Reasons for the Growth of MNEs from Emerging Economies from a Theoretical Perspective - Essay Example

?Growth of MNEs from emerging economies from a theoretical perspective As the term itself explains, MNEs are Multinational Enterprises which operate in many nations as part of their internationalizations strategy. Organizations which operate in number of countries or in particular organization that “controls and operates business establishments in at least two countries” are known as MNEs. (Anthony). Barlett, Ghoshal and Beamish (2008) provide a similar definition to MNEs, by stating MNEs are “organizations that have substantial direct investment in foreign countries and actively manage those operations and regard those operations as integral parts of the company both strategically and organizationally.” However, the same type of organization are also referred by other term as well like international firms, multinational companies (MNC), transnational or 'global', to supranational, etc in common day usage, in business circles and in various articles and books. This being the case, the term MNEs are used in particular contexts. That is, as pointed out earlier, the organizations that operate in many countries are not simply a MNC or MNE in just the legal sense. Instead, they are “an aggregate group or network of corporate and non-corporate entities, established under the domestic laws of different nations and thereby endowed with different nationalities” (Zurawicki 1979). In that context, the term enterprise or MNE appears to be the most suited for covering all the many and varied forms of corporate and operational interrelationships. (Zurawicki 1979). Thus, due to their extensive operations, they are being influenced by various factors from their origination to every day functioning. This is particularly visible when the MNEs are divided into MNEs from developed countries and MNEs from emerging or developing countries or economies. That is, it is a well known fact that economic advantages, military strength, technological capabilities, even geographical strength and other aspects differentiate and categorize countries of the world as developed, developing and poor countries. This categorization is also visible among the business circles, with the organizations categorized into MNEs from Developed countries (DMNEs for short) and MNEs from Emerging countries (EMNEs for short). According to Rugman (2009), “currently the world's 500 largest MNEs dominate world trade and investment, and in terms of FDI the world's largest firms account for 90 percent of the world total.”. As these MNEs operate in many countries by having subsidiaries, joint ventures, etc., they are making positive impacts all over the world. That is, many MNEs from emerging and least developed countries are also working as part of this large MNE system. “It is through the activities of this set of very large MNEs that less developed countries are being integrated into the world's economic system.” (Rugman 2009). But, at the same time, when the positions of these DMNEs and EMNEs are compared, it appears that EMNEs are positioned well below DMNEs. That is, although EMNEs from many countries including China, India, Brazil, etc, etc. have increased in numbers in the recent decades due to various accentuating factors, they constitute only minority among the largest firms of the world. “Although their numbers have increased, developing-country firms account for only between 5 and 8.4% of the largest public firms. Moreover, they tend to be present at the lower end of the ranking” (Cuervo-Cazurra and Genc 2008). Even then EMNEs are coming up with optimal strategies to strongly compete with the DMNEs, and in many cases are even overtaking the DMNEs. This paper focusing of these EMNEs will first discuss how certain historic, geographic, cultural and institutional factors acted and are still acting as the disadvantages for the EMNEs, and then will discuss how notwithstanding these disadvantages, the EMNEs are able to compete with established DMNEs through effective strategies. One of the main disadvantages which have been faced by the EMNEs and are still being faced is the historical ‘baggage’ of being colonized territories, with the currently developed countries being the colonizers. The reasons for this uneven development in these developing or least developed or Third World countries are plenty, but one of key reason is the historical exploitation of the resources of those countries by the colonizers for their own development. Due to the seventeenth century scientific revolution, and the eighteenth-century enlightenment and nineteenth century industrial revolution, Western countries set on the path of success through their hard work and geographical explorations. At that time, only many European countries particularly United Kingdom reached the zenith of their development. “The United Kingdom was the lead country in terms of labor productivity in the nineteenth century and played a strongly diffusionist role in world development through export of capital and free trade”. (Maddison 2005). Although, one perspective is, it is due to the ability of Britons that they were able dominate the world, it is also a known fact, that UK’s development is directly proportional to many Asian and African countries exploitation.” (Salomons 1999). During colonization, after defeating the native rulers and crushing any resistance, the Western countries did not stop with administration; they went on to exploit resources, both natural and human for the benefit of their own industries. All these countries had plentiful natural resources like iron, gold, cotton, etc., but all were used as the raw materials for the emerging industries in western countries including