The Evolving Multinational Enterprises Environment - Multinational Companies from Emerging Economies - Coursework Example

The Evolving Multinational Enterprises Environment (MNE’s) - MNE’s from Emerging Economies Name: Course: Professor: Institution: City and State: Date: Table of Contents Table of Contents 2 Introduction 3 Challenges facing multinationals doing business in emerging markets 4 Lack of qualified trade partners 4 State involvement 4 Absence of reliable government authorities 4 Corruption 5 Lack proper managerial strategies 5 Poor Infrastructural facilities 6 Under developed capital markets 6 Weak intellectual property protection 6 Labor shortages 7 Factors that make emerging markets attractive for Foreign Direct Investments (FDI’s) 7 Deregulation 7 Demographic trends 8 Manufacturing bases 8 Sourcing destination 9 Target/ Niche markets 9 Exchange rate 9 Conclusion 10 References 11 Introduction With the present global business landscape, business needs have evolved and as such, many businesses have achieved global logistical and operational capabilities. This is attributable to increased competition within the global market, which has been all time high. Basically, businesses are increasingly suffering complexities of doing businesses in global markets due to myriad problems. As such, international businesses need to understand such complexities for them to enhance their efficiency and attain a competitive edge over host country enterprises. According to Agosin and Machado (2007), doing businesses in the international market presents many opportunities to the organization as well as challenges. Having a clear understanding of the target country is advantageous for a business since it gives it insights in terms of logistics, tax laws, currencies, culture among other aspects. The business also gets to know which products to adopt in various markets depending on the demand. In addition, the political and economic environments are other factors with serious impact on global operations. Therefore, it is paramount to understand and abide to the rule of law and regulations of a country that an international business wishes to establish its operations. The present paper seeks to analyze the challenges faced by multinational companies when doing business in emerging markets such as South Korea, China, Brazil and Russia among others. In addition, this paper discusses factors that make emerging markets more attractive for foreign direct investments. Challenges facing multinationals doing business in emerging markets Lack of qualified trade partners Emerging economies are maturing gradually. This means that they are evolving very fast as they seek to compete with their developed counterparts. Economies such as India, China and Brazil continue to be loosely connected with the rest of the global economies hence making it hard for corporations established within these economies to access international markets. For instance, TATA Enterprises is an Indian car manufacturer. However, due to the formation of European Union market, the Indian car manufacturer finds it difficult penetrating the European market which is dominated by European and American based car manufacturers. State involvement Disappointingly, big firms in the emerging markets have diverse organizational forms. In this vein, the most common phenomenon is domination by the state sector. This aspect contradicts the free market mechanism common in established economies such as United Kingdom and Germany. A good example is the Republic of Korean where most organizations are government owned and if not the government has a controlling stake. One of such companies is the mobile phone giant, Samsung, in which the Korean government holds a stake. Thus, as the markets develop, the inefficient and improperly governed organizations die out, and their place is taken by private enterprises. Absence of reliable government authorities Multinational Enterprises (MNE’s) from developed countries suffer from both institutional and competition challenges. Back at home, MNE’s enjoy vast domestic markets that help them achieve economies of scale. In this regard, their competitive advantage tends to be quite different from those in emerging markets (Aw and Tang, 2010). This is attributable to institutional pressures brought about by the nature of emerging markets. Undoubtedly, many institutions, which are key in the establishment of favorable environment for multinational businesses, are plagued by such factors as underdevelopment, weak labor protection laws and lack of transparency among others. Corruption Corruption is another major hurdle facing multinational companies that intend to establish their presence in emerging markets. Most regimes in evolving markets are riddled with corrupt officials who require any foreign business wishing to establish their presence in their areas of jurisdiction to pay bribes. For instance countries such as Thailand, Mexico, India and Brazil were among the nations ranked top in global corruption index. This is facilitated by lack of sound laws and institutions to enforce the existing laws. In addition, some emerging economies have unstable governments and as such, no stable environment within which foreign business can operate. Lack proper managerial strategies As earlier mentioned, most emerging markets lack