Internationalization Process of Emerging Market Multinationals - Coursework Example

Name: Course: Tutor: Date: Topic: Does the internationalization process of emerging market multinationals differ from multinational enterprises from developed economies? OVERVIEW Internationalization has been defined by different scholars as the increasing propensity of organizations to operate their business transaction across their national boundaries by packaging their products and services in a way that they are easily consumed by diverse consumers of overseas market without necessary repackaging to meet their needs. Emerging economies on the other hand refers to those national economies which are rapidly growing in to more developed economies. This growth is measured by the presence of equity markets, different forms of market exchange and regulatory bodies in the nation. Emerging markets refers to the countries markets whose economies have been restructured to meet the dynamic change in consumer preference, technological advancement and availability of resources. By so doing the countries’ economies succeed in contributing wealth and opportunities towards trade. According to World Bank, China, India, Brazil, Russia and Indonesia are the five biggest emerging markets. . Emerging markets are actually less developed markets which are at the last stages of development compared to other less developed markets. They have a high growth potential, but low market capitalization. Multinational Enterprises is defined as a corporation operating in more than one country, where the operation is at the host countries are but managed from the home country. Rich and poor economies have been successfully linked by Multinational Enterprises which play a pivotal role in their economic growth. Multinational Enterprises transmit capital, knowledge, ideas and value systems across national boundaries. REVIEW LITERATURE Emerging Market Multinationals Enterprises ( EM-MNEs). Petersen & Pedersen (1995) observed that the path of expansion by Emerging Market Multinationals Enterprises ( EM-MNEs) is slow and incremental, with recurrent loops of trial learning. When these firms decide to invest abroad, they are face with challenges especially where they rarely have enough resources such as appropriate technology, modern brands, financial capital and experience management. Consumers in this market are unique and should be understood before designing strategies to operate in an emerging market. (Peng, 2001). This is because different consumers require different products this therefore call for a different level of strategy. Once the consumer group has been identified, there will be enough insight in to level of strategy to implement. The main characteristic of this market is the level of poverty. The market is characterized by low and middle income earners; the average living standard is low. The growing middle class do not have high purchasing power as compared to those developed economies. (Khanna and Palepu 2010) Foundations of internationalization by EM-MNEs Multinationals enterprises from developed economies Multinational Enterprises have established themselves as key regional players with global ambitions. They are market capitalist and are distinctive as documented by Khanna & Palepu (2006). According to Eisenhardt (2010).They have markets that follow free market policies even prior to the global liberation period. They are large stable markets but have low growth rate. The firms are technologically advanced and reliable infrastructure. Dunning (1995) highlighted the benefits that Multinationals enterprises draw by extending their markets abroad. First, the firms extend their properties and assets abroad to greatly reduce the local market competition. Secondly, the firms are able to draw more advantage by integrating their activities across the global sectors which have diverse factors of production such as cost, resources and manpower. Finally there firms are also able to tap more advantages derived from enjoying economies of scale and scope by internalizing business activities stretched across national borders, this would have otherwise been dispersed between numerous firms. The challenge however is how to meet the consumers needs. Sachwald (2001 ) Affirmed that The challenge these firms are facing is how to balance between the host country and the home country preferences, this is because the firm’s controls is in the home country which has a final say in the product design. Critical Analysis Critical analysis of the subject coupled with a comprehensive review of literature has clearly indicated that internationalization process of emerging market multinationals differ from multinational enterprises from developed economies. Internationalizing firms from poor economies or developing nations are pursuing strategies that will enable them catch-up with world class firms, this is achieved through re-engineering their business activities and strategic partnerships to conform to the global demands and match up with the market leaders. However, most of the EM-MNEs have been left to the whims of the local market competition as protection at home is eroded by market liberalization, they have little time to market and the production is continuously increasing to control costs. The EM-MNEs therefore have developed in a more risky business environment where political and economic situation is rough and tough. EM-MNEs notions of risk are totally different from that of firms from developed countries EM-MNEs have mechanisms to adapt in tough business environment such as using backup generators in rural areas where power supply is not available. These features depict EM-MNEs’ ability to operate reliably in highly unreliable environments. Therefore the risk tolerance for emerging markets are more reliable compared to their competitors the Multilateral Enterprises from developed economies. Mathews (2006) observed that EM-MNEs can have an advantage over the world-class competitors if they leverage their strategic and organizational innovations in order to establish a presence in the global market; a market that is heavily populated with well established multinationals. Such strategies can lead to higher benefits to