Internationalization Process f Firms from Emerging Markets - Case Study Example

HЕSЕ АRЕ СОNSIDЕRЕD ‘SЕMINАL’ АRTIСLЕS THАT ЕХРLАIN THЕ INTЕRNАTIОNАLISАTIОN РRОСЕSS ОF FIRMS FRОM ЕMЕRGING MАRKЕTS. The number of multinational enterprises from developing countries has been on the increase over the recent past. Many of such firms have established subsidiaries abroad and therefore engage themselves in large scale foreign direct investment in both developed and developing economies. The move by the multinational enterprises to expand their operations abroad is to some extent attributed to the fact that structural economic changes may have taken place in their domestic economies. Great focus will therefore be directed to multinational enterprises from the Latin American countries. It is therefore important to note that indeed, the first emerging markets multinational enterprises operated in natural resources as opposed to multinational enterprises from developed economies who dealt in large scale manufacturing of goods. The multinational enterprises from emerging markets had a common characteristic as most of them got support from their respective states based on their exporting advantage which served to maintain a favorable balance of payment for such governments. Apart from government support, these firms from emerging markets enjoyed such advantages as access to natural resources and low labor cost. The need by such firms to obtain new technology and vast knowledge to meet new customer needs may also be a contributing factor to the growth of multinationals enterprises from emerging markets. Initially the recipients of the expansion in terms of internationalization by such multinational enterprises were other emerging markets in the same geographical and cultural domain (Johanson & Vahlne, 1977, 22). These markets were viewed as less risky as compared to developed markets where the technologies used were superior hence making survival for new entrants difficult. However there are models developed to explain the process of internationalization of firms from emerging markets. These theories strive to give a vivid perspective of the main directions taken by firms that sought to expand their operations in other economies. There are three such theories that seek to explain the process of internalization of firms from the emerging economies. The internationalization models are incremental internationalization, the eclectic paradigm of international production and the accelerated internationalization model. The incremental internationalization model explain the behaviour of emerging markets firms of starting operations in the countries which they have less difficulties in establishing and running business. These firms then proceed to countries where they have more difficulties upon being more psychically distant. In this respect, the firms start with exports followed by establishment of sales units and finally setting up subsidiaries as a form of foreign direct investment in foreign countries. This is done progressively as such firms from emerging market acquire managerial advantages and technologies as a result of operating globally hence making them able to withstand foreign competition while at the same time striving to maintain their domestic market share. This model is therefore still relevant as far as understanding the growth and development of multinational enterprises from emerging markets. The eclectic paradigm of international production model draws attention to the advantages that a firm seeks as it moves abroad. The combined advantages of location, ownership and internationalization serve to encourage firms to establish subsidiaries in foreign economies through foreign direct investments. This model therefore proposes that firms from emerging markets will first operate in countries where they can best benefit from their advantages or rather exploit their location advantages presented by such economies in relation to other firms. The third model is a refinement of the first two models of internalization. It is the accelerated internationalization model that seeks to explain how multinational enterprises from emerging markets strive to keep pace with the existing and well established firms from developed economies through strategic alliances, acquisitions and technological improvement. The model therefore is effective in shedding light on the research about the growth and development of such firms. It is through this accelerated internationalization that these firms from emerging markets have succeeded in getting a significant share of the global market. The firms from the Latin America however, took time to become multinationals for a number of reasons. One of the major reasons for this is the fact that the Latin American countries adopted the import substitution model of development between the 1930s and the 1980s. This therefore established favorable domestic market conditions as the local firms were protected from foreign competition. In addition these firms benefited from the comparative advantage of the countries in terms of natural resources and low labour costs. These conditions therefore ensured that the firms in the Latin American countries were able to reap maximum benefits from the existing advantages in their home countries. They were also able to export goods at competitive prices abroad. Consequently, the firms lacked neither internal nor external pressure to seek opportunities abroad. The ready market offered by the domestic population and the significant demand for exports therefore barred global