AWA: Academic Writing at Auckland

INTRODUCTION

This essay will study Huawei Technologies as an multinational corporation and discuss its internationalisation processes and strategies. A multinational corporation (MNC/MNE) can be defined as a firm engaging in multi-activities and FDI, participating in a range of cross border alliances and value-adding activities. MNEs are often labelled as the ‘central actors in international business’ and have been increasing alongside globalisation. To explain Huawei’s development into internationalisation, international business (IB) theory, Dunning’s OLI paradigm will be applied to Huawei’s case. Relevance of the IB theory will be discussed and the introduction of a springboard perspective will be compared to the OLI paradigm.

HUAWEI’S BACKGROUND

Huawei has emerged into playing a key role in raising the Chinese economy ever since the multinational was offered ambitious networking jobs from Teliasonera, a Swedish phone company (Johnson & Groll, 2019). The Chinese global ICT provider was founded in 1987 by Ren Zhengfei, and is privately owned where shareholding is exclusive to only Huawei employees under their Employee Shareholding Scheme through the Union of Huawei Investment & Holding Co., Ltd. (Huawei Technologies, 2020)¹. Ren began the company in 1990 through a partnership with a foreign company and later from his research and development for his own products, made impressive investments. By 1996, the Chinese military and the Chinese government grew bonds with Ren and his company which further pushed Huawei’s domestic presence and power. Alongside this domestic growth, Huawei’s international presence also grew significantly due to the company’s competitive cost-efficiency advantages (Johnson & Groll, 2019). With currently over 194,000 employees, Huawei has 14 R&D institutes, centres and offices in over 170 countries and regions (Huawei Technologies, 2020)¹. Best known for its leading power in 5G, Huawei’s technological assets have been quickly noticed by governments and competing ICT providers outside of China.

HUAWEI’S INTERNATIONALISATION PROCESSES AND STRATEGIES

Huawei Technologies were initially focused on gaining domestic market share and competing against large Western companies who dominated the Chinese telecommunications market. By 1996, with the help of the golden period of China’s telecom industry growth (1990s), Huawei were able to position themselves as China’s leading telecommunications provider. Following their domestic success, Huawei began to explore its opportunities outside of their home country. According to Zhu, there are three significant reasons for Huawei to eye success in international markets. Firstly, China’s telecom market was beginning to limit Huawei’s potential growth and expansion because of domestic rivalry. With the slowing growth of Chinese investments on basic infrastructure for telecom carriers and the pressure of the rapid technology innovation drive of the industry, Huawei needed to internationalise if they were to maintain their advantages in their innovative technology products and stabilise their pace in global technology innovation movements. Secondly, internationalising would allow Huawei to maintain their growth, sustaining a steady development. Lastly, Zhu claims that actively competing in the international market is favourable over playing a passive defence domestically. Furthermore, Huawei had gained both confidence and capability through experience when competing with domestic rivalries, which contributes towards leading them into a global market and development of their international market strategies (Zhu, 2010).

Huawei’s mode of entry into new markets differs depending on the product, which they categorise into traditionally advantaged products, products lacking advantages and products with technological advantages (Appendix A). The company has tailored each market’s entry mode and strategy to suit Huawei’s position in that market, whilst considering that host market’s social and cultural environments. Huawei’s internationalisation  first began in the Russian and South American market in 1996. Through Beto-Huawei, Huawei entered the Russian market through a joint venture with Russian Telecom and Beto Konzern and started out slow but eventually saw an attractive increase in sales. Rather than a joint venture, Huawei approached South America’s market through exporting largely due to geographical distance factors and local market conditions at the time. Huawei also entered Asia and North African markets following 2000, through an export method. Chinese sales and service engineers were sent to service centres in their host markets, which were preferably low resource commitment, low dissemination risk and high flexibility. A contractual entry method was also adopted when Huawei entered North American and West Europe markets. Co-researching, co-production (OEM) and co-sales were contractual methods which assisted Huawei into these markets and into cooperation with local telecommunication firms in their host country (Wu & Zhao, 2007). Understandably, a contractual entry method is most advantageous for Huawei when entering western markets. For Huawei to catch up to globally leading technologies (including products and R&D capabilities), cooperation with foreign leading firms assists Huawei in acquiring internationally advanced technologies and recourses for R&D (Zhu, 2010). They will also acquire access into the western value chain channels, resources and infrastructure and is able to gain a new reach in target market while fuelling their own R&D systems and improvements of Huawei products.

