6.6 Emerging market multinationals
6 min read•august 21, 2024
Emerging market multinationals (EMNCs) are reshaping global business. These companies from developing economies are expanding internationally, leveraging unique advantages like and to compete with established players.
EMNCs face challenges like the "" and governance issues. However, their impact is significant, disrupting industries and shifting global competition. Understanding EMNCs is crucial for grasping the evolving landscape of multinational corporate strategies.
Characteristics of emerging markets
- Emerging markets play a crucial role in multinational corporate strategies due to their unique economic landscapes and growth potential
- Understanding these characteristics helps corporations tailor their approaches to capitalize on opportunities while mitigating risks
- Key features include rapidly evolving economies, large populations, and increasing integration into global markets
Economic growth patterns
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- Rapid GDP growth rates often outpacing developed economies (typically 4-7% annually)
- Cyclical nature of growth with periods of boom and bust
- Shift from agriculture and basic manufacturing to services and high-tech industries
- Rising middle class fueling increased consumer spending and market expansion
- Infrastructure development driving economic activity and attracting foreign investment
Institutional voids
- Absence or underdevelopment of specialized intermediaries, regulatory systems, and contract-enforcing mechanisms
- Weak legal frameworks and property rights protection
- Limited access to reliable market information and research
- Underdeveloped capital markets and financial systems
- playing a significant role in business transactions
Market volatility
- Higher levels of economic and political instability compared to developed markets
- Currency fluctuations impacting international trade and investment
- Susceptibility to external shocks (global financial crises, commodity price swings)
- Rapid changes in government policies and regulations affecting business environments
- Demographic shifts and urbanization trends influencing market dynamics
Emerging market multinationals (EMNCs)
Definition and key features
- Companies originating from emerging economies that engage in outward foreign direct investment
- Rapid internationalization often skipping traditional stages of expansion
- Strong government support and ties in home countries
- Ability to operate effectively in challenging institutional environments
- Focus on innovation and adaptability to compete globally
Differences vs developed market MNCs
- Later entrants to global markets with accelerated internationalization paths
- Stronger reliance on relationships and networks for business operations
- Greater emphasis on reverse innovation (developing products for emerging markets first)
- More flexible organizational structures and decision-making processes
- Higher tolerance for risk and uncertainty in business environments
Competitive advantages of EMNCs
Cost leadership strategies
- Leveraging lower labor and production costs in home countries
- Efficient resource utilization and lean management practices
- Economies of scale through large domestic markets
- Vertical integration to control costs across the value chain
- Innovative cost-cutting measures in product development and distribution
Frugal innovation capabilities
- Developing affordable products tailored to price-sensitive markets
- Reverse engineering and adapting existing technologies
- Focus on core functionalities and eliminating non-essential features
- Utilization of local resources and indigenous knowledge
- Rapid prototyping and iterative design processes
Institutional knowledge
- Experience navigating complex bureaucracies and regulatory environments
- Ability to operate effectively in markets with weak formal institutions
- Strong understanding of emerging consumer preferences and behaviors
- Expertise in managing stakeholder relationships in diverse cultural contexts
- Capacity to leverage informal networks and business ecosystems
Internationalization strategies
South-south expansion
- Targeting other emerging markets with similar economic and institutional characteristics
- Leveraging cultural and historical ties between developing countries
- Exploiting first-mover advantages in underserved markets
- Adapting business models to fit local contexts and consumer needs
- Forming strategic alliances with local partners to gain market access
South-north expansion
- Entering developed markets to acquire advanced technologies and brands
- Leveraging cost advantages to compete with established players
- Targeting niche markets or underserved segments in mature economies
- Establishing R&D centers to tap into innovation ecosystems
- Building global brand recognition and credibility
Acquisition vs greenfield investment
- Acquisitions provide rapid market entry and access to established assets
- Challenges include integration of different corporate cultures
- Benefits include immediate access to technology and distribution networks
- Greenfield investments offer greater control over operations and strategy
- Requires more time and resources to establish market presence
- Allows for customization of facilities and processes to company standards
- Hybrid approaches combining elements of both strategies
- Consideration of local regulations and restrictions on foreign ownership
Challenges for EMNCs
Liability of emergingness
- Negative perceptions associated with country of origin
- Lack of international management experience and global networks
- Limited access to capital markets and higher costs of financing
- Difficulty in attracting and retaining global talent
- Challenges in meeting international quality and safety standards
Corporate governance issues
- Opaque ownership structures and family-controlled businesses
- Weak shareholder rights and protection
