Developing a Knowledge-Based Industry in an Emerging Economy Through Entrepreneurial Agents

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1 Developing a Knowledge-Based Industry in an Emerging Economy Through Entrepreneurial Agents Experimentation in and Internationalization across Mobile Telecommunications Markets of Africa Mohammad Jahanbakht Salem State University April 2015

2 Motivation / Introduction 2

3 Knowledge-Based Industry in an Emerging Economy Know-how is critical. MNEs play a key role through a North-South model: MNEs invest in emerging economies Under certain conditions, the local firms acquire knowhow from MNEs. 3

4 MNE entry to emerging economy MNEs face two sets of risks: First: Political risks e.g. expropriation, extortion, institutional void, etc : average GDP/capita growth in sub-saharan Africa (SSA) was negative 1.1% SSA poor rank in development indicators conflicts. 4

5 MNE entry to emerging economy Second: VERY different business model from what MNEs typically operate Base of the pyramid (BoP) market. 50% of population in SSA live on < $1.25 / day. As many as 95% of Africa are BoP consumers (IFC, 2007) Prahalad and Hammond,

6 MNE entry to emerging economy Adaptation of business model based on the 4 As: Affordability, Accessibility, Availability, Awareness (Prahalad, 2004) Case studies of success / failed BoP adaptations (London & Hart, 2004) Unilever s radical distribution strategies in India (Balu, 2001) Approtech Pumps and Simputer (Chesbrough et al., 2006) Monsanto s GM seeds (Simanis and Hart, 2001) MNEs tend to delay their entry decision and adopt a wait-and-see strategy (Rivoli and Salorio, 1996). Sub-optimal investment. 6

7 7 Despite what literature predicts

8 What explains this phenomenal growth in such an adverse environment? /"01%'!"#$%&'23#)4*$#&*)'5!$%$"6)7' 8 )!!" (!!" '!!" &!!" %!!" $!!" #!!"!" Mobile subscribers grew from 1 to 645 million (0.15% to 62%) Even in conflict zones: Sudan, Eq. Guinea, DRC, mobile subscriptions during 2000s grew > 100% reached > 50% penetration by 2011 #++&" #++'" #++(" #++)" #++*" #+++" $!!!" $!!#" $!!$" $!!%" $!!&" $!!'" $!!(" $!!)" $!!*" $!!+" $!#!" $!##" $!#$",-./01"23.456/.164",-./01"718196:;-8"<:91" #!!" +!" *!" )!" (!" '!" &!" %!" $!" #!"!"!"#$%&'()&*)'+&*',--'+&".%&'

9 Unexpected presence of Entrepreneurs Importance of mobile industry, particularly for Africa: Effect on GDP and development, Impact on mobile banking, agriculture, healthcare Some entrepreneurs were salient 45 countries (173 licenses) EFE SOE MNE 9

10 Hypotheses Development 10

11 North-South-South Framework We offer a two-step mechanism through which: 1. Under certain conditions, local entrepreneurs could acquire know-how from MNEs 2. Enter high risk markets avoided by MNEs, explore adaptation to their acquired business model through costly experimentation. 11

12 First Step MNEs enter few countries in the region that demonstrate less perceived risk. H1a. Countries with relatively higher institutions H1b. Countries that are former colonies of their home countries shared historical, political interaction, colonial link, Gov-Gov relations that support MNEs investment 12

13 MNEs took local JV partners Reasons for local partner: Enforced regulations in host countries, cut through bureaucratic maze (Smarzynska and Wei, 2000) spread the cost. 13 most became silent partners except if Joint Venture / equity partnership. Superior channel to transmit tacit knowledge (Kogut, 1988; Mowery et al., 1996) Learning depends on local partners absorptive capacity (Cohen & Levinthal, 1990; Zahra & George, 2002) Local partners with relevant pre-entry experience (prior to JV) are more likely to acquire key tacit organizational know-how from MNEs during JV (Klepper, 2002)

14 Who enters higher risk, BoP markets? Question of capability and incentive MNEs: have capability, less incentive. SOEs: have incentive, poor performance (Megginson & Netter, 2001) Unclear residual claimant (Alchian and Demsetz 1972) Maximizing social welfare (Vickers and Yarrow 1988) Bureaucrats as managers (Buchanan, et. al. 1980) Local firms we denote as Entrepreneurial Founded Enterprise (EFE) have strong incentive. Strategic positioning to avoid direct competition with MNEs. 14 Among EFEs, those with pre-entry experience we denote as EFE with Heritage also have capability.

15 Second Stage: Experimentation All EFEs can take advantage of MNEs delay in higher risk markets. All EFEs Engage in experimentation to develop / adapt their business model to cater to demands of BoP markets. EFE with Heritage more likely to discover successful adaptations Hypothesis 2. EFEs with Heritage will have better performance than other EFEs (2a) and SOEs (2b) in BoP markets. 15

16 Second Stage: Internationalization EFE with Heritage s adaptations regarded as ownership advantage in Dunning s eclectic model (Dunning, 1980, 1988). EFE with Heritage more likely to exploit its unique ownership advantage to explore similar markets i.e. internationalize across different markets. Strong first mover advantage in telecommunication industry, EFE with Heritage have strong incentive to internationalize before business model is adopted by competitors. 16 Hypothesis 3. EFEs with Heritage will have a higher probability of internationalization across multiple BoP markets than other EFEs (3a), SOEs (3b) and MNEs (3c)

17 Data and Result 17

18 Covering Overview of my data Data analysis to analyze Entry pattern Firm performance conditioning on entry Case studies: How to measure heritage among EFEs (Tables in paper) Illustrate the process of discovery through experimentation 18

