The Internationalization of Energy firms: A literature review

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It retraces the internationalization of these firms and examines the characteristics of this movement in terms of geographical and industrial orientation horizontal, vertical upstream or downstream. The magnitude and speed of Russian metallurgical expansion abroad represent a great opportunity to discuss the literature on how firms become transnationals.

After an assessment of the limits of the available theoretical tools and of the need to articulate micro-mechanisms and macro- and meso-dynamics, the paper provides an institutional and systemic explanatory framework. The rise of multinational companies from non-triadic countries has attracted growing attraction in the recent period see Goldstein, for a review , but the Russian case has been somewhat neglected, given the scale and the speed of the phenomenon.

It is also highly original as far as the sectoral concentration of these FDI is concerned. After the oil and gas sector, metallurgy is the second sector to participate to this foreign expansion Liuhto and Vahtra, ; Kalotay, ; Skolkovo, Russia is also the fourth largest steel producer and exporter in the world, with four companies ranking among the top 30 of the industry in It describes the trajectory of internationalization of these firms and specifies its geographical and industrial orientations horizontal, vertical upstream or downstream.

This empirical research presents a very peculiar case.

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This process took place in an idiosyncratic domestic context resulting from the traumatic decade of post-soviet institutional transformations. Moreover, the global metal mining industry is a mature and highly oligopolistic industry.

Table of Contents

The conceptual issues discussed throughout the paper are thus relevant beyond the limits of our case study. We compiled data on the acquisitions of the main metallurgists from the corporations and from business publications 2. It then describes the geographical and strategic direction of investments abroad.

The third section presents our institutional and systemic analytical framework and its theoretical background. The concluding section summarizes our empirical results and draws some conclusions of wider interest for theoretical debates on transnationals. Figure 1 - Outward foreign direct investments stocks — world share. First, exports were a leading factor in the reorganization of this sector during the nineties.

Second, a very favorable economic environment has widely increased their financing capacities from to Tableau 1 - The largest Russian metallurgical firms The radical reforms implemented then led to a sharp drop in internal demand, a rise in atypical forms of payment and an acute level of uncertainty.

These changes created strong incentives for the development of exports, which were made possible by the recent trade liberalization. As a consequence, metallurgy was less affected than other sectors by the downturn in activity, leading to an increase in its weight in the Russian economy. The privatization of almost all the enterprises between and delivered a fatal blow to the existing Soviet hierarchical relations Appel, ; Durand, and In , TWG political supporters lost ground in the Kremlin. In most cases, the banks supported the management against TWG.

They helped them to strengthen their effective control by creating their own trade networks or by passing new agreements with foreign traders. On the one hand, banks rolled back because of the impact of the financial crisis. Moreover, metallurgical firms benefited from rising income stemming from devaluation. The changes in the economic context created new opportunities for top managers. They increased their shareholding in many companies and implemented a strategy of external growth.

Moreover, new actors penetrated the industry such as Sibneft in the aluminium business. Two of the aims of this reorganization were to build vertically integrated structures and to reinforce control over export channels. To that end, groups created their own commercial representations abroad and took stakes in transport infrastructure assets. Less significantly, some of them have also sought to expand to downstream industries: Severstal acquired and developed assets in the automotive industry, but assets acquired by Rusal in non-ferrous transforming mills were sold to Alcoa in , as the company preferred to focus on its upstream strengths.

The competitiveness of these products is based on cheap energy and low labor costs, as well as on the availability of natural resources Budanov, However, metallurgical firms have realized impressive financial performances since , thanks to the strong growth of domestic and international demands and higher prices. This super-cycle results from supply and demand factors. On the demand side, the key factor is the resource-intensive expansion of BRIC countries, including population growth, the rise of the urban working class and fast industrialization.

Table of figures

On the supply side, the industry has suffered from a number of bottlenecks, due to underinvestment and the long-term trend of deteriorating quality in mining projects Troika Dialog, There was another huge but brief surge at the end of This dramatic evolution is only partly explained by the weakening of the US dollar. Growing demand, mainly from China, higher transportation and energy costs, strain on iron ore and almost-saturated production capacities are the main factors explaining the rise. Moreover, rising oil prices and a massive move of speculative funds on the commodities markets caused the spectacular rise of This shift has been abruptly reversed by the global downturn, but steel prices are still significantly higher than before Nickel prices followed a similar dramatic evolution, although most of the rise occurred in and the fall began in early Here again, there was a dramatic reversal in that wrote off all the gains accumulated since Mounting over-production capacities in China have driven prices down in the post-crisis period toward their level at the beginning of s.

