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INVESTIGATING GREEK MULTINATIONALS’ BEHAVIOUR: IDENTIFYING OPPORTUNITIES, OVERCOMING BARRIERS AND CREATING COMPETITIVENESS Fragkiskos Filippaios Kingston University London & London School of Economics London, October 2009 Kingston Business School Outline Rational – Contribution The case of Greece: Where do we stand? Identifying Opportunities – Overcoming Barriers – Greek FDI Abroad – Factors affecting Greek FDI Creating Corporate Competitiveness – Conceptual Framework – Data – Results Managerial Implications and Policy Recommendations Kingston Business School Rational International Business – Corporations are in a continuous search for creating and sustaining advantages that will provide a competitive edge Strategic Management – Changes that a corporation has to undergo, especially with respect to its internal environment in order to respond to a changing and dynamic external environment A bridge between the two... Why Greece? Kingston Business School The case of Greece as an outward investor Key regional player and one of the largest investors in the Central and Eastern and South Eastern European Countries (Bastian, 2004; Demos, Filippaios, & Papanastassiou, 2004; Kekic, 2005) Current developments in the region have changed the role of domestic subsidiaries (Manolopoulos, Papanastassiou, & Pearce, 2005; Stoian & Filippaios, 2008) This process was enhanced by Greek policies aiming to transform the country into a key player for the region. – The ‘Greek-Balkan Reconstruction Plan’, offering almost 500 million euros, is an indicative policy fulfilling that aim (Hellenic Centre for Investment , 2005). – Furthermore, this expansion has been facilitated by the upgrading of the Athens Stock Exchange (ASE) from a developing to a developed financial market, i.e. a reliable source for raising funds. Kingston Business School Greek firms grabbed the opportunities and expanded rapidly in the newly opened markets: Albania - it was the second largest investor after Italy at the end of 2001 (WIIW, 2005) Romania - Greece was the second largest investor at the end of 2003 following the Netherlands (WIIW, 2005) Bulgaria - Greece on the third position following Germany and Austria (WIIW, 2005) FYROM - it was the second investor following Hungary (WIIW, 2005) Moldova - Greece holds the seventh place (WIIW, 2005) Kingston Business School The Greek investment occurred through two channels: First, Greek subsidiaries of multinational enterprises started internationalising. – Firms such as 3E, a Coca- Cola soft drinks subsidiary, Delta, partner of Danone, Intracom, a partner of Siemens working in telecommunications, Chipita, a PepsiCo food subsidiary and many others started investing abroad, thus becoming regional headquarters. – This strategic change appears to be verified by a prior study of Pantelidis and Kyrkilis (1994) where they argue that ‘it is possible for foreign subsidiaries to readjust their market strategies along time and in accordance with changing conditions’. Second, purely domestic firms, ranging from small entrepreneurial to large traditional firms, seized the opportunities and engaged in foreign production by using their accumulated experience and expertise. Kingston Business School Explaining Greek FDI abroad Until now only a few attempts were made in the international literature with a seminal one from Petrochilos (1988). Almost all studies are either purely descriptive or do not go beyond the analysis of specific case studies. For a long time, the lack and inconsistency of FDI data dissuaded scholars from examining the Greek case. – The adoption from Bank of Greece of the New Balance of Payment System since 1996, gives us the opportunity to inspect the locational determinants of inward FDI in Greece from 1996-2001, for different sectors and a range of investing countries. Previous studies (Demos, Filippaios & Papanastassiou, 2004; Filippaios & Stoian, 2006; Stoian & Filippaios, 2008; Filippaios, 2008) showed that traditional factors (size of the economy, as well as its openness are significant) attracting FDI seem to dominate the decision process of Greek firms. Capital productivity and labour costs on the sectoral level are also influencing the decision of Greek investors. Kingston Business School Factors affecting Greek FDI Opportunities – – – – Low labour costs Existence of well educated labour force (tertiary education) Rule of law Democratic accountability Barriers – High GDP per capita – High public debt – Existence of unskilled or semi-skilled labour force (secondary education) Kingston Business School Literature The main responsibility for corporate competitiveness lies with corporations themselves, in developing and building capabilities more effectively than competitors (Barney et al. 2001, Barney, 1991; Bartlett and Ghoshal, 1989; Doz and Prahalad, 1987; Hamel and Prahalad, 1989, Grant; 1991; Smith, 1995) One could distinguish the factors influencing competitiveness into external ones, over which firms have limited or no control whatsoever, and internal ones that are completely under