THEORETICAL VALUATION OF A TELECOM ASSET IN SUB SAHARAN AFRICA

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RESEARCH BACKGROUND AND LITERATURE REVIEW

Africa has progressively become a subject of research in the literature in the 2000s, whether it is on a strategy point of view (Hoskisson & al. 2000, Demirbag & al. 2010) or on a regulatory point of view (Berg 2002, Bodammer 2005, Gasmi 2010, Estache & al. 2009). More particularly regarding the telecommunications sector, Africa has proved itself to be an original and interesting area of research (Röller 2001, Benitez & al. 2002, Estache 2005, Iimi 2007) mainly because of the extraordinary growth the sector has experienced in the past fifteen years: The issue of the relationship between the sector and the economic development has been studied in many papers (Easterly & al. 1994, Pohjola 2001, Röller 2001, Baliamoune-Lutz 2003, McNamara 2003, Sachs 2005, Papaioannou 2007, Hosman 2008). Nevertheless, this chapter will show how the literature on telecom asset valuation in Africa is still quite scant.
This issue is at the centre of various literature bodies in economics, international business and finance: it relates to different subjects such as multinational enterprises investment strategies, valuation methods used for investment evaluation, investments in the telecommunication sector, in developing economies, in Africa. Chapter 2 presents a state of the art on these topics and shows on what extent our research question is relevant.
The approach of the international business and economic literature regarding Foreign Direct Investments (FDI) and Multinational Enterprises (MNE)33 investments in developing countries the asset valuation topic regarding the developing countries and the telecommunication sector. Valuation in emerging and developing economies is a more recent issue in the literature.

FDI and MNE investments in developing countries

When it comes to determinants of foreign investments, the O.L.I (Ownership, Location, Internalization) has been the most commonly used framework in the international business literature. After explaining what this paradigm is about and how our research has been based on it, this part will then focus on national investments made by MNE – more particularly on the determinants of MNE’s entry modes in host countries – and finally on the determinants of foreign investments inflows.
The O.L.I paradigm as theoretical framework (J. Dunning)
There has not been any unified theoretical framework on Foreign Direct Investment whether about their determinants or about their impact.
A commonly used theory in the field of foreign investments is the ‘eclectic paradigm’ of John Dunning (197734, 1998, 2000, 2001), also named O.L.I framework: O.L.I for Ownership, Location and Internalization. It states that FDIs are determined by three sets of interdependent variables: ‘Ownership advantages’ (or firm specific advantages) refer to core competencies of the investing company. To invest and be profitable abroad, a multinational company must have some specific advantages compared to its competitors that will offset the cost of operating abroad. It can be for example a trademark, a patent or a technology specific knowledge.
‘Location advantages’ (or country specific advantages) refer to host country specific advantages. This relative attractiveness of a country might vary over time. It includes economic advantages (market size, factors of production, availability of raw materials, etc.), political advantages (government policies, specific regulations regarding foreign investments, trade, etc.), social and cultural advantages (cultural distance between home and host country, difference of languages, position towards foreigners and free enterprise).
‘Internalization advantages’ refer to the advantages of developing its own production rather than relying on a partnership.
If a company has Ownership advantages, it can choose licensing as market entry. If it has Ownership and Internalization advantages, it can choose export to enter the new market. If it has the three categories of advantages – Ownership, Internalization and Locational advantages – the company can choose FDI, as it is the most capital-intensive type of market entry.
This paradigm suggests that the more O and I advantages the firm possesses and the more L advantages of exploiting these O and I advantages, the more FDI will be done. It results in a classification of 4 types of FDI: market-seeking, resource-seeking, efficiency seeking and strategic asset seeking. Market-seeking investments are made to access a market that is attractive in terms of size or growth. Resource-seeking investments are made to exploit local natural resources. Efficiency-seeking investments are made to take advantage of local cost-efficient production conditions (local workforce, infrastructure and administrative costs). Strategic-asset seeking investment aims at taking advantage of man-made assets (qualified workforce, brand name, etc.).
The O.L.I theory was criticized because of its static approach: For example, it does not consider the strategic choices of other local firms on the foreign market. Dunning (1993) attempted to give a dynamic approach to his theory, by introducing the evolution of the three sets of variables, O, L and I, over time. Also, the pure microeconomic approach of the eclectic theory location advantage was also criticized, as it does not take into account the macroeconomic specific advantages of a country relatively to another (Kojima, 1990).
Our present research has focused on the ’L’ (‘Location’) part of the O.L.I paradigm, applied to foreign investment.
In this thesis, we will name “local factors” the variables that influence the level of FDI inflows from a MNE to a host country. They include economic advantages (“cheap labor and other natural resources, market size and openness of the market, rapidly growing economy, macroeconomic environment and its stability, etc.”), as well as political and institutional environments (Stefanovic 2008). These “local factors” will relate, in the rest of the document, to country and market factors that potentially impact the level of FDI (the amount of investment by the MNE) in a sub-Saharan country.

