International Business in Emerging Markets - Research Paper Example

Topic:  International Business in Emerging Markets Introduction An emerging market usually refers to a developing market economy with low – to middle per capita income. Countries in this category are usually undertaking a process of economic development and reform. A vast majority of countries in the world fall in to this category. An important feature of more emerging market is that they are in the process of moving from closed economies to more open economies. According to Kuepper(2011) “Emerging markets are broadly defined as nations in the process of rapid growth and industrialization” A part of this process, emerging countries generally experience rapid growth in both local and foreign investment. While increased foreign investments bring much- needed jobs to the emerging markets, local firms that previously faced little competitions are now faced to compete with international firms. The shift of global economic power to the emerging markets has presented a number of fundamental challenges to mangers of multinational companies. With the fast emergence of the middle – market segments across the emerging markets, the traditional competitive advantages of MNC may not offer them much when it comes to serving the fast expanding middle -market segments demand in the emerging markets. To meet the challenge MNC managers badly need better knowledge about the emerging market consumers and businesses. It is not an exaggeration to say that the international success of most companies will depend upon the managerial skills of the multi – national companies. Emerging markets means dealing with companies on a global level, and this means accepting cultural diversity in management style. Outlook of Emerging Markets and MNCs Emerging markets like China and India are growing on day - by - day basis and therefore are building their own customer segments. Both countries belong to the emerging markets because they are concentrating on economic reform programs, have begun to open up their markets and emerge into a global scene. The characteristics of emerging markets are transitional economy, population of young and growing people, infrastructure of underdeveloped nature and increased foreign investment. In the past, MNCs were complacent and earned enough surpluses for their commanding positions in developed and other selected countries. In the website Heakal(2009) writes that, Although the term "emerging market" is loosely defined, countries that fall into this category, varying from very big to very small, are usually considered emerging because of their developments and reforms Clearly emerging markets also bring various risk to MNCs. Lack of skilled labor, government interventions, underdeveloped infrastructure, and inefficient property right protection, among others, can create substantially higher costs. An efficient strategy from the MNC manager is expected for the successful business with emerging markets. In today’s globalized business, emerging economies are creating their own gigantic MNCs. Many managers of MNCs believe that China and India are currently two of the most interesting markets in the world, in terms of growth, low cost manufacturing and market size. When it comes to doing business in emerging markets there is lot of dealing with legal system and government bodies. As a result the managers of MNCs have certain roles to play to conduct atmosphere in the changed atmosphere. Implications of Managers of a MNC dealing with Emerging Markets In regard to product and resources For a manager with global responsibilities for a product or business, the challenges are to provide a global product strategy, co – coordinating allocation of resources to fit the product strategy and co - coordinating resource flow across countries. i) Global Product Strategy : Regardless of the location and composition of the new product development teams, one consideration the managers should consider when developing new products for emerging market is determining the right branding strategy for the emerging market product. The value and quality perceptions of a product differ from market to market and in some cases from market segment to segment within a market. The starting point for product planners and designers is to ascertain, usually through market research, the value perceptions that emerging market consumers hold for a given product and the elements of that product that create the impression of that product’s quality One difficulty in branding consumer goods for sale in to emerging market is the fact that in many such markets consumers have not been exposed to brand for long time and are sometimes not sure how to interpret them. Many consumers in emerging markets desire brands that are international as they associate it with superior quality. Regional disparities in consumer purchasing power in countries like China, India and Indonesia often pose significant barriers for exporting organizations to adopt uniform strategies in this market. The main challenge for managers in MNC with product strategy is how to manage the differences between country of origin and brand origin. As per Vance(2011,pg.118)“ Among the challenges facing MNC are the lack of emerging market experience in their senior ranks and retaining capable local managers” ii) Co – ordinating allocation of resources to fit product strategy A key task of a manager of an MNC would be to align or fit the activities and capabilities of an organization with its product strategies. Strategies operate at different levels and there has to be congruence and co – ordination among these strategies. The management of fund is an important area of allocation of resources and is pivotal to any product strategy. It aims at the conservation and optimum utilization of funds- objectives which are central to any product strategy action.MNCs are also rich with intangible assets such as patents, trade names, brands, organizational and