Lecture 7 - Emerging economies & Emerging economy MNEs Flashcards
Khanna, Palepu, and Sinha: Strategies that fit emerging markets.
What are characteristics of emerging markets?
Fastest growing markets
Also offer cost and innovation advantages
Unavailability of
- Efficient local intermediary firms
- Broader macro-level institutions to facilitate business
Institutional voids (lack of markets etc.)
Why do MNEs still go to emerging markets (even if there are difficulties)?
Market seeking
Efficiency seeking
Plus: Managers do not really take institutional aspects into account
–> Most important aspects looked at when entering a new country:
- Market size (61%)
- Political and economic stability (17%)
- Structural conditions (institutional context) (13%)
Each emerging market has different specific institutions that matter. What are 5 components of the institutional context?
- Political and social system
- Country openness
- Product markets
- Labor markets
- Capital markets
What are questions to ask when it comes to the political and social system (institutional context)?
- What form of private property rights protection exists?
- How independent are the media?
- How accountable are politicians?
- Can strangers be trusted to honor contracts?
Senior managers should identify a country’s power centres and assess whether there are checks and balances in place
What are questions to ask when it comes to country openness (institutional context)?
- Are the government, media and the population at large receptive to foreign investment?
- Can a company make greenfield investments and acquire local companies?
- Are foreign intermediaries allowed (i.e. advertising firms, retailers, auditing firms)?
- Can executives leave and enter the country freely?
- Can citizens travel abroad?
Country openness refers to the extent that the country welcomes FDA, but it also includes openness to ideas and openness to travel
What are questions to ask when it comes to product markets (institutional context)?
- What is the availability of data on customer tastes and purchasing behavior?
- Are there cultural barriers to market research?
- Can customers obtain unbiased information?
- Can companies access raw materials of good quality?
Product markets are becoming increasingly more attractive, but MNEs still struggle to get reliable information about the consumer in such markets
What are questions to ask when it comes to labor markets (institutional context)?
- What is the language of the business?
- Are there post-recruitment training needs?
- Can employees move easily from one company to another?
Labor markets are often characterized by large labor pools, but these countries often lack both managerial and skilled workers
What are questions to ask when it comes to capital markets (institutional context)?
Are there capital market inefficiencies in areas such as:
- Barriers to raising capital?
- Weakness in corporate governance (i.e. investor protection)?
- Absence of financial intermediaries?
- Inefficiencies in regulating the financial services sector?
- Poor accounting standards?
- Inadequate procedures surrounding financial distress?
Capital markets are largely inefficient and lack specialized intermediaries in areas such as credit rating, investment analyst, banking services, venture capital and auditing
What are negative and positive effects of worker rights on FDI (labor market - institutional context)?
Negative effects:
Higher worker rights –> Higher labor costs (relative to labor productivity) –> Lower FDI
Positive effects:
Higher freedom of association/collective bargaining rights –> higher political and social stability –> higher economic growth –> higher FDI
Lower child labor –> higher human capital –> higher economic growth –> higher FDI
Lower gender discrimination/inequality –> higher human capital –> higher economic growth –> higher FDI
What are the 3 main options for MNEs towards emerging markets?
- Adapting the business model to the host country (while keeping the core value proposition constant)
- Changing the emerging economy’s context
- Stay out of emerging economies
Ghemawat & Hout (2008): Tomorrow’s global giants? Not the usual suspects
discusses the traditional and recent state of global giants. Explain.
Traditionally:
- Low level of technology and advertising intensity
- Low-cost labor and materials in large scale manufacturing plants
- Privileged network ties with local stakeholders
Recently:
- Technology-based or marketing-based FSAs
- Engagement in new forms of resource recombination
What are competitive advantages of Emerging Multi-National Economies (EMNEs)?
- Managerial advantages
- Home country advantages
- Diaspora (people who are living abroad) (e.g. economic, knowledge/skills, trade facilitator, entrepreneurial endeavors)
What are 6 strategies for foreign MNEs and rank them in terms of R&D intensity and marketing intensity?
- Regional exporters/importers
- Builds upon cost-driven strengths in narrow product niches. These countries are usually other developing economies, where limited competition can be expected from large, developed economy MNEs
- Low R&D intensity; Low marketing intensity - Global exporters/importers
- Focus on product quality and are supported by well-functioning, international supply chains and distribution arrangements
- Low R&D intensity; High marketing intensity - Technology fast followers
- Contract manufacturers
- Medium-High R&D intensity; Low marketing intensity - Technology leaders
- Rely on their in-house technological innovation, but do not attach much importance to sales and marketing
- High R&D intensity; Low marketing intensity - Global market niche players
- Their continued success depends on finding a narrow product niche where they can be successful in international markets
- Very High R&D intensity; Medium-Low marketing intensity - Multinational challenges
- Engage in head-to-head competition with large MNEs from the developed world
- High R&D intensity; High marketing intensity
What are strategies to follow for EMNEs? And what is the main challenge for EMNEs?
- Specialize in cost-efficient, mass-scale manufacturing
- Spread the own value chain across borders
- Move up the value chain (manufacturing rather than delivery)
- Specialize in the narrow segments of the value chain
The main challenge for EMNEs is the lack of managerial and organizational capabilities to govern a multinational network
What is a complementary perspective of Gadiesh & Vestring on (E)MNEs –> Success-related and preferred strategy for MNEs?
Success is largely attributed to their focus on products of sufficient quality and sufficiently low price to gain market share in segments of the middle class and B2B
- In some industries, the share of the good enough products represents 80% of the total market (Example: Huawei and its strategic pillars)
Strategy for foreign MNEs: “Dual Branding” (an effort to bring multiple companies together to enhance brand identity, recognition, and awareness)