MNE foreign investments and market entry strategies

Entry mode is the way an international company will choose to enter a new foreign market. It is ‘‘a structural agreement that allows a firm to implement its product market strategy in a host country either by carrying out only the marketing operations (i.e. via export modes), or both production and marketing operations there by itself or in partnership with others (contractual modes, joint ventures, wholly owned operations)’’ (Sharma & al. 2004). In international management, entry mode appears to be the third most researched topic behind foreign direct investment and internationalization” (Canabal 2008).
Entry modes can either be equity-based or non-equity based (Tse & al. 1997). Both differ in the level of resources they require, in the level of risk they entail and in their expected return on investment.
Equity-based entry modes include Joint Ventures (JV) (shared ownership model) and Wholly Owned Subsidiaries (WOS)
Non-equity entry modes include export and contractual agreements such as licensing.
Our research on telecommunication investments in Africa covers acquisitions of operators in the host country (acquisition) and licenses awarded by the host country (greenfield investment). This is why the present work focuses on equity-based entry modes (called solely ‘entry modes’ below).
When a MNE decides to invest equity abroad, it makes then two types of decisions (Ruiz-Moreno, 2007; Dikova & Van Witteloostuijn, 2007)
Its entry mode (ownership structure): decision between a JV and a WOS
Its diversification or establishment mode: decision between an acquisition and a greenfield investment.
Regarding sequential order between the two decisions, there has not been any consensus so far. Some empirical findings show that the entry mode decision is made before the diversification mode decision (Ruiz-Moreno & al. 2007) but some other analyses show the sequential order is not clearly determined (Estrin 2004).
MNE decision of entry modes and diversification modes in a foreign country is an issue of corporate strategy. For a telecom MNE, this foreign investment decision (the choice to invest in a particular country as well as the choice between taking a stake in an existing operator and bidding for a license) is most of the time based on opportunities than on a deliberate choice between investment modes: when a license is to be granted in a particular country, when there is an opportunity of taking stakes in an existing operator, etc. This literature body usually focuses on particular countries but not on particular sectors. No paper has been found specifically on the telecommunication sector. But it remains interesting to investigate what has been found regarding the determinants of MNE entry strategies.
In the international business literature, the issue of entry mode determinants has strongly increased in the last 30 years (Canabal & al., 2008) and has largely been studied in the light of transaction cost theory and of resource-based theory.
According to the transaction cost theory (Williamson 1981), the firm will choose the alternative that minimizes its transaction costs (transaction costs are costs incurred by making an economic exchange; in the case of entry modes, costs incurred by the investment by the entry mode choice). Transaction cost theory does not take into account the factors specific to the host country and to the local environment, considering them as constant or as being ‘moderators’, more than direct determinants (Yiu & Makino 2002).
According to the resource-based theory (Penrose 1959), the firm will make its choice according to its competitive advantage and its specific capabilities: the firm will decide entry mode depending on its existing capabilities, either by deploying them to the host country or by gaining new ones from the host country.35 36
Literature body based on transaction cost and resource-based theories states that the entry mode decision is exclusively based on determinants that are internal to the investing company: its corporate strategy (Caves & Mehra 1986, Harzing 2002), its resources and capabilities (Caves 1996, Peng 2001, Anand and Delios, 2002, Luo 2002), its learning perspectives (Barkema & Vermeulen 1998) and its need to minimize transaction costs (Hill, Hwang, and Kim, 1990).
In the 2000s, there has been a move towards more research on the influence of local context on the entry mode decision. Entry mode choices have increasingly been studied in the light of the institutional theory that takes into account the influence of local institutions on this decision (Scott 1987, Coase 1998). This theory has been used to enrich and refine existing results, rather than to replace the transaction cost theory (Brouthers & Brouthers 2000, Meyer & al. 2001, Hitt & al. 2004, Meyer & al. 2009).