- Inadequate financial reporting and disclosure practices
- Conflicts of interest between controlling shareholders and minority investors
- Challenges in implementing global best practices in corporate governance
Brand recognition barriers
- Limited global brand awareness and perception
- Difficulty in competing with established international brands
- Need for significant investment in marketing and brand building
- Overcoming negative stereotypes associated with emerging market products
- Challenges in communicating unique value propositions to global consumers
Global impact of EMNCs
Disruption of industries
- Introduction of innovative business models challenging industry norms
- Price competition forcing established players to reevaluate strategies
- Accelerated technological advancements in various sectors
- Reshaping of global supply chains and production networks
- Creation of new market segments and consumer categories
Shift in global competition
- Increased competition for resources, talent, and market share
- Rebalancing of economic power towards emerging economies
- Emergence of new global leaders in various industries
- Pressure on developed market firms to innovate and adapt
- Changes in the dynamics of international trade and investment flows
Influence on global value chains
- Integration of EMNCs into complex global production networks
- Upgrading of capabilities and moving up the value chain
- Reshaping of sourcing strategies and supplier relationships
- Increased south-south trade and investment flows
- Emergence of new regional and global value chain hubs
Case studies of successful EMNCs
Huawei (China)
- Rapid growth from equipment reseller to global telecom leader
- Heavy investment in R&D and innovation (5G technology)
- Strategic partnerships and strategies in foreign markets
- Challenges faced due to geopolitical tensions and security concerns
- Diversification into consumer electronics and enterprise solutions
Tata Group (India)
- Conglomerate structure with diverse portfolio of businesses
- Successful international acquisitions (Jaguar Land Rover, Tetley Tea)
- Focus on corporate social responsibility and sustainable development
- Leveraging Indian talent pool for IT services (Tata Consultancy Services)
- Balancing traditional values with global business practices
Embraer (Brazil)
- Transformation from state-owned enterprise to global aerospace player
- Niche focus on regional jets and military aircraft
- Strategic partnerships with global aerospace companies
- Leveraging government support and export financing
- Innovation in aircraft design and manufacturing processes
Future trends for EMNCs
Digital transformation
- Adoption of advanced technologies (AI, IoT, blockchain) to enhance competitiveness
- Development of digital platforms and ecosystems
- Leveraging big data analytics for market insights and decision-making
- Expansion into e-commerce and digital services
- Investments in cybersecurity and data protection capabilities
Sustainability initiatives
- Integration of environmental, social, and governance (ESG) factors into business strategies
- Development of sustainable products and services
- Implementation of circular economy principles in production processes
- Addressing climate change risks and opportunities
- Alignment with global sustainability frameworks and standards (UN SDGs)
Geopolitical considerations
- Navigating trade tensions and protectionist policies
- Adapting to changing global supply chain dynamics
- Managing risks associated with political instability in home countries
- Balancing national interests with global expansion goals
- Developing strategies to address potential decoupling of economies
Key Terms to Review (19)
Access to natural resources: Access to natural resources refers to the ability of individuals, communities, or companies to obtain and utilize resources provided by nature, such as minerals, forests, water, and fossil fuels. This access is crucial for economic development, especially for emerging market multinationals that often rely on these resources to support their operations and enhance their competitiveness in the global marketplace.
Cost Leadership: Cost leadership is a competitive strategy aimed at becoming the lowest-cost producer in an industry, allowing a company to offer lower prices than its competitors. This strategy often involves streamlining operations, achieving economies of scale, and utilizing efficient production techniques. By focusing on cost efficiency, companies can capture a larger market share and maintain profitability even in highly competitive markets.
Deglobalization: Deglobalization refers to the process of reducing interconnectedness and interdependence between countries, often resulting in a decline in international trade, investment, and cultural exchange. This phenomenon can occur as a reaction to globalization, driven by various factors such as economic protectionism, political nationalism, and social movements that prioritize local over global interests.
Eclectic paradigm: The eclectic paradigm is a framework that explains why companies engage in foreign direct investment (FDI) by integrating three key elements: ownership advantages, location advantages, and internalization advantages. This approach helps to clarify how firms can successfully operate across borders by leveraging their unique resources while considering the specific attributes of the host country and deciding the best way to exploit their capabilities.
Emerging market consumer behavior: Emerging market consumer behavior refers to the unique purchasing patterns, preferences, and motivations of consumers in developing economies. These markets, characterized by rapid economic growth and increasing disposable income, exhibit distinct trends influenced by local culture, socio-economic conditions, and globalization. Understanding this behavior is crucial for multinational corporations as they develop strategies to effectively engage with and cater to these diverse consumer bases.