UK. That is, with the industrial revolution happening side by side with imperialism, the industries of England and other European countries were in dire need of raw materials. The industrial revolution is the term given to the heightened activity that was witnessed in various industries in the Great Britain in the 19th century. (Ling 2002). All the industries in western countries functioned in full swing during the Industrial revolution, there by positively impacting the British economy and importantly elevating the capability of the Western industries or companies. That is, many of the Western companies or DMNEs, which developed during the period has become some of the stronger companies, particularly companies in the manufacturing sector, textile sectors, etc. However, on the other side, these Third World countries or Asian and African countries became the unwilling supplier with no benefits to them. This is one of the crucial things, why most of the Asian countries and African countries could not raise above poverty and underdevelopment and become a rich country. This had direct correlation on the development of indigenous enterprises. With minimal resources to tap in their own country, there was no incentive for individuals to start industries on the scale of Western countries, let alone MNEs. “Capitalism as a world system has developed unevenly, with the operations of the “free market” determined by unplanned but (after analysis) “lawful” tendencies of accumulation of surplus value.” (Juan 1998) However, when viewed from another perspective, it can be said that imperialism and the related exploitation are not only reasons for the under-development of these countries and their indigenous industries. Many domestic or indigenous issues also contributed towards the restricted development. In the external environment of an MNE, the political factor will play a key in shaping the MNE. Only if the political situation is stable, with the government guaranteeing as safe environment for the firms, the firms can establish their infrastructure and carry out their operations. However, in sizable number of developing countries like Russia, South Africa, Egypt, etc, there have been a lacunae regarding stable government. In addition, the official institutions in those countries were considered inefficient and corrupt to support the development of indigenous industries let alone MNEs. “In the case of developing-country MNEs, these firms emerge in countries that are characterized by poorer governance compared with developed countries.” (Cuervo-Cazurra and Genc 2008). That is, although China and India are believed to be the investor friendly countries, with a stable political setup, which is facilitating and indulging in economic reforms, liberalization of rules, etc. many of its government institutions are riddled with Red Tapism and corrupt practices. This restricts the development of many EMNEs, and this particularly visible in China. “China is, of course, vaster than the other countries combined, but its export-oriented companies are small. One reason for the atomization is pervasive mistrust and corruption, plus a shaky rule of law”. (Fallows 2007). Thus, from the above analysis, it is clear that EMNEs had and are still having key historical and political disadvantages, when compared to DMNEs, and that is negatively affecting its performance and global reach. “Developing-country MNEs tend to be less competitive than their developed-country counterparts, partly because they suffer the disadvantage of operating in home countries with underdeveloped institutions.” (Cuervo-Cazurra and Genc 2008). Notwithstanding this fact, EMNEs are making a strong impression aided by certain global factors and importantly by coming up with optimal innovations and management strategies. Global factors in the sense, with the advent of globalization and the liberalization of the WTO regimes, many countries gave up their protectionist regime and opened up their markets. For example, China brought down its Iron Curtain, while Russia opened its market after the collapse of the communism. “Domestic and foreign markets were more open in this period than in earlier decades, following the collapse of Communism, the conclusion of the Uruguay Round trade deal, and the creation of the World Trade Organization.” (Ramamurti 2008). This not only allowed the entry of foreign firms into those countries, but importantly also facilitated the outflow of many indigenous firms to other countries, thus leading to the formation and proliferation of EMNEs. “Globalization is one key environmental factor, which has brought many opportunities to the organizations, particularly Multinational Companies (MNC) to invest in an effective manner and importantly have a profitable venture.” (Knowledge Management 2007). Among the many economic based movements, globalization is the one which had and is still having major impact on the economic development of many countries and importantly on the emergence of MNEs including EMNEs and DMNEs. Economic part of globalization is the key because with the whole world becoming a kind of global village, barriers between the countries are broken with integration happening mainly in the economic aspects. In this scenario, organizations using the globalization plank, have entered and also entering various business sectors in various countries thus leading to the establishment of many MNEs. “Globalization is widely seen to be the dominant tendency of our time. It is a shorthand expression for a variety of processes encompassing worldwide integration of financial systems, trade liberalization, deregulation and market opening.” (Mathews 2006). China is one of the key emerging countries, which optimally tapped this globalization to the