Moreover, the internal market expanded fast as well. However, the disruption of was a tremendous shock. In dollars the rise is astronomic for all the firms. The shock of the crisis was huge for all firms; however their total revenue began to recover in Figure 3 - Evolution of total revenue of main firms According to their annual reports, firms modernized their production tools, increased labor productivity, increased their production assortment, improved their quality levels and commercial channels and increased economies of scale.

Moreover, the weakening of the dollar should also be taken into account. However, the evolution of prices as well as the strength of Russian and international demands are still the decisive explanatory factors of the performances of these firms, which is particularly clear when one considers the very strong negative impact of the global crisis on their profits and margins. In this context, metallurgical firms have also been able to obtain international funding. They are more and more exposed to foreign economic downturns and they must be able to face world competitors on specific grounds such as prices, quality and access to strategic inputs.

This exposure to world competition constitutes a set of constraints that shape the geographical and strategic orientation of their foreign investments. Based on information published by the press and by companies, we have compiled data on foreign acquisitions.

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Among the main Russian metallurgical firms, MMK is the only one which has not expanded abroad, in spite of several attempts. Figure 6 - Amount of foreign acquisitions by Russian metallurgical firms Firstly, the productive internationalization of Russian metallurgy barely existed up until and has dramatically increased since then. Indeed, non-ferrous metallurgical groups, as well as Severstal — which is building a gold mining business —, have sought to access to mineral inputs in peripheral countries of the world economy.

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Access to inputs appears to be less critical for the steel industry than for non-ferrous metallurgy and gold mining. Indeed, most of the investments of Norilsk and Rusal aimed at gaining access to raw materials. In the case of the rapidly expanding aluminium industry, the supply of bauxite was perceived as being the main point of tension.

The motive for productive internationalization therefore lies elsewhere.

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The born global firm: A challenge to traditional internationalization theory. A second limitation of the present work is that it relies mainly on secondary data to depict the illustrative examples, and it explores only one case study to attest the impact of institutional intermediaries. Ivan Tselichtchev. Contact us. Asian Development Bank.

Russian metallurgists were affected by antidumping procedures in the nineties; since then tariffs and quotas restricted their imports in the EU and the US. One of the main strategic problems for them was thus to stabilize their access to markets over the medium and long term.

The acquisitions of metallurgical firms in Europe and the US provided an opportunity to overcome this difficulty. The amplitude of the investments were very significant: Russian companies, led by Severstal and Evraz Group, accumulated 9. Tableau 2 - Amount and number of foreign acquisitions by region and orientation - ferrous metallurgy — millions USD. Tableau 3 - Amount and number of foreign acquisitions by region and industrial orientation - non-ferrous metallurgy Although further explanations are required on this issue, one can stress that market-led investments in Europe and in the US often involve loss-making firms, whereas there is a lack of such opportunities in fast-growing developing countries.

We observe two main strategies: resource-seeking in the non-ferrous metallurgy sector and market-seeking in the ferrous metallurgy sector, which reflect the respective market specificities of these industries. However, market-seeking strategies in western countries have been abruptly reversed by the crisis. Since then, debt trapped Russian companies have almost completely stopped foreign expansion. Several firms have adopted a divestment strategy in non-core assets, including the sale of significant assets in the US and in Europe by Severstal and by Mechel.

However, projects of further expansion in India are still considered by Severstal, suggesting that a possible next stage of Russian internationalization — when Russian metallurgists will have recovered from the crisis — may be oriented toward emerging markets, where demand growth has outpaced expansion elsewhere. Our case study points out some shortcomings of the recent literature, which lead us to suggest a new analytical framework. The eclectic paradigm articulates different theoretical tools and it suggests that the mode and level of internationalization result from the combination of three main forces: the specific advantage of the firm Ownership , the advantage of localizing abroad in some specific country L and the advantage of internalizing transactions within the firm I.

This eclectic approach is so large that it has been criticized for being more a taxonomy than a real theoretical framework Ietto-Gillies, , but also for being focused solely on the interest of the private firms Andreff, Moreover, it is completely disconnected from the macro-economic environment. It represents a significant improvement of the paradigm, as it allows conceptualizing the expansion of transnationals beyond the micro analysis and it has received some empirical corroboration Andreff, ; Duran and Ubeda, However, it is very hard to establish a simple relationship between gross domestic product per capita and foreign investment patterns; for example, contemporary Russia with a ratio of outward to inward stocks of about 0.

Moreover, the IDP needs to be considered alongside with the transformation of the international regime. A first hypothesis suggests a progressive pattern of internationalization: established transnationals continued to dominate knowledge and brand-intensive businesses, whereas companies from developing countries hold an advantage in industries where production and logistics matters Ghemawat and Hout, ; UNCTAD, Our case study is consistent with this hypothesis as the foreign expansion of Russian firms from the mining and metal industries is linked to a geographically bound access to natural resources.

