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Internationalization through Warsaw Stock Exchange - an empirical analysis

Witold Wilinski

World Economy Faculty, Warsaw School of Economics, Warsaw, Poland

Witold  Wilinski  is  a  lecturer  at  World  Economy  Faculty  in  Warsaw  School  of  Economics,
Poland.  His  current  research  focuses  on  internationalization  and  outward  foreign  direct
investment  from  post-communist  countries,  multinational  companies  strategies  and  corporate
finance.  He  received  his  PhD  from  Warsaw  School  of  Economics  and  a  Post-Master  Diploma
from  University  Paris  Dauphine,  France.  He  has  twelve  years  of  professional  experience  in
corporate finance including a CFO position, controlling and audit departments.

Internationalization through Warsaw Stock Exchange - an empirical analysis

The main objective of this article is to present the results of empirical research relating to
internationalization  of  Polish  companies.  The  analysis  that  has  been  carried  out  relates
mainly  to  motives  for  undertaking  investments,  methods  of  their  financing,    ownership
structure  and  one  aspect  of  institutional  environment,  i.e.  the  Polish  mandatory  pension
fund  system.  The  research  was  based  on  a  sample  of  400  large  and  medium  companies
listed  on  the  Warsaw  Stock  Exchange,  out  of  which  96  companies  conducting
international  activities  have  been  selected.  The  time  range  covers  the  years  2000-2010,
and  in  case  of  annual  financial  statements,  2009  is  the  last  year  of  the  research  period.
The  research  results  may  be  helpful  both  in  further  theoretical  analyses  of
internationalization  of  the  companies  from  CEE  and  other  emerging  markets,  and  may
also represent a significant practical value for the management staff of the companies.

Keywords: internationalization strategies, emerging multinationals, OFDI from CEE,

Internationalization through Warsaw Stock Exchange – an empirical analysis

Introduction

Internationalization of companies from Central and Eastern European Countries (CEEC) is a

relatively new issue in the stream of research of internationalization of the emerging markets.

Although the companies from this region have already conducted international activities

during the 1990s, a significant increase in the value of OFDI took place during the last decade

only. It should be pointed out that due to a relatively quick growth of GDP per capita in new

EU member states, some post-communist economies are now considered as highly developed

economies. Therefore, it is highly probable that in the nearest future the issues concerning

research of internationalization of economies from CEE will be included in the research

stream concerning internationalization of highly developed economies.

The objective of this study is to present the results of empirical research concerning the

motives for large and medium Polish companies to enter the foreign markets as well as the

methods of their financing, ownership structure and one aspect of institutional environment,

i.e. the Polish mandatory pension fund system. The study focuses on the companies listed on

the Warsaw Stock Exchange, the method of carrying out the research is presented hereinafter.

The paper is organized as follows. In the next section, the applied research method is

described. In section 2, a description of the most important internationalization theories is

presented. Section 3 concentrates on macro-economic data of OFDI from CEEC, Poland’s

position compared to other states of the region is also presented. In section 4, discussion of

the research results is presented.

1. Research methods

An interesting study concerning theoretical and empirical research on emerging market

multinationals was carried out by Jormanainen and Koveshnikov (2010). They reviewed 49

articles from 15 top academic journals in the field of international business published during

the years 2000-2009. Among empirical articles 23 were quantitative (47%), 16 were purely

qualitative (33%), and 2 articles used both qualitative and quantitative data (4%). Altogether 8

articles were conceptual (16%). An important finding was also the fact that among the

reviewed articles, there was practically no research based on „first-hand” data obtained

directly from companies.

In the study, 400 companies listed on the Warsaw Stock Exchange as of the fourth

quarter of 2010 have been analyzed. From this group, 96 companies conducting their

activities outside of Poland have been selected, and the companies at their early stage of

internationalization, i.e. conducting export activities only, have not been taken into

consideration. Additionally, all companies registered and located outside of Poland and not

controlled by Polish capital have been eliminated with the aim of concentrating on Polish

businesses. The companies conducting their activities abroad in order to optimize their tax

results have not been taken into consideration either. It should be pointed out that due to the

fact that the research has been based on the companies listed on the Warsaw Stock Exchange,

it is related to internationalization strategy of large- and medium- sized companies, which

eliminates in this article the considerations concerning internationalization of smaller entities.

