Emerging Multinationals - Essay Example

? Companies from emerging markets are better equipped to conduct business in other emerging markets Date of Submission Companies from emerging markets are better equipped to conduct business in other emerging markets. INTRODUCTION: The essay focuses on the multinationals of emerging economies and their increasing importance in today’s economy due to their extensive globalization and the scale of demand they cater in emerging and developed markets. It further discusses the beneficial factors that only an emerging market, like the one from which the multinational comes from, can provide to these companies when compared to the developed markets. Emerging markets could be referred to the low income generation economies, or could be the developing markets or the economies currently in the growth stage. The emerging markets have shown more growth in the recent years, as compared to the more developed markets and economies. In such economies every opportunity is exploited to its fullest and such markets are important strategic factors to be considered by the companies willing to grow in emerging economies. In these economies the higher growth leads to higher returns and higher demand for investment and capital which further leads to favorable movement in the flow of capital and currency alignments. The growth in incomes and products are also seen in these economies which are important detriments of patterns of demand and pricing of products. These days the most significant strategic choice faced by the global companies is investing in the right emerging market. (JAIN. 2006) It is estimated that till 2050 the BRIC (Brazil, Russia, India, China) economies will become large forces in economy of the world. According to these projections based on growth in GDPs, income per capita and currency movements, if everything goes right these emerging economies will become greater than G6 in US dollars terms. It is expected that by 2050 the BRIC’s exchange rates would appreciate by 300 percent and per capita income could reach to about US$30,000. There are underlying assumptions to these projections like BRICs should maintain policies and develop institutions that support and foster growth. Due to these assumption and high level of risks faced by these countries, there are chances that these projections could go wrong due to policy change or any other factor that can affect the economy adversely. (JAIN. 2006) EMERGING ECONOMIES AND MULTINATIONAL CORPORATIONS: Due to such enormous effect of BRICs on world’s economy and the impact it would have in future years, it has become increasingly important for the Multinational Corporations (MNCs) all around the world to realize the importance of these emerging markets and the benefits the investment in these can provide. The major characteristics that attract the investors in these markets are increasing demand and group of wealthy people, educated work force and opportunities for low cost production. Many large MNCs such as P&G, IKEA, Coca Cola, HP etc have realized the importance of these markets and have expanded tremendously in these markets. (VAN DE KUIL. 2008) Out of BRICs, India and China are the strongest in the race of these emerging markets. It is estimated that in next 20 years these both countries will become more than the size of mature countries like UK or Japan. Today’s advances markets and nations will lose their position and a drastic shift in spending would provide opportunities to global markets. China and India both have world’s largest population which together holds 37% population of the world. The population living in the mid-income segment of these both countries is constantly growing which means a demand of products and services is growing rapidly. (VAN DE KUIL. 2008) REASONS TO ENTER EMERGING ECONOMIES: Many MNCs have strategically planned to enter these emerging markets due to various reasons. Firstly it has become hard for the companies to grow in the mature markets; therefore the companies are now looking for markets other than USA, Europe and Japanese which have more potential to grow. They feel that emerging markets are providing more opportunities to exceed as compared to the more developed markets. The profit margins and the sales volumes are growing immensely in the emerging markets, resulting in companies taken a serious interest in such markets. Moreover, emerging markets have become more commercial over the years, due to increased competition by local and foreign companies to expand in such markets. It has been observed that the growth level in emerging markets is exceedingly more as compared to the growth level in more developed markets. For companies, it is easier to acquire the market share in emerging markets as compared to more developed markets, as the level of competition is still not as aggressive in such markets, and there are no defined boundaries to entry and exit or to compete in emerging markets. So emerging markets in it self presents a lot of profitable opportunities to the companies to grow and to acquire a major market share in such markets. (PACEK & THORNILEY. 2007) To be operative in an emerging economy or market, it is important that it forms an important part of company’s strategy and the senior management should support the decision of being operative in these markets as part of the company’s long term strategy. The strategies required to operate in an emerging market is different from that of in mature markets and under developed markets. In emerging markets a company is expected to go fast, make massive market share and sale leaps, for which a company is required to be flexible, focused and should be ready to invest. The investment in emerging markets is preferred to be done on the decentralized basis in which regional or country managers takes decisions about expansions, spotting opportunities etc. The success in these markets depends on well researched market entry, development of customer relationships based on trust and loyalty, market expansion, restructuring and reengineering of different components of business and expenditure in research and development along with market research in order to be well informed about the various market segments. (PACEK & THORNILEY. 