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1 Introduction

The competitiveness of firms from emerging markets has come increasingly to the focus of the international business research during last decades. The scholars have attempted to comprehend the foundations of their competitiveness and whether these foundations are different from those of developed market MNEs (Collinson and Rugman 2007; Luo and Tung 2007; Demirbag et al. 2009). Although literature has addressed these issues in the context of manufacturing firms from emerging economies (Jormanainen and Koveshnikov forthcoming), service sector, and in particular IT services, received significantly less attention. Indeed, only 50 academic studies for the time period of 1971–2007 were devoted to service companies (Kundu and Merchant 2008). This proves that theoretical and empirical knowledge about the patterns and determinants of international competitiveness in the service sector are still limited and the analysis of their growth potential has yet not been conducted in proper depth (Pauwels and de Ruyter 2005). Moreover, with regard to the IT services, the existing studies have been conducted on the basis of empirical evidence from Indian and Chinese firms (e.g., Narayanan and Bhat 2009), while other contexts are clearly underresearched.

In this chapter, we aim to fill this gap by taking a close look at the nature and sources of competitive advantages of Russian IT firms. We develop a framework explaining their international competitiveness with the objective to extend the existing theories on competitiveness of service firms from emerging markets. We ask how Russian IT service firms use their strategic resources to create a sustainable competitive advantage to expand internationally. Specifically, we aim to examine (a) what is the nature of sustainable competitive advantage of Russian IT firms enabling the international expansion, (b) what are the critical resources and capabilities supporting the creation of this sustainable competitive advantage, and (c) how these IT firms organize and explore the resources and capabilities when developing strategy for international markets.

Due to the lack of previous knowledge about the studied phenomenon, we adopt an explorative empirical approach and conduct a qualitative study to shed light on the objectives of this research. Hence, our main methodology is multiple-case study while using the results of the critical analysis of the existing research as guidance in data collection process. Furthermore, we carefully account for the emerging issues during the empirical investigation to be able to extend theorizing in this field.

We include in the study those Russian information technology (IT) sector firms that focus their operations on software development and intellectual services (integration, consultancy, and outsourcing). We conduct an empirical work in three phases. First, we undertake a pilot study comprised of the personal interviews with top managers of three Russian IT companies that have operations overseas. The objective at this stage is to grasp an overall understanding about the nature and the sources of Russian IT firms’ competitive advantages overseas. Also, we attempt to understand the underlying features of Russian IT service sector. Second, on the basis of accumulated knowledge during the pilot phase, we further examine IT sector in order to locate more companies having international operations to include them into the main study. As a result, we include 30 companies suitable for a case investigation. Finally, at the third phase, we conduct personal interviews in selected companies to examine the nature and sources of their competitiveness in international operations. The respondents were either owners or top managers responsible for companies’ international operations. Also, companies’ internal documentation has been studied as an additional source of information. The empirical evidence obtained during the case investigation is used as a primary source for drawing the major conclusions of the study.

2 Internationalization and Competitiveness of Service Firms from Emerging Markets

Service firms from emerging markets are increasing their efforts to integrate into the global economy and have already started internationalization process (Panibratov 2012). Internationalization is broadly considered to be a process when a company moves from operating in domestic market to international markets (Andersen 1993; Buckley and Casson 1998). Recent studies have extensively addressed various aspects of international operations of emerging market firms in manufacturing sector context, while service sector received significantly less attention. However, it is worth noting that the growth rates of international operations in service sector have been documented to be even higher than those in manufacturing sector (Braga 1996; Svetličič and Rojec 2003). Cardone-Riportella and Cazorla-Papis (2001) have suggested that such drivers as increasingly tense competition in domestic markets, profit margin pressure, and opportunity to develop business in foreign markets stimulate a considerable growth of the service sector.

