Xiaomi’s Internalization, Internationalization and Ecosystem

Introduction to Xiaomi

The emergence of smartphones began with the iPhone in 2007, two years later in 2009 Samsung introduced its first Galaxy smartphone (Barham, 2020). Later other brands emerged such as HTC, Lenovo, ZTE and Huawei.

Xiaomi was established in 2010, the company's first product was the MIUI Android-based operating system, which quickly became popular with Android developers, due to its alternative and intuitive interface (Simons, 2021). The company introduced desired features that were not present on other stock devices, consequently gaining traction. By the end of 2011, it introduced its Mi 1 smartphone in China, with high-end specifications at the time (Simons, 2021; Joseph, 2019). Since its establishment, the company had LoT (Internet of things) at its core. Xiaomi mainly focused on low-cost devices with high performance. In the first three years of its development, it operated within its domestic market of China (Pee et al., 2019; Wei and Long, 2021). Four years after its establishment, in 2014 Xiaomi entered the international market. By 2018 its international revenue was 40% of its total income. The company focuses on its international market, as its domestic one (Wei and Long, 2021).

?Xiaomi was listed on the Hong Kong Stock Exchange in 2018; as its revenue reached 52.9 billion RMB, becoming the youngest Fortune 500 company (Li, 2019; Fortune, 2022). Furthermore by 2019 Xiaomi had over 6000 stores in India, 100 in Europe and entered over 90 different nations and regions worldwide.

MNE and OLI, its Significance in Corporate Governance

According to Eden and Dai (2010), multinational corporations are not simply businesses that export finished products or intermediate goods and hold a portfolio of investments abroad. John Dunning has created the Ownership-Location-Internalization (OLI) paradigm to clarify MNE’s foreign pursuits (Eden and Dai, 2010). The OLI developed into an important paradigm in international business. The ownership advantages allow for intangible assets, property rights, marketing systems and innovation capabilities (Zeng, 2022). Location advantages include a productive and skilled labour force, advanced infrastructure, innovatory policies, reduced tax, and a broad range of other producers for cooperation. The internalisation of the OLI paradigm is the negotiation costs and expanding operation. Based on the efficiency argument, it should be economical for MNCs to use the benefits outlined in the OLI theory, according to Dunning (2001). Moreover, Dunning (2001) has stated that economic value is a return to how the ownership specific advantages of firms are created and deployed rather than a return to capital in the sense of a return to owners of capital equipment and property. MNCs commonly use wholly-owned subsidiaries, equity joint ventures, and mergers and acquisitions to exert control over their externalised activities.

Corporate governance sets the basis for controlling a firm, and rights and responsibilities are distributed amongst shareholders. It is the source for objectives to be monitored.?Corresponding with Corporate Governance (2016), corporate governance is an important quality that any theory of a global organisation should have.

?The Internalization Theory

The internalization theory was initially associated with establishing the conditions under which cross-border transactions for immediate items are likely to be internalised within hierarchies (Dunning, 2001). The internalization theory oversees the expense and advantage of managing a geographically spread endeavour within a cohesive enterprise, instead of externally through the market. Narula and Lee (2020) have indicated that transaction costs in the markets for immediate products are often elevated due to the risk of both buyers and sellers, frequently reflected in the transactions. Especially for technology-based goods, as well as in the negotiating process, specific legal contracts, and continuous monitoring of each company's compliance. Additionally, extensive legal processes in the event of a contract violation. Nevertheless, once a company establishes a strong reputation and grows in market share many of the issues mentioned above are mitigated or constrained. The global economy is interconnected in numerous ways, and MNEs are an essential part of facilitating the procedure (Dunning and Lundan, 2008). Dunning and Lundan (2008) have further emphasized the significance a corporation's response to cross-border collaboration for long-term sustained growth and competitiveness. As Zhu, Liang, and Ren (2011) have noted MNEs suffer from transactional market imperfections. Specifically, whilst operations are in multiple regions which involve the negotiation with contractors, buyer ambiguity, cost of broken agreements, the ability to keep quality and reputation, the discrepancy in tax rates and exchange rate fluctuations. Narula and Lee (2020) identified the usage of a multinational hierarchy diminishes transaction costs. Thus, the presence and survival of MNE can be explained by superior efficiencies in the cross-border transaction of products.

