Value co‐creation between foreign firms and indigenous small‐ and medium‐sized enterprises (SMEs) in Kazakhstan's oil and gas industry: The role of information technology spillovers

• Author: Irina Heim,Weizi Li,Yelena Kalyuzhnova,Kecheng Liu
• Date: 01 November 2019
• Published date: 01 November 2019
• DOI: http://doi.org/10.1002/tie.22067

RESEARCH ARTICLE

Value co-creation between foreign firms and indigenous small-

and medium-sized enterprises (SMEs) in Kazakhstan’s oil and

gas industry: The role of information technology spillovers

Irina Heim

1

| Yelena Kalyuzhnova

1

| Weizi Li

1

| Kecheng Liu

1,2

1

Henley Business School, University of

Reading, Reading, UK

2

School of Economics and Management,

Beijing Jiaotong University, Beijing, China

Correspondence

Irina Heim, Henley Business School, University

of Reading, Whiteknigths campus, Reading,

RG6 6UR, UK.

Email: i.heim2@reading.ac.uk

Funding information

National Natural Science Foundation of China

(NSFC), Grant/Award Number: 71532002; The

Newton Fund Institutional Links Grant; Local

content impact: economic development,

technology and entrepreneurship in Kazakhstan’s

energy value chain—developing a center for

competitiveness in Kazakhstan, Grant/Award

Number: 172697816

Abstract

Study related to the extractive sector still plays a limited role in the mainstream inter-

national business (IB) and management literature, with even less focus on ongoing

liberalization and digitalization in the industry. This article was motivated by the

question of how collaboration between foreign and indigenous oil and gas (O&G)

companies can support small-sized and medium-sized indigenous technological

development. The main contribution of this article is the development of a model

that explains how different actors can cocreate value in the ecosystem of the O&G

industry through digital technologies. A three-stage qualitative–interpretive method

based on interviews with industry experts was adopted to build three vignette case

studies. This article proposes what companies and the government could do to

increase the competitiveness of the local economy, diversify from O&G into high

technological industries, and support industrial development through information

and communication technologies (ICT).

KEYWORDS

foreign and indigenous firms, ICT technology spillovers, industrial competitiveness, oil and gas

industry, public-private partnership, value cocreation

1|INTRODUCTION

Resource-rich countries

1

place great emphasis on oil and gas (O&G)

industrial competitiveness because it is crucial to this sector of the

economy in creating jobs and stimulating growth, as well as providing

potential for diversification from the O&G industry into the growing

service sector, namely the information and communication technolo-

gies (ICT)

2

industry, among others. Industrial competitiveness is

associated with the “industry’s ability to obtain and utilize resources

to participate in competition”(Zhao & Wen, 2004). It also indicates

the capacity of a country to support the development of businesses,

and is especially important for small- and medium-sized enterprises

(SMEs), the backbone of every economy (Hobohm, 2001). The devel-

opment of SMEs is important in terms of job creation, especially for

reducing urban poverty in developing countries, as they account for

around 70% of employment, around 35% of exports, and the majority

of national earnings in any economy (Navickas & Malakauskaite,

1

Resource-rich countries: at least 20% of their total exports are natural resources, or at least

20% of their revenue are derived from the natural resource sector IMF (2007, 2012).

2

Information and communication technologies (ICT) are primarily intended to fulfill or enable

the function of information processing and communication by electronic means (UN, 2015).

Digital technologies include; (a) advanced production equipment, robotics and factory

automation, (b) new sources of data from mobile and ubiquitous Internet connectivity,

(c) cloud computing, (d) big data analytics, and (e) artificial intelligence. These technologies

and processes are based, in one way or another, on advanced ICT, so that the driver of the

New Digital Economy is the continued exponential improvement in the cost-performance of

ICT, mainly microelectronics (UNCTAD, 2017).

DOI: 10.1002/tie.22067

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© 2019 The Authors. Thunderbird International Business Review published by Wiley Periodicals, Inc.

Thunderbird Int. Bus. Rev. 2019;61:911–927. wileyonlinelibrary.com/journal/tie 911

2009). SMEs are especially important for emerging resource-rich

countries (ERRC) to move out of the middle-income trap (Radosevic &

Yoruk, 2018), defined as the inability to sustain growth and transition

from resource-driven growth, based on low-cost labor and capital, to

productivity-driven growth (Khakas & Kohli, 2011). To boost industrial

competitiveness, many resource-rich countries are, or have been, pur-

suing development policies aimed at maximizing the impact of natural

resources on the whole economy (Ramdoo, 2015). These policies are

focused on supporting domestic producers in expanding their activi-

ties, at least partially with domestic inputs, and gaining access to inter-

national technological and managerial expertise to enhance their

competitiveness (Kalyuzhnova, Nygaard, Omarov, & Saparbayev,

2016). According to OECD (2013), business linkage

3

policies are an

example of a public-private partnership (PPP), where development

can enable increased interaction between local SMEs and interna-

tional companies. It can incorporate a wide range of targets, including

business development, boosting competitiveness, and diversification

of the economy. Typically, these policies attempt to foster business

between local companies and international companies, and have been

used in many different countries and industries; for example, in high-

tech industries in the Czech Republic, Costa Rica, and Ireland. No pol-

icy is, to some extent, context-independent: because the business set-

ting is always changing, transferring practices from one country to

another is difficult. Therefore, policies are always designed for a spe-

cific industry’s characteristics, a specific country's characteristics, and

time settings.

