International Firms in Emerging Market - Essay Example

International Firms in Emerging Market Name: Course: Institution: Date: Introduction Emerging markets are said to be in their later stage of development compared to other less developed markets. These markets are often characterized by poverty, high growth potential and low market capitalization (Martin, 2014, p. 1). One of the outstanding differences between less developed and emerging markets is that the latter is a market in which buyers and sellers do not have the opportunity to easily or efficiently argue from a similar position. However, the recent developments in emerging markets have given these two entities an increased attention. Some of the largest emerging markets in the world are China, India, Russia and Brazil. Some of the reasons include the fact that these markets account for more than a quarter of land in the world and about 40% of the entire world population (Martin, 2014, p. 74). The main objective of this paper is to assess the implications for international firms doing business within emerging market. This paper will also present an opinion on the most relevant macro-environment factor for international business when choosing to internationalize in an emerging market. This will be in relation to Eli Greenblat’s Australian wine sales and China plummet and The Economist’s Business in Emerging Markets: Emerge, Splurge, Purge. Implications for international firms doing business within an emerging/developing market As emerging markets continue to grow their companies at home they also continue to develop in other countries. It is however important to note that international companies, especially Multinational Corporations (MNCs) in emerging markets are affected by numerous factors which include the legal, political, cultural and economic aspects which are varied in the host countries and the home countries where these MNCs come from. The legal aspects have played an essential role in influencing operations in China which is one of the emerging markets that is in its exponential stage of growth (Dunning, 200, p. 123). Australian wine manufacturers who are one other leading wine exporter to the market in China have been experiencing some form of decline in sales to China (Martin, 2014, p. 1). This decline is attributable to austerity drive which was characterized by a crackdown on flamboyant blowout to the local wine sector (Greenblat, 2014, p. 1). The austerity measure that the government in China introduced have on numerous occasions continued to have negative impact on the mechanics of the imported wine sector. In addition, Australian wine manufacturers have continued on an initiative of working with different importers as a way of building their brand image (Greenblat, 2014, p. 1). Politically, international firms from developed countries, enjoy peace, proper governance and stable governments. Such environment promotes business can be effectively conducted. American, British, Australian and even Japanese governments create environments friendly for conducting business (Martin, 2014, p. 1). Governments in emerging markets especially the BRIC countries have witnessed a growth in their economies due to stability that these countries have been enjoying in terms of government stability and political development. Most MNCs that operate in emerging markets have been experiencing instances of profits. American firms as at 2012 made about 12% turn on equity. This was almost in line with their global averages (Greenblat, 2014, p. 1). According to a study conducted by Stoxx, a data company, concerned with the affairs of international forms from developed countries, the high exposure that has introduced most western firms into emerging market is a symbol of existence of security in these countries (Greenblat, 2014, p. 1). This popularity has been can in most cases be attributed to the existence of relative political stability in emerging countries and the abundance of opportunities that heighten competition for the limited resources in these countries (Greenblat, 2014, p. 1). Existing cultural orientation in emerging markets can be said to be have negative implications on the wellbeing of international firms operating in emerging markets. The US is a society whose economic culture is capitalistic (Martin, 2014, p. 2). This means that the existing cultural orientation and the mind-sets of individuals in emerging markets will play an essential role in influencing the level of acceptability or rejection of an international firm’s products. Emerging markets such as China and Russia operate are more communist compared to markets in developed societies such as America and Australia among other developed nations (Martin, 2014, p. 155). The austerity measures instituted by Chinese government to regulate the consumption of luxurious wine in China appears as a major contributor to the decline in demand for Australian wine (Greenblat, 2014, p. 1). These measures also forced other international beverage companies operating within the Chinese market to cut down on their production across wines and spirits. This was based on the fact that the law had led the Chinese into a culture where they abstained from upmarket, restaurants and bars. This was an attempt to minimize their socializing activities with government officials. The reduction brought about by government operations was a major factor in redefining cultural behaviour of Chinese wine buyers (Greenblat, 2014, p. 1). Differences in economic factors in emerging markets and home countries also play a defining role on the ways by which international firms conduct their businesses. China in its endeavours to promote local businesses introduced laws to limit the consumption of foreign products such as wine (Martin, 2014, p. 1). These measures were aimed at introducing a competitive advantage of local businesses over international manufacturers. This led some of the world’s largest wine producers to warn other exporters and shareholders in China that consumer demand for wine had softened due to fermenting demands for products oscillating from drinks to fashion. The operations of international companies in new and emerging markets can be said to be a boom where every international firm perceives itself as potentially successful considering the market research and prevailing market conditions (The Economist, 2014, p.1). This in certain situations leads to saturation arising from excess investments. The more capital intensive any industry becomes, the greater the financial challenges that weak companies stand to experience. India for instance, houses more than 20 international companies gulping it out of its market shares while contributing cash (The Economist, 2014, p.1). Most European companies possess a lot of financial assets in emerging markets. Such markets are considered as trophy markets in which all the other international markets consider themselves as possible investors (The Economist, 2014, p.1). Most relevant macro-environment factor for an international business when choosing to internationalize into an emerging/developing market Institutional approach The influence of the external environment on the operations of an international firm whose aim is to invest in an emerging or developing market forms the basis of institutional theorists. This school of thought focuses on different fields of activities such as industries, population and countries become designed and organized and the successive effects on international firm activities. While attempting to provide an explanation for the mechanisms involved in the process of change or coordination of a company’s activities, it is possible to use the institutional approach to understand individual company behaviour. The main objective of such an approach is to provide a proper illustration on the effects of the external environment in a foreign society (Findlay, 2008, p.15). Institutional