant that for Telefónica to maintain its growth it would have to seek new foreign markets.
The Eclectic Paradigm
As stated by Chandprapalert (2000), one of the most comprehensive theories of FDI is the Eclectic theory of international production, developed by John Dunning. The eclectic paradigm allows the identification of three key advantages and conditions under which direct investment can occur. This OLI framework is classified in ownership advantage, location advantage and internalisation advantages conferred by direct investment (Dunning, 1993). The location advantage identifies four different types of international production: Natural Resource Seeking, Market Seeking, Efficiency Seeking and Strategic Asset Seeking (Rugman, 2001). This report investigates Telefónica’s FDI strategy by taking into account Jack Behrman’s 1972 taxonomy and Dunning’s eclectic paradigm (Dunning, 1993). We shall now look more closely at the four types of FDI identified above: Natural Resource Seeking Motives:
In the last decade, extensive research has analysed firms’ quests for resources that will yield sustainable competitive advantage (Kahnuns, Wilburg, 2004: 689). This particular FDI method refers to the concentration of a business in host countries that offer attractive resources at the lowest cost possible. These can refer to physical resources, the supply of cheap, unskilled labour or the seeking of technological capability, management, marketing expertise or organisational skills (Hill, 2007). Kahnuns and Wilburg (2004) outline Dierickx and Cool’s (1989) argument on resources being capable of serving as a basis for firm-specific sustainable advantage. In the case of Telefónica, the acquisition of the leading British mobile phone operator O2 in 2006 (Telefonica), has enabled the company to redirect its activity towards telecommunications, placing emphasis on mobile telephony. To allow the success of the operation, O2’s management team has been kept active. Due to O2’s experience in the mobile phone business in developed countries throughout Europe, Telefónica can take advantage of this know-how as it had previously focussed its internationalisation on developing countries in Latin America.
Another case of natural resource seeking is found in Telefónica’s purchase of a 5% stake in the second biggest fixed telephony company in China, China Netcom Telecommunications, in 2005 (Telefónica). This has enabled the company to have a constant exchange of experiences and best practices thus creating value for the two companies. In comparison, Vodafone’s takeover of the leading mobile operator in Japan, J-Phone, in 2001 (Vodafone), is another example of successful resource seeking within the telecommunication industry. The acquisition has enabled the company to be the first to introduce camera phones successfully.
Dunning explains that ‘Market-seeking investment may be undertaken to sustain or protect existing markets or to exploit or promote new markets’ (Dunning, 1993:58). This definition of market seeking demonstrates how an organisation may seek new markets to increase profits through new custom. The definition also displays how companies are motivated to internationalise in order to maximise company strength in the home market through the sharing of resources, costs, technology and business practices which can improve a product or service in the home country while reducing costs.
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- Institution / Hochschule
- Royal Holloway, University of London – Management Institute
- internationalisation internationalization multinational enterprise multinational foreign direct investment FDI push factors eclectic paradigm telefónica john dunning efficiency market horizontal FDI vertical FDI Porter oligopolistic theory telecommunications industry