emergent global economy generated by low costs, organizational innovations and local knowledge. According to Bartlett & Ghoshal (2000), the formula that leads to the success of EM-MNE’s was the ability to approach the global competition as an opportunity to assemble capabilities, propel their activities to more profitable market segments, and employ organizational strategies that converts their late coming into a source of competitive advantage. The EM-MNE’s critical starting point is to focus on securing access to resources which could otherwise be unavailable. They then need to heavily invest in R & D and innovation so that they can generate their own distinctiveness. Their late coming advantage can also be boosted by applying advanced management techniques which accelerate searching and chasing of opportunities for growth. The rapid organizational changes can also better adapting to the evolving market conditions. EM-MNEs strive to truly understand consumer’s needs in the emerging markets. This is why they keep products cheap and portable. These features are hardly found with the multinationals from developed economies. For example adding flash light to the mobile phone to be used as a torch during power outage is one of the indicators of the length the emerging economies can go to satisfy their consumers. It has been mentioned that emerging economies face macro risks that could derail their growth compared to multinationals from developed economies; it has been proved that today’s developed countries are also overwhelmed by serious macro risks . It is important therefore for the policy makers to have a solid understanding of the role of EM-MNEs in emerging economies. This is because it is the policymakers that are influencing the regulatory regime whereby both EM-MNEs and local market partners operate. They should clearly understand how foreign direct investment (FDI) manipulates economic development and public welfare. This therefore means if the host state perceives that FDI will benefit the local economy then it shall be motivated to give competitive incentive to entice foreign investors. Without proper understanding of the policy relevance, the benefits and impact of MNEs on host economies will not be realized. Wells (1998). There is need for international mergers and acquisitions, or even collaborative alliances; these will nature international production networks that favor closer business integration. Strong international network fosters internationalization strategy which is heavily intertwined with technological and product diversification strategies (Cantwell & Piscitello, 1999). Khanna & Palepu (2006) sought to establish how large firms emerged to triumph in their own markets. The researchers found out that most of the EM-MNEs start by their own market where they exploit their local knowledge of product market. IT firms for example have deployed strategies on exhausting local IT human resource before venturing in to world market. The concept of geocentric versus ethnocentric mindset has been adopted by some EM-MNEs where doing business abroad as it is done at home or polycentric mindset where doing business abroad is determined by how the locals do it. Bartlett and Ghoshal (2000) highlighted the Thermax case, Thermax is an Indian company that took its products to the world market and adopted global standards even when its Indian domestic sales were still the highest source of revenue. The firms from emerging economies need to start with the role of first-tier suppliers for world class firms in order to operate on a global scale and eventually grow and enhance their profitability. When this is not well planned, there are risks that relates to overstretching geographically and functionally. The cultural difference can also become a barrier especially where the EM-MNEs is operating in a more advanced country. CONCLUSION It is evident that the more the global economy interconnects, the greater the pressures on business players to internationalize so that it is in a position to enhance their competitiveness. The emergence of broad analysis on how EM-MNEs master this advancement can therefore offer meticulous insights into the broader argument on the discrete relationship between multinational diversification and internationalization. The critical analysis of this issue is significant because it shades more light on the wider questions of multinationals and internationalization. The study and general analysis is done in the hope that it will indeed provide more concentration on the topic and create a cumulative body of knowledge on the subject. The EM-MNEs may share some of the highlighted features in internationalization though these may not be entirely a representative of the entire body of developing economies. This analysis has identified the most crucial features which are taken as standard depiction of the internationalization process. References Bartlett, C.A., & Ghoshal, S. (2000). Going global: Lessons from late movers. Harvard Business Review, 78: 133-142. Cantwell, J.A., & Piscitello, L. (1999). The Emergence of Corporate International Networks for the Accumulation of Dispersed Technological Capabilities. Management International Review, 39: 123-147. Dunning, J.H. (1995). Reappraising the eclectic paradigm in an age of alliance capitalism. Journal of International Business Studies, 26: 461-491. Goldstein, A. (2008), ‘The Internationalization of Indian Companies: the case of Tata,’ CASI Working Paper 08-02, Center for the Advanced Study of India, University of Pennsylvania: Philadelphia. Hennart, J.-F. (2012). 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Cambridge, UK: Cambridge University Press. Ramamurti, R. (2012). What is really different about emerging market multinationals? Global Strategy Journal, 2(1), 41–47. Sachwald, F. (ed.) (2001). Going Multinational: The Korean Experience of Direct Investment. Oxford: Routledge. Wells, L. (1998). Third World Multinationals: The Role of Foreign Direct Investment from Developing Countries. Cambridge, MA: MIT Press. Zeng, M., & Williamson, P. (2007). Dragons at your door: How Chinese cost innovation is disrupting the rules of global competition. Boston: Harvard Business School Press. Read More