It is vital for an international organization to alight its transactional costs, such as the cost of acquiring and transmitting information, communication costs, or inducement schemes to align the activities of participants of the organization with the objectives of the firm (Zhu, Liang, and Ren, 2011). For an MNE to develop as an efficient firm, the governance structure must be based on a comparison of market transaction costs and internal transaction costs, with internal transaction costs not surpassing market transaction costs.?

Eclectic Paradigm

The eclectic paradigm focuses on the aspect of internalization and transaction cost theory (Chowdhury, 2015). The aim is to create a framework explaining choices between FDI (foreign direct investment), exports, and licensing as alternatives for internalization. It is essentially the traditionalist’s assumption. However, it is important to note, that Dunning's eclectic paradigm is not a theory of FDI and MNEs.

As Dunning and Lundan (2008) and Dunning (2001) have outlined, a static eclectic paradigm cannot fully explain MNEs' strategies in a rapidly shifting environment, consequently necessitating the global strategic management to integrate the dynamics of environmental changes. Rao (2004) declares, that forming a global strategy model from an eclectic paradigm requires effort from strategy scholars. Li, Tallman, and Ferreira, (2005) additionally state that traditional models of international production and FDI fail to adequately account for environmental scanning behaviours which are essential for most technology-centred companies.

Xiaomi’s Gradual Transition and Strategy of Choice

Xiaomi did not have any international operations before 2014. Initially, the company focused on the Chinese internal market of operation. Xiaomi has taken a careful approach to boost and expanding its outreach and reputation within China first, then expand (Cui, Zhao, and Xiao, 2017). The strategy Xiaomi decided to undertake is carefully chosen and effective, as it allows the company to thrive in its native environment first, before gaining the resources, experience, and expertise to expand internationally. Thus, proving the importance of strategic marketing transition and understanding one’s strengths and weaknesses. When a start-up company is working in a single environment it is easier to adjust a quick course of change in case a strategy change is required. Furthermore, developing a strategy for its products is vital. Subsequently, Xiaomi has been highly effective within the single-country setup, in dealing with customer requirements, the ease and understanding of the local market, financial system and already has an established supply chain (Flynn and Xiande Zhao, 2015, pp.13–44; Cui, Zhao and Xiao, 2017). Therefore, while Xiaomi has established its brand, supply chain, and quality assurance it simultaneously built the founding foundation of its international operations. By unitizing the most appropriate marketing, working with the government, dealing with a single currency, understanding market demand, tweaking its internal policies, and enhancing the benefits of its products, it has initiated the beginning of an internationalized brand.?

The Focus on Internationalization

Xiaomi officially entered the international market in 2014. According to Tang (2018) and Kuo (2014), the period between 2014 and 2018 was particularly challenging in the Chinese market. As Tang (2018) has reported, the average growth rate of smartphone sales in China was 10%, compared to previous years of over 100%. Furthermore, Xiaomi was facing further saturation in the highly competitive Chinese mobile phone market. During the same period, in 2018 smartphone manufacturers were decreasing prices; thus, resulting in lower profit margins, gradually reducing profitability (Flynn and Xiande Zhao, 2015, pp.13-44; Cui Zhao and Xiao, 2017). Consequently, Xiaomi had to shift part of its attention globally. By the time Xiaomi began to internationalize it has already built strong FSAs, which is the MNE’s intangible resource being difficult to imitate (Narula, 2012). Such enterprises are often successful due to relatively strong technological edge, and production capabilities. Moreover, Xiaomi has implemented "lower target prices” relative to the market average in the sector, thus gaining a price competitive advantage. As Li (2021) has revealed Xiaomi has a strong in-house innovation ability and cost advantage over brands such as Apple and Samsung, thus being the largest smartphone seller in the world (Katti and Raithatha, 2018; Huyn, 2018; Reuters, 2022).

