10. Emerging and growing markets Flashcards
Characteristics of emerging markets
- Lower than average per capita income
- Rapid growth
- High volatility
Importance of emerging markets
more population= more infrastructure, need access to seaports and containers to transport goods (or LAN cargo!! demand rising) which will also increase demand for fuel.
Issue related to increased demand as a result of emerging markets (meaning more infrastructure)
prices rise globally, including energy, airline industry runs of unsustainable source of energy.
Liability of foreignness,
face additional social and economic costs when they operate in foreign markets.
Liability of foreignness,
additional costs of doing business include
– Communication costs – Resource costs – Host government discrimination (were able to overcome this by having domestic hubs) – Cultural unfamiliarity – Legal and institutional unfamiliarity
LLL framework
It’s about being in the market & what advantages you gain from the outside -from international expansion.
Linkage (A focus on what advantages can be externally acquired. → accessing resources to address firm specific weaknesses, collaborating instead of overcoming weaknesses alone.)
Leverage (Focus on how barriers to access resources that are often sustained by incumbents may be overcome)
Learning (repeated application of linkage & leverage processes may result in the firm learning to perform such operations more effectively)
OLI and LLL frameworks allow us
to explain MNC’s international expansion strategy. OLI framework is developed based on MNCs from developed market whereas LLL framework is developed based on international expansion strategy of emerging market firms.
LLL Framework lan linkage
Partnerships with other companies, or acquisitions
Bilateral agreements, Liability of Foreignness
Distrust of foreign airlines, greater tendency to trust airlines of their own country
Uncertainty about operation of company in the market
Political instability
Higher taxes
OLI
Ownership
Location
Internationalisation
Ownership –> ownership advantage
(extending proprietary assets abroad) to compete with competitors in host markets→ shouldn’t go overseas if they don’t have necessary assets)
This suggests that MNC possesses a resource that isn’t generally available to others/easily imitated (VRIN)
MNC has high levels of resources which can be applied to production in dif. locations
Location
(integrating activities across sectors of the world with very different factor & resource costs, ie looking at cheaper resource costs via outsourcing, cheaper labour, must also consider political risks. If the company doesn’t have a location advantage, it doesn’t make sense to invest in the market, they could just export their products there (ie vie LLL)) –> LOCATION ADVANTAGE
MNCs have an incentive to produce where (location) they can generate the highest profits.
Location advantages include
Access to resources (eg raw materials)
Cost of required resources (eg cheap labour)
Transportation costs)
Ownership advantage- what do low productivity firms do (OLI?)
produce only in home market, whereas high productivity firms engage in FDI
Ownership advantage LAN
Location advantages include
1. Access to resources (eg raw materials)
2. Cost of required resources (eg cheap labour)
3. Transportation costs)
Unlikely to exist, labour and access to resources likely far cheaper in Latin America than in developed economies,
More expensive in developed economy
Internationalisation –>(building economies of scale & scope through internalising activities spread across borders that would otherwise be dispersed btw numerous firms, must think about risks associated, whether their technology is patented etc → INTERNATIONALISATION ADVANTAGE
Organisation cost of running firm > transaction cost of using the market: use the market
Organisation cost of running firm < transaction cost of using the market: internalise
LOCATION advantage LAN
Location advantages include
1. Access to resources (eg raw materials)
2. Cost of required resources (eg cheap labour)
3. Transportation costs)
Unlikely to exist, labour and access to resources likely far cheaper in Latin America than in developed economies,
More expensive in developed economy
Internationalisation –>(building economies of scale & scope through internalising activities spread across borders that would otherwise be dispersed btw numerous firms, must think about risks associated, whether their technology is patented etc → INTERNATIONALISATION ADVANTAGE
Organisation cost of running firm > transaction cost of using the market: use the market
Organisation cost of running firm < transaction cost of using the market: internalise
Internationalisation advantage LAN
They benefit from having routes to more international spots because then it will be more convenient for passengers who have to travel to different parts of the world other than what is offered by LAN, boost their reputation as an international traveller
Ownership advantage LAN
Does Lan have any assets that competitors cannot access or imitate?
- Brand image, reliability, service awards
- Specialisation into cargo shipping - hard to replicate on the same scale
- Workforce - flexibility and loyalty hard to imitate in other companies
- Longstanding history/reputation of the company
- Expertise (have been in the industry for some time)
- Destinations and routes - difficult to imitate due to bi-laterial agreements
Oneworld alliance - Capacity to do ground service
Porter’s frameworks derive from neoclassical economics
based on notion of equilibrium.
Why would neoclassical economics be useful for analysing EE firms?
neoclassical economics is based on a static notion of equilibrium, making it more suitable for turbulent environments, in contrast to industry analysis which may be outdated before they’re ever implemented.
Using RBV to understand strategic choices in emerging economies
egic choices in emerging economies:
RBV strategy: holds that a firm can earn above normal returns if & only if it has superior resources, which are protected through an isolation mechanism, where acquiring these resources is path & context specific.
How is RBV different as opposed to neoclassical view of firms?
In contrast to the neo-classical approach, which assumes that resources are strategically similar & highly mobile, RBV holds that path dependence & heterogeneity allows firms to develop core competencies.
Nexus of contracts view of firms
Holds that creating & enforcing efficient contracts reduces transaction costs & that efficient contracts can be a source of CA
Nexus of contracts view of firms and EE
notes that costs of transacting in EEs are much higher compared to advanced industrial economies, with costs sometimes being so high that no exchange occurs.
