Emerging Russian Multinationals: Challenges and Opportunities

1. Emerging Russian Multinationals: Challenges and Opportunities Sergey Filippov (UNU-MERIT) Maastricht, The Netherlands Copenhagen Business School, 10 Oct 2008

2. Motivation for Research • Increasing interest towards multinationals from emerging economies among IB scholars (e.g. Dunning and Narula, 1998; Goldstein and Shaw, 2007; Benito and Narula, 2007). • Yet, the focus is mainly on China and India, or BRIC(S) in general • Scant literature explicitly addressing Russian multinationals (e.g. Heinrich, 2003; Kalotay, 2005, 2008; Vahtra and Liuhto, 2006) • Explorative investigation in order to get a better understanding of the idiosyncratic nature of Russian emerging multinationals and contribute to relevant literature

3. Historical Timeline • Soviet Capitalism • “Shallow” internationalisation of state-owned enterprises / “red multinationals” • 1987: 72 soviet MNCs in 22 capitalist countries • The 1990s: Cowboy Capitalism • Distribution of state property among a selected few • “A class of effective owners” / “oligarchs” / “appointed billionaires” • Growth of large companies in the financial sector • The 2000s: Russia Goes Global • Rise of the commodity prices and hence growth of companies in resource-based sectors • Impressive growth dynamics of outward FDI • internationalisation of large Russian companies • strengthening of their foothold abroad

4. Stocks of outward FDI of BRICS economies (mln USD) Source: UNCTAD, World Investment Reports of respective years

5. Emerging Multinationals in Global Ranking • Forbes 2000 List (2007): 109 CN, 48 IN, 34 BR, 17 SA, 16 MX • 29 Russian companies with capitalisation of around $ 1 trillion • Fortune 500 List (2007): • BCG100 (Russia: 6) and Skolkovo 25 • Only Gazprom and Lukoil appear in all four ratings Source: author’s calculation based on Fortune 500 list Note: Fortune 500 includes Hong Kong-based companies in the list of Chinese firms

6. Motives of Internationalisation: Pull factors (Dunning, 2003) • Resource-seeking • Oil industry and steel making (oil in AZ, iron ore in KZ) • Market-seeking • Retail chains, mobile telecom (CIS), downstream oil sector (US and Western Europe) • Efficiency-seeking • Acquisition of factories in neighbouring countries / corporate consolidation / integration of value chain (CIS) • Asset-seeking • Acquisition of technologically-advanced companies in developed markets (Renova acquired Oerlikon / Sulzer AG in CH)

7. Motives of Internationalisation: Push factors • Instability at home • “System escape” motivation (Bulatov, 2008) • To escape economic volatility and political instability • Access to capital overseas • Underdeveloped financial market in Russia • IPO in London

8. Internationalisation: Mode of entry • Traditional Greenfield vs. M&A trade-off • Non-equity partnerships: strategic alliances Source: UNCTAD, WIR 2007, Thomson Platinum M&A

9. Acquisitions vs. alliances • Russian companies are active in M&A: • 309 (in 2000)  616 (in 2007) • Especially in Russia itself and CIS • Since mid-2000s: rising interest towards assets in Western Europe (53 deals in 2007) and Northern America (10 in 2007) • Strategic alliances • Number is smaller but rising: 50 (2000)  152 (2007) • When entering developed markets of Western Europe and Northern America, many Russian companies tend to rely on strategic alliances • Strategic alliances as a way to access the partner’s technological competence

10. Geography of Internationalisation • Commonwealth of Independent States • Re-establishment of Soviet links (corporate consolidation), access to resources and emerging markets • Test of new products before launching them at home (e.g. launch of 3G network in Belarus by MTS) • CIS countries prefer Russian investors vis-à-vis Western ones • Eastern Europe • Familiar environment, yet political sensitivities of uneasy past • Impact of EU enlargement: Gateway to Single Market • Western Europe and Northern America • Access to technology and mature markets (e.g. Novolipetsk Steel acquired DanSteel A/S in 2006) • Africa • Natural resources (diamonds, nickel) and retail banking • “Axis of Evil” • Cuba, Sudan, Iraq, Iran, Libya, Syria. • Former close relations and ties from the Soviet times

11. Corporate R&D in Russian MNCs • Only one Russian company (Gazprom) in Global 1250 R&D Scoreboard • Soviet heritage: state-owned research institutes • Privatisation and integration in the corporate structure • Primarily in the traditional sectors, well-developed in the Soviet times (e.g. Lukoil) • Strategic alliances with western partners • Access to technology and knowledge (e.g. Yukos / Schlumberger) • Particularly in high-tech, such as mobile telecom (e.g. MTS, Beeline) • Acquisition of assets overseas • Acquisition of a company as “a full package” and singling out R&D unit (e.g. Basic Element and Magna Int, auto parts maker)

12. State Policy on Outward Investment • No explicit state policy on support of OFDI • Is there an implicit state policy? • Speculations over politically-driven motives of internationalisation of Russian companies • Gazprom is often portrayed as Kremlin’s arm • President Medvedev openly encourages Russian businesses “to copy China” (go global): • Global expansion would "allow us to retool Russian enterprises with technology, boost their production culture and grant them the opportunity to diversify investments and win new markets". • Pledges “government’s support” for acquisition of assets overseas, especially in energy and high-tech industries

13. Russia & Europe • Russian investments in Europe: small but increasing • Only €3bn in EU as opposed to €30bn of EU investments in Russia • Unreliable statistics (offshore schemes and manipulations) • Acquisitions rather than greenfield • Access to knowledge and expertise • Concerns over the motives and nature of Russian companies • Russian companies as agents of Russian government • Concerns over “Russian way of doing business” • Prospects: • “Depolitisation” of investment relations • The Partnership and Co-operation Agreement (PCA)

14. Avenues for further research • Subsidiaries of emerging multinationals • Competence • Subsidiary evolution • Technology transfer / knowledge flows within emerging multinationals • Host country policies in the face of arrival of emerging (Russian) multinationals

15. Tak for lån nemlig jeres opmærksomhed! • www.filippov.eu • filippov@merit.unu.edu