Xiaomi entered markets in the European Union, The United States, Russia, India, and Brazil. However, due to Brazilian regulations and legal issues, Xiaomi had withdrawn from the market in 2015. The company mainly targeted India, due to its large population and high demand for low-end and low-priced smartphones (Katti and Raithatha, 2018). The internalization of Xiaomi between 2014 and 2016 was turbulent and challenging. Henceforth it is essential to evaluate an entry and ensure knowledge and understanding of political, economic systems, laws, policies, and local market demands. Xiaomi’s main target market of India was a success, as the company provided cost-effective products, eventually surpassing Samsung. Xiaomi has had an advantage in the Indian market, as it already focused on high-performance and low-cost products in its domestic market, thus having a competitive advantage (Barton, 2018 Hyun, 2018). For the European market, Xiaomi focuses specifically on high-quality and low-price products, which boost profit margins for the company. Specifically for the European market, it is important to build trust, as a new entry Xiaomi had to prove it is a company to be trusted (Hyun, 2018). Xiaomi has subsequently improved its brand image and reputation as a reputable brand.?

Table 1 Chinese smartphone sales in Q3 2018 (Tang, 2018)

The Path to Achieving an Ecosystem

By accelerating its growth rate via innovation, expansion and focusing on market demands Xiaomi has reached a revenue of over ￥328.3 billion in 2021 (Reuters, 2022). The company has an outreach in over 90 countries and regions. After its expanded reach amongst technology-based customers, Xiaomi set out to expand in online shopping (Yang, Ma, and Chattopadhyay, 2021). Xiaomi's initial strategy was to have low-profit margins, reach a large customer base and gradually increase its profitability through the increase of quality, and the creation of an ecosystem of products. Thus, forming the foundation of the company’s internet of things (IoT) strategy for providing value (Yang, Ma, and Chattopadhyay, 2021). The main strategy of Xiaomi is to build up a complete network of companies that align together for one common target, with similar appearance and quality. As a result, an ecosystem of different internet-connected homes and technology-based items is being created.

Xiaomi’s Uniqueness

Xiaomi is unique in its LoT products and its ecosystem partners. The strategy creates synergy through design coherency and visual pattern (Yang, Ma, and Chattopadhyay, 2021). Xiaomi has purchased various patents from Intel, Microsoft, and Nokia, thus solidifying its brand image and intellectual property rights (Kong, 2019).

The internet of things includes smart components, such as sensors, and various software which the company incorporates into an ecosystem. The devices are divided into various sections and are interconnected.

Xiaomi has been regarded as more than a technology and smartphone company. Xiaomi further includes a Alot products, internet services, its product range includes:

1. Smartphones, accessories for each
2. Tablets, notebooks, and accessories for each
3. Power banks, batteries, wireless chargers, and accessories for each
4. Headphones, Bluetooth headsets, speakers, FM transmitters, and accessories for each
5. Smartwatches, smart dog tags, and accessories for each
6. TV boxes, sets, projectors, drones, sound systems, mirrorless cameras, VR glasses and accessories for each
7. Sockets, sensors, smart lighting, Wi-Fi routers, air purifiers, personal care, power strips
8. Electric scooters and bikes with accessories for each
9. Toys, games, health care, clothing, pets, musical instruments, and spare parts for its products

Xiaomi’s speaker as an example could be interconnected with various other devices, creating a better algorithm.?Xiaomi has shifted its specialization into growing services such as cloud storage which is provided by a monthly or yearly subscription (Devental, 2019). Furthermore, through its TV it delivers streaming of shows, movies, and games. The Xiaomi brand has asserted itself as a trustworthy provider of internet, and finance. The company gives small loans to consumers buying its devices, driven by artificial intelligence evaluating each client's creditworthiness (Devental, 2019).

The Future Shift and Progression

As Nambisan (2017) has indicated entrepreneurial results and processes have become less restricted because of digital technology, subsequent in a change from defined, impermeable, and fixed borders to increasingly absorbent and shifting boundaries. Digitization has resulted in less pre-definition in the position of an entrepreneurial company, as it progressively encompasses a wider, more miscellaneous, and constantly evolving set of participants. A change from a pre-defined, centralized company to a vibrant group of companies with closely aligned objectives and skills.

Limitations of Future Shift and Progression

Verbeke and Kano (2015) have noted that MNEs have progressed fundamentally based on the products of their national products, influenced by political, economic, and financial drivers. However, Verbeke and Kano (2015) have also stated that MNEs' advantages, cultural, political, and economic largely depend on the trajectory of their economies.