As such policies' designs differ substantially over time and geo-

graphic location, the literature gives contradictory views toward

answering the question of how collaboration between foreign and

indigenous O&G companies can support indigenous SME in their

technological development, taking into consideration the ongoing dig-

italization

4

of the O&G industry. The fact that Kazakhstan has man-

aged to attract significant foreign investments, predominantly in the

natural resource sector, and, therefore, has built its O&G sector on

foreign investments (Delevic & Heim, 2017). The collaboration

between foreign and indigenous companies could play an important

role in the transfer of international technological and managerial

expertise to the indigenous SME in the O&G industry. Previous study

in international business (IB), however, has also stressed foreign multi-

national enterprises (MNEs) tend not to agglomerate with local

domestic companies, but are willing to agglomerate with other foreign

MNEs (Mariotti, Piscitello, & Elia, 2009). This is, in large part, why gov-

ernments of resource rich-countries pursue policies aiming to develop

their domestic industrial capacity to support links with indigenous

firms, and not only with other foreign MNEs. As such, further research

is necessary to make such initiatives as successful as possible,

accepting that our knowledge about them will continue to evolve

(Tirole, 2017). In particular, the literature does not provide necessary

multidimensional theoretical foundations for industrial development,

as it is predominantly informed by economic and political theories

(Shapiro, Hobdari, & Oh, 2018), and strategic management perspec-

tives are virtually absent (Hansen, 2017). IB research has often

excluded extractive industries and the service sector, claiming that

they are likely to be subject to restrictions on the extent of foreign

ownership in those businesses (Smarzynska-Javorchik & Wei, 2002).

This article aims to address this research gap, providing new theo-

retical insights into possible cooperation between local firms and

MNEs in the O&G sector in Kazakhstan from the strategic perspec-

tive, taking into consideration recent trends such as liberalization of

the extractive sector and convergence of the NDE.

The findings encourage policymakers, as well as indigenous SMEs,

to take advantage of the digitalization of the O&G industry, including

opportunities based on cooperation with foreign firms through facili-

tation of technology spillovers.

5

2|IMPACT OF FDI TECHNOLOGY

SPILLOVERS ON LOCAL INDUSTRY

The literature on IB highlights the fact that foreign investments bring

a package of capital, technology, and management skills to the host

country, including those in the form of spillovers. For example,

agglomeration spillovers refer to the vertical (buyer–supplier) and

technological spillovers that arise from clusters and networks; these

impacts can be intra-industry or interindustry (Dunning & Lundan,

2008). The empirical focus of research has been mostly on technologi-

cal spillovers (Eden, 2009). Technological spillovers are informal, invol-

untary, nonmarket transfers (Eden, Levitas, & Martinez, 1997). An

example of an agglomeration spillover is a knowledge spillover gener-

ated by geographically clustered high-tech firms in Silicon Valley

(Almeida & Kogut, 1999). Technological spillovers represent differ-

ences between social and private impacts that are not reflected in

market prices, and can, therefore, generate inefficiencies. As a result,

public policy intervention may be needed for market prices to reflect

social costs and benefits (Eden, 2009).

The extensive literature on horizontal foreign direct investments

(FDI) spillovers (in the same industry) is inconclusive; the results show

the presence of FDI seems more often than not to have no statisti-

cally significant productivity effects on domestic firms in the same

(horizontal) industry (see, among others, Javorcik, 2004). FDI-induced

performance (or productivity) spillovers take place when local firms

learn about new technologies, marketing, or management techniques

by: observing a foreign firm subsidiary (demonstration effects), hiring

workers trained by the foreign firm subsidiary (labor market impacts),

or using technologies shared by a foreign firm (technology-sharing

impacts), thereby improving their performance. Competition may

force a local firm to improve performance; however, competition may

also negatively affect a local firm, reducing its revenue. For example,

Aitken and Harrison (1999) and Javorcik (2004) demonstrated FDI

may have negative effects on the productivity of domestic firms

within the same industry. Positive effects have been found in

3

Linkages refer to relationships created by companies with other actors, such as other

companies, as well as academic and research institutions.

4

Digitalization is a process of digital transformation to improve business performance.

5

Technology (including ICT) spillovers (or externalities) are technological impacts on third

parties not directly involved in an economic transaction (Pigou, 1920 in Eden, 2009).

912 HEIM ET AL.