From 2002 onwards, Huawei sees a stable increase in contract sales in both domestic and international markets. By 2006 the international market contributed 65% towards contract sales, showcasing a capable global market growth. Compared to 2002 where contract sales in the international market were at 550 million USD, 2006 contract sales stood at 7.15 billion USD (Huawei, 2006). It is naturally agreeable after Huawei’s successful internationalisation, their strategies are effective in sustaining long-term global growth. The Chinese company sought after markets where telecommunication infrastructure was poor but with great development potential. It was also beneficial for Huawei to target markets which had a good relationship with China and the Chinese government to ensure information security of their networking and telecommunication resources, products and knowledge assets (Wu & Zhao, 2007). Huawei’s strength lie in their R&D, which they generously invest at least 10% of their sales revenue to innovating new and improved technologies aimed to be sustaining and pose a long-term value creating potential for its users (Sun, 2009). Huawei’s extensive R&D investments have lead them to becoming global leaders of 5G technology.

THEORY APPLICATION

To explain Huawei’s internationalisation processes and strategies, international business theories and perspectives can be applied. Dunning’s OLI paradigm addresses that for profitable FDI to take place, all three OLI aspects must be satisfied. The paradigm consists of ownership, location and internalisation advantages where according to Dunning, ownership and location advantages must favour the firm. This then contributes towards incentives to internalise and engage in FDI. Dunning defines ownership advantages as “…exclusive possessions and use of certain kinds of assets.” Essentially these are internal advantages a firm holds unique to them and are usually difficult for other firms to acquire, for example property rights, institutional assets and/or advantages of common governance. Location advantages are usually what an MNE finds attractive in a foreign country for investments (specific endowment factors), including natural endowments, artificial barriers and/or legal and regulatory systems. Internalisation advantages refer to a firm’s ability to exploit their ownership advantages to contribute towards a cost efficient internationalisation, including avoiding various costs, avoiding or exploiting government intervention and/or to retain control over ownership advantages (Dunning & Lundan, 2008).

In the case of Huawei, Zhu identifies the two aspects which the Chinese firm was lacking compared to MNE’s in developed countries, technology and brand. Thus, as explained previously, Huawei could not directly internationalise on its own but rather, had to seek partnerships and methods of entry where they had support from powerful Western telecommunications and technology companies. Before their internationalisation success, Huawei’s main competitive strength (which was sought after by MNE’s from developed countries) was their low cost advantages, especially low R&D costs. Thus, as Zhu addresses, “Huawei intends to acquire the technology advantages rather than “exploit” its low cost advantages in developed countries.” For Huawei to proceed in a catch up strategy, they had to utilise their competitive advantages into creating ownership advantages in areas where they were disadvantaged to enter the global market and acquire location advantages, to further build their internationalisation strategies. Huawei’s existing ownership advantages consists of differentiation, high efficiency and low costs. In terms of low costs, for Huawei this meant their Chinese-based R&D and engineering resources were lost costing. The average cost of Huawei’s R&D employee is six times less than that of European enterprises annually. Huawei’s R&D staff would also work almost double the hours European R&D workers worked annually. This was effective for Huawei to enter developed countries especially with the rising cost of operation in the telecom industry. However, differentiation advantages (brand advantage) allowed Huawei to compete in high value-adding markets globally (Zhu, 2010). Huawei, reflecting the unique characteristic of many Chinese firms, absorb and adapt well to international consumer needs through customisation of their products. Huawei is able to tailor their products to perfectly satisfy the needs and requirements of different international markets (Zhou & Minshall, 2014). This assisted Huawei into the Netherlands to undergo a customised 3G project for Telfort after winning their first European WCDMA contract. Zhu further identifies Huawei’s acquired advantages, which the firm gained after ‘catching-up’ to developed country MNE’s. As previously mentioned, these are technology (which Huawei has developed through extensive R&D, improving its technology to becoming the world’s most innovative and advanced) and brand reputation (Zhu, 2010).

Location advantages in Huawei’s case changed as they began investing from developing countries, to transitioning economies to eventually developed markets where technological innovation and competition was highest. At the earlier stages of Huawei’s internationalisation journey, Huawei was most attracted to the following country-specific factors: low market access standards and backward telecom technologies,  undeveloped basic telecom infrastructure, geographically large regions for use of their influential power and factor endowments including low cost R&D resources (Zhu, 2010). For example, Huawei has continued to operate in Kenya, Africa since 1988. Not only did Africa offer what the company favoured in terms of scale and state of networking infrastructure, Africa readily relied on Huawei for technology infrastructure development. The African government welcomed Huawei’s entry for its low-costs and investments towards the country’s telecom networks. Until now, the Chinese company remains strongly bonded with Africa and has grown to contribute extensive networking systems (including 5G networking) and technology development (such as e-government systems) across many African continents (Chimbi, 2019). Countries like Africa, offered locational advantages which prepared Huawei for the competition within developed countries and giant telecommunication firms that participated in global investments.