Emerging Market Multinational Corporations (EMNCs): Emerging market multinational corporations (EMNCs) are firms based in developing countries that operate in multiple countries and are often characterized by their rapid growth and increasing competitiveness on a global scale. These companies leverage their unique advantages, such as lower labor costs and access to local resources, to expand into developed markets, challenging traditional multinationals. Their rise is reshaping global trade patterns and business strategies.
Foreign exchange risk: Foreign exchange risk refers to the potential financial loss that a company might face due to fluctuations in currency exchange rates. This risk can significantly impact multinational operations as companies conduct transactions in different currencies, making them vulnerable to changes that affect their profitability and competitive positioning. It is critical for companies to understand this risk, particularly when making investment decisions or engaging in international trade.
Frugal Innovation: Frugal innovation refers to the process of developing products or services that are affordable, efficient, and resource-conserving, often tailored to meet the needs of consumers in emerging markets. This approach emphasizes simplicity and cost-effectiveness, allowing businesses to deliver value without the frills, making it especially relevant for companies looking to penetrate cost-sensitive markets or innovate under resource constraints.
Global South: The Global South refers to countries in Africa, Latin America, Asia, and parts of the Middle East that are often characterized by lower income levels, economic development challenges, and a history of colonialism. This term highlights the socio-economic divide between these countries and their more affluent counterparts in the Global North, emphasizing disparities in wealth, technology, and access to resources that affect their participation in the global economy.
Huawei: Huawei is a Chinese multinational technology company that specializes in telecommunications equipment and consumer electronics. Established in 1987, it has grown to become one of the largest providers of telecommunications infrastructure and smartphones globally, showcasing the significant rise and influence of emerging market multinationals in the technology sector.
Informal economy: The informal economy refers to economic activities that occur outside of formal regulations, protections, and tax systems. This includes unregistered businesses, street vendors, and casual labor, which often operate without government oversight or employee benefits. It plays a crucial role in many emerging markets, where formal employment opportunities are limited and can contribute significantly to local economies.
Institutional voids: Institutional voids refer to the absence or inadequacy of market-supporting institutions that facilitate efficient economic transactions, such as legal frameworks, regulatory bodies, and financial systems. In emerging markets, these voids can hinder the operations of businesses and create challenges for multinational corporations trying to establish a foothold. The presence of institutional voids often forces companies to adapt their strategies and find innovative solutions to navigate these gaps.
Liability of emergingness: Liability of emergingness refers to the challenges and disadvantages that firms from emerging markets face when competing on a global scale. These companies often struggle with perceptions of lower credibility, lack of experience, and limited resources compared to established firms from developed markets. This can hinder their ability to secure partnerships, attract talent, and access financing, ultimately impacting their global competitiveness.
Localization: Localization is the process of adapting products or services to meet the specific needs and preferences of a particular market or region. This involves not only translation of language but also adjustments to cultural, legal, and social norms, ensuring that offerings resonate with local consumers. By embracing localization, companies can enhance their market relevance, improve customer satisfaction, and foster brand loyalty across diverse markets.
Lower labor costs: Lower labor costs refer to the reduced expenses associated with employing workers, which can significantly impact a company's profitability and competitiveness. This concept is particularly relevant in global business, where companies often seek to minimize expenses by relocating operations to regions with cheaper labor. This strategy can influence market dynamics, production decisions, and overall corporate strategies, especially for emerging market multinationals that aim to leverage cost advantages in their operations.
Political Risk: Political risk refers to the potential for changes in the political environment or government policies to adversely affect the operations and profitability of businesses. It encompasses a range of factors, including instability, corruption, regulatory changes, and the potential for expropriation or nationalization, which can impact various aspects of international business activities.
South-north expansion: South-north expansion refers to the phenomenon where companies from emerging markets in the Global South expand their operations and influence into more developed markets in the Global North. This trend signifies a shift in global economic power dynamics, as firms from developing countries seek growth opportunities and access to advanced technologies, resources, and markets that were traditionally dominated by Western multinationals.
South-south expansion: South-south expansion refers to the growing economic and trade relationships among developing countries, particularly in the Global South, as they seek to strengthen their positions in the global economy. This trend allows emerging market multinationals to leverage opportunities in other developing nations, fostering collaboration, investment, and shared growth while reducing reliance on traditional markets in the Global North.
Tata Group: Tata Group is one of India's largest and oldest multinational conglomerates, founded in 1868 by Jamsetji Tata. The group has diversified interests across various sectors including steel, automobiles, IT services, consumer products, and telecommunications. It serves as a prime example of how emerging market multinationals can leverage local resources and human capital to expand globally.