While some researchers argue that existing theoretical premises developed for manufacturing firms are applicable to service companies (Boddewyn et al. 1986; Katrishen and Scordis 1998), others suggest that direct applicability is questionable (Johanson and Vahlne 1990). Moreover, Majkgård and Sharma (1998) propose to distinguish among hard services, where production and consumption are decoupled, and soft services, for which production and consumption occur simultaneously, as they differ in the internationalization strategies. Moreover, the influence of external and internal factors on service firms’ international expansion is also argued to be different from those in manufacturing context (Erramilli 1990; Sanchez-Peinado and Pla-Barber 2006).

Further, studies that focus specifically on foundations of competitiveness of service firms overseas are even scarcer. If determinants of entry mode and incentives for the international expansion have been addressed by the literature to date (e.g., Ball et al. 2008), assessment of assets and capabilities that firms need to successfully compete in international markets was largely overlooked. A traditional conceptual model of sustainable competitive advantage (SCA) in service industries is based on the research done by Barney (1991), Coyne (1985), Day and Wensley (1988), Dierickx and Cool (1989), Lippman and Rumelt (1982), and Reed and DeFillipi (1990) and highlights a firm’s distinctive organizational skills, and resources are viewed as the source of a business’s competitive advantages in the market (Bharadwaj et al. 1993). The characteristics of services, service sector, and firm within an industry are shown as moderating the skills and resources underlying a business’s competitive positional advantages. The sustainability of a business’s competitive advantages is viewed as contingent on barriers to imitation of its unique skills and resources. Bharadwaj et al. (1993) define the specific combinations of resources that are unique to service industries and IT sector in particular. They propose that the greater the complexity and co-specialization of assets needed to market a service, the greater the importance of innovation as a source of competitive advantage will become.

The SCA approach finds that firm-specific characteristics that support successful international strategy implementation (Hitt et al. 2006). Also little is said about the specific of internal resources on which international strategy implementation is based and how it manages global operations to achieve planned results (Tallman 2001). Valuable resources must be managed accurately in terms of combination and reinforcing to achieve a sustainable competitive advantage (Barney and Arikan 2001; Sirmon et al. 2007), especially in global environment. Buckley et al. (1992) note that such characteristics of services as their intangibility, inseparability of production and consumption, heterogeneity, and perishability contribute to increasing the mobility of resources and capabilities of these firms, which makes them more willing to become quickly involved in international markets. It is also argued that to compete internationally requires companies to develop new routines and organizational processes, which imply that firms must unlearn routines rooted in domestic operations before new, internationally oriented routines can be learned (Grant 1996). Domestic firms normally develop and build up resources and capabilities at home that spread into international markets (Bilkey and Tesar 1977; Cavusgil 1980; Johanson and Vahlne 1977, 1990).

Based on literature review, we can summarize different sources of SCA in service companies. Some authors discuss innovations and technology level as main sources of competitive advantage (Hitt et al. 2006; Martinez-Gomez et al. 2010; Melia et al. 2010); others define firm-specific capabilities deriving from internal environment, namely, knowledge management practices (knowledge capital), marketing and customers operations (customer capital), financial and informational resources, corporate clients (relational capital), and management characteristics (Edvardsson et al. 1993; Bharadwaj et al. 1993; Johanson and Vahlne 1977; Tallman 2001; Hitt et al. 2006).

3 Russian Context for IT Service Sector

Aiming to fill the existing gap and considering the fact that service firms from different sectors differ in their characteristics, we focus specifically on IT services. IT (information technologies) sector is often interchangeably considered together with other segments of ICT (information and telecommunication technologies) sector. In this chapter, we emphasize that it is worthwhile to examine this segment separately as its firms’ operations are rather different in nature from those in other segments of ICT sector. Further, we suggest to distinguish between tangible and intangible segments of IT sector. Intangible segment consists of a broad spectrum of soft information technology services, whereas tangible segment focuses on manufacturing of hardware equipment and IT infrastructure. As software and service companies are shifting in their development toward a new stage of internationalization due to the increasing homogeneity in the world market, this sector is particularly interesting to study. IT services are conducted at the top end of a value-added chain when the competitive challenge is rooted in global standardization of products and operational procedures of software and IT service firms.

