Managing International Operations - Lenovo and China - Case Study Example

Managing International Operations Introduction The world business is changing and the dominant economies like US, Europe, and Japan, are having stiff competition from the emerging markets multinationals. Over the past years, multinational enterprises from the developed economies have controlled the markets including, acquisitions, foreign direct investments, and creating opportunities. The global market has always been dominated by multinationals from these countries. Recently, this is rapidly changing due to the increase of companies from the developing countries. The rise of emerging markets is remarkable, and the percentage and influence of the multinational corporations from the developed countries have declined (Khanna & Palepu, 2006). Emerging markets are countries that have undergone economic transition, thereby experiencing rapid economic development. Various centers of economic power and activities characterize the emerging markets. There is no particular list of identifying the emerging market countries; however, reports identified several countries including China, Mexico, India, Turkey, Brazil, Mexico and South Korea. The four largest emerging markets are India, China, Russia, and Brazil. According to the latest projections, these four countries will add approximately 220 million consumers. The economy of these countries may overtake UK, U.S., and Japan. Multinationals in emerging markets Recently multinationals from the developing countries are shaping the global markets. The companies have grown rapidly over the past years, rising from home countries to the world market and becoming strong competitors, thereby changing international market environment. The multinationals from developed countries have invested in the developing countries because of various reasons such as access to new market, economic liberalization, cheap resources, and portfolios development. In the past decades, developing countries, for example, India and China, allowed multinational to invest in their countries because they wanted to gain exposure to the international markets. These countries reduced restrictions and regulations, thus reducing trade barriers. On the other hand, the multinationals from developed countries were able to access these countries to obtain cheap workforce and increase global competitiveness by reducing cost. Additionally, the companies were able to access new markets for their products and services. In the end, these companies enlarged their portfolios through investments, raise market share, and gain a competitive advantage. Rise of Emerging Market Multinational Enterprises Research indicate that the developing countries account for approximately 48% of the world gross domestic product, and is likely to overtake the developed countries in the next few decades (Khanna & Palepu, 2006). These developing countries continue to rise because they export cheaper goods to developed countries. Several drivers have contributed to the growth of these economies. Advancement in technology including the internet and other technological innovations has connected people and business from all parts of the world. It has eliminated all the barriers of communication and distance, thus making it possible for multinationals to work with emerging economies. In addition, the developing countries have an opportunity to communicate and interact with the developed countries. The rise of economic openness has been contributed by the increase in trade agreement both regional and international, thus reducing trade barriers. The economic liberalization allowed the governments to adapt and integrate policies with the integration agreements, reducing trade barriers, and allowing foreign direct investments by the multinationals. This has resulted in the increase of economic growth economic for the developing countries. Additionally, multinational uses expansion strategies in order to increase their assets. Multinational enterprises have increased their activities in the emerging markets to expand their business, as well as become global competitive players. Developing countries had plenty of raw materials, cheap workforce, and required low capital; as a result, becoming attractive markets for the multinationals from developed countries. In other words, these countries become major hubs for foreign direct investments in order to access new markets. Emerging Market Multinational Enterprises: Lenovo from China China became a global competitive player after joining the World Trade Organization (WTO). In the past decades, there were no major innovation in China, and it was not taking part in the international economy. However, in the past few decades, the country has adjusted to changes in the global economy and become a primary market for multinational enterprises. The cost of workforce is cheap in China, and has been a competitive cost-leader. Also, it specializes in manufacturing and production, and thus many multinationals have outsourced production in China. However, China is facing intense competition from other emerging markets such as India due to cheap workforce. Moreover, others sectors in the developed and developing countries are significant competition. China has large domestic market, for this reason, most companies have ben dependent on the countries market rather than global markets. This has resulted in companies having standardized products determined by the local markets. However, China has benefited from increased research and development due to the rise of the middle class. In addition, research and development have enabled China to compete with developed countries, thus increasing their opportunities in the global markets. Within the past decade, China has increased its outward foreign direct investments, mergers and acquisitions (Deng, 2009). Emerging market multinational enterprises enter into foreign market