10. Emerging and growing markets

Question 1

Characteristics of emerging markets

Answer 1

1. Lower than average per capita income
2. Rapid growth
3. High volatility

Question 2

Importance of emerging markets

Answer 2

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.

Question 3

Issue related to increased demand as a result of emerging markets (meaning more infrastructure)

Answer 3

prices rise globally, including energy, airline industry runs of unsustainable source of energy.

Question 4

Liability of foreignness,

Answer 4

face additional social and economic costs when they operate in foreign markets.

Question 5

Liability of foreignness,

additional costs of doing business include

Answer 5

– Communication costs
– Resource costs
– Host government discrimination (were able to overcome this by having domestic hubs)
– Cultural unfamiliarity
– Legal and institutional unfamiliarity

Question 6

LLL framework

It’s about being in the market & what advantages you gain from the outside -from international expansion.

Answer 6

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)

Question 7

OLI and LLL frameworks allow us

Answer 7

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.

Question 8

LLL Framework lan linkage

Answer 8

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

Question 9

OLI

Answer 9

Ownership
Location
Internationalisation

Question 10

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)

Answer 10

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

Question 11

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

Answer 11

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)

Question 12

Ownership advantage- what do low productivity firms do (OLI?)

Answer 12

produce only in home market, whereas high productivity firms engage in FDI

Question 13

Ownership advantage LAN

Answer 13

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

Question 14

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

Answer 14

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

Question 15

LOCATION advantage LAN

Answer 15

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

Question 16

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

Answer 16

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

Question 17

Internationalisation advantage LAN

Answer 17

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

Question 18

Ownership advantage LAN

Does Lan have any assets that competitors cannot access or imitate?

Answer 18

1. Brand image, reliability, service awards
2. Specialisation into cargo shipping - hard to replicate on the same scale
3. Workforce - flexibility and loyalty hard to imitate in other companies
4. Longstanding history/reputation of the company
5. Expertise (have been in the industry for some time)
6. Destinations and routes - difficult to imitate due to bi-laterial agreements
   Oneworld alliance
7. Capacity to do ground service

Question 19

Porter’s frameworks derive from neoclassical economics

Answer 19

based on notion of equilibrium.

Question 20

Why would neoclassical economics be useful for analysing EE firms?

Answer 20

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.

Question 21

Using RBV to understand strategic choices in emerging economies

Answer 21

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.

Question 22

How is RBV different as opposed to neoclassical view of firms?

Answer 22

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.

Question 23

Nexus of contracts view of firms

Answer 23

Holds that creating & enforcing efficient contracts reduces transaction costs & that efficient contracts can be a source of CA

Question 24

Nexus of contracts view of firms and EE

Answer 24

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.

Question 25

Consequences of high transacting costs- nexus of contracts view

Answer 25

1) boundaries of the firm likely to encompass more activities, ceteris paribus since EE firms attempt to economise on transaction costs by having more vertical integration & less outsourcing for value chain activities
(eg boundary blurring inter-organisational relationships in China where they adopt a network based strategy, which enables firms to avoid ownership transfer of assets whilst enabling them access to complementary assets during the transition period)
2) Assets won’t have as much transaction specificity, firms will be less likely to invest in assets that are specific to a particular transaction with another org.
3) hybrid organisational forms (business groups & networks) more prevalent in EEs due to prohibitively high transaction costs

Question 26

how theories of firms can shed light on strategic decisions in EEs- internal organisation of EE firms

Answer 26

RBV notes that firms are less focused on traditional core competencies because organisational stakeholders in EE firms lack the incentive to invest in firm-specific assets which are central to the idea of RBV.
EE firms more entrepreneurially & externally focused since they’re constantly looking for new advantages to keep paced with the volatile, rapidly changing institutional environment, (especially since these volatile conditions can trigger unlearning of current routines & offer novel opportunities)
Nexus of Ks view shows EE firms more likely to be vertically integrated, pointing the way to internal & external market failure for EE firms relative to DE counterparts, with the double market failure explaining the emergence of hybrid organisational forms blurring the distinction between firm & market.

Question 27

In EEs, firms experience internal and external

Answer 27

transaction costs, which limit the extent to which activities are conducted within the boundaries of the EE firm

Question 28

LLL framework and emerging markets

Answer 28

In this framework, the international expansion of emerging country multinationals is driven by resource linkage, leverage and learning.

Question 29

In terms of linkage to gain resources what are important strategic choices to access external resources?

Answer 29

forms of collaborative strategic partnerships in international markets such as joint ventures are important strategic choices to access external resources and are commonly chosen modes of foreign market entry strategies for emerging country multinationals.

Question 30

LLL: Establishing networks of resource exchange and exploitation can

Leverage thus refers to

Answer 30

leverage the linkages between resources and competitive advantages.
Leverage, therefore, refers to the emerging country multinationals’ ability to take advantage of these unique capabilities in their international network of activities

Question 31

Emerging country multinationals, are able to leverage resources by establishing

Answer 31

knowledge sharing across the network. This may also include technology licensing contracts, imitation and reverse engineering

Question 32

Learning processes

Answer 32

accelerate expansion patterns. Companies apply repeated linkage and leverage processes that lead to organisational learning processes.

Question 33

Thanks to linkage and leverage, emerging markets are more

Answer 33

more adapted to the global markets that are themselves increasingly interlinked.