prospects of the firms in the Latin America. However, in 1979, the Latin American countries shed off the import substitution model of economic development and subsequently embarked on a serious economic structural reform. This move led to significant impacts on the firms in the region. The firms were left unprotected from foreign investors. Among the foreign firms that invested in Latin America and specifically Brazil is Walmart, which posed serious competition on the existing domestic firms. As a result of such structural reforms, the institutional conditions under which the domestic firms operated were changed hence building up pressure for firms to internationalize in order survive. The firms therefore had to revise their activities and improve on the competitiveness of their operations and consequently seek foreign markets as poles for sustainable growth. As a result the firms in the Latin America reinforced restructuring and improvement of their technology and competencies in order to enable them face foreign competitors (Domininquez, 1997, 9). These pressures therefore, left the firms with no more strategic options other than seeking opportunities beyond borders in order to ensure survival. As a result of the deep structural reforms in the Latin American countries, the debt crisis set in making matters worse for the firms. This is because the debts of the firms were quoted in US dollars and the local currencies had been devalued as result of import substitution policy withdrawal. These made the domestic markets intolerable hence need to explore opportunities in foreign economies in order to offset the losses incurred in the domestic market. The impact of the structural reforms in the 1980s led to a serious economic crisis in the Latin America (Williamson, 2003). The economies contracted significantly making business growth difficult hence making foreign investment inevitable. The formation of the North American Free Trade Agreement also helped to considerably boost the internationalization of the Latin American firms. This is because the trade agreement opened up the region to foreign investors as well as creating opportunities for the Latin American firms abroad. NAFTA became an incentive to restructure operations and improve competitiveness (Thomas, 2005, 88). Due to the pressure of increasing foreign competition, the firms then focused on diversifying their activities as well as expanding their operations abroad in order to be able to sustain growth which was negatively affected by the structural reforms and the economic crisis which made the domestic market exceedingly volatile. The primary goal of the move by firms from emerging markets to internationalize is growth through profit maximization. Therefore, such firms seek foreign resources in order to mitigate risks and constraints in their respective home markets. It is through such a long range strategy that firms endeavor to establish their competitive positions effectively in the global market place. This is possible because a firm is able to serve both the domestic market and the foreign market. Therefore, a firm is able to set different prices for goods depending on the market segment it is serving. The strength of firms from emerging markets remains to be their ability to leverage core competencies at home and explore new opportunities at home. This approach puts them ahead in terms of profitability and market share which enables them to expand rapidly. The firms from emerging markets are able to effectively exploit the opportunities offered in other emerging markets. Good examples of such firms are Chinese enterprises that have expanded their operations to developing countries. The firms from Latin America, especially those from Brazil, Mexico and Argentina have shown such patterns in their long range strategies of internationalizing their operations. The nature of firms from the emerging markets is also a crucial factor that needs to be highlighted. Among these firms from emerging markets, there are state-owned enterprises and private enterprises that endeavor to reap the benefits offered by the global markets. The state-owned enterprises enjoy the support of home government because they are aimed at achieving various political and diplomatic objectives (Caves, 1982, 77). These firms include the firms that deal in the natural resource exploitation as they are much likely to benefit from the comparative advantage of the accessible natural resources. Another category of such firms are the private firms which are exploiting the foreign markets as a way of achieving growth through market expansion. The private firms however may find it challenging to deal in foreign markets due to their narrow financial base but they finally make it through by seeking contracts and strategic alliances from the already established multinational enterprises. Almost all the multinational enterprises from emerging markets are late entrants in the international markets. This therefore means that they have the latecomer disadvantage due to the new and strange foreign market conditions. They therefore have to endeavor to avoid the risk of technological obsolescence by trying to keep pace with the existing multinational enterprises. They do this by acquiring technologies and employing highly competent personnel capable of boosting the growth of the firms. These active acquisitions assist them to produce quality products that will compete favorably with those of competitors. Another challenge that the firms from emerging markets face is the extra burden of educating the