The study is based on „first-hand” primary data, including among others quarterly and annual

financial statements of the companies, and on the information contained in issue prospectuses,

also those concerning issues of shares related to the purchase of specific foreign companies.

The main positive aspects of the research sample selected in this manner are: (1) full

availability of financial data due to the fact that the companies are listed on the public stock

market; (2) full comparability of input data based on uniform financial data in accordance

with International Financial Reporting Standards; (3) coherent and comparable period of

publication of the data; (4) full, i.e. 100% range of the information obtained (as opposed to

survey research method).

The objective of the research was to find a reply to the following research questions:

(1) Is the institutional environment, including first of all pension system based on Open-End

Pension Funds, a factor having positive impact on internationalization of companies? (2)

What are the main motives for undertaking activities in foreign markets by the companies

listed on the Stock Exchange? (3) Are company shareholders dispersed or are these the

companies in which a specific group of shareholders has a decisive impact on decision

making; if so, are these foreign or Polish entities? (4) What is the age structure of the

reviewed companies, how long did they exist before starting their activities abroad? (5)

Which companies dominate in the reviewed group: regional or global, and what is the

geographical structure of the investments made?

2. Theory of firm internationalization

The research on internationalization has already been carried out for more than 40 years.

Evolution of its results was a function of changing economic reality and more and more clear

business globalization. One should remember, however, that the globalization was and is

carried out with various intensity. The early works on internationalization (e.g. Vernon 1966;

Kindleberger 1969; Hymer 1976; Caves 1971; Buckley and Casson 1976) explained to a large

extent the decisions concerning FDI market imperfections. The theory which describes the

mechanisms of making foreign investment in the broadest way at the meso level is John H.

Dunning’s (1981; 1993; 1996) eclectic theory of international production, also known as the

OLI Paradigm. The advantages defined in this theory: ownership advantage, location

advantage and internationalization advantage have impact on the decisions of the companies

relating to FDI. The eclectic theory is supplemented by investment development path, which

shows the dependence between the economic development level and the investment position

of the state (i.e. the relation between OFDI and IFDI). Goldstein (2009, p. 82) concluded that

the IDP model had indeed proven very useful for evaluation of smaller European economies.

An important addition to the above theories is the Uppsala model created by Johnson

and Vahlne (1977), who paid attention to cyclical nature of internationalization, which is

carried out gradually – sequentially. This is the consequence of a risk arising from a limited

knowledge of the foreign market. According to the sequential internationalization model,

companies expand their activities first on the markets of culturally close neighboring

countries, and then, using the knowledge gained, consider expansion into more distant

markets, with larger cultural distance to their local market. Due to delayed expansion of

MNEs from emerging countries, most literature concentrates on issues related to MNEs from

highly developed states.

The first most important studies concerning internationalization of businesses from

emerging economies are those carried out by Wells (1983) and Lall (1983), and the most

recent studies are those carried out by Goldstein (2009) and Narula (2010). From the point of

view of narrowing this issue to CEEC only, important publications are those by (Meyer 2001;

Goldstein 2009; Meyer et al. 2009; Narula 2010).

All previous publications relating to internationalization of companies from CEE can

be divided into three main groups: Firstly, publications in which a group of states and

businesses originating from them is analyzed (Svetlicic and Rojec 2003; Kalotay 2004;

Rugraff 2010); secondly, those concentrating on one state only and on the businesses

established in it (Jaklic and Svetlicic 2003; Rosati and Wilinski 2003; Kalotay 2010; Filippov

2010); thirdly, the studies comparing BRIC states, in which strategies of internationalization

of Russian companies are analyzed, compared to Brazilian, Indian and Chinese companies.