Indeed, some studies demonstrate the impact of both investing firm’s characteristics and local context of host country on the entry mode choice. According to Luo (2001), the nation, the industry, the firm and the project influence the entry mode choice. Working on data of Chinese companies, the authors finds that the JV is preferred (rather than a WOS) by the investor in the following cases: when the investor perceives possible intervention of local government, when there is a high level of uncertainty of the local environment, and when the investor has no or little previous experience in the host country. On the contrary, WOS is preferred (rather than a JV) when intellectual property rights are not protected well in the host country, when the number of firms in the sector is rapidly growing and when the project is led in an open economic region.
These findings have been confirmed by Yiu & Makino (2002). The paper states the importance of using both transaction cost and institutional theories to get relevant results on foreign entry mode choices, by underlying the “significant incremental contribution in explaining entry mode choice decisions” of institutional factors. Based on the study of more than 300 Japanese overseas subsidiaries, the analysis shows that the investing firm chooses an entry mode through a JV, when local “regulative and normative pressures” are high, and when there is an important local ethnocentricity and cultural distance. When the firm has an experience of the host country, when it has a high R&D intensity, it will better choose a WOS investment.
More recently, the influence of the sole local context and uncertainties on the entry mode decision has been studied (Meyer & al. 2009, Demirbag & al. 2010), and results confirm some previous ones.
Basing their work on the institutional theory, Meyer & al. (2009) examine how MNE investing in emerging economies make a choice between joint venture, acquisition and greenfield investment, arguing that local institutions directly affect this strategic choice. The authors test their hypotheses on a cross-country panel of data from India, Vietnam, South Africa and Egypt, to run their multinomial regression model. The results clearly show that the development of local institutions directly impacts entry strategies: the more they are developed in the host country, the most likely the company will go for an acquisition or a greenfield project (therefore a WOS), instead of a JV.
Focusing specifically on MNEs coming from emerging economies, Demirbag & al. (2010) study the role of local uncertainties on the entry mode choice and finds out that JV will be preferred compared to WOS in some particular local contexts. The authors have used the integrated risk management framework of Miller (1992) that we will also use in our research, and have extended it by adding other variables like corruption, based on data gathered from Turkish companies that have invested in Central Asian Republic economies. The most important finding of this paper is the strong relationship between the entry-mode chosen by the investors and the uncertainties of the local environment. Their model brings support to the following hypotheses: Firms will have a preference for a JV over a WOS in the following contexts: when ethical uncertainties are high, when legal uncertainties are high, when intervention risk by the local government (in the various regulations, taxation, pricing, exchange rate…) is important and when corruption level is high. Thus, JV appears to be a more secured choice when local uncertainties are high. In conclusion, “assessments of environmental uncertainties and corruption are critical factors in entry mode decision making for FDI”.
More specifically, the literature studying the influence of host country characteristics on the choice between a JV and a WOS finds out that the investing MNC will tend to prefer a JV when competition on the host market is high (Kim & Hwang 1992, Hennart & Larimo 1998, Cui, Jiang & Stening 2007) or when country risk, political and economical uncertainties are high (Brouthers & Brouthers 2000, Cristina & Esteban 2002, Tahir & Larimo 2006, Cui, Jiang & Stening 2007). On the contrary, healthy institutions represent a safe framework for an investor: thus, when clear regulations exist in the host country, the MNC will prefer a WOS (Mutinelli & Piscitello 1998, Pan and Tse 2000, Brouthers 2002, Cui, Jiang & Stening 2007).
