INTERNATIONALIZATION OF MOBILE NETWORK OPERATORS: INSTITUTIONAL DISTANCE, REGIONAL EFFECTS AND COUNTRY FACTORS

ABSTRACT

Competition in the mobile telecommunications market is enhanced by entry of foreign mobile network operators (MNOs). Competition results in lower prices of mobile services that, in turn, can lead to increased levels of adoption. Despite these benefits, to date understanding of the drivers behind increasing international involvement (i.e., internationalization) of MNOs has not been systematically evaluated. Existing studies on internationalization in other domains have shown the importance of industry-, country- and regional-level factors in internationalization. Furthermore, differences in institutional environments between countries (known as institutional distance) have recently been shown to explain internationalization strategies of firms.

To that end, the goals of this study are to: 1) systematically evaluate MNO internationalization which, despite many rich case studies on internationalization of individual MNOs and MNOs in separate geographic regions, has not yet been done; 2) test the importance of industry-specific factors in institutional distance and their effects on MNO market entry from a home to a host country and 3) assess the impact of the regional dimension on MNO internationalization.

By achieving these objectives, this study makes the following contributions. First, it develops a theoretically-based framework that explains and predicts internationalization of MNOs. The framework considers several factors in MNO internationalization: institutional distance between the home and host countries of the MNO, regional factors and characteristics of the host country. A survival regression model is built and tested based on the framework using data on MNO entries into 36 countries of Europe and South America during the time period 1995—2006. Second, following institutional theory, this study combines the national- and industry-level measures of institutions, thus advancing international business research on the effects of institutional distance on market entry.

Results of this study show that internationalization can be explained by both institutional and regional factors. The differences between institutions of MNO’s home and host countries have a consistent effect on MNO entry as the MNO internationalizes. By comparison, the effect of regional experience on entry eventually decreases as the MNO enters more countries. Country characteristics, including the level of technology adoption and quality of life, were found to not have a significant effect on MNO entry.

1. INTRODUCTION

1.1     Problem motivation

Mobile telephony is seen as a logical completion of the “personal computing revolution” that started with the advent of IBM’s Personal Computer in 1981, which brought the power and resources of computing and subsequently the internet to offices and homes around the world and boosted productivity. The increasing capabilities of mobile phones and their ability to perform many tasks that were previously done on personal computers is particularly promising for developing countries, where adoption of computers has so far lagged behind developed nations (UNCTAD, 2007). Furthermore, many innovative business models are being built around mobile phones, such as the joint project between Vodafone and WWF in Tanzania. In this project, fishermen use mobile phones to obtain market and weather information, which helps them manage their time and find out the price of fish while offshore (Vodafone, 2006). Additionally, studies show that additional 10% in mobile technology adoption in an average developing country adds 0.5% to GDP per capita (Waverman et al., 2005). In summary, telecommunications have turned into a central driving force behind the development of information societies and a global information economy, rather than being a mere complement to economic development (Melody, 2001a; UNCTAD, 2007; World Bank, 2008).

Mobile telecommunications industry has experienced a surge in growth over the past decade. In 1995, only 8.2% of the population living in developed countries and 0.4% of people in developing countries had a mobile phone. By 2004 76.8% of people were mobile subscribers in developed countries and 18.8% in developing countries (International Telecommunications Union, 2006). In addition to reflecting the phenomenal growth, these numbers also indicate the closing gap between developed and developing countries, changing from a difference in penetration of 20 times in 1995 to only four times a decade later. Driving forces behind the growth in mobile telecommunications have been advances in technology and liberalization of telecommunications markets. However, although the divide has shrunk in relative terms, greater efforts are necessary to increase the level of mobile technology adoption in the developing world even if it may not be possible to achieve levels of adoption on a par with developed countries.

Adoption of mobile technology in a country requires large-scale investments to build infrastructure in order to provide mobile service. Firms that provide the service, mobile network operators (MNOs), provide such investments and build the infrastructure, thereby contributing to the level of development of the country. They also have to obtain licenses for mobile spectrum, which in some cases are provided for free but many times cost substantial amounts of money (for example, six third-generation licenses auctioned in Germany in 2000 cost the MNOs $51 billion). Thus, MNOs also contribute to the financial well-being of countries.

Many MNOs are partially or wholly owned by large multinational operators, and the number of instances of foreign market entry by MNOs has substantially increased in the past decade (Gerpott and Jakopin, 2005a). When MNOs enter a foreign country, investments they provide are, in effect, foreign direct investments (FDI). For many countries FDI bring in not only money but also new technologies and better business practices (Rossi and Volpin, 2006). This is especially true of developing countries. FDI by MNOs thus help improve infrastructure, promote higher levels of adoption of information and communication technologies and enhance business practices. With these, developing countries are able to increase their productivity and overall well-being. In addition, improvements in mobile telecom benefit the existing stock of capital in the country as well.