Once Huawei had matured and built its technology and brand reputation (acquired ownership), they began looking into developed countries for investment in high value adding production activities. Zhu (2010) identifies three location advantages offered by developed countries which benefits Huawei. Firstly, Huawei will be exposed to leading technologies and quality R&D resources. The company has the ability to upskill their own technology through acquisition of technologies and R&D support while benefitting from technology clustering and alliances effects. Secondly, while developing countries were large geographically, developed countries offer large telecom markets (hence high competition between telecom providers and suppliers). Additionally to high penetration rates, there is also high demand for leading innovative technologies possessing high value adding operations and products. Resultingly, these areas offer high potential market shares and profits which is what Huawei would be wanting to acquire. Lastly, developed countries have improved basic infrastructure and business environments. As Huawei entered big markets in America and Europe, they were able to develop in an environment where communication, transportation and education were well established, contributing towards efficiency in development and operations. Especially, within the telecommunication industry, developed countries possess the technologies and capitals for Huawei to fuel their R&D to new potentials (Zhu, 2010). 43% of Huawei’s foreign alliances were distributed towards Europe and 36% towards the USA. Since 1997, the Chinese firm formed joint ventures and partnerships in such markets where industry reputation was high, technology base was larger and clustering of networks. The table showing “The Memo of Huawei’s Alliances (1989- present) display Huawei’s partnerships with mostly develop countries in a period after Huawei’s ‘catch-up’ to the bigger telecommunication markets (Appendix B) (Zhang & Duysters, 2010). Zhu (2010) describes Huawei’s internalisation strategy in developed countries as ‘technology and market seeking’, where “… most of Huawei’s high-technology products are developed, designed and released in Europe and the USA.”

Huawei’s internalisation process when entering developing countries exploited their comparative advantage in technology and utilised low-costing local workers. Technology support and training centres were set up to internalise technology and knowledge (intermediate products). This also allowed the company to avoid uncertainty in external markets and reduce transaction costs (Zhu, 2010). For example, Huawei is actively operating eight training centres in Africa, aiming at customers (employees of companies overseeing technologies which they will sell from Huawei), subcontractors (for knowledge on installation, troubleshooting and health and safety principles) and channel partners (third parties related to distribution of Huawei technology). Furthermore, Huawei also has training centres set up through partnerships with external institutions including HANA, HAINA and HALP. Huawei’s internalisation in Africa was well received by African governments as they in turn, received spillovers (subcontractor and staff) with Huawei’s contribution to technology transfer and lifting of Africa’s telecommunications sector (Tugendhat, 2020).

When Huawei internalised in developed countries, they aimed to enhance transaction value by acquiring R&D resources and combining them with their technological advantages. By doing so, the firm develops new ownership advantages that can be transferred back to China (Zhu, 2010). As emphasised previously, Huawei generously invests in R&D spending and innovation. The company has 16 R&D centres located globally including Germany, Sweden, US, and Italy. Furthermore for global integration of ICT talent, Huawei also runs 31 joint innovation centres, working with research institutes and partners within the industry (sciencebusiness2020). Taking Europe as an example, Huawei’s investments began in the year 2000 where R&D centres were placed in Kista, Sweden (major European mobile technology development region). In the following years the company built up Europe’s production network featuring numerous R&D centres, manufacturing and logistics and management operations. Huawei’s choices of investment in locations across Europe display a division of labour that ultimately string together to contribute towards Huawei’s growth in Europe. R&D related activities operate mainly in western Europe and Russia. Poland’s operations focus on sales and marketing while Hungary focuses on manufacturing and logistics within Europe and Romania focuses on providing technical support for services around Europe. Huawei’s developments in operations across Europe provides upgrading potential in technological capabilities of the firm. The company is able to take advantage of Europe’s technological infrastructures and R&D resources through internalisation processes across Europe and acquire new ownership advantages to exploit transactional values, all while having extensive control over internal resources (ownership advantages) (Drahokoupil et al., n.d). Since Huawei began setting up R&D centres there they are now operating 23 R&D sites and 2 regional offices. Huawei has employed over 13 3000 employees and has partnerships with over 150 universities across Europe. The company facilitates ICT knowledge transfer and aims to educate and build skilled human resources through training and mentoring programs (Huawei Technologies, 2020)².