the control of firms (Fayerweather, 1978; Kobrin, 1976) Kingston Business School Competitiveness of locations It is changing constantly Use of IMD World Competitiveness Yearbook – It is the world’s most thorough and comprehensive annual report on the competitiveness of nations, published without interruption since 1989 Kingston Business School Rank loss / gain by IMD Index in the 2002 – 2006 (five year period) Country Austria Belgium Denmark Finland Germany Luxemburg Netherlands Sweden United Kingdom France Greece Ireland Italy Portugal Spain Overall Competitiveness indicator +2 -7 +1 -7 -8 -7 -11 -2 -4 -5 0 -2 -14 -4 -8 Economic Performance Indicator -6 -18 -17 -9 -15 0 -10 -6 -2 -7 -6 -1 -18 -12 -13 Government Efficiency indicator +3 +4 +4 -4 -3 -12 -1 -5 -3 -4 +1 +3 -9 -7 -12 Business Efficiency Indicator +8 -5 +9 -7 -5 -11 -12 +2 -6 -7 -12 -2 -16 -8 -7 Infrastructure Indicator -1 +5 +2 -4 +1 -4 -7 -2 -2 -5 +3 -3 -5 +4 -1 Source: IMD, Various Years and Authors’ Calculations Kingston Business School Conceptual Framework - Corporate Motivations Resource Seeking Market Seeking Efficiency Seeking Strategic Asset Seeking (Berhman, 1984; Dunning, 1993; Filippaios et al., 2004) Kingston Business School Locational Characteristics Low Added Value High Added Value Conceptual Framework Traditional (RS, MS) Sophisticated (ES, SAS) Corporate Motivations Kingston Business School Conceptual Framework - Hypotheses H1a: Corporate competitiveness will be positively related with resource seeking motivation in manufacturing upstream industries H1b: Corporate competitiveness will be positively related with market seeking motivation in manufacturing downstream and services industries H2a: Corporate competitiveness will be positively related with efficiency seeking motivation in mature manufacturing industries H2b: Corporate competitiveness will be positively related with strategic capability seeking motivation in high tech manufacturing and services industries Kingston Business School Questionnaire Administration Questionnaire posted to 110 enterprises with a developed process of internationalisation in the last ten years. 70 questionnaires were filled out by companies presidents, managing directors and executives. The research took place in the period between 20 September 2006- 20 January 2007. From a total of 110 companies, 70 answered (64% response rate) Kingston Business School The survey dealt with: The incentives, strategies and barriers that Greek companies faced when exploring setting up and operating an affiliate/subsidiary company abroad The incentives, strategies and barriers that Greek companies faced when developing only an export activity Kingston Business School The parameters that have been examined in the survey were: The internationalization incentives The benefits from the internationalisation development actions The strategies that the Greek internationalised companies are following The barriers that the companies are facing in their involvement in new markets Kingston Business School Data and Sample description (Survey) 70 firms from all industrial sectors. – 66% of companies are members of Federation of Industries of Northern Greece (FING) – 33% members of Federation of Greek Industries (SEV) Two considerations: – The sample should be representative of the Greek case – Additional data could be combined with the data from public sources Kingston Business School Data and Sample Characteristics All companies are SMEs (<250 employees) Average Turnover is 16,3 mil € Average Profits (before taxes) are 1 mil € Average employees size is 125 employees Average Age is 26 years Kingston Business School Data and Sample description (Secondary data) Data capturing the external environment come from a combination of two databases: Economist Intelligence Unit (key macroeconomic data) World Development Indicators (structural characteristics of the economies) Kingston Business School Methodology Our dependent variable is an ordered discrete variable measuring corporate competitiveness Takes values from 1 (low) to 5 (high) for the two time periods (2002 and 2006) and for the different countries under investigation Ordered logit model (Maddala, 1983) Use firm and time effects for our estimations and separating thus the individual effect of companies from our results (Carro, 2006; Honore and Kyriazidou, 2000) Kingston Business School Factors affecting the overall corporate competitiveness Market – GDPGR (+) – GDPPC (+) Efficiency – Labour costs (-) (Not always significant) – Infrastructure (+) Strategic asset seeking – Education, primary and secondary (+) Not significant – – – – Trade openness Education, tertiary Royalties and fees International trade taxation Kingston Business School Ordered Logit estimation of External factors influencing competitiveness (Dependent variable: Corporate competitiveness) GDPGR GDPPC ULCCH TRABAL LPRI LSEC LTERT Model 1 Model 2 Model 3 Model 4 0.619*** 0.536*** 0.549*** 0.377*** (0.059) (0.063) (0.066) (0.117) 0.003*** 0.004*** 0.005*** 0.004* (0.001) (0.001) (0.002) (0.001) -0.034* -0.030 -0.029 -0.035 (-0.020) (-0.019) (-0.021) (-0.024) 