The contemporary debates has focused on institutional affinity, suggesting that developing-country transnationals are able to transform the disadvantages of their weak domestic institutional background into advantages as they expand in other developing countries with the same characteristics Vora and Kostova, ; Cuervo-Cazurra and Mehmet Genc, The internationalization pattern of Russian metallurgists is not fully consistent with this assumption as they have expanded in neighboring economies in transition but also in remote developing and developed countries.

This last issue may be one of the aspects of the vulnerability of the metallurgical firms in particular and of the Russian economy more generally which results from an excessively outward economic orientation Drahokoupil and Myant, Moreover, our case study point out inconsistencies of these theoretical hypotheses in front of the rise of non-triadic transnationals.

The exploratory institutional and systemic approach, presented in the following section aims at integrating the peculiar case of transnationals from developing countries — and in particular Russian Metallurgical firms — within a more general theoretical framework. We mobilize various set of literature in order to articulate the macro- and meso-context to the microeconomic competitive strategies on which underlying foreign investment decisions are based. Three interdependent dimensions of the internationalization paths of the firm are thus combined: factors related to company growth, macro-meso institutional and economic features, and micro-economic strategies.

It includes determinants deriving from the demand-led explanation exposed below, from national characteristics in terms of size and factor endowment for both the host-economy and the country of origin. Moreover, it appears highly relevant to explore a combination of two schools of thoughts that are usually presented as antagonistic — but not always Noelke and Vliegenthart, : on the one hand, the diversity of national capitalisms Amable, ; Berger and Dore, ; Boyer and Hollingsworth, ; Dore, ; Hall and Soskice, ; Jacoby, ; Whitley, and, on the other hand, the world system perspective, which focuses on the integration of national economies within a hierarchical capitalist world system Michalet, ; Chesnais, ; Wallerstein, Indeed, the international expansion trajectories of firms are obviously affected, and to some extent motivated, by the heterogeneity of countries.

But, at the same time, as firms occupy specific positions in the global value chains, they shape the meso-foundations of an interdependent and hierarchical world system Gereffi and Korzeniewicz, Figure 7 - An institutional and systemic perspective on corporate internationalization. These resources may be financial but are mainly, in the mind of Penrose, managerial resources. Her analysis is then somewhat precursor of the evolutionist concept of collective knowledge Nelson and Winter, These resources contribute to a specific advantage made of intangible assets Hortsman and Markusen, or related to localization geographical situation and institutional context.

This specific advantage orientates the growth of the firm.

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The internationalization option and especially that of creating a transnational corporation is the most difficult. Indeed, many different factors make it more complicated and expensive to operate abroad. However, in core industries Crotty, , the process of capital accumulation is deeply embedded in a specific sector. First, as the production process is not subject to the law of diminishing returns, there are strong incentives to increase the scale of operations, possibly through internationalization.

Moreover, as the assets of the firms are significantly immobile, irreversible or specific, they lose substantial value if reallocated to a different industry or sold on a second hand market. As a consequence of these sunk costs, there are strong incentives to acquire complementary assets - possibly abroad — insofar as they may positively affect the valuation of the firm.

He indicates the desire of firms to protect themselves against national economic cycles while diversifying geographically Pitelis, This argument allows enlarging the relevance of demand-led explanations but cannot explain why internationalization involves foreign investment and not just exports. There are two main forms of this embeddedness. Firstly, territorial embeddedness, whereby GPNs do not merely locate in particular places but absorb characteristics of these places and are constrained by them.

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Secondly, network embeddedness, which refers to the mutual dependence of the firms with regard to the architecture and institutional configuration of the networks. Concerning transnationals, Kostova et al. Nonetheless, institutional characteristics of networks and territories are not only constraints for firms but also resources.

watch They constitute institutional configurations which may evolve significantly not only endogenously but also through interplay between certain corporate leaders and political figures. In particular, we need to explore the local and global institutional features which have favored the internationalization of metallurgists as a further step of their growth, and to what extent the foreign expansion was an attempt to escape from weak property rights.

Firms are then not only institution takers but also institution makers , which means that improving their positions within private-public networks could be a major source of competitive advantages. But at the same time, their international strategies may be partially shaped to satisfy the requirements of their political allies, suggesting a two-way relationship between internationalization and private-public network embeddedness.

This phenomenon is probably even greater in sector highly concentrated such as the metallurgy where business-State relations take the form of direct connections between political personal and business leaders rather than formal relations through business associations Duvanova, These networks are all the more important in the exporting sectors as federal policies on international integration and energy directly affect the competitiveness and profit prospects of these companies.