In Russian context, IT service represents a particular interest for investigation of international competitiveness as majority of studies have been conducted to analyze the overall competitiveness of Russian firms (Kalotay and Sulstarova 2010) and that of firms in natural-resource industry (Panibratov and Verba 2011). To our knowledge, top journals do not even fully recognize the existence of competitive capabilities of Russian IT firms to expand abroad. Nevertheless, this sector plays an important role in Russian economy, and it is worth 15 billion USD. The share of export has been estimated as 2.75 billion USD in 2009 despite the crisis (RUSSOFT 2010), and in 2010, the total net value of IT products and services increased by 23.4%.

The intangible or intellectual segment of Russian IT sector is comprised of (1) consultancy in business, IT, and information security; (2) integration (development, network integration, and distribution); (3) and operation (SW and PC maintenance, IT outsourcing, education, and training). As compared to hardware, the software production sector has been growing very fast in domestic as well as in international operations. In this sector, the Russian companies developed their capabilities in their narrow niches (e.g., IT security, speech recognition, computer-aided translation) and aimed to avoid competition with large transnational corporations in such niches as, for example, operating systems and databases. A number of Russian companies are already visible at the global market of IT outsourcing and included in world ratings. According to National ICT Sector and Policy Appraisal Report, among competitive advantages of Russian software companies are ability of Russian companies to tackle nonstandard tasks essential for troubleshooting, product development and managing high-end complex projects, and also Russia’s large pool of high-skilled professionals with mathematics and science backgrounds capable of solving complex and math-intensive problems (National ICT Sector and Policy Appraisal Report 2009).

4 Theoretical Underpinning

We ground our theoretical development in the resource-based view (RBV) of the firm as it represents a central theoretical foundation to explain the origin of firms’ competitive advantages (Barney 1991, 2001). The main premise of this approach is that firm’s rare, valuable, and inimitable resources generating a competitive advantage and thereby an above-normal rate of return (e.g., Barney 1991). We focus on two specific types of resources – knowledge and capabilities – that are argued to be a vital source of firms’ competitiveness in the global business environment (Grant 1996). This approach is particularly applicable for intangible IT sector where innovation is knowledge based and evolves rapidly. The nature of competition in this sector is rooted in the heterogeneity of innovative and organizational capabilities and knowledge across firms.

We also build on premises of the literature on internationalization of service firms that defines three groups of resources underlying the competitive and international advantage. These are firm-level resources such as market orientation, entrepreneurial orientation, and service innovation capability; management characteristics such as global mindset and international experience; and firm characteristics such as size, service type, and years in business (Javalgi and Martin 2007). However, as this framework has been developed in context of developed economies, there is a need to examine whether it can be applied to firms from emerging markets.

Further, the literature on competitiveness of emerging market firms exploring the resources and capabilities used by emerging market firms for international expansion finds that the ability to operate in environments with weak institutions (e.g., Del Sol and Kogan 2007; Cuervo-Cazurra and Genc 2008), various types of business and personal networks (Thomas et al. 2007; Kotabe et al. 2010; Manolova et al. 2010), common language with international partners (Musteen et al. 2010), and ethnic identity (Miller et al. 2008) often represents the basis of emerging market firms’ competitive advantages in developing countries and assists them in overcoming the liability of foreignness that they face when operating in developed markets. Entrepreneurial motivation has also been found to be a very important resource outbalancing the lack of education, pre-internationalization experience, and technological and managerial knowledge (Liu et al. 2008; Latukha et al. 2011). With regard to the size of the companies, the literature concludes that emerging markets’ SMEs tend to rely on their networks more heavily than large emerging market firms.

Further, emerging market firms often possess the ability to treat global competition as an opportunity to build missing capabilities and move into more profitable industry segments by adopting strategies that turn their latecomer status into a source of competitive advantage (Bonaglia et al. 2007). To achieve this, emerging market firms develop an adaptive capability to transform key resources into positive performance outcomes (Lu et al. 2010).

