Multinationals and Emerging Markets - Case Study Example

Business: Case Analysis Multinationals and Emerging Markets Multinational firms willing to venture in emerging markets are faced with a myriad of challenges that include; globalization, which has been a major issue since over the past few decades it has become tougher to identify internationalization strategies and to decide which countries to do business with, thus making it difficult for most multinational corporations to develop successful strategies in emerging markets. There is also the absence of specialized intermediaries, regulatory systems and contract-enforcing mechanisms in emerging markets, which hampers the implementation of globalization strategies. Thus emerging markets lack or have got underdeveloped soft infrastructure which firms in developed countries take for granted. These two challenges are important because multinational firms need to have prior and basic knowledge about the emerging markets they intend to venture in. Thus lack of this vital information will lead to them sticking to the strategies which they have always deployed, which emphasize on standardized approaches to new markets while sometimes experimenting with a few local twists, thus making many multinational corporations struggle to develop successful strategies in emerging markets. It is also important to have soft infrastructure for informing the multinationals reliably about customer preferences so that they can design products to particular needs and thus increase people’s willingness to pay. Soft infrastructure is also crucial in the execution of business models that the multinational firms have. The situation in emerging markets is not all doom and gloom and there seems to be some light at the end of the tunnel. There are several strengths and opportunities that multinational firms can capitalize on, in emerging markets. Multinational corporations should also be cautious of the weaknesses and threats that are associated with these markets. The following is a discussion of the above four major points that multinational corporation thinking of doing business in the emerging regions should critically analyse. Strengths Openness-Multinational corporations can leverage a lot if they exploit economies that are open and those that especially welcome direct foreign investments, even though companies can get into countries that do not allow foreign direct investment by entering into joint ventures and partnerships and licensing with local players. For instance executives do believe that China is an open economy because the government welcomes foreign investment but that India is a relatively closed economy because of the luke-warm reception the Indian government gives multinationals. Thus the more open a country’s economy is, the more likely global intermediaries will be allowed to conduct their business. Multinationals therefore will always find it easier to operate in markets that are more open because they can use the services of both the global and local intermediaries. This is a very strong leverage tool that multinationals can utilise to maximize on their profits. Openness also affects the developments of markets. If a country’s capital markets are open to foreign investors, financial intermediaries will become more sophisticated. This has taken place for example in India, where capital markets are more open than they are in China. Opportunities The following are some of the opportunities that abound in emerging markets that can be exploited by multinational corporations as they seek to expand in these new frontiers of business; Capital markets-The capital and financial markets in developing countries are remarkable for their lack of sophistication. Apart from having a few government-appointed regulators and few stock exchanges, there aren’t many reliable intermediaries like credit-rating agencies, investment analysts, merchant bankers or venture capital firms. It is this window of opportunity that multinationals can exploit and raise debts or equity capital locally to finance their operations. In Brazil, for instance there is a good banking system and healthy market for initial public offerings and wealthy individuals can invest in offshore accounts. On the other hand Russia has got a strong banking system, dominated mostly by state-owned banks, the consumer credit market is booming and the IPO market is growing. India has got a well developed banking system and multinationals can rely on local banks for local needs. China however has got an underdeveloped local banking system and equity markets. Foreign companies have to raise both debt and equity in home markets. Threats Political and social systems-It is a fact that a country’s political system affects its product, labor and capital markets. In socialist societies such as China, for example workers are not allowed to form independent trade unions in the labor market which has a direct impact on wage levels. A country’s social environment is also crucial. The thorny relationships between regional, ethnic and linguistic groups in emerging markets also affect foreign investors. In Malaysia for example foreign companies should enter into joint ventures only after checking if their potential partners belong to the majority Malay community or the economically dominant Chinese community, so as to avert possible conflict with the government’s long standing policy of transferring some assets from Chinese to Malays. Such policies came into existence after the 1969 riots which were caused by the tension between Chinese haves and the Malay have-nots. This is a possible threat to the multinationals, since it is a possible disruption of smooth operation of business. Weakness Product markets-The most notable weakness in emerging markets is that companies in emerging economies struggle a lot to get reliable information about consumers, especially those with low incomes. Thus developing a consumer finance business is tough, since data sources and credit histories that firms draw on in the West are non-existent in emerging markets. This is a major weakness since market research and advertising are still in their infancy in developing countries and it’s a big challenge finding the deep databases on consumption patterns that allow companies to segment consumers in more developed markets. Due to lack of consumer courts and advocacy groups in developing nations, many people feel that they are at the mercy of big companies. Finally for multinationals to survive in the emerging markets, they can adapt any of the following alternatives; foremost, they can either adapt their business model to countries while keeping their core value propositions constant, secondly they can try to change the contexts, and thirdly they can stay out of the countries where adapting strategies may be uneconomical or impractical. The best recommendation for multinationals venturing in emerging markets is that they should modify their business models for each nation. They may also have to adapt to the voids in a country’s product markets, its input markets, or execute both. However multinationals should retain their key and core business propositions even as they prepare for adaption of their business models. If in any way they make shifts that are too radical, these firms may lose their competitiveness and advantages of global scale and global branding. When companies tailor strategies to each country’s contexts, they can capitalize on the strengths and opportunities of specific locations. Before adapting their approaches, however, multinationals must compare the benefits of doing so with the additional coordination costs they’ll incur. References Khanna Tarun, Palepu. G.Krishna,Sinha Jayant (2005). Strategies That Fit Emerging Markets. Harvard Business Review , pg 63-76. Case Analysis Read More