Factors of corporate transnationalization in the infrastructure industries

Due to some specific factors a rapid foreign expansion of companies in the infrastructure industries is observed. As a result the number of such companies from developing countries has increased in the infrastructure industries.

The analytical reports of international economic organizations include in the infrastructure industries electricity, gas, water and sewage, telecommunications and transport (business activities related to airports, roads, railways and ports). Enterprises of the mentioned industries support the functioning of the market mechanism and occupy the central place in the world economy; the volume and the quality of services produced by these industries are important determinants of economic and social development.

State forms of business organization had dominated the infrastructure industries of the world economy until late 1990s when the liberalization of business in these industries allowed wider access of private companies, particularly of transnational corporations (TNC), and formed new opportunities for making foreign direct investments (FDI). Even though some large firms were doing business in the infrastructure industries for a long period of time statistical analysis shows rapid expansion of the "infrastructure" TNCs: in 1990 these industries attracted 2% of the global FDI stock and by 2006 the value has reached 10%. In absolute terms the value of global FDI stock in the infrastructure industries has increased 31 times and reached $786 billion[1].

The analysis shows that the infrastructure industries bear some specific characteristics that influence the business environment of TNCs:

1. Investments in the infrastructure are capital intensive and difficult to organize logistically.
2. There are evident oligolopoly and monopoly characteristics in many infrastructure projects.
3. The majority of countries views the infrastructure industries as strategic ones and connotes them with sustaining of the economic security; the services of these industries are often considered to be public goods, while social and political aspects are involved in discussing the access of foreign companies.
4. The key role of the infrastructure industries in the national economy influences a county's international competitiveness and its ability to host affiliates of TNCs operating in other industries.

The main non-firm-specific advantage (FSA) that determines the transnationalization of companies operating in the infrastructure industries is the economic policy of home countries. This has allowed such companies to gain experience of participation in liberalization programs of infrastructure industries and to use it in host countries with a similar business environment. Under these conditions TNCs are attempting to diversify the places where their capital is invested and to decrease the dependency on home countries while their markets are becoming mature and can limit the opportunities to expand a national business.

Furthermore commercial use of R&D achievements is a key factor of transnationalization in the infrastructure industries which allows TNCs to use proprietary innovations and know-how of doing business; this is typical for telecommunications and electricity[2]. Favorable tenders organized by governments in the infrastructure industries increase the attractiveness of host countries for TNCs, for example, the contracts in South Africa to build facilities for the 2010 World Cup in soccer. The improving conditions of access to capital and other resources in host countries also attract FDI in infrastructure, while good knowledge of business conditions stimulates the South-South corporate transnationalization in neighboring states and countries with similar business environment.

"Follow the client" principle is a relatively new motive to organize a foreign business in the infrastructure industries of developing countries: FDI in the infrastructure are being made for the purposes of providing for the business activities of TNCs operating in other industries. For example, port transnationalization in Latin America is being performed to integrate the continent into the international transport network and to serve other industrial affiliates established with FDI. This tendency was originally observed when audit companies began opening their foreign affiliates in order to serve foreign affiliates of other TNCs headquartered in the home countries of the audit firms[3].

Such a motive of transnationalization in the infrastructure industries of developing countries economies can, firstly, take the form of "parallel" investments when the infrastructure FDI support the business of other TNCs in extractive industries and, secondly, take the form of "barter" investments when during negotiations on grating TNCs the rights to extract natural resources governments of host countries correlate such issues with demands of making FDI in the infrastructure. Evident examples of such involvement can be observed when Chinese and Indian TNCs are making FDI in the infrastructure of Africa while undertaking projects in oil and natural gas extraction and also in mining.

The factors of decreasing relative labor costs, achieving positive synergetic effects due to integration of TNC's enterprises, acquiring new production technologies and know-how and also establishing good business relations with local clients are not important for TNCs investing in the infrastructure of host countries, even though these factors are crucial in many other industries. Only the factor of establishing good business relations with local municipalities can have some influence on TNCs in electricity and water industry.

The most important FSAs for the "infrastructure" TNCs include the experience in commercial usage of new technologies (such as projecting and operating complex infrastructure networks), project management, solving engineering problems, gaining environmental know-how and skills in conducting financial operations. Minimization of production costs and their monitoring, client orientation, maximization of sales and market outreach, the flexibility and adaptiveness of the corporate management system are also important among the FSAs.