5 Empirical Results

The analysis of the extensive qualitative data from Russian IT service firms allowed for extending the discussed above premises on competitiveness of service sector firms from emerging economies. The results of this analysis enable to formulate the empirically based propositions regarding the nature and sources of international competitiveness of Russian IT service firms and develop an empirically grounded framework.

5.1 Propositions Development

The propositions were developed in such a way and order to provide an explanation of the research questions formulated for this study.

The first objective in our examination was to understand the nature of competitive advantages of Russian IT firms abroad and to analyze whether they are different from those of developed countries’ firms. The results indicate that Russian firms are capable of competing on the same foundations, that is, delivery of new highly sophisticated products to the foreign markets. This finding is of value to the existing research that often emphasizes the lack of technological capabilities of emerging market firms. Further, Russian firms have an additional advantage, that is, an ability to carefully match characteristics of the product and with the time of entry to the international marketplace. Hence, our first proposition is formulated as follows:

P1 : The competitive advantage of Russian IT service firms stems from their ability to develop highly innovative products which are new to the foreign markets as well as from the ability to carefully match the product and the time of entry to the international marketplace.

Proceeding with assessment of empirical data, we were able to further delineate the competitive strength of researched firms. It appears that an ability to differentiate the products’ characteristics targeted for developed and developing markets according to the local needs and level of development represents the other competitive advantage of Russian IT service firms. We summarized this finding as:

P2 : The competitive advantage of Russian IT service firms stems from their ability to develop a comprehensive and complex products to satisfy a broad range of customer needs in developed and developing markets.

The other important foundation of the Russian IT firms’ competitive advantage originates from their ability to provide to foreign customers a full range of supporting services at the lower price if compared with the international players. Hence, the third proposition of the study is as follows:

P3 : The main competitive advantage of Russian IT service firms stems from the provision of competent supported services to the foreign customers at the competitive price.

Lastly, the important strength of Russian IT service firms has its roots in the fact that their owners are highly ambitions, proactive, and risk-accepting individuals who have succeeded to establish an efficiently operating management team having similar strategic orientation and vision. Hence,

P4 : The competitive advantage of Russian IT service firms stems from pro-activeness of owners in searching the paths for international growth.

Further, we have proceeded in the analysis toward the understanding of sources for building mentioned above competitive advantages. The empirical evidence shows that the solid technological knowledge acquired from the home environment has allowed for development of advanced products and services to ensure competitiveness in foreign markets. Thus, we formulated the next proposition as:

P5 : The important source allowing for building competitive advantages of Russian IT service firms is strong professional expertise of the technical personnel resulting from the high efficiency of the Soviet educational system in these specializations.

However, at the same time, there is a negative influence of the home environment, which could be defined as a source or push factor for dedicating efforts toward international expansion. The respondents have clearly indicated that Russian market is often not ready for the consumption of the advanced IT products due to a lack of supporting infrastructure and services. Hence, our last proposition is as follows:

P6 : The source that incentivizes for building competitive advantage internationally is a lack of readiness of domestic market for top innovative products.

5.2 Framework Development

On the basis of the formulated above propositions, we have developed an empirically grounded framework that graphically shows the main arguments of the study. Figure 1 illustrates how the specific types of resources influenced building a sustainable competitive advantage by Russian IT service firms in their international expansion.

Fig. 1
figure 1

Empirically grounded framework

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6 Contributions

The contribution of this study is threefold. First, we extend the theorizing on international competitiveness by outlining the nature of competitive advantage of service forms from emerging economies. Hence, we contribute to the debates whether emerging market firms are distinctive in their international strategy or comply with the logic of developed market firms. Second, we bring more knowledge about the behavior of Russia firms that is currently one of the less-researched contexts in the field of international management. Third, we provide important conclusions for policy makers how to provide support for IT companies for the international expansion.

Overall, this chapter draws attention to the fact that firms from emerging markets possess a solid technology competitive advantages that allow them to become strong rivals in international business arena. This observation should raise attention of firms from developed market and to assist in planning of the further strategic expansion as well as in development of new capabilities to compete against new rivals appearing in the global business arena.