management skills, and so on. These intangible assets also need to be allocated in the right manner to get the best use out of it. The resources like manpower, raw materials and tangible assets of an organization should be used in such a way that it can outperform its competitiors.Every organization has main four kinds of resources : financial resources, human resources , physical resources and technological resources. The Managers of an MNC when dealing with emerging markets should make sure that they allocate resources to achieve high quality products in a cost effective manner. In the website Christensen(2005) mentions that “The resource allocation process is a complex, diffused process that occurs at every level, every day, in all companies”. iii) Co - ordinating resource flow across countries Resource allocation and dispersal (both tangible and intangible) are primary devices for maintaining operational flexibility in global business activities. Essentially, by directing resources flows an MNC may shift its activities in response to change in tax structures, labor rates, exchange rates, governmental policy, competitor moves, or other variables. Resource flow requires extensive co – ordination within a MNC network because it creates interdependency among subsidiaries. Co – ordination, in turn, is thought to require centralizes decision making responsibility and authority. Centralized control is important for making trade off decision between subsidiaries. However control should be segmented by product line and distributed among different subsidiaries depending upon particular capabilities and environmental contingencies. However the trade relations in regard to emerging markets are many which explain the nature of business involved in MNC when dealing with foreign countries. Trade theories related to emerging market Some of the modern trade theories which can be related to emerging market are as follows: i) Mercantilist Theory The essence of mercantilism was that national power was dependent on national wealth and that changes in national’s wealth can be measure by changes in its stock of bullion. In a trading world where the natural supply of gold and silver increases slowly, international trade produces winner and losers. According to this theory developed by Adam Smith, “a country can flourish by increasing its exports and reducing imports to a minimal”. It also suggests that the industries should regulate their commercial activities in order to bring a balance in trade. In the website LaHaye(2008) states that “Mercantilism is economic nationalism for the purpose of building a wealthy and powerful state”. ii) Absolute Advantage According to this theory a nation should specialize in economic activities in which they have an absolute advantage and trade with others. By specializing and trading, each nation produces more and consumes more. The English had an absolute advantage in the production of textiles, while the French has the absolute advantage in the production of wine. By specializing in the production of goods in which each nation has an advantage and by buying /selling from the other, both the countries stand to gain by engaging in trade. Climatic condition, skilled labor and deposits of natural resources contribute to the absolute advantage of a country. iii) Comparitive Advantage The principle of comparative advantage explains interdependence and the gains from trade. The principle of comparative advantage state that each good should be produced by the country that has the smaller opportunity cost of producing that good. As per Deardorff (2005) “Comparitive advantage is certainly one of the most basic ideas in economies, underlying much of our understanding both of why countries trade the way they do and why they benefit from doing so”. “.This theory show that trade can make everyone better off because it allows people to specialize in those activities in which they have comparative advantage. The gains from specialization and trade are based not on absolute advantage but on comparative advantage. Political and legal structure in emerging markets Countries must have an economic and political structure that allow for free trade with the outside world to be considered on the path to becoming a developed economy. The type of government a country is ruled by has a significant influence on the business activity. Politically, the government in the emerging markets is often labeled as multi – party but the political system is subject to changing factions. In many emerging markets, government plays more roles in the economy than the market forces do. There is a history of extensive direct government control of the economy, including restriction on international trade, capital movement, etc. Many multinational companies face uncertainty in political environment due to instability of political leadership, coalitions and external pressures. In most emerging market countries, there are generally three levels of local presence: the representative or the information office, the branch office and the subsidiary. The legal structure of different countries varies greatly. The legal impositions in the areas of tax, currency and labor vary greatly. A representative office must be registered locally and a legal presentation must appoint. As part of local registration a company requires to do the formation of Article of Association. The strategic intent of the corporation will determine which legal structure is most appropriate.As per Dallas (2011) “The quality of public governance affects the level of law enforcement and, in turn, the extent of bribery and other forms of corruption. These factors influence the quality of corporate governance and corporate transparency in a country”. Entry Strategies of MNC in Emerging Markets The process of entering a emerging market is a tedious task. In his book Luo(2002,pg.181) mentions that “ Entry strategies concern where, when, and how international companies should enter and invest