When looking at Huawei international growth, Dunning’s OLI paradigm is relevant when explaining the company’s internationalisation process in aspects of Huawei’s innate ownership advantages (developed within home country) and acquired ownership advantages (gained through developed countries and partnerships with larger telecommunication providers). Dunning’s ownership advantage theory however, could not explain in depth how an MNE’s ownership advantages could still contribute towards internationalisation continuously. For Huawei’s case (and possibly for many Chinese firms looking to globalise through a similar ‘catching-up’ process), the firm constantly acquires and develops new ownership advantages and are being exploited as Huawei extends their global reach. Additionally with Huawei’s constant development of their R&D and sustainability centres/ systems, the way which Huawei is internalising yet distributing its acquired innovative resources and assets with partnerships like universities and other firms in the industry is an extremely large scale and complex development which its motivations could not be well explained by the OLI paradigm.

This leads me to introduce the springboard perspective, which compared to the OLI paradigm better explains Huawei’s international expansion. The springboard strategy is designed for emerging market MNEs to seek more extensive gains for the firm, propelling them ahead of ‘late comer’ disadvantages. The significance of EM MNEs arise from the growth environment within their home countries. Compared to developed countries, emerging economies have extremely competitive business environments where resources are lacking. Thus, MNEs from emerging economies are pressured to be strategic and engage in FDI to acquire strategic assets to compete with greatest effectiveness. As China is an emerging market, the springboard perspective better reflects the motivations behind Huawei’s internationalisation strategy (Luo & Tung, 2007).

Huawei’s drive to internationalise is better described to be asset and opportunity seeking in investments. Thus, explaining how Huawei initially invested in developing markets (“stunned fish”, damaged markets) where telecommunications development has potential. Huawei was able to exploit their cost competitive advantages in these emerging markets and secure preferential treatment emerging market governments offered (Huawei in Africa). It is more agreeable that instead of exploiting their firm specific advantages through internationalisation and internalisation (as suggested by the OLI paradigm), Huawei sought to first acquire technology and build their brand to compensate for the competitive disadvantages they had compared to foreign (especially Western) telecommunication MNEs. Huawei undertook inward FDI to later benefit from outward FDI engagement in more mature markets. The Chinese government at the time had not only encouraged domestic firms to engage in outward FDI, but also presented incentives for foreign firms to invest into China. Huawei is one of many successful Chinese firms which participated in round tripping to benefit from the incentives offered to foreign firms by the Chinese government by acquiring Western firms and re-entering China as a foreign firm. We can see this through Huawei’s multiple acquisitions and joint ventures throughout their internationalisation process. Huawei can be strengthened as an MNE through springboarding to counter rivals within their home country as both Huawei and their acquired ‘foreign firms’. Springboarding reasons, including home government support for going global, offshore availability of standardised technology and entrepreneurial leadership is reflected in Huawei’s initial plans of globalising and their seek for advanced technologies. Resultingly, they’re leadership, innovation and R&D abilities lead them to acquire and establish the world’s most successful 5G networking (Luo and Tung, 2007). (Refer to Appendix C for springboarding perspective details).

Dunning’s OLI paradigm explains how Huawei were able to benefit from various location specific endowments in firstly developing countries and later, developed countries. The theory around location advantages agreed with Huawei’s movement between markets and explained how Huawei’s various cross-border alliances and networking partnerships built throughout their internationalisation process allowed Huawei to access specific advantages of each host country. It was also relevant in explaining the advantages associated to Huawei’s internalisation processes. However, the springboard strategy explains the underlying motivations for their location strategy and how they moved between other emerging markets and mature markets. Through interaction with foreign firms, Huawei integrated themselves and participated in global value chain to gain market intelligence and knowledge. Their internalisation activities (R&D, training facility set-ups) was also a product of their springboard perspective and development of their initial acquisitions (Luo & Tung, 2007).

CONCLUSION

To explain the internationalisation processes and strategies of Huawei, both Dunning’s OLI paradigm and the springboard perspective have relevance in their theories surrounding MNEs international expansion. While the OLI paradigm is relevant in addressing advantage gains from Huawei’s locational and internalisation strategies, its theory on ownership advantages did not identify its firm specific advantages situation as an emerging market MNE. Therefore, the springboard perspective is relevant in explaining Huawei’s background as an emerging market MNE and hence, its motives to seek resources and opportunities through acquisitions (development of ownership advantages). The springboard perspective also uncovers motives behind Huawei’s locational strategy. Thus, both theories contribute towards explaining Huawei’s internationalisation journey in different dimensions of global expansion.