2007) MULTINATIONALS FROM EMERGING ECONOMIES: Recent researchers showed that FDIs and investment of MNEs are a two way process. The typical concept is that a developed country like USA, European and Japanese enterprises build upon in their home regions and strengthens by firm specific advantages and expansion into other regions by operating a strong network of subsidiaries. Recently it has been found out that the foreign subsidiaries which are operative in emerging markets can be a source of improvement in the macroeconomic structure of the host country. The upgradation of the macroeconomic structure leads to the emergence and development of local MNEs. This was seen in Canada where they relied on inward FDI mainly from USA to develop their own MNEs. The upgradation of macroeconomic infrastructure in countries like India, Taiwan, China and Singapore is now leading to the emergence of MNEs in host economies. (FREYTAG. 2011) MULTINATIONALS FROM EMERGING ECONOMIES IN EMERGING ECONOMIES: There are many MNCs from emerging companies which are making their landmarks in global economy. These have not only invested and expanded in developed markets but also have occupied large market share in emerging economies. Since the emerging markets are attractive markets for FDIs and investments throughout the world, these MNCs from emerging economy should not miss a chance to develop through these economies too. These MNCs compete on the basis of different country and firm specific advantages along with the investment in innovation and research and development. MNCSs of emerging nations like from Korea Hyundai, Daewoo and Samsung, Tata Group from India, from Brazil Petrobras and Embraer and Acer from Taiwan have become leading and global players in world’s economy. Most of the companies internationally wants to invest in emerging economies due to its cost advantages, especially in China, however Chinese economy in the meanwhile is looking for even cheaper markets in emerging economies which is evident by its investments in bicycle production in Ghana and video players in South-East Asia. Similarly other countries have even adopted strategies like those of Chinese like a Malaysian textile company Ramatex has invested in a plant in Namibia where all its manufacturing takes place for the world’s garment market. It is assumed that companies from emerging and underdeveloped economies face hardships and find it difficult when they expand internationally as they are disadvantaged in comparison with local firms in foreign markets. These companies can learn and benefit from their experiences in their home country as the emerging nations have challenging market and business conditions with highly demanding customers and pressures of low cost strategies, these challenges give these companies an advantage to compete anywhere in the world. These companies both geographically and culturally are usually closer to the host country. It is often seen that at times MNCs from emerging nations do better than those of developed nations. The MNCs from emerging nations focus on cost cutting strategies as they are not cash rich, they even operate with low overheads. They do not even advance tremendously in technology so their focus is better suited to markets in other emerging economies. They are more accustomed to operate and invest in countries with unpredictable and unstable political and regulatory environments. (GAMMELTOFT. 2007) The MNEs from emerging economies expand and grow in foreign markets on the basis of firm-specific advantage (FSAs). They don’t only compete on the basis of FSAs but also on the basis of home country’s country specific advantages (CSAs). In order to compete in the foreign markets where there is a cost of being a foreigner and the costs associated with operating in distant lands, it is necessary for companies to have resources which are valuable and provide them with a competitive edge. These country specific advantages vary from country to country and the emerging countries have their unique country specific advantages for e.g. the MNEs in Brazil, Russia and South Africa have access to vast resources, the MNEs in China and India took benefited from large home markets and availability of low cost labour while in Israel many MNEs benefited from highly skilled engineers and scientists. Further for Indian MNEs operative abroad large Indian workforce with English language speaking skills and a large numbers of Indians living abroad created advantage for these MNEs to export knowledge based services to high cost countries. China had an advantage of the authoritarian system in which decision making is easy and Mexico benefited from its easy access to US markets. (RAMAMURTI & SINGH. 2009; FREYTAG. 2011) FSAs are usually associated with MNEs in developed economies which mostly include factors like powerful brands, technology, managerial capabilities, dissemination of information, knowledge and process etc. However problem arises when FSAs are to be recognized for MNEs in emerging economies as they do not possess all these factors. Many theories suggested that MNEs from emerging countries have FSAs that can provide them a competitive advantage in other emerging markets. Such FSAs are identified as: Products according to needs of emerging markets: One of the FSAs seen in the MNEs of emerging markets is their flexibility of adopting new technology and altering the product according to local customers needs by making them more affordable, also these companies can adapt in moving in products which are well suited to conditions prevailing in emerging markets such as poor infrastructure and absence of after-sales service. This condition not only provides these MNEs to compete in home markets but also in other emerging economies. For e.g the examples of this FSA is Chinese MNE Haier which produced washing machines better suited to small loads but also were useful in washing vegetables, India’s Tata Group produced trucks that were famous for their rough use and low maintenance, later it also launched world’s lowest priced car Nano, Brazil’s Marcopolo sold its high quality buses in many merging countries and enjoyed a great market share. (RAMAMURTI & SINGH. 2009) Adversity Advantage: The emerging markets MNEs have an advantage over foreign MNEs in other emerging markets as they possess an ability to function in the difficult conditions of the emerging markets where the infrastructure is underdeveloped and in a poor state. Usually the emerging economies are associated with political and regulatory uncertainties corruption, bureaucracies, weak educational systems etc. Since MNEs from emerging markets have dealt with these institutional voids since birth, it is easier for them to tackle these in other emerging markets too. (RAMAMURTI & SINGH. 