0.001 0.001 0.001 0.001 (0.001) (0.001) (0.001) (0.001) 0.113** 0.112** 0.120** 0.243* (0.044) (0.045) (0.056) (0.136) 0.080** 0.083** 0.089* 0.203* (0.040) (0.041) (0.052) (0.121) 0.053 0.061 0.066 0.207 (0.040) (0.041) (0.053) (0.126) 0.019*** 0.017*** 0.024*** (0.005) (0.005) (0.007) 0.008 0.019 (0.013) (0.018) MOBS RLFEES TAXINTTRADE -0.034 (-0.044) Number of Obs Wald Chi2 Pseudo R2 Akaike Info Crit 640 138.3 0.0978 1459.052 Kingston Business School 640 143.51 0.1061 1447.878 640 147.2 0.112 1393.847 640 114.49 0.1047 1078.713 Manufacturing Services GDPGR (+) GDPGR (+) Labour Costs (-) GDPPC (+) Infrastructure (+) Education (+) Infrastructure (+) Royalties and Fees (+) Kingston Business School Ordered Logit estimation of External factors influencing competitiveness by Manufacturing and Services (Dependent variable: Corporate competitiveness) GDPGR GDPPC ULCCH TRABAL LPRI LSEC LTERT MOBS RLFEES TAXINTTRADE Number of Obs Wald Chi2 Pseudo R2 Akaike Info Crit Kingston Business School Manufacturing Services 0.280* 0.340* (0.153) (0.201) -0.001 0.005*** (-0.001) (0.001) -0.061* -0.013 (-0.034) (-0.042) -0.001 0.004 (-0.001) (0.003) 0.294 0.647** (0.184) (0.325) 0.248 0.565* (0.162) (0.29) 0.261 0.583* (0.167) (0.312) 0.031*** 0.018* (0.011) (0.011) -0.001 0.045* (-0.025) (0.024) -0.041 -0.009 (-0.062) (-0.053) 460 58.15 0.082 711.159 180 99.39 0.204 363.391 Recommendations Outward FDI – Understanding of who, when, why (3W) – Support of Greek entrepreneurs – SMEs as well as larger corporations – Efficient and effective use of expansion abroad through the acquisition of knowledge Kingston Business School Managerial recommendations Key finding: – Before any investment abroad there should be a carefully examination between the corporate motivations and the possible future changes in the external/country environment – If the corporate motivations are not fully aligned with changes in the local environment, either due to miscalculation of the changes or in many cases changes in government policies, this can create problems to the corporate goal for competitiveness Kingston Business School Policy Implications There is always scope to create flexibility in the labour markets and the necessary conditions for lower wages Important is the existence of: – A strong local market – Human skills – Well developed infrastructure Policy makers should focus on: – Education, infrastructure building and possibly on creating enough buying power for the local consumers. Kingston Business School Limitations Single country study when it comes to the country of origin Measure of competitiveness is not an objective one but rather measures the managers’ perceptions on their corporation and therefore it might be in some cases overvalued. Data selected for the independent variables could be further expanded to capture also institutional factors Kingston Business School Further Research Add corporate characteristics This will eventually give us a more complete and coherent picture of the interrelation between: Internal (corporate) environment External (country) environment ...in creating competitiveness Kingston Business School THANK YOU Any Questions? Kingston Business School Results Dependent: FDI Flows Normalised by GDP GDP Per Capita -0.101** (0.041) (0.043) (0.134) -6.808** -6.261** -4.590 (3.153) (2.642) (11.312) -0.945 -3.291 2.425 (2.828) (5.565) (20.902) -12.515** -11.267 -12.865* (5.008) (7.514) (7.290) Unit Labour Cost Trade Balance as % of GDP Secondary Education Enrollment -0.127 -0.102** Tertiary Education Enrollment Public Debt over GDP Socioeconomic Conditions Corruption Rule of Law Democratic Accountability Ethnic Tensions 17.213* 16.948 17.197 (9.679) (10.306) (36.257) -4.778** -5.230*** -7.338** (2.014) (1.716) (3.357) 6.844 6.265* 6.326 (4.159) (3.292) (6.732) -3.197 -2.578 -1.180 (3.703) (4.333) (6.845) 2.566* 1.984 3.927 (1.413) (2.963) (4.090) 1.093** 1.039* 1.024*** (0.443) (0.547) (0.379) -1.08383 -0.898 -1.212 (0.83470) (1.344) (2.507) Distance form Greece 0.118 (0.357) Marginal Corporate Taxation -5.394 (11.093) Number of Observations Adjusted R-square Kingston Business School 648 0.932 648 0.855 648 0.853 Table 2. Variable Description and Sources Variable Description Source Competitiveness as captured by survey responses Authors’ questionnaire Real Gross Domestic Product Growth (% pa) Economist Intelligence Unit GDP per head (US $ at PPP) Economist Intelligence Unit Unit Labour Costs (change per annum) Economist Intelligence Unit Trade Balance Economist Intelligence Unit Labour Force with Primary Education (% of Total) World Development Indicators COMPET GDPGR GDPPC ULCCH TRABAL LPRI Labour Force with Secondary Education (% of World Development Indicators LSEC Total) Labour Force with Tertiary Education (% of Total) World Development Indicators Mobile Phone Subscribers (per 100 people) World Development Indicators LTERT MOBS Royalties and Fees Payments over Royalties and World Development Indicators Fees Receipts ( $ PPP) RLFEES Taxes on International Trade (% of Public Revenue) World Development Indicators TAXINTTRADE Kingston Business School