Let’s now have a look at the literature studying the determinants of diversification mode: the choice between acquisition and greenfield investment. Here research has more largely studied the MNE characteristics as determinants of its choice than the host country impact. Characteristics of the investing firm – such as its experience – are parts of the determinants of its diversification mode choice. Chang & Rosenzweig (2001) highlights the importance of international experience in the diversification mode choice and states that the MNE will prefer going for a greenfield investment when it has a competitive advantage over local firms, when it has experience of international sales and when there is a strong cultural distance between both markets. On the contrary, MNE will prefer go for an acquisition when entering a new product line of business. Kamal (2009) also lays the emphasis on the firm’s experience. Their work is based on data of Japanese investments to four countries: Indonesia, Malaysia, Taiwan and Thailand. First, their results underline that both the size of the parent company and the cultural distance have an impact on the choice: Bigger companies will likely go for an acquisition, instead of a greenfield; and the bigger the cultural distance, the more the firm will go for a greenfield instead of an acquisition. Besides this, firm’s experience is also relevant in its choice: When the investing MNE has host country experience, it will be more inclined to start a new venture instead of acquiring an existing one and thus to choose greenfield investments. Harzing (2002) states that the diversification mode choice depends on the international strategy of the investing company: acquisitions will be preferred by firm with a multinational strategy (lower global competition and local competition, products adapted to local markets, autonomous subsidiaries) and greenfield investment will be chosen by firms that have a global approach (competition globalization, national product markets interconnected, economies of scale).
Brouthers & Brouthers (2000) have included the effects of both the MNE characteristics and the local context. They study the impact of variables mixing characteristics of the investing MNE and of the local context (institutional, cultural and transaction cost variables) on the diversification mode choice of a sample of Japanese firms entering Western Europe. Their results show that the company will be more likely to choose a greenfield investment (rather than an acquisition) when size of the investment compared to the size of the investing firm is pretty small, when the investing firm is technologically intensive, when the firm has international experience, when market of host country is growing fast, when cultural distance between country of the investing firm and host country is small, when the firm is less diversified, when the firm is risk-averse and when the firm enters the host market with a ‘related-product’.
To conclude, there has been a large body of research on the determinants of entry strategies in MNE foreign investments, represented by a binary choice in the literature either between Wholly acquisition. The literature has first focused on the characteristics of the investing MNE as determinants of the entry strategy, then on the local context of the host country.
The influence of the host country local context is the one that interests us for our research:
It has been a research subject particularly for the choice between WOS and JV.
In the existing literature, there is a form of consensus on the determinants of the entry-mode choice (ownership structure): A host country environment that would be less favourable to investment (economical, ethical, legal uncertainties, corruption, possible intervention of government, etc.) influences the investment decision towards a JV instead of a WOS. Indeed, when uncertainties are high, JV appears to be a safer choice to the investor than a WOS: avoiding full ownership enables the investor to be more flexible in case of local changes. On the contrary, MNE tend to go for a full ownership when host country offers fewer uncertainties.
In terms of host countries studied, it appears that Africa has not really been researched as a host region in this literature body. Among emerging regions, only China and other Asian countries are part of top 8 (Canabal & White, 2008). Africa thus remains a host region to investigate in terms of FDI and MNE investments.
FDI inflows to developing countries and their determinants