3. Background: OFDI from CEE countries

Although Polish economy is one of the largest economies among the states of CEE, the level

of its internationalization measured as OFDI stock per capita is lower than in case of

Estonian, Slovenian, Hungarian and Lithuanian economies. As opposed to the states in which

the companies operating in a relatively small domestic market are compelled to invest abroad

in order to develop and obtain the scale effect, in case of Polish companies this was not

necessary at the early stage of their development. This fact caused, however, that in case of

Polish economy a certain delay in internationalization of companies took place compared to

smaller states of the region with similar level of GDP per capita.

Despite a comprehensive literature concerning business internationalization, it is an

obvious drawback of the existing theories that there is no theory taking into consideration

market transformation processes in the CEEC. Meyer (2001), Meyer et al. (2009) note that

from the point of view of decisions made by a company which intents to start its business

activities in a country where economy undergoes substantial institutional changes (political

system, economic system), the transformation carried out in a given state seems to be one of

the key variables that determine the manner and the type of the decisions made. Additional

factors specific for the market transformation countries, which do not exist in countries with

stabilized institutional systems or exist, but on a significantly lower scale, are first of all: (1)

incompatibility of the legal system with the market economy principles and its high volatility;

(2) state sector share higher than in highly developed states, allowing participation in the

privatization process; (3) limited resources of the management staff having experience in

business management on international scale; (4) lack of developed basic financial sector

institutions (independent central bank, developed capital market, etc.); (5) low stability of

political institutions system due to creating democratic system. The aforementioned factors

have direct impact on the level of transaction costs in a given economy, which determines

decisions of businesses operating in the transition economies.

The CEEC are now a diversified economic area. Whereas during the first 15 years after

the transformation of political and economic system all of them could be considered as the

transformation countries, after accession of the first group of states to the European Union,

the situation has changed substantially. It can be assumed that adaptation of proven

institutional solutions functioning in the European Union by new member states of the former

Eastern block improved and at the same time accelerated transformation process in the region.

There can be no doubt that in many cases this contributed significantly to successful

termination of the transformation process of the economic and political system.

UNCTAD (2008; 2009; 2010) reports clearly show that post-communist countries

noted an increase of their share in the total global OFDI stock from 0.2% to 2% during the

years 1990-2008. In terms of value, OFDI stock from CIS states amounts to USD 216 billion

(of which the major part falls to Russian investments – USD 203 billion), whereas OFDI

stock from new EU member states amounts to USD 68 billion, and from South East Europe

states – USD 3.8 billion (see: Wilinski 2010, p. 5). In Poland, the outward FDI stock at the

end of 2009 amounted to USD 26.2 billion, which means that foreign investments of the

Polish companies were after the Russian ones the highest among the market transformation

states. However, in terms of the value of OFDI stock/GDP and OFDI stock per capita,

Poland’s position in the region is not that significant. Like in case of OFDI stock/GDP ratio,

the highest level of which was reached by Estonia (37%), Slovenia (17.5%) and Hungary

(11.4%), the value of OFDI stock per inhabitant reached also the highest level in these

countries (data concerning GDP based on IMD database). Compared to companies from

Estonia, Slovenia and Hungary, Polish companies started their internationalization relatively

lately, among others due to relatively large domestic market, which did not force them to

invest abroad in order to obtain sufficient scale effect.

4. Institutional environment of the Warsaw Stock Exchange

While concentrating only on one aspect of institutional environment of the Warsaw Stock

Exchange (WSE) listed companies, one should pay attention to significant influence of the

Polish pension system. Unlike the principles of functioning of most European pension

systems, the principles adopted in Poland since 1999 were based on the following

assumptions: pension contribution paid by individuals has been split into two parts: (1) the

part allocated to the state social insurance agency and (2) the part allocated to mandatory

private pension funds. Private pension funds have been statutorily obligated to allocate 60%

of the received funds in state treasury bonds, and the remaining 40%, in accordance with

applicable regulations, must be invested in the companies listed on the Stock Exchange.

Through this mechanism, at the end of 2010 the value of share portfolio owned by private

pension funds amounted to EUR 20.2 billion, and it should be pointed out that the Polish

government introduced statutory limitation that prevents from allocating pension

contributions in the shares of the companies outside the Polish capital market. This quite

simple and transparent system significantly stimulated growth of the Polish capital market

during the years 1999-2010, but it had also a substantial impact on the development of

internationalization of the Polish companies. At present, capitalization of the Polish stock

exchange is higher than that of all stock exchanges of the region (Bratislava, Bucharest,

Budapest, Ljubljana, Prague Stock Exchange, Bulgarian Stock Exchange, but also Wiener

Borse AG).