Possession of advanced production technologies and trade marks in not a significant source of competitive advantages in the infrastructure industry due to the necessity of managing complex networks and the ability to use such technologies. For example, companies in the electronics industry market new goods that contain fundamental discoveries and technological innovations, but all telecommunication companies possess standardized technologies and equipment while the ability of their commercial usage determines the business success.

The level of external connections with buyers and sellers (including foreign ones) and well-organized marketing channels also serve as factors of corporate transnationalization in the infrastructure industries. A progressive corporate financial structure, the indicators of high cash turn-over, availability of own capital and profitability of business (especially in the home country) significantly determine the possibilities for foreign expansion of companies operating in the infrastructure industries. The research indicates that approximately 20-30% of foreign investments are financed from own funds of companies, especially from revenues acquired in home countries, and the rest of funds are gathered from consortium members and banks due to large sizes of infrastructure projects.

The analysis of transnationalization factors undertaken in separate infrastructure industries allows to structure the conditions of forming TNCs' competitive advantages:

1. A distinct feature of water industry is a long and complicated process of gaining and keeping competitive advantages[4]. This can be proved by the fact that the majority TNCs with large FDI stocks in the industry have a long history of development and are constantly undertaking significant investments in technologies of engineering networks and their management. Such companies are primarily based in developed countries (some of them were established back in the 19th century): "Agbar" (Spain), "Suez" (France), "RWE" (Germany), «Veolia» (France), while the number of such companies from developing countries operating in the industry is relatively small. The sales of such TNCs (for example, Singapore-based "Hyflux" and Malaysia-based "YTL") are significantly smaller that analogical indicators of their developed-country-based competitors.

2. Electricity is also characterized by the importance of a long-term experience in servicing complex networks, however an innovative R&D in power generation has increased the competition in the industry and stimulated market entrance of private companies and TNCs[5]. Particularly, 28 companies among the 100 largest "infrastructure" TNCs of the world are doing business in electricity and 6 companies - in electricity and another industry. Furthermore, an important role of electricity is in providing for economic industrialization; this has determined large-scale state and private investments in this industry. Therefore TNCs from developing countries have formed some competitive advantages, and several companies, such as "ESKOM" (South Africa) and "KEPCO" (Republic of Korea), were able to acquire proprietary technologies. However such advantages and experience gained by these companies are still not sufficient for undertaking a large-scale expansion beyond their home region and for face-to-face competition with companies from developed countries. Therefore, only 3 firms out of 30 electricity companies from the list of 100 largest "infrastructure" TNCs of the world are based in developing countries, however there are 12 electricity firms in the list of 50 largest "infrastructure" TNC from developing countries[6].

3. In contrast to water, TNCs in telecommunications can gain competitive advantages relatively easily due to progress in science and technology and the fact that stimulation of competition the industry has in large caused it to loose its features of a natural monopoly. However it is hard to keep these advantages even for companies with a certain market position, and this determines the importance of production organization and business models for TNCs in the industry[7]. In the result, a lot mobile telecommunications operators have appeared in the industry and these companies are pursing strategies of rapid transnationalization. For example, there are 37 telecommunications companies out the 100 largest TNCs, operating in the global infrastructure industries, and 1/4 of these 37 companies are based in developing countries.

However such TNCs from developing countries can primarily organize a foreign business in the "South-South" direction and this indicates that competitiveness of such companies is not sufficient enough for making FDI in developed states. The competitive advantages (and also the volume of foreign assets) of the largest telecommunication company based in a developing country - "Singtel" (Singapore) are far less that such of the industry leaders - "Vodafone" (UK), "France Telecom" (France) and "Verizon Telecommunications" (USA) which dominate developed country markets.

4. The business of companies which operate in transport infrastructure has transnationalized (especially of those in ports and road construction) under conditions of rapid international trade expansion. Using the "learning-by-doing" principle in production of goods and services such companies from both developed and developing countries have accumulated a large volume of FSAs. Furthermore, export-oriented industrialization of some developing countries has become a factor of forming large competitive TNCs in transport industry. Such firms primarily draw their competitiveness from the sources of operational experience in efficient transport infrastructure organization[8].

