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This study aims to give theoretical and practical insights to potential investors who are thinking about investing in different business sectors in Uzbekistan. It investigates communication constraints during the internationalization process of Uzbekistan’s highly protected auto industry in light of its potential membership in the World Trade Organization (WTO). Using a case study approach, this study presents empirical evidence from semi-structured interviews with managers involved in the internationalization process of a joint venture between UzAuto and PSA Group. The Uppsala Model is emphasized as a conceptual framework for comprehending the phases of internationalization. The case study highlights insufficient market research and communication problems in relation to PSA Group’s unsuccessful business partnership with UzAuto. The study ultimately provides insights for organizations considering international expansion and offers guidance for navigating complexities, advocating for improved approaches to internationalization in Uzbekistan, an emerging economy that has received little research from a business and management perspective.

Introduction

In November 2017, during his State Visit to South Korea, President Mirziyoyev publicly announced the intention of Uzbekistan to become a member of the WTO (Schroederet al., 2018). The driving force behind such a turnaround was Uzbekistan’s Five-Area National Development Strategy for 2017–2021, aimed at “improving the competitiveness of the economy through deepening of structural reforms, modernization, and diversification of its leading industries” (The Tashkent Times, 2017). Such changes will eventually force economic players to exert great strain on Uzbekistan’s extremely protected automobile industry to internationalise its management systems.

Along with the adoption of international trade regulations and access to new markets, internationalization can foster the Uzbek auto industry to widen its learning of international management standards, which are historically top-down due to the influence of the former Soviet Union and a lack of proper understanding by higher-level managers.

This study attempts to understand existing management constraints during the internationalization process of the automotive industry. The study argues that to achieve excellence in internationalization, an organization’s stakeholders should be better prepared for each step of internationalization. The study aims to seek answers to the following questions: Why do companies fail in the internationalization process? How can international joint ventures be prevented from failing?

Literature Review

Uzbekistan’s Path to the WTO

The World Trade Organization (WTO) is an international organization that covers 98% of world trade and deals with global trade rules between 164 member countries (WTO, n.d.). Countries intend to join the WTO for various economic and political reasons. For some, it is about integrating their country more fully into the global economy; for others, it is about attracting more foreign direct investment; more generally, using WTO membership as a stamp of approval recognized by the international business community (Evenett & Braga, 2005).

Being a member of the WTO plays a major role in boosting goods exports (Gnangnon, 2024). The commitments made by member countries to bind tariff rates and refrain from using non-tariff barriers help to improve the stability and predictability of member countries’ trade policies (Gozgor, 2022). Furthermore, WTO membership improves member states’ governance, domestic policies, and trade-related institutions (Basu, 2008).

The WTO membership application process is complicated and often takes a long time. Applying nations must enact significant reforms to bring their national policies and institutions into compliance with WTO rules. One of the most important stages of becoming a member is forming a Working Party, which any existing WTO member can join to consider the application for WTO membership (Evenett & Braga, 2005). In addition, a nation that wants to join the WTO must hold separate bilateral negotiations with each of the member nations and reach agreements regarding tariff rates, specific market access commitments, and other policies on goods and services of the acceding country (Javorcik & Narciso, 2017). Such regional trade agreements have the potential to expand markets, strengthen integration, and foster economies of scale in regulation and investment (Newfarmer, 2006).

After almost 26 years of negotiations, Uzbekistan has realised that it is difficult to actively participate in the global economy while remaining outside the WTO. Such a prolonged process can be attributed to the developmental policies of the former Uzbek government, which hindered compliance with WTO regulations and played a critical role in slowing down the progress of the WTO negotiations. Among these policies that are impeding progress are the vested interest in having state-owned enterprises (Umirdinov & Turakulov, 2019), which is a holdover from the country’s time as a part of the former Soviet Union, and the unwillingness to confront the non-market and discretionary aspects of the economy (Pomfret, 2005). Such refusal to change the direction of its development policies remained Uzbekistan in isolation for another decade (Broadman, 2006).

Following the demise of the first President Karimov, Mirziyoyev decided to take a very different course. In November 2017, Mirziyoyev publicly announced Uzbekistan’s intention to join the WTO during his state visit to South Korea (Schroederet al., 2018). Following that, Uzbekistan is proactively pursuing its WTO accession and plans to finalise it within a couple of years. However, given its vulnerable industries, this period may differ based on Uzbekistan’s rate of WTO accession (Umirdinov & Turakulov, 2019). Joining the WTO means that Uzbekistan needs to liberalise many economic sectors, including its auto industry. If that is the case, its historically ultra-protected auto industry will eventually face immense pressure from economic agents within and outside the market (Umirdinov & Turakulov, 2019).