so that they can learn or gain resource to gain competitive advantage in the domestic markets or to expand their business in the international markets. Following, we will focus on the rise of Lenovo, a Chinese multinational. Lenovo is one of the Chinese multinational, which is partially owned by the state, which is now recognized as a global brand. A branded company is advantageous because it earns a gross profit of more than 15%, and it will have more loyal customers because of name recognition. While unbranded company receives a lower gross margin of about 5%. In the past years, Chinese markets were recognized for low price products, and thus Lenovo faced many challenges before it was acknowledged to be a trusted PC manufacturer. Over time, they dealt with an issue of recognition, learning and dominating home country markets. The first strategy was to sell their products with corporate clients and establishing a brand in the segment market and then entering into the consumer markets. However, home market was not enough to make Lenovo become accepted in the international market. Secondly, the company changed their brand name, which was initially Legend to Lenovo, which was a Chinese name (Rui and Yip, 2008). This would enable the company to enter the international markets and acquire leading American multinational. Lenovo became one of the Chinese multinational that gained international recognition to a high-end PC manufacturer after acquiring the personal computer division of the IBM Company in 2005. Currently, Lenovo is the second largest PC manufacturer in the world, and biggest exporter of personal computers. Over the years, Lenovo has proved to be a competitor in both domestic and international markets. Its continuous growth is due to its response to the market needs and development of new products (Wang et al., 2012). Lenovo continues to expand its range of products, and has currently introduced smartphones and tablets. According to Lenovo was the second largest smartphone seller in China and fourth globally. Advantages Emerging market multinationals enterprises uses their country’s specific advantage for lower operation cost and cheaper resources to gain competitive advantage in their domestic country. For this reason they can attract investors due to their overall competitive prices that the developing countries offer in workforce and operation costs (Li, 2007). The developing countries have low income; therefore, the cost of labor is lower than developed countries. According to World Bank per capita data, the developing countries are in the lower rank, while the developed countries have highest per capita income. This is the reason emerging markets multinational enterprises use the country specific advantage to provide cheap workforce and lower operation costs for the investors. For example, India has attracted many multinational corporations because of their low wages. In addition, developing countries have abundant resources, thus emerging multinational enterprise can become the supplier of natural resources to the other multinational enterprises. Most developing countries have abundant supply of natural resources, and the emerging multinational enterprises have access to these resources. This advantage helps the companies to internationalize. For example, a Brazilian firm known as Vale is a large supplier of iron. Moreover, countries with natural resources can integrate with other companies through forward vertical integration to supply the raw materials (Mathews, 2002). However, companies with limited natural resources may use backward integration in order to secure the resources. Finally, emerging multinationals enterprises may also use their firm specific advantage to understand the local markets. The companies know the local environments, thus can make a product that suits the need of the local markets. They create cheaper products, but with similar function as those from developed countries multinationals. For example, one of the largest emerging markets multinational developed Nano, a cheaper product that suited the local market. In addition, these companies can operate in an unstable market conditions better than developed markets countries. For example, they can provide quality services at a very cheaper price compared to companies in developed countries. Challenges Although, they have become stiff competition to the established multinationals in the developed countries, they also face numerous challenges. Nevertheless, some firms from developing countries have become the new global market. One of the problems with emerging markets multinationals is lack of brand equity (Luo and Tung, 2007). Therefore, they have remained at the bottom in the global marketplace. They face challenges on how to create new competitive advantage in the world market. Learning continues to be expensive, especially due to the advancement of technology, as well as stiff competition from other firms. In other word, the emerging markets multinationals must continue learning new skills and knowledge to achieve firm specific advantages rather than cost based competencies. These companies should use the global competition to increase their capabilities so that they can gain competitive advantage. Firms’ entry into the global economy faces a lot of competition from both the developed multinationals and from one another. The features of multinationals that make them very competitive are a significant threat to their internationalization. A recent study indicates that their major risks are other emerging market multinationals in their own countries or other firms from developing countries. This is a bigger challenge because most of the firms focus on the domestic markets, particularly in their early stages of development. Many emerging markets face significant challenges in accessing and securing inputs such as skill, energy, raw materials, and capital. Continuous growth can be maintained