Chinese MNEs

Child and Rodrigues (2005) have looked at Chinese MNEs and suggested the IB theory is too intertwined. However, Child and Rodrigues (2005, pp., 388) noted authors which have clearly “failed” to predict the future of Chinese MNEs, and their “limited” capabilities to expand internationally; or to exploit domestic advantages internationally. Moreover, the author noted, “Chinese industries such as mobile phones, and electronics face fierce competition from leading international brands” thus driving “extremely” thin profit margins. However, that has been disproven by international brands such as Xiaomi, in 2021 the company reported record sales figures, and surpassed Apple and Samsung in key markets (Katti and Raithatha, 2018; Huyn, 2018; Tang, 2018; Reuters, 2022). Chinese MNEs benefit highly by not being only "hindered at home", thus establishing a competitive advantage via internationalization whilst expanding operations.

Global monthly smartphone sale trends in % (Martin, 2021; Counterpoint Research, 2022)

Recommendation for Expanding the Theory and Limitations

Traditional theories are inevitably limited in their applicability, such as differentiation in the asset-exploiting FDI and asset-augmenting FDI. Moreover, there is a lack of ownership structure accountability for MNEs.

Furthermore, certain institutions have weaker and more “unstable” environments in their home markets than the ones that they enter or vice versa, which should be considered by the theory as it could pose significant threats. Luo and Tung (2007) have underlined the competitive disadvantage many EMNEs have and have suggested that such late arrivals use internalization to acquire strategic assets such as technology, brands, expertise, or distribution channels.?Moreover, the authors have noted that the EMNEs reduce their vulnerability to the market and institutional limits at home. Verbeke and Kano (2015) go on to say that a systematic examination of the theory is required. It would necessitate the use of empirical techniques not commonly seen in conventional international business research. Emphasising the relevance of history and the internationalisation theory, asserting that the theory remains one of the key drivers of MNE, regardless of whether the MNE's home country is developed or emerging. Thus, emphasizing that history is an important aspect in looking at expansion and the future.

Conclusion

Engaging in cross-border activities enables organizations to create more value and expand their operations, whilst becoming a better organization through adaptation. Dunning and Lundan (2008) have mentioned that not all hybrid MNEs such as Xiaomi will be successful, some are adapting their values, national, regional, or global to adapt sourcing, production marketing and human resource strategies, to become a better organization. The Eclectic paradigm provides useful insights into an MNE. The ownership advantages observe management capability, property rights and asset-based advantages (Dunning, 2001). The location advantages encompass the productivity of the labour force, investment policies and infrastructure. The internalization advantage of the OLI is the ability to negotiate costs, profit from market imperfection, expand outreach, and build a network. The internalization theory provides explanations of how markets are to be internalized through FDI but lacks to connect with the internalization structure of specific actives. Additionally, conventional theories of the MNE illustrate the assumption of short-term efficiency as the main objective regardless of the market power theory, eclectic paradigm, or the internalization theory.

Xiaomi's international expansion and growth are distinctive. The company had a narrow segmentation and later expanded. It has achieved its strategic goals by selecting its partners, through personal networks, thus enabling the values and management of the collaboration to be closely aligned (Yang, Ma, and Chattopadhyay, 2021). Consequently, it enables a company to change a strategic partner swiftly, due to close connections. It is critical for an international organisation to alight its transactional costs, such as the cost of receiving and sending information, communication expenses, or enticement schemes, to align the activities of the organization's members with the firm's aims (Zhu, Liang, and Ren, 2011). Enabling business partners to have a say in the company further helps to “democratize” and include important insight into business operations (Zhu, Liang, and Ren, 2011; Wei and Long, 2021; Yang, Ma, and Chattopadhyay, 2021). Furthermore, Xiaomi has not purchased partnering companies and has chosen start-ups that present substantial value as they concentrate on one type of product (Yang, Ma, and Chattopadhyay, 2022). Thus, backing the theory of MNEs and the ecosystem, explained by Zeng (2022a) “Value creation necessitates the collaboration of several co-specialized partners, and a coordinated market provides greater returns”. Xiaomis’ strategic partnership solidifies the validity of MNEs ecosystems, as it enabled autonomous actors with varied assets to join from several sectors and form an ecosystem. As the future shifts towards loT devices, it's vital to enhance the user experience and focus on interconnectivity.?

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