5. Results and discussion

5.1. Ownership, age, geographical structure and capital sources

5.1.1. Ownership structure and capital sources

It results from the research that mandatory private pension funds have their shareholdings in

most companies of the reviewed group, i.e. in 70% companies. In 43% of the companies they

have significant shareholding, i.e. more than 5%, and in 23% of the companies their

shareholding is higher than 10%. Therefore, it can be assumed that the pension system

functioning in Poland is undoubtedly one of important sources of raising capital by companies

listed on the Stock Exchange, including companies investing abroad. Nearly 30% of the

companies controlled by private capital raised their capital for investment projects abroad

through share issues carried out for this purpose

Regarding the blocks of shares giving influence on the company management, in most

cases this is Polish private capital (71%), followed by foreign entities (16%), state treasury

and Polish capital funds. Availability of data concerning the shareholders’ structure of the

companies listed on the Stock Exchange eliminated the problem of the lack of possibility of

determining the “nationality” of a company, appearing quite frequently in research.

An Appendix with all detail concerning companies sample are availble from the author.

5.1.2. Age and geographical structure of companies

It is characteristic that all companies of the reviewed group, controlled by the state treasury

were established during the pre-transformation period. For companies with dominant role of

the Polish private capital, this percentage amounts to 40%, and for companies with dominant

foreign capital – to 26% only. This means that in most cases companies controlled by the

Polish capital, operating in foreign markets, became regional or global companies in less than

twenty years of their activity – this applies to as much as 39 companies, i.e. 40% of all

reviewed companies.

Despite many company classifications applied in literature, such as Rugman’s definition

(2008), a relatively simple division has been adopted for the needs of the study. The

companies have been divided into three groups: regional, biregional and global. Regional

companies are the companies which operate only in the European market. Biregional

companies are the businesses which operate on at least two continents, global businesses

conduct their activities in all areas belonging to the triad. In the sample, 10 global, 8

biregional and 78 regional companies have been identified.

5.2 Motives for OFDI

In making their decisions concerning OFDI, companies quite frequently base on several

premises at the same time. In the analyzed group of companies, five main motives have been

distinguished: market seeking, efficiency and market-seeking, efficiency-seeking, asset-

seeking and resource-seeking. A similar division has been proposed by Dunning (1993),

however – on the basis of a detailed analysis of individual cases, the fifth motive (efficiency/

market-seeking, not distinguished by Dunning, has been added. This refers to investments of

the companies, related to increasing production capacity and reducing production costs with

significant increase in sales in foreign markets. It is worth pointing out here that all Polish

investments abroad were carried out during the third wave of world investments only, and that

is why the motives such as efficiency-seeking and asset-seeking are now taken into

consideration; they did not appear at earlier stages of internationalization of companies from

emerging economies.

5.2.1. Market seeking

Market seeking is the motive that appears most frequently in the analyzed group of companies

(56%). From the point of view of strategies related to expansion, the most frequent strategy

elements in case of the market seeking motive are: (1) purchase of foreign companies that

have already developed their distribution network (e.g. Intercars and Fota, the largest

distributors of spare parts for cars in CEE); (2) development of company’s own sales network

or by means of a franchising network (e.g. Wojas, Prochnik, Gino Rossi, Monnari, LPP, NG2

and Euromark); (3) development of services being a duplication of the business model

existing in the country of origin of the company, e.g. in banking sector companies (e.g. Getin

Holding, PKO BP), insurance companies (PZU), media sector companies (Agora, Empik) and

postal services sector companies (Impost). The companies seeking markets for their products

on the foreign markets, usually went earlier through a process of vertical integration on the

Polish market, dealing at the same time with production and sales and creating successfully

their own original brands. Such companies, having achieved sufficient effect of scale and

having tested their business model on the Polish market, commenced their expansion into the

regional market of CEE. The companies of the clothing industry, mentioned above: Wojas,

Prochnik, Gino Rossi, Monnari, LPP, NG2 and Euromark operate just in this way; similar

business model is also applied in the restaurant industry (Sfinks). An interesting sales model

has been developed by an electro-engineering industry company (Amica), manufacturer of

electric household appliances, which purchased brands functioning in the Scandinavian and

German markets to successfully enter the Scandinavian and the Russian markets.

