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30.01.1995

Nr. 145: Foreign Direct Investment of Telecommunications Operators in Fixed Networks

Ernst-Olav Ruhle

Foreign Direct Investment of Telecommunications Operators in Fixed Networks
Nr. 145 / Januar 1995

Summary

"Globalization" has become one of the key words in the description of developments in the telecommunications sector in the past decade or so. An increase of business activities of telecommunications operators outside their traditional home markets as well as an internationalization of markets, representing a structural change from formerly monopolistic towards competitive markets (including entry by foreign companies) can be observed. These major changes are also affecting the core area of telecommunications. Thereby, opening up the areas of telephony services and infrastructure to entry is a relatively new phenomenon. Such a decision is an important step towards full liberalization of the core areas of telecommunications as it liberalizes the segment of the telecommunications market that has most strongly been protected up to now.

Some countries have liberalized market entry for the installation and operation of fixed telecommunications networks. The focus of the current paper, therefore, is to analyze motives for TO's attempts to enter foreign fixed network markets. Since applications generally are organized in order to undertake entry in the form of Foreign Direct Investment (FDI), we have chosen to apply the eclectic theory developed by J.H. Dunning towards this topic. His approach - which is also being referred to as the O-I-L-paradigm in the literature explains FDI by the existence of three factors which have to be present simultaneously. These are ownership specific advantages, internalization incentive advantages to make intra-firm use of firm specific knowledge, and location specific advantages of countries. While O- and L-factors will be analyzed on an empirical quantitative basis, I-factors will only be discussed verbally. Thereby, we conduct a partial analysis in order to scrutinize whether specific factors derived from Dunning's theory influence the TO's internationalization behaviour in the fixed network area.

Summing up, our analysis yields that there are 11 key factors which have an impact on carrier's internationalization attempts for the installation and operation of fixed telecommunications networks. These are: (1) Revenue development of telecommunications services in the home market, (2) the cash flow, (3) the range of different services provided, (4) the portion of private ownership of a telephone company, (5) successful market entries abroad in former periods, (6) the geographical adjacency of target countries, (7) the introduction of competition in the home market, (8) the regulatory process of selecting the entrant in the target country, (9) economic market attractivity of the target country, (10) the supply situation with telecommunication services in the target country and (11) the intensity of international telephony traffic between the home country of the TO and the target country. No influence can be stated for factors like company size, specific know-how in the use of advanced technology and the market structure of target countries.

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