Uzbekistan chose Korea as a working group for its WTO accession due to Korea’s expertise and experience in the accession process. Korea successfully completed its accession to the WTO in 1995 and, since 2004, has been chairman of the working group that supports Uzbekistan’s membership in the WTO.

Choosing Korea as a working group for its WTO accession was a strategic decision by Uzbekistan to leverage Korea’s expertise and experience to facilitate its accession process. Uzbek-Korean relations have a long history, including trade, economic, and cultural ties. By working with Korea, Uzbekistan could benefit from Korea’s valuable advice and assistance throughout its accession negotiations, helping Uzbekistan navigate the complexities of the process more effectively.

Internationalization

Depending on the type of foreign economic transactions carried out, there are two types of internationalisation: internal and external (Khantaeva & Saginova, 2017). As Tsukanova (2015) defines, internationalisation is developing a company’s international operations to achieve benefits such as additional profit, strengthening competitive advantage, and acquiring knowledge.

The growing concern about internationalisation requires the development of various theories and approaches to explaining companies’ entry into internationalisation. The internationalisation process of a particular company is largely linked to the pioneering research carried out by Johanson and Vahlne (2009). In their research, the scholars proposed a gradual internationalisation approach, the Uppsala Model (UM), validated by data from four case studies of Swedish companies (Ibadullaeva, 2024). Not surprisingly, most internationalisation research is conducted in countries with small domestic markets, such as Sweden, where reaching foreign markets through internationalisation is the most important (Bashutkin, 2014).

The UM is based on the assumption that the lack of market knowledge impedes the growth of international operations. The more knowledge a company has about the international market, the fewer obstacles it encounters. The UM authors focused on industrial companies that start their international activities on a relatively small scale and gradually expand their activities abroad. They use the technique of breaking down the phenomenon of internationalisation into periods (Boguslavscaia, 2023). UM splits internationalisation success into four stages and recommends starting international expansion by entering markets based on its awareness: market learning (sporadic export), export through independent representatives, establishing a foreign sales subsidiary, and foreign production/manufacturing.

The core of the UM is that the company initially expands its presence in neighboring markets through a small entry and then gradually expands its commitment and distance to the primary market. It was found that the lack of clear market knowledge allowed Swedish companies to expand their international activities in small steps, initially expanding to geographically close countries to reduce risks.

The authors further developed the model by considering important characteristics of modern companies. However, only minimal theoretical changes were made. The most significant changes in the 2009 version were in training and maintaining trust, and in the 2017 version, the knowledge development processes were changed.

The role of UM in international business studies is inevitable. It provided a clear framework for comprehending the internationalisation process over the last forty years (Ibadullaeva, 2024). Scholars consider the UM a reliable, proven description of internationalisation as long as the algorithm underlying it is adapted to the time, context, and conditions in which world regions, countries, industries, and companies operate (Bamiatziet al., 2016). UM was examined and tested in a variety of study frameworks (Bashutkin, 2014).

Nevertheless, UM received a fair amount of criticism. As Bashutkin (2014) states, the more popular the model is, the more criticism it can receive. Some scholars point out that individual behaviour is not considered in the companies’ internationalisation process in the UM model (Felinet al., 2015). Others complain that such an approach to internationalisation is deficient in providing a comprehensive explanation and accurate prediction regarding the transition between stages (Andersen, 1993).

In response to these criticisms, Johanson and Vahlne (2009) argue that company behavior has changed since the model was built. Technological development and access to other companies’ experiences have affected the theoretical and practical aspects of the internationalisation concept (Santangelo & Meyer, 2017). As a result, previously unusual entry strategies such as international new ventures (INV) and born globals (GB) began to appear that initially formulate their supply on the world market without being tied to a specific country (Boguslavscaia, 2023).

Generally, a single model or theory cannot comprehensively assess all internationalisation problems. Most international companies are characterised by a combination of various elements of different models; a special role is played by cultural characteristics, infrastructure development, and legislative features (Bashutkin, 2014). To be theoretically sound and practically implementable, UM needs to be further improved, including its application to new empirical settings (Vahlne & Johanson, 2017).

In this study, I view internationalisation as an internal and external process from the perspective of local partners and investors. I focus on internationalisation as “bringing new foreign activities within a firm’s boundaries” (Hittet al., 1997, p. 767) and expanding foreign activities.