2009) Technological Advancements: MNEs compete in the home country and in the host country on the basis of technology. It is seen that if MNEs from emerging countries have advanced technological background it may affect MNE’s international expansion decisions that is to expand into emerging or developed markets. It is argued that the assets MNEs posses in the home markets can only be exploited in the foreign markets if a proper infrastructure for there exploitation is provided. Mostly developed countries are able to provide such an advanced structure to the MNEs from emerging markets; therefore MNEs which have greater assets of technology should invest in developed markets. However, MNEs from emerging countries with relatively low technological advancements can compete easily with other MNEs in the other emerging economies as they are even less advanced as compared to developed nations where competition is severe regarding technology. (KIM. 2008) Marketing Assets: The value of marketing assets and characteristics of consumers is not the same in home and host countries. Institutional infrastructure in any country plays a significant role in developing marketing assets. Additionally local competition and supporting industries can also affect the development of marketing assets. Since the developed counties have a stronger institutional infrastructure than the emerging countries, therefore the MNEs may have harder time competing in developed economies as compared to the emerging economies. It was also seen in US that purchasing rates of brands from emerging economies was much lower than developed economies and a negative country of origin bias was seen. However an emerging economies brand name might be better received in other emerging country as compared to develop countries. Therefore “emerging economies’ MNEs with high level of investment in marketing assets are more likely to expand in other emerging economies than into developed economies.” (KIM. 2008) Product diversification: MNEs from emerging markets with high level of product diversification due to its ability of replicating their product diversification strategies in other emerging economies may consider expanding into an emerging market. Due to institutional similarities found in the emerging markets the cost of obtaining information regarding product markets and market information and pursuing a product diversification strategy may be low in emerging economies as compared to the developed economies. In developed economies an MNE from emerging economy may not greatly benefit from replicating its product diversification strategy in the developed market. Additionally the information processing needs and demands needed to know about the learning effects in businesses in developed economies may become really high. Therefore the MNEs from emerging economies with greater level of product diversification have lesser chances to expand in developed markets as compared to emerging economies. (KIM. 2008) Business Group Affiliation: Emerging economies are usually made up of two kinds of organizations, first being firms that are affiliated with business groups while the second one being the independent firms. The firms affiliated with business groups tend to share resources and conduct international transactions with each other within a group. Such firms are well equipped with information and have experience for the operation in the foreign markets and get identify opportunities in the foreign market easily. These firms even use their regional offices to coordinate with foreign subsidiaries of their group affiliated firms. Therefore when compared to independent firms these group affiliated firms are in a better position to conduct business in a globalized network, where it is easier to operate and benefit from the interorganizational network of group affiliated firms and even the foreign subsidiaries of these affiliated firms that are dispersed globally. Due to these characteristics of the firms affiliated with business groups such firms expand and grow more in developed economies. However, usually the MNEs from emerging countries are independent firms as the merging economies are not in the phase that owns large business groups, affiliated firms and foreign subsidiaries. Therefore it is feasible for the independent firms form emerging markets to invest in emerging markets. (KIM. 2008) CONCLUSION: Emerging markets of today are the future developed markets of tomorrow. These markets and counties are advancing at a very rapid pace with constant growth in their GDPs and per capita income. These countries and markets have high level of demand due to economic factors which are contributing towards its growth unlike the developed markets which are now in the mature phase. Due to such rapid advancements the business in the emerging nations is also boosting and recently many multinationals have emerged from developing counties like BRICs, Mexico, South Africa, Korea etc. These companies have an option to expand in developed or in developing countries like themselves. The expansion and growth of a firm depends upon the strategy it chooses to operate globally, however the economies of emerging markets can be very beneficial for MNCs from emerging nations. Bibliography KIM, H. (2008). Three essays on international diversification of firms in an emerging economy: entry and exit decisions. Thesis (Ph. D.)--Arizona State University, 2008. FREYTAG, A. (2011). Securing the global economy: G8 global governance for a post-crisis world. Farnham, Surrey, England, Ashgate. RAMAMURTI, R., & SINGH, J. V. (2009). Emerging multinationals in emerging markets. Cambridge, UK, Cambridge University Press. GAMMELTOFT, P. (2007). Emerging Multinationals: Outward FDI from the BRICS countries. PACEK, N., & THORNILEY, D. (2007). Emerging markets: lessons for business success and the outlook for different markets. London, Profile Books in association with the Economist. VAN DE KUIL, A. (2008). Strategies of Multinational corporations in the emerging markets China and India. Mu?nchen, GRIN Verlag GmbH. http://nbn-resolving.de/urn:nbn:de:101:1-2010083021577. JAIN, S. C. (2006). Emerging economies and the transformation of international business Brazil, Russia, India and China (BRICs). Cheltenham, UK, Edward Elgar. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=274909. Read More