Therefore, it is in the interests of national governments to promote entry of MNOs from other countries. Furthermore, given the importance of the regional dimension in firm internationalization (Rugman and Brain, 2003), regulatory structures at the regional level may also play a role in facilitating FDI in the region. However, not all governments have managed to create adequate conditions to attract FDI in mobile telecom, or to enjoy all the benefits that such FDI might bring. Governments and policymakers in developing countries that are considering or have only recently begun to attract FDI in mobile telecom can benefit from knowledge about conditions they should create in their country to attract more foreign firms.

A framework that explains MNO internationalization would thus be beneficial to governments and policymakers by making their efforts in attracting FDI from MNOs into their country more focused. It would also benefit MNOs, which would be able to relate their practices to general trends in the industry. This is particularly salient given the importance of the regional dimension in internationalization. MNOs from one region would be able to link their practices not only with other MNOs in the same region, but also with MNOs from other regions. It should be noted, though, that because such framework would not attempt to model behavior of decision-makers in MNOs, it would not provide insight on how actual internationalization decisions are made in MNOs.

Additionally, such framework would contribute to research on internationalization of MNOs. The regional orientation of internationalizing firms described above has been documented but is still largely unaccounted for in theoretical frameworks, and it has yet to be linked with some other theoretical developments in the studies of international business. By explicitly recognizing regionalization, such framework would advance theoretical understanding of internationalization.

 

1.2     Problem definition and scope

Although such multi-level framework that addresses MNO internationalization in a systematic manner would be very beneficial, to date there is a lack of consistency in the understanding of country- and regional-level drivers of MNO internationalization. This study addresses that problem by constructing a conceptual framework that explains entries of mobile network operators (MNOs) from a particular home country to foreign (host) countries. Foreign entries are regarded as part of the internationalization process of the firm, defined as the gradual increase in international involvement of firms (Johanson and Vahlne, 1977).

Internationalization of MNOs is seen as being driven by several factors: MNO characteristics, host country characteristics, institutional distance between the home and host countries of the MNO and regional factors. To test whether these factors indeed influence MNO internationalization, and whether they explain internationalization reliably, the study will answer the following research questions:

What factors influence internationalization of MNOs?

RQ1

 

How reliably does the selected set of factors predict internationalization behavior of MNOs?

            RQ1a

In addition to the general factors mentioned above, studies of firm internationalization have shown that internationalization should be regarded within the context of the industry the firm operates in (Boter and Holmquist, 1996). This is even more salient in the mobile telecom industry, given its relatively high amount of regulation compared with some other industries. This study addresses these mobile industry specifics in MNO internationalization by asking the following question:

How do mobile industry-specific characteristics affect MNO internationalization?

RQ2

Furthermore, MNOs usually follow a “learning curve” with respect to internationalization. As they start to internationalize, they seek host countries that are similar to their home country in some respects. One concept that accounts for such similarities is institutional distance, which includes country regulations, norms and culture (Kostova, 1999; Xu and Shenkar, 2002). The concept of institutional distance may also help explain the recent finding that most multinational firms do not operate on a global scale but rather are confined to their geographical regions (Rugman and Brain, 2003).

Two approaches to institutional distance have been used to date. These approaches are differentiated with respect to their treatment of context: “generic” (context is irrelevant) and “industry-specific” (context is relevant) institutional distance. However, empirical studies tend to use either one or the other approach, and little comparison between them has been done to date. I will test whether a combination of a generic and industry-specific institutional distance, which I will call hybrid institutional distance, better explains MNO internationalization than only generic or only industry-specific one. This leads to the following research question:

Does hybrid institutional distance better explain MNO internationalization than only generic or only industry-specific institutional distance?

RQ3

Finally, I will link the concept of institutional distance with research on regional patterns of multinational activity by asking:

Does institutional distance between countries exhibit regional patterns?

RQ4

To answer these research questions, I construct a framework of internationalization of MNO and operationalize a hybrid institutional distance. These are informed by three major bodies of research. The first one is institutional theory where the institutional distance construct has been operationalized. The second domain is internationalization of firms, which explains how firms internationalize and provides explanation for patterns of internationalization. The third domain is telecom policy studies, which explores, among other, effects of various policy and regulatory mechanisms on the telecom market.

This research covers 36 countries in two regions, Europe and South America. The timeframe of the research is 1995—2006. The model and the hybrid institutional distance are constructed using survival regression analysis based on the data set of MNO entries into foreign markets constructed during the study, as well as on secondary data.

 

1.3     Research merit

This research has both theoretical and practical merit.

From the theoretical perspective, this study empirically compares several theoretical approaches to firm internationalization, including the internationalization process model, the institutional distance approach and the regionalization approach. Furthermore, it compares the role of generic and industry-specific institutional factors in MNO internationalization. Finally, by creating a framework of internationalization of MNO, this study advances understanding of internationalization of firms in the mobile telecom sector.

From the practical standpoint, the results of research may assist policymakers at the national and regional policymakers in development of programs and policies of attracting FDI, in particular to the important mobile telecom sector, in the country or region. Furthermore, this research may help MNOs to compare their internationalization strategy with general trends in the industry or assist in development of such strategy if it is yet to be created.

INTERNATIONALIZATION OF MOBILE NETWORK OPERATORS: INSTITUTIONAL DISTANCE, REGIONAL EFFECTS AND COUNTRY FACTORS

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