Method

This study examines PSA Group’s failed attempt at internationalization with UzAuto using a case study methodology. The study provides empirical data from semi-structured interviews with top managers who had significant experience in internationalization and took the lead in establishing JV Uzbekistan Peugeot Citroen Automotive (UzPCA).

Business Context

The automotive sector of Uzbekistan is one of the most dynamic sectors of the country’s economy. This is an example of Uzbekistan’s export capacity, which plays an increasingly important role in the development of foreign economic activities. This industry includes the manufacturing of private and commercial vehicles, OEMs, and spare parts. JSC “Uzavtosanoat” (UzAuto) is a holding company that controls automobile manufacturers and auto component companies. It is a former economic sector-specific government agency and a fully state-owned enterprise that was converted into a state corporation. The company offers over 26,000 jobs.

Uzbekistan is proactively pursuing its WTO accession and plans to finalise it within a couple of years. Joining the WTO means that Uzbekistan needs to liberalise many economic sectors, including its auto industry. If that is the case, its historically ultra-protected auto industry will eventually come to face immense pressure from economic agents within and outside the market.

Therefore, in this case study, the primary unit of analysis is the top management of UzAuto and PSA Group (Peugeot Citroen Automotive, France), which took the lead in the internationalization process of the Uzbek-French joint venture with UzPCA.

Organization Context

The UzAuto was looking for a foreign partner to get advanced products that meet increasingly strict legal regulations globally, such as emissions and pedestrian safety, and to offer attractive solutions for the Uzbek economy and logistics as well as the export market where UzAuto products are already launched (UzDaily, 2017).

With the Uzbek automobile market dominated by UzAuto Motors, a potential breakthrough for the light commercial vehicle market occurred, with locally manufactured, outdated products and low availability for higher loading capacities (cargo and passenger vehicles) becoming a bottleneck in the economy. Due to the steadily increasing economic growth, Uzbekistan’s light commercial vehicle (LCV) market urgently needs volume and modernisation of the LCV fleet. International companies such as PSA Group, Fiat, Volkswagen and Mercedes Benz participated in the bidding.

On May 16 2017, UzAuto and PSA Group signed an agreement to establish a joint venture in the form of a limited liability company, UzPCA. According to the presidential resolution, the authorised capital of the joint venture was 29.3 million euros. The parties also determined the conditions for implementing the investment project, costing 133.3 million euros. The enterprise’s production capacity was predicted to be up to 20,000 cars per year.

Establishing a joint venture with the PSA Group and UzAuto was a 50–50 percent joint venture. The JV was a “greenfield” project with a manufacturing plant in the Jizzakh region to produce LCVs. PSA Group decided to do business with UzPCA through its regional headquarters in the Russian and CIS countries.

President Shavkat Mirziyoyev provided the project participants with several tax and customs privileges and preferences. The services of official dealers of UzPCA for the maintenance and repair of the manufactured cars, including the prices of spare parts, units, aggregates and materials, and their sale through the trading network, were intended to be carried out without VAT. Construction and installation work at the facility and corresponding contracts for supplying technological and technical equipment were concluded.

The PSA Group was tasked with providing new technologies and intellectual property and facilitating the implementation of modern production processes and employee training. The plant was planned to operate in accordance with the PSA Group’s modern systems in production, quality, purchasing, supply and sales.

50% of parts localisation was targeted in the first year of production by attracting domestic parts manufacturers—30 large factories owned by UzAuto and more than 160 small and medium enterprises.

The PSA side nominated a few key personnel per the charter agreement: the First Deputy General Director, the First Deputy Finance Director, and the Quality Manager. The key leaders from both sides were competent in a start-up experience and aware of international business standards. They also significantly influenced the development of UzPCA’s internationalisation process. Such background experience allowed participants to compare and contrast the management style of the current case study with their previous experiences. In addition, this ensured that respondents possess a first-hand understanding of the importance of cultural contexts for internationalisation.

General Director (CEO) of UzPCA

According to the company charter agreement, UzAuto nominated the General Director (CEO) for the JV. He had over 20 years of experience in the automotive industry and predominantly held key positions. He completed a six-month intensive training and exercise program at General Motors Flint Assembly. He was fluent in Uzbek, Russian, and English.

First Deputy General Director of UzPCA

First Deputy General Director was nominated by the PSA Group. Prior to taking this position, he had 34 years of working experience in international companies and participated in internationalization processes in Hungary, Indonesia, Thailand, Uzbekistan, Germany, and Russia. Such diverse experience allowed him to understand Western and Asian culture from a business perspective.

