Mode of Entry in Transition Economies

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ENTRY MODE CHOICE IN TRANSITION ECONOMIES Operations of International Hotel Companies in Russia Päivi Karhunen Center for Markets in Transition Helsinki School of Economics and Business Administration

Abstract

Main emphasis in research on economic transition in CEE is on manufacturing sectors. However, due to the total neglect of services in socialist economies upgrading the quality of service industries is crucial in economic transition in Central and Eastern Europe. In this restructuring process foreign investors play an important role. This paper looks at the issue from a service industry’s point of view, hotel business being the industry in case. The paper draws on two lines of research. First, studies on internationalization patterns and foreign entry modes characteristic to the global hotel business, and second, literature on foreign entry strategies in transitional economies. This literature is used as a backdrop against which data collected on foreign hotel companies operations in Russia is mirrored. The paper aims at finding out to what degree the chosen entry modes are determined by the companies’ global strategies and to what extent the transition-specific factors in Russia have affected decision-making.

Introduction

According to the socialist ideology services were a neglected sector of the Soviet economy. Therefore, the development and transformation of service industries is an integral part of the economic transition of Russia. In the transformation process foreign investors play an important role by providing both know-how and financing. One of the emerging service industries in Russia is the hotel sector, due to the actual and potential growth of tourism and tourism-related business in the country. The Russian market is considered too large for the international hotel companies to ignore. Some international hotel management companies were present on the market already in the communist era, but it has been during the 1990s they have entered the market to a greater extent, although the success and pace of entry has not been as good as expected. This paper discusses the entry strategies of international hotel companies operating in Russia and aims at pointing out those transition-specific factors,

which affect the choice of entry mode in the hotel sector of Russia. The data on Russian hotel sector is collected from secondary sources, such as industry reports and interviews of managers of international hotel companies, published in Russian newspapers. Furthermore, previous literature on internationalization and operation modes in the hotel industry are reviewed, as well as studies on entry motives to Central and Eastern European countries in transition. The paper is structured as follows. First, operation modes in the global hotel industry are overviewed. Second, motives for hotel companies’ investment in CEE are discussed. Third, the current degree of privatization, and ownership patterns in the Russian hotel industry are described. Finally, operation modes chosen by foreign hotel companies operating in Russia are analyzed.

Operation Modes in Global Hotel Industry

Several strands of theory have been used to explain the internationalization and modal choice in the global hotel industry. The theories applicable include market entry literature from the marketing and international business fields and approaches from organization theory literature (Contractor and Kundu 1998). The first profound attempt to explain the forms of TNC involvement in the international hotel industry was made by Dunning and McQueen in 1981 leaning on the eclectic theory of Dunning (1981, 1988, 1989). The eclectic theory is an attempt to pull together the various strands of explanation for the growth and activities of TNCs. It concentrates on ownership effects, internalization

strategies and location costs. According to the eclectic theory, enterprises with headquarters in one country will undertake production...
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