5.2.2. Efficiency-seeking and market-seeking

This kind of motives occurs when the company intends to improve its effectiveness by

increasing production capacity, reallocating production to a country where labor costs are

lower, purchasing the supplier to extend company’s product range, but this is done with

simultaneous increasing sales in the market in which it acquired a production company or

made an greenfield investment. It is worth pointing out that there are cases, in which the same

company makes an investment in one market, with efficiency-seeking motive, and another

investment in another market, with market seeking-motive. Therefore, it is necessary to

separate a group of motives being a combination of efficiency-seeking and market-seeking.

This kind of motives occurred in 16% of the reviewed companies, three cases of which are

global companies. In case of Bioton, a global biotechnological company, access to local

output markets was an important factor as it played a significant role in production of

medicines – due to restrictive regulations concerning their registration. Selena FM operating

in chemical and construction industry is another global company of this group, which reduced

costs of transportation of the products to its world customers through purchasing production

companies in Asia, America and Europe. The third case of a global company in this group is

interesting – SecoWarwick operating in electro-engineering industry became a global

company through acquiring its parent company from the United States.

5.2.3. Efficiency-seeking

The companies of this group (11% of the sample) are mainly the enterprises which locate their

production in the states where labor costs are lower, in the CEE region. Investments made

mainly in production capacity (both greenfield investments – e.g. Barlinek, and acquisitions

of the existing companies – e.g. Duda) took place in Ukraine, Romania, Russia and Moldova.

In most cases, a major part of sales generated by the company was carried out in the EU

market.

5.2.4. Asset-seeking

This group includes first of all companies of new technologies and services sector – IT, media

and telecommunication. More than half of them are global companies or companies operating

on two continents. In three cases, the companies own global Internet sales platform (Optimus,

City Interactive). IT companies entered foreign markets in a stepwise way, purchasing the

companies with technological assets and the share in foreign market (Asseco Poland, ATM).

The telecommunication company acquired a supplier of wholesale telecommunication

services in the North-American market. The company purchasing commercial real estate in

the whole CEE region, in large part through funds gained on the stock exchange, is and

interesting case.

5.2.5. Resource-seeking

Unlike Russian MNCs, in case of Polish OFDI, this group of motives is definitely the smallest

one. It includes 5 companies only, of which 3 companies with the state treasury as a deciding

shareholder, and 2 companies with the shares held by private shareholder. One of them

operates globally, whereas the other two operate in two triad regions only. This is the group

with the highest share of companies operating on more than one continent. All of them carry

out exploration of natural resource deposits: oil, natural gas and copper. It can be said

objectively that they are not the tools of Poland’s foreign policy.

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Insert Figure 1 about here

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Figure 1. presents a graphic summary of the research in its part concerning OFDI motives. X

axis means the level of internationalization of each group of motives – the level is calculated

as a total number of biregional and global companies divided by the number of all companies

classified to a given motive. Y axis indicates type of company orientation – companies with

market oriented investments achieve higher position, whereas companies which concentrate

their OFDI on assets achieve lower position in the graph.

It has been assumed that in case of market orientation illustrated on Y axis, the following

dependence takes place:

RS < AS < ES <EMS < MS,

where:

RS – resource seeking

AS – assets seeking

ES – efficiency seeking

EMS – efficiency/market seeking

MS – market seeking.

Beside each circle there are two figures, the first one stands for percentage of biregional and

global companies in the set representing a given motive, the second one stands for the number

of companies that have been assigned to a given motive.