approach provides several assumptions on how the environment is the core of societal action. The first assumption is based on the idea that any form of action that a foreign firm seeking to internationalize is based is structured. Unlike other international business theories, this school of thought does not view any activity or action taken by a firm as a result of an autonomous initiative, instead, it argues that behaviour is structured by numerous factors such as culture, society, norms and other regulatory requirements (Palepu, 2013, p. 6). An interaction among all these forces holds an essential economic role for the firm since it is socially ordered. Company representatives and representatives from that emerging or developing economies act in a way that is embedded within a wider framework. When such a company engages in an in-depth analysis of the wider socio-cultural networks will allow a better understanding of the behaviour of different forces of the market. With such an understanding companies that are interested in investing in emerging and developing economies will be able to predict possible behaviour of their potential customers (Dunning, 2006, p. 44). Organizations that operate on the institutional approach have their foundations embedded on the established networks. Such networks help in building relationships that are strongly infuses in their meaning and value (Palepu, 2013, p. 3). The symbolic meaning derived from an infusion of these networks motivates behaviour that is seen as an essential aspect in explaining firm level behaviour (Lin, 2013, p. 67). The view asserts that organizations are more than mechanisms that help in providing solutions to complex coordination and control issues. Firms are able to understand how their management will act and the possible implications that may be generated form such actions. The provision of systems of meaning gives more essence to the organization’s operations and this makes this school of thought more powerful in understanding the operations of a company on an international platform (Lin, 2013, p. 68). The existing culture of a nation forms an integral part in the meaning system. The effect of such culture can be demonstrated in any organizational theory as a way of understanding the direct and distinct effects of individual organizations (Buckley, 2006, p. 243). An organization that chooses to work based on an understanding of a nation’s culture focuses on the meaning members of a culture attach to different objects and how they affect the principles upon which the company will operate on (Findlay, 2008, p.16). This is based on an understanding that national culture plays an important role in defining and moulding the field of production that a company seeks to engage itself in. in addition, culture also allows such organizations to suggest possible alterations on their products or services. An international firm operating from this perspective will operate based on an understanding of how the influence of cultures and the meanings system have on its activities. Such an understanding helps in the development of a strategic behaviour on how best to penetrate the market (Dunning, 2006, p.78). The institutional approach while providing an understanding on the effects of external environment in the operations of an international firm, that seeks to internationalize in emerging and developing markets, provides an understanding concerning on the role of this macro-environmental factor in the promotion of similarities among companies (Lin, 2013, p. 55). This is based on the understanding that as macro-forces acts and direct various systems’ components into more similar entities, they also realize that organizations change. This leads to the reorganization of companies into competitive entities. When these changes occur, they not only transform individuals within the organizations but they also result in an overall transformation of the target population (Palepu, 2013, p. 4). Any international firm that seeks to internationalize must understand that change is a continuous aspect in within a given market. These changes happen even in situations where other population dynamics remain constant. When such changes occur within a given market, the international firms must also change and influence different aspects resulting from such vagaries (Findlay, 2008, p.22). While operating through the institutional approach, it is important for companies to understand the effects that any form of localization or setting of standards would have on its overall existence in the said market. These include the ability of a country to produce and embrace different aspects of technology. Most BRIC countries, with respect to China, are often trending in terms of technological innovations (Helpman, 2006, p. 67). A country that has a high level technology, with all the other factors held constant, would serve as the best destination for numerous international firms as this is an integral part in enhancing the production process. Institutional theory is therefore a philosophy of change that can be applied in understanding the external environment as a macro environmental factor in internationalization of trade (Findlay, 2008, p.24). Conclusion Emerging and developing markets play a central role in the development of global trade. This is because most international companies, especially MNCs perceive them as prospective markets that play an essential role in the providing profits to the companies. These markets provide profits since they host large populations that are potential markets for the products and services of international businesses. There are however political, legal, cultural and economic factors in different countries that have a direct and indirect impact on the operations of international businesses. The institutional approach studies numerous external environmental factors that are considered as essential in the understanding of prevailing market conditions in both emerging and developing economies. These conditions are important since they provide information that is considered essential the operations of any international firm. References Buckley, P.J. and P.N. Ghauri, 2004, "Globalization,economic geography and the strategy of multinational enterprises", Journal of International Business Studies, 35, 81-98 Deardorff, A. V. 2004, "Local comparative advantage: trade cost and the pattern of trade", Gerald R. Ford School of Public policy, The University of Michigan, Discussion paper # 500 Dunning, J. H. 2000, "The eclectic paradigm as an envelope for economic theories of MNEs activities", International Business Review, 163-190 Dunning, J.H. 2006 "New directions in international business research", AIB Insights, vol.6, no. 2 Findlay, R. 2008. "International trade and development policy" Columbia University Press, New York Helpman, P., 2006, "Trade, FDI, and the internationalization of the firm", Journal of International Literature, September Kindleberger, C.P. 1969 "American Business Abroad", Yale University Press, New Haven Lin, J. Broadman, H. 2013. Navigating the Risks and Opportunities in Emerging Markets. http://www.pwc.com/us/en/view/issue-15/navigating-risks-opportunities-emerging-markets.jhtml Greenblat, E. 2014. Australian Wine Sales to China Plummet. The Sydney Morning Herald. http://www.smh.com.au/business/australian-wine-sales-to-china-plummet-20140416-36r5i.html Martin, H. 2014. Six Global Trends of Shaping the Business World: Emerging Markets Increase their global Power. http://www.ey.com/GL/en/Issues/Business-environment/Six-global-trends-shaping-the-business-world---Emerging-markets-increase-their-global-power Palepu, K. 2013. Winning in Emerging Markets. Harvard Business School The Economist. 2014. Business in Emerging Markets: Emerge, Splurge, Plurge. www.economist.com/news/business/21598642-western-firms-have-piled-emerging-markets-past-20-years-now-comes Read More