effective rule of law due to the absence of stable institutions. Even where there are stable business environments, the government invades the business sector, and as such, many organizations are fully or partially owned by the government. Usually, government owned enterprises are poorly managed and are riddled with corruption. Ideally, such organizations are not managed by competent professionals, but by political cronies who lacks the basic knowhow of managing bigger businesses. This problem has led to macro economic shocks such as unstable exchange rates and inflationary conditions which are unfavorable for multinational businesses. Poor Infrastructural facilities Poor infrastructure is another challenge facing multinationals operating in emerging markets. Notably, most emerging market both in Africa and Asia lack modern infrastructural facilities. The road network is dilapidated, and as such, large ports cannot handle huge capacity of loads. In addition, buildings are poorly maintained, and cannot serve as offices for big multinational companies. Therefore, international companies wishing to establish bases in emerging markets are forced to contribute in development of such facilities in order to run their business. This, in turn, results to increase unnecessary spending. Under developed capital markets Many emerging economies rely on mining and agricultural sector as the key pillars of their economies. This means that other key sectors such as finance, insurance, education and health among others are still underdeveloped. According to Zhou and Wu (2010), multinational enterprises particularly from developed nations suffer huge setback when it comes to source of capital and workforce to support their organizations. As a result, the businesses are required to seek financial assistance back at home in order to invest in foreign a market, which at times becomes more expensive. Weak intellectual property protection Lack of sound laws and established legal institutions is also a major challenge affecting multinational enterprises investing in emerging markets. In this vein, many MNE’s lose intellectual property rights when local experts steal their expertise and start production of similar products under different brand names. A good example is the pharmaceutical sector where Chinese, Pakistan and Indian drug manufacturers continues to produce generic forms of patented drugs (Bakir & Alfawwaz, 2009). The local governments are not bothered in enforcing laws that should protect such companies from losing their patent rights. Labor shortages Recent developments have seen Malaysia lose its position as one of the preferred Foreign Direct Investments (FDI) destinations to China and India. This is mainly due to factors such as wage bill pressures and shortage of human capital. However, it is strongly believed that Malaysia can reclaim its economic position in the Asian market by stimulating its domestic economy. Factors that make emerging markets attractive for Foreign Direct Investments (FDI’s) Foreign Direct Investments (FDI’s) play a major role in the internalization of businesses. As defined by Lokesha and Leelavathy (2012), FDI is a process where investors from the home country purchases assets for the purpose of controlling activities of a company located in another country. In recent years, FDI’s have gained popularity particularly in the emerging markets considering their contribution in capital inflows, which is a long-term investment that increases aggregate demand and eventual economic growth in the host economy. Similarly, Russ (2007) argues that local companies tend to counter competition leveled against them by foreign corporations. In this vein, they enhance their effectiveness resulting to overall economic growth. The following section discusses factors such as deregulation, cheap labor, growing class of consumers among others that makes emerging markets attractive for foreign direct investments: Deregulation Many emerging economies have no stringent laws. As such, MNE’s find these markets favorable for investments. For instance, most developed markets such as European markets have stringent laws including labor laws that set the minimum wages high resulting to a huge wage bill (Xin and Pearce 1996). On the other hand, the market in emerging economies is not highly regulated making it highly conducive for businesses. For instance, in the African set up, there are few requirements for international businesses that are willing to establish their presence. As a result, multinational enterprises are free to channel their profits to their home countries without any problem. Demographic trends Presently, people in emerging economies are getting a better education either from local learning institutions or abroad. As such, most of these markets are saturated with much expertise that is willing to offer their services for lesser costs. This serves as one of the factors attracting foreign multinationals to come and invest in emerging markets due to a significant reduction of the wage bill which translates into increased profits. For example Starbucks Coffee, a US coffee company entered Thailand and Korean markets which are sources of cheap labor and has a growing population that offers good market for its coffee. Manufacturing bases Most emerging markets are less industrialized. Therefore, these