in a foreign territory during international expansion”. MNCs would choose a low risk entry strategy and prefer the acquisition of existing firms rather than Greenfield entry when expanding abroad. Entry through a greenfield investment implies an increase in the industries’ overall capacity .As far as the entry strategy is concerned ,it is the kind and extent of competition that really matters.MNC operating there look for ways to maintain an edge over its competitiors.Technical collaboration is one strategy used by MNCs to enter emerging market. The sequential entry strategy is yet another strategy often adopted by MNCs. In this they opt for licensing in the first stage and after making themselves well acquainted with the host country market, they proceed to set up a manufacturing unit. Apart from entry strategy, operating strategy is also worth considering in face of severe competition from rivals firms. The operating strategy is normally based on the combination of three factors, namely, cost, product differentiations, and market segmentation.Infact; it is the cost factor that motivated MNCs to locate their assembly units in countries with cheaper labor force and not in industrialized countries. There are also certain movers and shapers in international business which motivate it. Globalization and society movers and shapers In every market there are some movers and shapers which influence the business of MNCs. In emerging markets, the political structure of a country can be a mover and shapers of a business. According to Khanna (2010,pg.199)“ Globalization is not a straight forward process for emerging giants.Market selection is a difficult proposition. It is not always clear which markets will be easy for such firms to enter”. The decision of government really affects the business of MNCs which operate in emerging market. The rules and regulations of a country are in the hands of the political members of the ruling party. The prominent members of political party, parliament and civil society act as movers and shapers in global market. Any change in political structure significantly affects the business of international corporate. Even the culture of a particular society is a prominent movers and shapers. The business of the particular product is enhanced by culture followed by the nations of emerging market. For example in India the society is getting urbanized every second. For the very same reason, the demand for luxury goods and fast food is increasing steadily. So it can be understood that particular culture followed by society is a credible mover and shaper in a society. An MNC will making strategies, should focus on the movers and shapers of a society in order to enhance their business. Conclusion The traditional competitive advantages of MNC may not be readily applicable to serving the market segments need in the emerging markets. Owing to their fast rising but still modest disposable income, the consumers in emerging markets are increasingly demanding high quality products and services at high quality price.Unless MNC managers bring out the figure out a way to enhance their business by bringing down the cost substantially while maintaining the product quality to serve the consumers in emerging. In some industries, some local competitors already seized the opportunity to become successful in serving the consumers in India, Brazil and China. To meet the challenge MNC manages badly need better knowledge about the emerging market consumers and businesses. As per Scullion(2006,pg13) “ The rapid growth of the emerging markets such as China and India implies an increased need for managers with distinctive competencies and desire to manage in these culturally and economically distant countries”. Owing to the significant differences in cultures, political and legal environments, and economic environments, existing theories about firm’s internationalization, branding building in the global market, and strategies for conquering the markets are simply not readily applicable to explain the consumer and business behaviors in the emerging markets. Thus new theories and new research must be developed in order to understand and explain the consumer behaviorism in emerging markets across the globe. There are so many emerging issues in the emerging markets that need to be researched and that need new theories to explain. Most notable are the emergence of new communication and process technologies, increased trade liberalization, regional economic integration, and the growth of international networks. Bibliography Christensen,C.M. 2005. The Process of Strategy Development and Implementation. [ONLINE] Available at: http://www.innosight.com/documents/The%20Processes%20of%20Strate gy%20Deve lopment% 20and%20%20Implementation.pdf. [Accessed 22 November 11]. Dallas,G. 2011. Corporate governance in emerging markets. [ONLINE] Available at: http://blogs.law.h arvard.edu /corpgov/2011/08/24/corporate-governance-in-emerging-markets/. [Accessed 22 November 11]. Deardorff, A.V. 2005. How robust is comparitive advantage. [ONLINE] Available at: http://www.aeawe b.org/assa/2005/0107_1430_1002.pdf. [Accessed 22 November 11]. Heakal,R.. 2009. What Is An Emerging Market Economy?. [ONLINE] Available at: http://www.invest opedia. com/articles/03/073003.asp#axzz1edoTmdo6. [Accessed 22 November 11]. Khanna, T., 2010. Winning in an emerging market . 1st ed. Boston: Harvard Business Press Kuepper,J. 2011. What are Emerging Markets?. [ONLINE] Available at: http://internationalinvest.about .com/od/gettingstarted/a/What-Are-Emerging-Markets.htm. [Accessed 22 November 11]. Luo, Y, 2002. Multinational enterprised in emerging markets. 1st ed. Copenhagen: Copenhagen Business School Press La Haye,L. 2008. Mercantilism. [ONLINE] Available at: http://www.econlib.org/librar y/Enc/Mercanti lism.html. [Accessed 22 November 11] Scullion, H. 2006. Global Staffing. 1st ed. Oxon: Routledge. Vance, C.M, 2011. Managing a global force. 1st ed. New York: M.E.Sharpe Read More