The companies of the resource-seeking set are characterized by the highest level of

internationalization, which is due to the deficit of natural raw materials not only in Poland but

also in a major part of the European continent. We can generalize this statement and assume

that such regularity should take place in case of all companies dealing with exploration and

extraction of raw materials, originating from continents where such raw materials are not

found.

The companies of the asset-seeking set, as mentioned earlier, are mainly the

companies operating in the newest technologies sector, i.e. IT and telecommunication. In their

case, the most important objective of OFDI is not to extend the sales market for their products

but to gain technologically unique assets which may be used in local, regional and global

markets. Due to the fact that the newest technologies sector is subject to global competition,

companies of this set must be globalized in a stepwise manner. Therefore, their

internationalization is quicker than in other industries. Young et al. (1989) came to similar

conclusions while analyzing internationalization strategies of UK technological companies. It

is worth pointing out that in this set of companies, almost all of them carried out share issues

on the Stock Exchange in order to raise capital for purchasing specific assets abroad. The

Warsaw internationalization model can be a good example for companies originating from

emerging economies, which do not have a sufficient capital at the initial stage of their

development, both for gaining technologies and other foreign assets.

The companies motivated by efficiency-seeking, efficiency/market-seeking and market-

seeking operate mainly in the regional market. In most cases, companies gain a competitive

advantage in the domestic market, and then duplicate the proven model of their activities in

the markets that are close geographically and culturally. It is quite probable that after they

have achieved a satisfying share in the regional market – in this case mainly in Poland’s

neighboring countries – they will start OFDI in geographically more distant markets. Apart

from the first aspect related to the use of the proven business model in nearby foreign

markets, it is worth paying attention to another aspect related to competitive advantage of the

Polish companies in the Czech, Slovakian, Rumanian, Ukrainian, Russia and Moldavian

markets. It results from two main factors: (1) possibility of obtaining the scale effect by

companies in the domestic market and taking advantage thereof while competing with

companies operating in smaller countries, (2) competitive advantage resulting from successful

market transformation process which started later in the last four countries mentioned above.

Conclusions

The most important research results are:

Companies listed on the Warsaw Stock Exchange are characterized by high level of

internationalization, ¼ of 400 reviewed entities are the companies which made

investments abroad and conduct their activities abroad. The possibility of gaining

capital for foreign investments from new share issues is an important factor having

impact on the rate of internationalization. This applied to 29% of companies listed on

the Stock Exchange and investing abroad at the same time. This factor is important

due to accelerated possibility of minimizing the lack of capital which is characteristic

for young companies from the market transformation states.

The “Warsaw model of internationalization” described in the article could be in the

future an optimal method of accelerated internationalization, especially for the

companies of the newest technologies sector from other emerging-economies.

The institutional factor that contributes to accelerated internationalization is the

construction of the Polish pension system, which stimulates capital investments of

mandatory pension funds. Mandatory pension funds are the shareholders of 70% of

the Polish companies listed on the Stock Exchange, which conduct international

activities.

The major part of companies, for which asset-seeking is the investment motive, are the

companies operating in the newest technologies sector. Most of them are global

companies internationalized in a stepwise manner, through special share issues carried

out to acquire specific foreign assets.

The most frequent motive for carrying out investments is market-seeking. Investments

from this set are located mainly in Poland’s neighboring states, and based to a large

extent on duplicating the business model that has been tested earlier in the Polish

market.

The companies, for which the investment motive is resource-seeking, are the smallest

group in the analyzed sample, the highest percentage in this group falls to the

companies controlled by the state treasury. However, as opposed to Russian

companies (the development of which is based on natural resources), these are not

companies used as a tool in carrying out foreign policy – mainly due to their

characteristics related above all to exploration of natural resources.

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Young, S., James Hamill, Colin Wheeler, and Richard J. Davis, (1989), International market

entry and development. Strategies and management. Hertfordshire: Harvester
Wheatsheaf.

Fig. 1. Motives and level of internationalization of Polish companies

Source : Own calculation based on annual and quarterly financial statement of 96 companies listed on the WSE.

9%; 11

21%; 14

55%; 11

80%; 5

8%; 53

-1

20%

40%

60%

80%

100%

M S

EM S

Internationalization level (% of biregional and global companies)