The internalization theory can be termed as one of the general theories of foreign direct investment (FDI) (Tang, Selvanathan, & Selvanathan, 2012). The theory defines a multinational enterprise (MNE) as a business that utilizes its internal markets to enable production and distribution of products in an efficient way in the situations where the regular markets fail to operate (Tang, Selvanathan, & Selvanathan, 2012). FDI ensures that MNEs can be able to produce and distribute their products through internal markets that allow efficiency and hence, an augmentation of total profit from ownership and the use of their own resources (Tang, Selvanathan, & Selvanathan, 2012). The internalization process through FDI occurs where the benefits outweigh the costs involved in ownership. It can be denoted that FDI can be accrued as one of the most significant indicators of the globalization process. The United Nations –UNCTAD- predicts that by the end of 2016, the total FDI inflow could reach $1.8 trillion (Estrin, 2015). The paper focusses on an exploration of the internalization process of the Huawei company both in industry and Country (South Africa).
According to Drs. Sim and Pajendran, the theories on the internalization processes are mainly founded on Western MNEs (Sim & Pandrian, 2003). An examination into MNEs from emerging economies such as India, China, and South Africa among others is required to add the available information on the internalization process and theory. Mohamed Amal et al. highlight that in the last decade, the participation of MNEs or MNCs from emerging economies have escalated in the international flows of FDI and this has made them significant global players (Amal, Raboch, Awuah, & Andersson, 2010). The authors denote the Eclectic Paradigm as one of the most widely accepted models of internalization production (Sim & Pandrian, 2003). They continue to highlight that internal production is a configuration of three sets of advantages that entail ownership or firm-specific benefits e.g. expertise or proprietary technology (Sim & Pandrian, 2003). The second denotes the internalization of the advantages to overcome market imperfections and maximize profits. The third is the benefits provided by the home and host countries (Sim & Pandrian 2003).
Globalization has led to a perpetual increase in FDI as aforementioned, MNEs internationalize because of a myriad of factors that include costs reductions, diversification of markets, new opportunities and flooded markets among others. The process is not entirely smooth since there are a lot of dynamics that come into perspective. For example, in the emerging economies characterized by political and economic instability, internalization processes may be somewhat a blur or unclear. The case study evaluates and examines the internalization process of Huawei, strategies utilized and the host country. It also discusses the how, when, with whom and where issues of market penetration and the aspects that need to be put into consideration before investing in foreign markets. The paper extends to examining the host country’s environment and illustrated based on the Huawei Company. South Africa is an emerging market. Therefore, the study analyzes the internalization process in emerging markets.
. The Huawei Company is a Chinese multinational networking and telecoms firm that was founded in 1988 (Suvakunta 2010). Currently, it is one of the largest telecommunications company in the world operating in over one hundred and forty countries. According to the American Enterprise Institute, the Company has emerged to become the second-largest surpassing known telecommunication firms such as Eriksson (Barfield 2011). The entity provides equipment, software, and consulting services to forty-five of the fifty largest telecom operators. In addition to this and with significant investments in the research and development department of the company, it is diversifying into the smartphone markets (Barfield 2011).
The word Huawei is derived from a Chinese word set to mean a “flower,” has certainly bloomed as concerns foreign direct investments and becoming a world leader in the telecommunications industry. It started from a modest beginning as a private equity firm whose mission was to provide consultative and operational services to firms in China and outside the country. The Company acquired its first International project in 1997 when it was contracted to fix network products to a company in Hong Kong. The R&D division of the company is now spread in countries such as Turkey, UK, Pakistan, Brazil and Finland among others (Suvakunta 2010). The company continues to make large investments in its market entry programs in an endeavor to create new opportunities, especially in the emerging markets. In china, it is the largest telecommunications company and holds an undefeated position in soft switches market. The success of the enterprise can be accredited to focus on peaked out technologies and provision of abundant output, supplementation of their technology and patents through partnerships and collaborations and, targeting the developing countries in order to establish a de facto standard (Nakai & Tanaka 2010).