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MNE strategy to developing countries

Research related to firm strategy in emerging countries has been growing in the past decade (Wells 1998, Hoskisson & al. 2000, Meyer 2004, Ramamurti 2004, Wright & al. 2005, Peng 2008). There has been an abundant academic work done about the impact of Multinational Enterprises (MNE) and of FDI (Foreign Direct Investments) on the socio-economic environment of the host country (Meyer 2004, Ramamurti 2004). Most of papers state that FDI contribute to the host country’s prosperity and to integrating developing markets into the global economy (UNCTAD 1999).
Research on the reverse causation between MNE and host country environment – the “impact of developing country context and policies on MNE behaviour” – has emerged but has remained an issue for future research (Ramamurti, 2004). Uncertainties and risks of the local environment are indeed a critical factor for investment decisions (Demirbag & al. 2010). This is why Meyer (2004) calls for more international business research on the influence of the context on MNE decisions, in order to better understand the behaviour and the ‘inner logic’ of MNE in emerging countries.
FDI inflows to developing countries and their determinants Multinational company investment in the developing countries is part of what is called Foreign Direct Investment. Foreign Direct Investment (FDI) is a type of international investment that involves ownership, control position and, most of the time, management in the domestic firm (It can be an acquisition, a joint-venture or a wholly-owned subsidiary). On the contrary, a “foreign indirect investment” – commonly called Foreign Portfolio Investment – is the passive holding of an investment portfolio made of foreign securities (e.g. stocks, bonds). Our research focuses on FDI, as it covers acquisitions by MNE of local operators or of local licences.
Ramamurti (2004) notes “the stock of FDI in developing countries nearly doubled from 1980 to 1990 and has since more than quadrupled, reaching $2340 billion in 2002”. He also underlines that FDI has “become the single most important source of foreign capital for these countries, displacing by a wide margin previously popular alternatives, such as official aid and private commercial bank lending.” Indeed, FDI inflows to developing countries have kept increasing in the 2000s compared to inflows to developed countries and have been more and more a subject of research in the 2000s, focusing on Latin America and Asia. Looking particularly at the telecommunication sector, the almost totality of FDI inflows in telecom services goes to developing countries in 2010 (Chart 7, FDI inflows in telecom services, ITU, 2010), which confirms the relevance of research on this subject. Research corpus on the determinants of FDI inflows to developing countries generally underlines the prevalence of political, governance and regulatory framework of the host country in the MNE investment decision (Wilhelms 1998, Dupasquier & al. 2006, Kirkpatrick & al. 2006, Asiedu 2006, Musonera 2008, Fedderke & al. 2008, Luiz & Stephan 2011).
Indeed, working on a sample of low and middle-income countries between 1990 and 2002, Kirkpatrick & al. (2006) study the relationship between quality of host country regulation and FDI in infrastructure. The authors state that an effective domestic regulatory framework has a positive impact on FDI inflows. On the other hand, a regulation that is vulnerable to capture by the country government or by the private sector is a factor of reluctance of potential foreign investors to implement large infrastructure projects. This supports Wilhelms’ (1998) findings who has worked on 67 emerging economies between 1978 and 1995 and argues that the way institutions, policies and laws are handled in a country is significantly more important on FDI inflows than population size and sociocultural context. Henisz (2000) states that foreign companies are more likely to enter a country with credible political rules and Globerman & Shapiro (2002) show the correlation between host country governance quality and FDI flows.
The research corpus also studies the impact of other determinants on FDI, whether it be on developing or developed countries, such as country size and wealth as well as economic, business and legal environments (Onyeiwu 2004). Empirical results are generally conflicting, as illustrated in Table 5.

Table of contents :

CHAPTER 1 GENERAL INTRODUCTION
CHAPTER 2 RESEARCH BACKGROUND & LITERATURE REVIEW
CHAPTER 3: THEORETICAL VALUATION OF A TELECOM ASSET IN SUB SAHARAN AFRICA
CHAPTER 4: TELECOM ASSET VALUE IN SUB-SAHARAN AFRICA OVER 2000-2010: QUANTITATIVE ANALYSES

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