changing market (Cuervo-Cazurra, 2008, 138). This in extension implies that expensive advertising and promotion programs need to be initiated and effectively executed in order to ensure that a significant share of the market responds positively to the products of the late entrants. In order to survive in the new foreign markets upon internationalization, these firms from emerging markets employ several spring boarding strategies that help to keep them afloat in the changing markets. These international springboarding strategies include accumulating benefits through inward investments before actively participating in foreign direct investments. This is done through extensive diversification activities domestically in order to achieve a broader financial base. This will make foreign investment easier as it will be leverage by domestic investments. The other most common strategy employed by the multinational enterprises from the emerging markets is the leapfrog trajectory approaches that they employ in the global market. This is done through strategic firm and technology acquisitions and Greenfield investments in foreign markets (Rodriguez, 2005, 368). These acquisitions strengthen the competencies of a firm through production of competitive products that are of high quality. The Greenfield investments carried out by such firms enable them to exploit new markets hence speeding up organization growth and competiveness. The third approach use by these firms to strategically survive in the foreign markets is cooperation with established global players who will mentor them and develop their managerial and technological competencies. These strategic alliances help them to effectively understand the global markets and to take the necessary steps to address the challenges offered by such markets. The global players complement their technologies and managerial skills. Moreover, these firms from emerging markets have several motivations that make them seek global markets. One of the major reasons that make multinational enterprises from emerging markets to internationalize is their objective to compensate for their competitive disadvantages in the domestic markets. They seek sophisticated technology in advanced countries in order to be able to increase their market share both globally and in the home market. The firm from emerging markets may also acquire foreign companies or subunits that are considerably strategic to their success in the global environment (Dunning, 1981, 470). Furthermore, the acquired technology and brands through internationalization serve to effectively fill their resource voids which may inadvertently affect their long term performance in the dynamic global market environment. Foreign firms are always ready and willing to sell or share their technology, knowhow or brands due to financial exigency or restructuring needs (Child, 2005, 402). This makes it possible for firms from emerging markets to internationalize effectively through such strategic acquisitions hence facilitating growth. The firms from emerging markets use internationalization as a springboard overcome their latecomer disadvantage. This is done through well thought-out plans regarding strategic mergers, acquisitions and asset-seeking from advanced markets. Such measures are spurred by the desire to secure control of critical resources, acquire advanced technology, and obtain advanced managerial competencies and expertise as well as gaining access to consumers. This facilitates effective servicing of foreign markets. In an attempt to counter-attack the global rivals’ major foothold in their domestic market, the firms from emerging markets seek foreign opportunities that will make them competitive against such rivals. These multinational enterprises from emerging economies acquire brands and technologies from established global players. They then offer the brands in the domestic markets as a way of improving the perceived quality of their products through offering globally known brands other than their own brands. The mergers with global firms enable them to improve their managerial skills and their technology making them highly competitive both domestically and globally. In order to avoid stringent trade barriers which include quota restrictions, antidumping penalties and some of the special tariff penalties in their domestic markets, opt to internationalize in order to utilize their advantages to serve the favorable foreign markets instead (Andersen, 1984, 813). Such trade barriers make business operations difficult and may lead to losses hence deterring survival. Foreign markets therefore, remain the only option for the firms to continue operating optimally. In order to benefit from the opportunities offered by foreign markets, firms from emerging markets participate in foreign direct investments in order to leverage their operations in the domestic markets. The foreign investments are always in form of subsidiaries which actively facilitate in sustaining the overall long term growth of the firms. Most of the multinational enterprises from emerging markets participate in reverse investment. This is always aimed at benefitting from preferential treatment offered by the emerging markets governments. This is achieved by creating subsidiaries in foreign countries. They thereafter use such subsidiaries as foreign entities to invest back in their home countries in order to receive financial privileges that include tax breaks and cheaper land fees. This makes the operating costs of the firms hence increasing their profit margins. This is