Emerging Economies (EMs): South Africa
It can be denoted that there is an escalated increase in the African region as a potential investment location. It is because the developed countries are not expected to grow with the high rates noted in emerging economies in the African region such as South Africa (KPMG Africa 2014).In addition, the regions are becoming more politically and economically mature creating easier accessibility and of course, the high population growths recorded in the continent means an alleviation in consumer demand (KPMG Africa 2014). Hence, an increase in market size and share. The continent is still young in terms of development and goods manufacturing. Therefore, it creates an environment of low competitiveness that firms such as Huawei continue to take advantage.
EMs such as South Africa and India among others present opportunities for low-cost production. One of the reasons behind this is the fact that there exist cheap labor and a lot of unutilized resources and minerals. The profits derived by Huawei in emerging economies continue to soar with the majority of its profit and revenues coming from these markets. However, it is not an easy endeavor to determine the internationalization process or business strategy to be utilized in these economies. It is because the countries’ markets have diverse laws, regulations and processes that are determined by the political, economic and cultural dynamics in each nation or jurisdiction (Hoff 2006).
Dean also continues to reiterate that the first-mover advantage in emerging economies is significant since the markets do not have the ability to purchase products on a scale that remains profitable to MNCs (Hoff 2006). Therefore, pumping in large sums of money is not a guarantee for success. According to Bonaglia, Goldstein, and Mathews, the maturation of second wave MNEs such as Huawei suggests the epitome of globalization (Bonagliaa, Goldsteina, & Mathews 2007). The latecomers have since pursued global growth through accelerated internalization combined with strategic and organizational innovations, and this indicates the implementation of international business approaches that hand them the competitive advantage of the traditional MNCs (Bonagliaa, Goldsteina, & Mathews 2007).
International Business Strategy
Therefore, it is essential for an MNC with International operations to employ tactics that are applicable to the diverse businesses and subsidiaries located in different geographical regions. The integration of each and every activity effectively and actively in the organizations across various national borders is a steep predicament. Timing in the internalization process is also a significant factor to consider. As aforementioned, Dean denotes that it is important for an individual firm to become a first mover due to the dynamics of the environment (Hoff 2006).
Huawei and South Africa
In 1998, the Huawei company entered South Arica with its headquarters in Pretoria which later changed to Johannesburg. The headquarters in South Africa do serve not only the host country but also the East and Southern regions of the African continent. The employees in the company are multi-cultural with high experience and knowledge of the telecommunications industry. They continues to grow and the focuss is at taking on Samsung, which has been a large telecommunications provider in the African continent.The contemporary trends observed by the growth of the entity shows a successful internalization process of the company in the country. Some of the internalization processes that can be denoted that the firm uses include export mode, contractual and turnkey. The international business strategy utilized underlie the characteristic entry mode that insinuates low resource commitments, flexibility and decreased risk in distribution. The reasons for the choice can also be accrued to the geographical distance and conditions of the country that present some of the challenges represented in investing in South Africa.
However, there are increased partnerships between the Chinese and South African governments that continue to encourage FDI investments in the nation. The company is the supplier to the largest telecom firms in South Africa e.g. MTN, Cell C, and Telkom (Speckman 2013). The firm was also awarded a contract with the Passenger Rail Agency to supply digital radio communication systems for its trains and other infrastructure (Speckman 2013). The mentioned indicate the contractual mode entry strategy as employed by Huawei. South Africa is characterized by mostly low-income earners ( prefer prepaid services) and for this reason, Huawei company utilizes an ABC strategy: growing the average revenue per user (APRU), augmentation of bandwidth and reduction of costs (Huawei 2016). The company has also entered into strategic collaborations and partnerships as part of the internalization process of South Africa that is characteristic of other developing nations in the continent.
MTN is the largest mobile operator both in South African and Nigeria. It represents a 30 percent market share in S.A (Huawei 2016). However, the outfit has been experiencing low APRU despite its market size. It is because of the necessity to expand the existing infrastructure. Huawei being a strategic partner assisted MTN with an enhanced coverage solution that enhanced the experience of users (Huawei 2016). The turnkey entry mode is observed through the use of Huawei technologies South Africa Limited that offers retail and marketing services for the Huawei Company Limited.