REFERENCES

Chimbi, J. (2019, March 3). How African continent has embraced Huawei. Retrieved April 23, 2020, from http://www.globaltimes.cn/content/1140747.shtml

Drahokoupil, J., McCaleb, A., Pawlicki, P., & Szunomár, Á. (n.d.). Chapter 11 Huawei in Europe: strategic integration of local capabilities in a global production network. PDF. Retrieved April 25, 2020, from http://real.mtak.hu/80609/1/Chapter11_u.pdf

Dunning, J. H., & Lundan, S. M. (2008). Multinational Enterprises and the Global Economy (2nd ed.). Cheltenham: Edward Elgar. Retrieved from https://content.talisaspire.com/auckland/bundles/5c69c1cb540a266dc778a0f4

Huawei Technologies Co., Ltd. (2006). Annual Report 2006. PDF. Retrieved April 21, 2020, from https://www.huawei.com/ucmf/groups/public/documents/annual_report/092583.pdf

Huawei Technologies Co., Ltd. (2020). Who we are. Retrieved April 25, 2020, from https://www.huawei.eu/who-we-are ²

Huawei Technologies Co., Ltd. (2020, April 3). Corporate Introduction . Retrieved April 20, 2020, from https://www.huawei.com/en/about-huawei/corporate-information ¹

Johnson, K., & Groll, E. (2019, April 3). The Improbable Rise of Huawei. Retrieved April 20, 2020, from https://foreignpolicy.com/2019/04/03/the-improbable-rise-of-huawei-5g-global-network-china/

Luo, Y., & Tung, R. (2007). International Expansion of Emerging Market Enterprises: A Springboard Perspective. Journal of International Business Studies, 38(4), 481-498. Retrieved May 2, 2020, from www.jstor.org/stable/4540438

sciencebusiness. (2020, February 13). Huawei predicts 10 emerging trends in telecom energy in the next 5 years. Retrieved April 25, 2020, from https://sciencebusiness.net/networks/huawei

Sun, S. L. (2009). Internationalization Strategy of MNEs from Emerging Economies: The Case of Huawei. Multinational Business Review, 17(2), 129–156. doi: 10.1108/1525383x200900013. Retrieved April 20, 2020, from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1528265

Tugendhat, H. (2020). How Huawei Succeeds in Africa. PDF. Retrieved April 24, 2020, from https://static1.squarespace.com/static/5652847de4b033f56d2bdc29/t/5e73a9cddd18b9610af5420f/1584638413829/PB+41+-+Tugendhat+-+Huawei+Kenya+Nigeria.pdf

Wu, D., & Zhao, F. (2007, April). Entry Modes For International Markets: Case Study Of Huawei, A Chinese Technology Enterprise. PDF. Retrieved April 20, 2020, from http://www.iberchina.org/files/2018/Entry_Modes_For_International_Markets_Case_Study_Huawei.pdf

Zhang, Y., & Duysters, G. (2010). Alliance-Based Network View on Chinese Firms’ Catching-Up: Case Study of Huawei Technologies Co.Ltd.. Journal on Innovation and Sustainability RISUS, 1(2). doi:https://doi.org/10.24212/2179-3565.2010v1i2a9

Zhou, Y., & Minshall, T. (2014). Building global products and competing in innovation: the role of Chinese university spin-outs and required innovation capabilities. International Journal of Technology Management, 64(2-4), 180-209. PDF. Retrieved April 22, 2020, from https://www.researchgate.net/profile/Yuan_Zhou32/publication/259867560_Building_global_products_and_competing_in_innovation_the_role_of_Chinese_university_spin-outs_and_required_innovation_capabilities/links/5463f1020cf2cb7e9da99c91/Building-global-products-and-competing-in-innovation-the-role-of-Chinese-university-spin-outs-and-required-innovation-capabilities.pdf

Zhu, B. (2010, August 3). Internationalization of Chinese MNEs and Dunning’s Eclectic (OLI) Paradigm:A Case study of Huawei Technologies Corporation’s Internationalization Strategy. DOC. Retrieved April 20, 2020, from http://lup.lub.lu.se/student-papers/record/1338205

APPENDIX A

Text extraction: “5.4 Different Entry Modes for Different Products”

Huawei also employs different entry modes flexibly to different products. For example, in traditional advantaged products, such as switching network, telecommunication power, Huawei often uses join-venture and export methods. In the products without advantages, for instance in 2G mobile networks, Huawei cooperates with Giants of this area. For the products with technological advantage and without market resource, it uses the modes of joint venture, franchising or co-research (Wu & Zhao, 2007).

APPENDIX B

Table: “The Memo of Huawei’s Alliances (1989 – present)”

(Zhang & Duysters, 2010).

APPENDIX C

Figure: “International expansion of EM MNEs: a springboard perspective”

(Luo & Tung, 2007)