because such firms will be able to expand their foreign investments as a result of the returns from the reverse investments undertaken by the firms. Such an approach is a case that is still relevant as far as understanding of the growth of firms from emerging markets is concerned. Domestic instabilities make the firms from emerging markets to seek foreign opportunities in order to leverage the domestic operations and consequently sustain long term growth. For instance, the economies of the Latin American countries underwent a serious economic crisis as a result of the deep structural reforms which opened up the domestic markets to global challenges. The debt crisis as a result of domestic currency devaluation made the conditions in such markets unfavorable (Hennart, 1989, 123). This is because the debts of the firms from the Latin American countries were tied in US dollars. In order therefore to effectively service their debts, they had to diversify their operations abroad in order to get enough profits to service their debts. The firms which initially dealt in exports had to consider participating in foreign direct investments because the exports no longer sustained growth due to the volatility of the domestic economy. This meant that the firms that had for a long time avoided expanding their operations abroad to consider investing in global markets. The firms from emerging markets use internalization also to exploit their competitive advantage in other emerging markets. This is because these firms are often champions in their respective industries at home. This places them ahead even in foreign markets hence ensuring that they compete favorably with various other rivals in the global markets. This is achieved through acquisition of technology and expertise which make the production of standardized products in other emerging markets possible. The low cost position held by such firms will further facilitate reduction in the operation costs which in return lead to competitive pricing. A common feature among the internationalized firms from emerging markets is their strategic partnerships with the developed country multinational enterprises in their domestic economies. This is no doubt the most effective way of transferring modern practices to mainland companies hence strengthening international competitiveness through the transfer of tacit knowledge to local partners (Guthrine, 2005, 168). For instance, Grupo Gigante and the French company Carrefour formed a strategic partnership which led to Grupo Gigante being able to learn superior management experience from the French company. Grupo Gigante was thereafter able to successfully compete with Wal-mart, which was then the leading retailing foreign company in the Mexico. Grupo Gigante further expanded to the United States of America as a process of internationalizing its operations. It is prudent the firms from emerging markets were able to internationalize rapidly because of their active acquisitions and Greenfield investments (Johanson, 1977, 26). However, the firms from the Latin America were discriminative in their choice of location in terms of culture and political systems in place (Davidson, 1980, 13). They therefore invested in the countries they perceived the cost relating to foreignness as low. The existence of well established multinational enterprises from developed economies played a major role in ensuring that the local firms benefited from their technologies and management experience. Learning by the local firms was transmitted through institutionalized organizational practices which entailed decision making procedures and corporate policies to be embraced by such domestic firms. This was therefore an effective means of acquiring site-specific knowledge needed to improve on the competitiveness of operations and practices (Andersen, 1983, 216). Such moves were facilitated by the strategic act of converting rivals into alliance partners through cooperation. A practical case of such alliances is displayed by Ranbaxy, an Indian company, which cooperates with GlaxoSmithKline for clinical development, drug discovery and a wide range of therapeutic areas. It also collaborates with Merck for clinical trials and with Terumo (Japan) in the production and marketing of blood bags and dialysis systems. Such strategic alliances are aimed at attaining win-win scenarios for businesses by creating complementary relationships (Nalebuff, 1996, 78). This is therefore put forward as an effective way of staying competitive in a challenging global market. The growth of foreign direct investments from emerging economies has been significantly facilitated by the liberalization of government policies and the subsequent relaxation of the regulations governing offshore investments (Richard, 1982, 267). This has effectively opened up the international markets to firms from emerging economies that seek growth through effective exploitation of lucrative opportunities offered by the global markets. This is because some of the domestic governments have supported the purchases of key foreign businesses in order to boost growth and competitiveness of local firms. For example, the Chinese government has been in the forefront in financing the local firms’ acquisition processes by offering low interest loans as an incentive to expand both local investments as well as foreign direct investments abroad. This support by local governments has therefore assisted in achievement of rapid internationalization of firms from emerging markets. The firms specifically from the Latin American countries