Huawei also utilized the export entry mode in South Africa. The strategy is influenced by the geographical conditions and local market conditions in the nation. The outfit sent numerous sales and service engineers to the host from the home country to set up branches and service centers in these countries. Huawei has set up a call center in South Africa to assist customers and enhance service delivery.As aforementioned, the selection is founded upon the characteristic notion of export entry mode: high flexibility decreased resource commitment and low distribution or dissemination risks.
It follows that Huawei does not completely utilize the widely accepted Eclectic Paradigm of internalization process. The company owns proprietary technology in the form of software among other products (Dunning 1988). It assesses the market imperfections and works out approaches that accrue to the advantages in the host and home countries. It also considers the market imperfections as viewed in the South Africa case. However, it does fully market internalization as seen in the case of South Africa. It enters into contractual obligations with the host country firms such as MTN.
Huawei and South Africa’s Telecom’s Industry
The Telecom industry has seen rapid growth that has been depicted by the escalation in the total number of mobile phone users. In South Africa, dictated by a developing economy still showcases a low penetration of mobile phones and other technologies. However, through a sustainable internalization process, Huawei objectifies to increase its sales in the country due to the vast potential. The potential is augmented by the rise in disposable incomes and the escalation in middle-class folk in the country.
The case study of the internalization process of Huawei in South Africa shows that models such as the Eclectic paradigm cannot entirely suffice and reflect the internalization process of technology firms. They do not fully follow the congruent advantages as offered by the Eclectic paradigms or OLI- framework (Dunning 1988). The company mostly utilizes joint ventures, FDI and export entry modes to venture into new markets that can be said to be governed by the consideration of transaction costs and risk. It is not logical to engage in investments where the costs supersede the benefits to the Company. Investing in emerging economies offers challenges. However, as seen through the market trends and the enormous potential, it is fit for companies to invest in the nations but through a prior benefit-cost analysis.
Amal, M., Raboch, H., Awuah, B., & Andersson, S.2010. The Internationalization of Multinational Companies (MNCs): An intrasector. XXXIV Encontro da ANPAD, 1-17.
Barfield, C.2011, November 16. Telecoms and the Huawei conundrum. Retrieved May 11, 2016, from American Enterprise Institute:
Bonagliaa, F., Goldsteina, A., & Mathews, J. 2007. Accelerated internationalization by emerging markets’ multinationals: The case of the white goods sector. Journal of World Business, 369-383.
Dunning, J. H.1988. The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions. Journal of International Business Studies, 1-31.
Estrin, S. 2015. Foreign Direct Investment: Can China teach The World A Lesson.
[Accessed: 11 May 2016]
Hoff, D.2006. South African cellular wars in Nigeria. International Journal of Emerging Markets, 84-95.
Huawei. 2016. Corporate Information.
[Accessed: 11 May 2016]
KPMG Africa. 2014. Listing in Africa: Advantages and Disadvantages of an equity listing.[ Online]
[Accessed 11 May 2016]
Nakai, Y., & Tanaka, Y. 2010. Chinese company’s IPR strategy: How Huawei Technologies succeeded in dominating overseas market by Sideward-Crawl Crab Strategy. Picmet 2010 technology management for economic growth (pp. 1-5). Phuket: IEEE.
Sim, A., & Pandrian, J. 2003. An exploratory study of internationalization strategies of Malaysian and Taiwanese firms. Proceedings of the 2003 Academy of International Business Northeast Conference: Globalization in the Age of Technology (pp. 107-129). U.S.A: US Dept of Education BIE.
Speckman, A. 2013. Huawei sees itself as long-term investor in SA
[Accessed 11 May 2016]
Suvakunta, P. 2010. China’s Go-Out Strategy: Chinese Foreign Direct. Thailand Journal of Law and Policy, 1-10.
Tang, S., Selvanathan, E., & Selvanathan, S. 2012. China’s Economic Miracle: Does FDI Matter? Northampton, MA: Edward Elgar Publishers.