only when there are sufficient inputs. Research indicates that lack of competencies is a major hindrance to growth. Despite improvement in education system, the firms still face challenges of acquiring people with the necessary skills and experiences. This has led to increasing labor costs in the developing countries due to the problems of employee turnover. Accessibility of raw material has also become a significant challenge to the rising competition for resources. However, many emerging market multinational have overcome this challenges. Rationale for the international investments of developing country MNEs Several researchers indicate that emerging markets multinationals are likely to have advantages related to production, network, and the firm organizational structure. Moreover, the country specific factors give the firm individual competitive advantage in their internationalization strategies. Country advantage Firms’ domestic position, including low cost, size, a local market, and the degree of monopoly at home country is an important advantage (Contractor, 2013). Low cost of operation is a major source of competitive advantage to the emerging markets multinationals. In addition, low cost of labour and availability has played a significant role for a firm to gain competitive advantage. The companies can also operate in imperfect capital markets at home, thus easier access to capital and low cost access to raw materials. Location advantage also helps a firm to focus on domestic production activities and establish a market in other countries. Firms thus may pursue internationalization strategy for products that made at home markets in other developing countries. Firm also gain relative market power at home since some of the developing countries have the largest and the fastest growing markets globally. This allows the firm to build a competitive advantage that will enable the firm to face international markets. In addition, multinationals from developing countries concentrate their mergers and acquisition activities and have accumulated capabilities, thus enjoy competitive advantages such as capital-intensive production and economies of scale. Companies from developing countries have adopted innovative strategies to enter global markets that have facilitated their internalization. This has allowed them to access latest technologies, as well as best practices. Firms’ advantages are incorporation of innovative organizational forms to influence resources by means of international connections. Some firms from the developed firm have invested in strategic functions such as human resource and research and development. Thus it can gain a new competitive advantage through strategic partnership in home and international markets (Ramamurti & Singh, 2009). For example, Haier and Tata, utilized innovative management practices, ability to enter new sectors through strategic partnership have enabled both companies to become successful. Several studies point out that the participation of networks is a crucial mean to substitute the available resources. Companies may get knowledge on how to enter into the global markets. Research indicates that companies improve their capabilities through learning in an established network (Mathew, 2006). Emerging market multinationals can gain competitive advantage by associating with domestic institutions. The role of the state is crucial in shaping the firm internationalization (Mathews, 2006). For example, in China most of the multinationals are state owned, and some private companies are assisted with loans, selection of joint ventures partners and favorable taxation. These institutions help in the in the stage development and international activities. Government support and other institutions network act like a competitive resource for international activities of the domestic firms. In Indian, the government has played an important role in promoting developments of domestic firms in technology through regulation and investment efforts. Modality of Internationalization There are two processes of internalization of emerging market multinationals namely path dependent and sequential stages. The path-dependent shows that investment position is directly related to the level of a country economic development. As the country grows, it becomes more attractive to foreign investments through interaction between domestic firms and multinational enterprise. The firm may first exploit outward foreign direct investments. This has been confirmed by analysis of several countries, who declare that the investment position is dependent on the gross product per capita. For example, China uses human capital, exports, and inward foreign direct investments. Sequential internationalization is a stepwise process based on acquiring knowledge about global markets and modes of operation over time. The firm start to invest in cultural and institutional markets. The existence of cultural ties and foreign linkages plays a significant role in firm’s decision to invest in the international market. In China, for example, cultural proximity affects the decision on a firm to invest in a foreign country. While in Asia, business relation facilitates linkages with foreign companies, especially during the initial stages of internationalization. For example, TATA started internationalization through joint venture in developing countries. A recent research indicates that emerging market multinationals have successfully acquired companies in home markets to rely on cultural affinities. Conclusion The significant increase of emerging market multinationals has become a major concern because of the changes in the global competitive environments. They have been improving their competitive position in both domestic and international level. Some companies have cooperated with the government to improve their position and the economy of the country. 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