follow for levels in their internationalization process (Cuervo-Cazurra, 2008, 138). They may start committing foreign direct investments to countries that are proximate in culture and economic development. They can alternatively start investing in countries that are distant in culture and development. These firms can also begin investing in countries they are culturally proximate but distant development wise. Finally, the Latin American firms may however, begin investing in countries that are culturally distant and proximate in development. These levels to a great extent influence the direction and the extent of internationalization in any given firm. The firms choose to invest in countries that are culturally and developmentally proximate for a number of reasons. The firms may find it good to invest in such economies because the existing resources may help to complement the resources available in such countries. This makes adjustment costs minimal. The firms that choose to invest in culturally proximate economies may benefit from properly understanding the practices in such countries. Maximum benefits will be acquired also if the firm produces cultural goods hence making it easy to address the market needs effectively (Dunning, 1988, 27). Many firms may find this level less risky as the uncertainties are minimal as far as operations are concerned. Alternatively firms may opt to invest in countries that are distant both culturally and developmentally. This may be necessary if the firms deal in products that have universal acceptance such as cement and electrical appliances. Firms may also be seeking new improved technology and resources which may only be found in developed economies (Benito, 1991, 35). These moves help the firms from emerging markets to internationalize in the most appropriate foreign markets given their competencies and their operational needs. These firms seek to directly invest in foreign countries that are distant both culturally and developmentally where they need high levels of technology and skills that cannot be found in emerging markets. By doing so the firms from Latin American countries are able to offer highly competitive brands which will compete favorably with those of rival multinational enterprises from developed economies. Another reason that attracts these firms from emerging markets to invest directly in foreign markets is the ease and appropriateness of their resources in foreign markets where products can be sold at relatively high prices. However, multinational enterprises from Latin American countries may begin investing in global markets that are culturally proximate but distant in terms of development. This may be as a result of dealing in products that are cultural in nature. Therefore, firms that produce goods or services that are popular with certain cultures, it is appropriate to only target consumers that accept the products from a cultural view (Bilkey, 1982, 138). Cultural products therefore are likely to face difficulties in terms of demand if they are offered to consumers from unrelated cultures as they may face absolute rejection. Countries such as United States that have significant numbers of immigrants may attract foreign direct investments from firms from emerging markets (Czinkota, 1982, 87). For example, the Hispanic sub segment in the United States has attracted foreign direct investment from firms that deal in Spanish food. One particular firm is Bimbo which deals in production of Spanish delicacies in the United States of America. These unique and cultural markets in foreign markets influence the firms from emerging market to seize the opportunities offered by such markets as they well equipped to effectively serve such a market. These approach employed by firms from emerging markets as they endeavor to internationalize their operations is still relevant as the approach addresses the challenges of uncertainty associated with foreign markets from a global perspective. The internationalized firms from emerging markets at times begin to establish subsidiaries in foreign countries that are proximate in terms of development although they may be culturally distant (Herman, 2002, 140). Such firms deal in products that are specific to consumers of a certain level of income. Such customers may hail from different cultural backgrounds but have the same levels of income which give them the ability to purchase products offered by multinational enterprises from emerging markets. This is because the low level income population in emerging markets may not be able to provide market for the products which are of high technological superiority. In order to succeed in foreign markets, the firms from emerging markets should consider several factors prior initiating any foreign direct investment project. The firms should ensure that it efficiently transfer productive resources to a new country (Anderson, 1986, 103). This will ensure that such firms undertake profitable businesses abroad. The advantages associated to particular resources should be capable of being transferred to new countries that have potential markets. They should therefore ensure that the disadvantages associated with certain resources are not transferred to a new country. This is because many developed countries have higher levels of regulations which may pose challenges. In conclusion, it is pertinent to point out that the two articles truly explain the scenarios exhibited by the firms from emerging markets in their quest for internationalization. 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