He already had experience with Uzbek employees and people in the country from the former General Motors Uzbekistan joint venture. Based on his previous achievements, he received a very high level of acceptance and respect for his honest leadership style. He also had no language problems as he knew Russian, the most preferred business language in Uzbekistan, and a little Uzbek.

In 2020, due to some unforeseen changes, UzAuto and PSA Group announced a revision of a project concept for the construction of a joint automobile plant. On March 5, 2020, the project was completely removed from the investment program. The production facilities allocated for the project in the Jizzakh region were built at the expense of UzAuto. As for PSA Group, the French funds were not attracted to the construction of the plant.

Sample

As a sample population, the respondents for the current study were selected from top managers from partner—PSA Group and the local—UzAuto sides, who were appointed into key positions in newly established Uzbek-French JV.

Those top managers routinely communicated with local authorities in Uzbekistan and France, as well as senior politicians and policymakers. They had a significant influence on the development of the internationalization process.

All respondents had experience participating in an internationalization process before working in the current case study organization. Such background experience allowed participants to compare and contrast constraints in the management of the current case study with their previous experiences. In addition, this ensured that respondents possess a first-hand understanding of the importance of cross-cultural contexts for internationalization.

Results and Discussion

Since the focus of this study is to understand the company’s internationalization process, the semi-structured questions were created based on the UM process. A wealth of information about how businesses experienced internationalization and the stages at which constraints arise was obtained by organizing the interview into UM stages.

Market Learning

Market learning is a crucial aspect of the internationalization process, as it involves acquiring and applying knowledge about foreign markets to reduce uncertainties and enhance the chances of success. Knowledge of local market conditions allows companies to quickly adapt their strategies and operations to changing market dynamics. This learning process involves not only formal research methods but also experiential learning and building strong local networks.

According to UM, in this phase, companies can establish a local presence through subsidiaries such as dealers to gain local experience or conduct small pilot projects to test market response and gain practical insights. From the data obtained, it appeared that the PSA Group did not perform very well in this phase. It did not get to know the specifics of the Uzbek market well, understand the regulatory environment, and learn about cultural differences.

Production

Instead of using the incremental market entry mode that the UM recommends, PSA Group has chosen a radical entry mode by establishing a joint venture with UzAuto. That means partners have decided to skip the ‘Export via Independent Representatives’ and ‘To export through own organizations in the foreign market’ steps.

At the production stage, the Uzbek side noted that PCA Group had assumed that the project could be implemented without financial participation and any legal obligation to finance the project (no hard currency loan). The tool availability from the PSA Group side turned out to be tight as well. In addition, the design of the PSA production system that was to be brought to Uzbekistan was not yet ready for implementation into production. This may all be due to poor preparation and miscommunication in the market learning phase on the part of PSA Group. Because production could not be set up properly, the start of the project ended before actual production began.

After several unsuccessful attempts to improve the negotiation process with the PSA Group, UzPCA’s top managers realised that the project could not continue. As an early warning to the French side, the General Director of UzPCA sent a letter of explanation to the Vice-President of PSA Group in June 2018. In his letter, he explained the situation and brought high risks that hindered the continuation of the project. High-risk issues included financial problems, inadequate tools to start production, non-compliance with safety standards, and difficulties related to logistics.

Conclusion

In response to the growing trend of globalisation in recent years, organisations have embraced internationalisation as a proactive and strategic approach to handle associated challenges effectively. A methodical and thorough approach is needed when expanding a business internationally.

Managers need to decide what is important to internationalise and look closely at everything that can affect how it is implemented. Before beginning the internationalisation process, the following steps should be carefully considered.

First and foremost, a thorough business strategy outlining the objectives and course of an organisation’s internationalisation is imperative. The geographical, financial, and regulatory resources must all be carefully considered when creating such a strategic plan. Secondly, it is critical to consider investing in human capital and developing cross-cultural training initiatives for staff members. A competent workforce helps the organisation’s internationalisation initiatives and long-term economic growth and development. Finally, key employees who stayed in the initial stage of the internationalisation project should remain at least until the production stage begins.

The results of this study provide practical advice for organisations considering internationalisation as a business strategy and offer suggestions on managing the complexities of the process. To enhance their global expansion efforts, the research also provides experiences that companies will use as a basis for education that will ultimately support the World Trade Organization accession process.

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