advantage of its indigenous firms, thereby leading to the formation of strong Chinese MNEs. That is, even while allowing foreign investments, as part of globalisation (or ‘reverse’ globalisation) Chinese companies and its products optimally entered many countries’ market, striking rich benefits. Its cheap as well as quality products received good response from many countries and its people, thereby generating a lot of revenue for the Chinese MNEs. That is, although Chinese MNEs moved into foreign territories in a delayed manner and had a late mover disadvantage. The MNEs compensated by optimally using its net advantage of quality products at cheaper prices. “Firms that overcame these challenges often did so by turning their late-mover status into a net advantage rather a disadvantage, not only in other emerging economies but sometimes even in developed economies—which explains the significant amounts of “up-market” FDI by EMNEs” (Ramamurti 2008). Thus, with the aid of globalisation, China had been able to nurture its indigenous MNEs with global reach and appeal. “Within the high value-added, high technology, strongly branded market, a sizeable number of giant firms are created as a form of 'system integrators'” (Nolan 2002). Apart from these globalization factors, EMNEs are able to emerge and compete in the global market due to the advancing technologies. That is, “radical changes in computing technology and the rise of the Internet, dramatically altered the boundaries of the firm and the costs of doing business across borders.” (Ramamurti 2008). Thus, it is clear that although EMNEs faced historical and political barriers, globalization and other favorable aspects actually lowered the entry barriers for the MNEs from the emerging and developing countries. The MNEs for their part optimally tapped these opportunities by coming up with effective innovative and entry strategies. Not only the EMNEs produced quality products, but also innovative products and that helped them to not only preempt the entry of foreign firms into their domestic territory, but also helped them to taken on the DMNEs in the foreign markets. That is, many EMNEs by adapting the successful technologies came up with products that were suited to the customized or special needs of the local customers, and at the same time also made key modifications in their foreign exports so it fulfilled the expectations of the foreign customers. This was validated by Ramamurti (2008), who stated, “local adaptations of this sort provided EMNEs defense against foreign competitors in the home market, but equally important, they provided a basis for internationalizing into other low-income emerging economies.” (). For example, India’s automakers Tata and Mahindra & Mahindra’s keeping in mind the rugged terrain of India (without proper roads) came up with a range of indigenously-designed rugged SUVs, which had innovations and provisions to perform in those conditions. This innovative strategy preempted the influence and success of the Foreign made SUVs including that of General Motors, Toyota, etc. More importantly, understanding how the African and Latin American countries also have the same geographical terrain, exported the same SUVs with sizable success. On the same lines, “Brazil’s Marcopolo, which made high-quality buses suited to emerging markets, sold its products in 103 countries and enjoyed a global market share of 7-10 percent” (Ramamurti 2008). Apart from these innovations, EMNEs are entering the sectors, in which the DMNEs do not have a major historical advantage or strong hold. For example, the Information Technology sector was of recent origin and so it does not get influenced by the historical factors, and thereby provides EMNEs a level-playing field to compete. This is one of the reasons, why many successful IT forms are from the emerging countries like India, China. Globalization in hand with technology particularly IT has first ‘flattened’ the competitive field in IT sector, secondly, made geographical boundaries invisible and thirdly, aided many EMEs to develop. India has number of successful MNEs including Infosys, TCS, Wipro, etc., which have expanded operations all over the world and are making strong impacts. The Chinese companies for their part with a global and superpower perspective took over few iconic foreign brands such as the IBM think pad brand. From the above analysis, it is clear that due to certain historical and political factors, EMNEs had a disadvantage when it came to competing with the DMNEs. However, with the aid of globalization and in-house optimal strategies, the EMNEs are making sizable impacts on the global scenario. Firms or particularly Multinational Enterprises (MNEs) as their name indicates and as part of their operations will not remain “static”. They will have to break not only geographical boundaries but also their limited economical boundaries in order to utilize the opportunities that may be found in markets, other than their own domestic markets or parent countries. References Anthony, D. Definition of a Multinational Enterprise, [Online] Available at http://www.ehow.com/facts_6149397_definition-multinational- enterprise.html(Accessed on May 1, 2012) Barlett, C., Ghoshal, S & Beamish, P., 2008, Transnational Management, Text, Cases, and Readings in Cross-Border Management, McGraw-Hill Cuervo-Cazurra, A and Genc, M., 2008. Transforming disadvantages into advantages: developing-country MNEs in the least developed countries, Journal of International Business Studies, vol. 39, pp. 957-979 Fallows, J., 2007, China Makes, The World Takes, [Online] Available at http://www.theatlantic.com/doc/200707/shenzhen(Accessed on May 1, 2012) Juan, ES., 1998. 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