countries rely on imports for supply of some vital products and services. However, such imported products incur a lot of costs including taxation and transportation costs among other import related costs, which are eventually transferred to the consumer (Wang and Wong, 2009). Due to this problem, many foreign companies are motivated to establish bases in emerging markets, in order to avail their products to consumers more conveniently and at a cheaper cost. A good example is two American computer manufacturers IBM and Dell that have established bases beyond the Silicon Valley in China and Korea. The two Asian emerging economies have great demand for computers which at the same time offers cheap labor. Sourcing destination In the face of globalization, emerging markets are experiencing significant trade liberalizations. These changes have lessened restrictions on multinational companies wishing to source products from countries with competitive advantages. Such moves have increasingly seen the establishment of new braches in different countries rich in factor products. As such, the move enhanced the expansion of FDI as multinationals target emerging markets. Target/ Niche markets Xiao and Tsui (2007), in their studies, suggests that the degree of regional integration encourages FDI. This is attributed to increase in market size for multinational companies. Undoubtedly, trade openness has a significant impact on FDI. Alba, Park and Wang (2009) both found trade openness to have a positive impact on investments and trade in South Africa. For instance, South Africa is part of South African Development Cooperation that includes other Southern Africa states. In this vein, multinational companies with a presence in South Africa take sell their products in other South African countries that form part of the trading bloc. Exchange rate According to Russ (2007), the endogeneity of exchange rate indicates the variance the exchange rate presents and the impact it has towards decision by multinational companies to enter a certain market. Zhou, Poppo and Yang (2008), in their studies of the euro-effect on FDI, concluded that the exchange rate is an important factor in attracting foreign direct investments in another country. Baker and Alfawwaz (2009) argue that the instability of exchange rates has a devastating impact on FDI inflows. Their study focused on the case of Turkey where highly volatile currency discouraged FDI inflow. Conclusion Irrespective of the many opportunities that motivate multinational corporations to establish their presence in emerging economies, it is undeniable that they are also faced with myriad challenges. Notably, countries such as Malaysia are gradually turning industrialized but lack global connections. As such, most foreign markets continue to be dominated by traditional trading partners such as the United States, Britain and France. Despite economic progress, many emerging markets still suffer from corruption and government involvement in the economy. Similarly, a number of emerging markets are still trying to overcome challenges such as dilapidated infrastructure and inadequate legal framework in order to guarantee a favorable environment for multinational enterprises. Notwithstanding the fore mentioned challenges, multinational companies still continue putting their investments in emerging markets due to their big market size, availability of cheap labor, trade openness and presence of favorable trade and investment policies. References Agosin, M., and Machado, R., 2007. Openness and the international allocation of foreign direct investment. Journal of Development Studies, 43(7), p. 1234-1247. Alba, J. D., Park, D., and Wang, P., 2009. The impact of exchange rate on FDI and the interdependence of FDI over time. ADB Economics Working Paper Series, 64(164), p. 1- 25. Aw, T., and Tang, T., 2010. The determinants of inward foreign direct investment: The case of Malaysia. International Journal of Business and Society, 11(1), p.59-76. Bakir, A., and Alfawwaz, T., 2009. Determinants of foreign direct investment in Jordan. International Management Review, 5(2), p. 66-73. Lokesha, B. K., and Leelavathy, D.S., 2012. Determinants of foreign direct investment: A macro perspective. The Indian Journal of Industrial Relations, 47(3), p. 459-469. Russ, K. N., 2007. The endogeneity of the exchange rate as a determinant of FDI: A model of entry and multinational firms. Journal of International Economics, 71(2), p. 344-372. Wang, M., and Wong, M., 2009. Foreign direct investment and economic growth: The growth accounting perspective. Economic Inquiry, 47(4), p. 701-710. Xiao, Z., and Tsui, A. S., 2007. When brokers may not work: the cultural contingency of social capital in Chinese high-tech firms. Administrative Science Quarterly, 52 (8), p. 1-31. Xin, K. R., and Pearce, J. L., 1996. Guanxi: Connections as substitutes for formal institutional support. Academy of Management Journal, 39 (9), p. 1641-1658. Zhou, K. Z., and Wu, F., 2010. Technological capability, strategic flexibility, and product innovation. Strategic Management Journal, 31(9), p. 547-561. Zhou, K. Z., Poppo, L., and Yang, Z., 2008. Relational ties or customized contracts? An examination of alternative governance choices in China. Journal of International Business Studies, 39 (56), p. 526-534. Read More