Companies operating in ports have achieved the most progress among the developing counties TNCs of the industry, and some of port operators have become able to enter markets of developed countries. For example, in 2006 "DP World" (UAE) acquired a British company "P&O Ports". The changes in geographic structure of the world economy related to the trade expansion of Asian states with Africa and Latin America have allowed some TNCs from developing countries to utilize their capabilities in organizing interregional transport networks of these continents.

The analysis allows to outline the following groups of strategies used by TNCs during internationalization in the infrastructure industries:

1. Global expiation strategies of large TNC from developed countries. These strategies are primarily being used by companies from the EU member-states during organization of a foreign business in electricity, telecommunications and water industries. Such TNCs have foreign affiliates in both developed and developing countries, while in the latter group of countries it is common for historic and cultural factors to influence the allocation of enterprises. For example, foreign affiliates of Spanish "infrastructure" TNCs concentrate in Latin America and of French companies - in Africa. The conditions of the infrastructure industries' liberalization in early 1990s allowed such TNCs to become the most prepared for starting foreign businesses. This allowed such companies to derive additional benefits from favorable conditions of entry into host country markets, to start attractive investments projects and to successfully compete with newly established TNCs in the later years.

2. Strategies of regional internationalization are common for small and medium-sized companies which start businesses in the neighboring states (the classification criteria of companies as small and medium-sized depend upon an industry). Similar conditions of starting a business in home and host countries allow these companies to increase their profitability due to the synergies effects and decreasing of risks. Such strategy results in increasing the share of "cross" investments in the South-South direction (especially investments made in Asia and Africa) in the total volume of FDI in the infrastructure. It can be expected that the strategies of regional internationalization will be used wider in the future.

Companies based in developing countries of Asia, such as China (including Hong-Kong), Malaysia, Singapore, Republic of Korea, India and UAE have begun pursuing the global expiation strategy in the 21st century while in the past the economic interests of such firms were regional. Even though by accumulated assets and sales these companies are still behind their counterparts from developed countries, the abovementioned TNCs already have a definite level of competitiveness and are actively trying to use such strategy and to globally diversify the locations of their affiliates and investments.

The studied factors and motives also determine some interests of Russian companies in undertaking infrastructure-related investment projects abroad, however their geography is limited to developing countries, especially to Africa. For example, in 2006 Russia has started to participate in the activities of the Consortium for Development the Infrastructure of Africa, and a Russian company "Renaissance Group" opened representation offices in Kenya and Nigeria for the purposes of financing relevant projects. In April of 2008 the Russian Railroads signed a contract to build a railroad in Libya[9].

It is forecasted that TNCs will expand their business in the infrastructure industries of the world economy, especially in developing countries. Except for further transnationalization that will receive the infrastructure industries of large developing countries (such as Brazil, China, India and South Africa), it is expected that "infrastructure" TNC will become present in a wide range of developing countries, including the least developed ones[10].

[1] World Investment Report 2008 / UNCTAD. N.Y.; Geneva: UN, 2008. P. 99.

[2] R. Ramamurti, J. Doh. Rethinking foreign infrastructure investment in developing countries // Journal of World Business. 2004. No. 39. P. 151-167.

[3] World Investment Report 2004 / UNCTAD. N.Y.; Geneva: UN, 2004. P. 110.

[4] E. Lobina, D. Hall. Problems with Private Water Concessions: a Review of Experience / Public Services International Research Unit. Greenwich: University of Greenwich, 2007. P. 30-32.

[5] E. Woodhouse. The Obsolescing Bargain Redux? Foreign Investment in the Electric Power Sector in Developing Countries // Journal of International Law and Politics. 2006. No. 38. P. 121-219.

[6] World Investment Report 2008. Op. cit. P. 239-241.

[7] Nomads at last: a special report on mobile telecoms // Economist. 12.04.2008.

[8] D. Olivier et al. The Time Scale of Internationalisation: the Case of the Container Port Industry // Maritime Economics and Logistics. 2007. No. 9(1). P. 1-34.

[9] The Russian Railroads are Starting Construction in Libya // Web-site of the Russian Railroads - www.rzd.ru. 2.09.2008; Vedomosty Newspaper. 02.09.2008.

[10] World Investment Report 2008. Op. cit. P. 123.