19 Unique Dataset All licenses in 45 African countries since inception of industry (1994) data on ownership structure, technology, yearly performance till Data Source: 19 Prior to 2000: surveys of African mobile operators by the World Bank + UN Economic Commissions in Africa After 2000: Private Participation in Infrastructure (World Bank) + CommsUpdate databases (Primetrica Inc) Where data was missing: corporate annual reports, trade journals, and databases from GSMA & CDG. Crosschecked multiple sources for consistency & accuracy Augmented yearly data on country characteristics

20 Entry Analysis Logistic regression on a dynamic panel. Similar studies; Holburn and Zelner, SMJ 2010, Chang, AMJ 1995 Independent variable: entry decision (GF / AQ) How to construct the panel: 20 For each firm, consider all potential choices each firm has each year. If entry occurred, that country dropped from subsequent choices of entry. Panel start from the firm s establishment year or when a country opened market, whichever earlier

21 Our results supports H1 and H2 Model 1 Model 2 Model 3 Model 4 Model 5 Model Logit Logit Logit Logit Logit Logit MNE H3b (0.312) (0.312) (0.344) (0.378) (0.386) (0.471) EFE with Heritage *** *** *** *** ** H3a * (0.307) (0.307) (0.309) (0.309) (0.351) (0.577) Rule of Law (0.528) (0.549) (0.549) (1.112) (0.988) MNE! Rule of law ** ** *** H1a (0.226) (0.227) (0.354) (0.312) MNE! Colonial Match *** *** H1b (0.314) (0.290) (0.513) Industry/ Country Controls Log Distance to Firm s Home Operation # of Operators t-1 (# of Operators t-1 ) 2 Mobile Penetration Rate Country Engaged in Armed Conflict Yes Yes Yes Yes Yes Yes Std. Inflation Std. GDP growth Log GDP Log GDP per capita Country fixed effect and Year fixed effect Yes Yes Yes Yes Yes Yes Observations Pseudo R Log Likelihood Robust standard errors, clustered by firm, are reported in parentheses: + p < 0.10 * p < 0.05 ** p < 0.01 *** p < 0.001!

22 22 Interpretations of the interaction terms

23 Analysis of performance OLS analysis Two measures of dep. variable: subscriber growth, market share Market share serially correlated unless in a cross section analysis. We chose final year. Growth cit = Log (Subscriber cit ) Log (Subscriber cit-1 ) Following (Evans, 1987; Dunne, Roberts & Samuelson, 1989) Because African countries have substantial BoP market, firms that successfully penetrate into BoP are likely to have high growth rates 23

24 Model 7 Growth Model 8 Growth Model 9 Growth Model 10 Growth (without acq. yrs) Model 11 Log Sub. Model 12 Log Sub (without acq. yrs) MNE (0.070) (0.071) (0.072) (0.108) (0.072) (0.108) EFE with Heritage * * * *** * H2a *** (0.082) (0.083) (0.083) (0.106) (0.083) (0.106) SOE H2b + (0.106) (0.119) (0.120) (0.180) (0.120) (0.180) Industry/Country controls (at t 1) Std. Population below $4 / day (0.071) (0.071) (0.081) (0.071) (0.081) EFE with Heritage X Std. Population below $4 / day * * (0.051) (0.062) (0.051) (0.062) Rule of Law Log Distance to Firm s Home Operation # of Operators Mobile Penetration Rate Country Engaged in Armed Conflict Std. Inflation Std. GDP Growth Log GDP Log GDP per capita Firm controls Entry Order *** *** *** *** (0.037) (0.039) (0.038) (0.056) (0.038) (0.056) Log Subscribers t *** *** *** *** *** *** (0.034) (0.036) (0.036) (0.039) (0.036) (0.039) Log Age t ** ** ** ** ** ** (0.057) (0.057) (0.057) (0.062) (0.057) (0.062) Country fixed effect and Year fixed effect Yes Yes Yes Yes Yes Yes 24 Observations Overall R Wald! Robust standard errors, clustered by firm, are reported in parentheses

25 Analysis of market share in the final year 25

26 26 Case studies on experimentation

27 Case studies on experimentation Major challenge in early years in rural Africa: unpredictable demand low-income customers could not afford handset price lack of access to reliable power Innovation on credit sharing Me2U to provide services allow financially-dependent low-income. But big risks paid off. By 2005, Celtel expanded to 13 countries in SSA. Acquired by Zain for $3.6 B. 27

28 We rule out two alternative explanations EFEs with Heritage made BoP adaptations not through experimentation but because of their local knowledge Cannot account for the inability of joint ventures between MNEs and local partners to make successful adaptations The adaptation process would have been deterministic; rather pioneers made adaptations through trial & error EFEs with Heritage had substantial access to capital to fund experimentation and internationalization 28 Many EFEs were founded by entrepreneurs who were owners of large conglomerates, but they did not do well

29 Implications A few local, entrepreneur-founded firms with exemplary performance catalyzed the growth of the industry Implications for MNEs and local firms: Subsidize process of experimentation to local firms Local knowledge may not be sufficient for successful BoP adaptations Implications for Governments: 29 Subsidize Experimentation cost for local entrepreneurs Policy to prohibit full foreign ownership Encourage investment from development agencies

30 30 Questions?

Determinants of Entry Modes: A Review of Literature

Determinants of Entry Modes: A Review of Literature MS. SHILPA GARG Department of Commerce, Delhi School of Economics, University of Delhi, Delhi 110007 Delhi (India) Abstract: International entry mode