4.

The Rise of New Players:

Emerging Market Multinationals

Prof. Jean-François Hennart

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 Recent foreign investments by
firms based in emerging markets
Lenovo’s acquisitions of IBM’s PC division (2005)

JBS’s acquisition of Swift and Pilgrim’s Pride

Tata’s acquisition of Jaguar-Land Rover (2008)

Geely’s acquisition of Volvo (2010)

Fosun’s acquisition of Club Med (2015)

ChemChina acquisition of Pirelli (2015)

Suning Group acquisition of Inter Milan (2016)

Haier’s acquisition of GE appliance division (2016)

ChemChina’s acquisition of Syngenta (2017)

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Do you know which firm is the world’s largest

PC manufacturer?

Baked goods manufacturer?

Beef, pork and poultry processor?

White goods manufacturer

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1. Are existing theories able to explain
Emerging Market Multinationals (EMMs)?

2. What are the future prospects of

EMMs?

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 OLI Theory

• Ownership advantages (Firm-specific

advantages) (intangibles)
• Location advantages (Country-specific
advantages) (local resources)
• Internalization advantages

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EMMs have weak technology and weak brands =
weak Ownership advantages (weak Firm
Specific Advantages)

EMMs
“start from behind without ..skills and
knowledge” (Mathews, 2006)
“lack knowledge-based firm-specific
advantages” (Rugman, 2009)

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 Yet OLI theory says that Ownership advantages (firm-
specific advantages) are a sine-qua-non condition for
Multinational Enterprises

“No firm specific capabilities, no multinationals”

(Guillen & Garcia-Canal, AMP, 2009, p. 34)

“Firms cannot internationalize successfully if they do

not possess firm specific advantages” (Fleury & Fleury in
Cuervo-Cazurra et al, 2014, p. 243)

So why are EMMs investing abroad?

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 Three answers in the literature
1. OLI is fine, but EMM FDI is non-sustainable
“When will China generate its own world-class
MNEs? The answer is---not for 10 or 20 years”
(Rugman, 2009)

2. OLI is fine, but EMMs have different FSAs than

Western Multinational Enterprises
i.e. skills at operating in countries with weak formal
institutions (Cuervo-Cazzura & Genc, 2008)

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3. OLI must be replaced by new theory
“Can we account for the success of these
latecomers… The answer is: No, we can’t”
(Mathews, 2006)
 Linkage-Leverage-Learning : EMMs go abroad to
acquire resources, not to exploit them
 Springboard hypothesis (Luo and Tung, 2007)

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 All these explanations are not fully
satisfactory

EMMs do innovate and successfully exploit

these innovations overseas

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 Emerging market MNEs do innovate
(Williamson & Yin, 2013)

Example of Chinese firms

• Cost innovation (e.g. BYD)

• Application innovation
• Business model innovation
• Technological innovation
• Shanzai innovation
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• EMMs compete also in developed countries
• How do EMMs manage to compete with their
teachers? How do they fund their learning
sprees?

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EMM foreign investments can be explained by
transaction costs/bundling theories (Hennart,
1982; 2009) which state that:
1. One does not need Ownership advantages
(FSAs) to be a foreign direct investor
2. Location advantages are as, or even more,
strategic than Ownership advantages (FSAs)

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 One does not need Ownership
advantages (Firm Specific
Advantages) to be a Multinational
Enterprise
Internalization means using hierarchy over the
price system to handle interdependencies

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 Organization of Interdependencies

Employment relationship

A B
Market exchange

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 EMM foreign investments can be explained by the transaction
cost theory of the MNE (Hennart, 1982, 1990, 2010)
Type of investment Rationale
Backwards and forward integration Inefficient markets for intermediate
between extraction and processing inputs

Backward and forward integration Inefficient markets for distribution

between manufacturing and selling services

Horizontal investments to exploit Inefficient markets for intangibles

intangibles

Investments in developed countries Inefficient markets for intangibles

to acquire intangibles

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 When does the search for FSAs lead to EMMs?
Knowledge embedded in

Assets Services of Assets People Firms

Local Low Components Licensing Migrants

embed Machines Franchising Returnees
edness Patents Mgt. contracts Consultants
Foreign Emerging market
Trademarks Consulting
employees based EJV
OEM
High Acquisitions of
Foreign-
based firms
Foreign-based
Greenfield
EJV and WOS

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Foreign Direct Investment by Emerging
Market MNEs

• Some exploitation of intangibles

• Servicing of exports
• Natural resource acquisition
• But also acquisition of European, American
and Japanese firms to obtain intangibles
• and setting up of greenfield R&D units abroad

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But how can EMMs, which are competing with
MNEs in their home market, afford these
technology-acquiring shopping sprees and what
explains their successful catch-up?

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 What explains the rapid rise of
EMMs?
Two Western misconceptions

1. Innovating is more profitable than imitating

2. Having top technology guarantees high profits

everywhere

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 Innovating vs. imitating

Many successful business models are imitations

Ryanair copied Southwest airlines

Apple copied the visual interface developed by

Xerox Palo Alto Research Center

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Developing innovative products is not
enough

• The MRI story: EMI vs. General Electric

• The strategic importance of complementary

assets

• Control of complementary local assets explain

the rise of emerging market firms
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The EMI Cat Scanner Story

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 Teece (1986)
Profiting from technological innovations depends on
two factors

-appropriability regime for intangibles

-accessibility of complementary assets

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 In the EMI case…

• the appropriability regime for

intangibles was weak: the scanner
could be reversed engineered
without infringing EMI patents
• The main complementary asset
(access to the customers) was held
by GE (it had a strong sales and
repair force) and was hard to
duplicate

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 Application of the model to
emerging markets
Appropriate context is the domestic market in emerging
markets

Competition between local firms vs. foreign MNEs

Complementary assets in this case are complementary

local assets

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A foreign MNE needs to bundle its intangibles
with complementary local assets

• Permits (Governments)
• Land
• Labor
• Utilities
• Access to customers

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 Location advantages are as strategic as
Ownership advantages

• In OLI, Ownership and Location advantages

are not handled in a parallel way
• Ownership advantages (FSAs) assumed to be
traded on imperfect markets (Internalization)
• Location advantages (CSAs) assumed to be
freely available to both local and foreign firms

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“Location advantages are specific to a
particular country but available to all firms”
(Dunning and Lundan, 2008, p. 6)

“Country-Specific advantages are common to

all firms located in a country” (Lessard and
Lucea, 2009)

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EMMs are only ‘resource-poor’ if one follows
OLI theory and assume that Location
advantages (CSAs) are freely available to firms
investing in a target country
If instead one takes a bundling perspective
(Hennart, 2009), then the EMM control of
Location advantages (CSAs) give them
advantages that can be even more strategic
than the MNE’s control of Firm-specific
advantages.

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MNE production in an emerging market requires the
bundling of
imported intangibles (technology, reputation,
management) and
local assets (land, natural resources, utilities,
permits, customers, etc.)
Optimal outcome is that which maximizes the rents
available from bundling both sets of assets on all
available markets:
inputs to build assets, assets, services of assets,
firms in which assets are embedded

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Four alternative markets to bundle inputs
Land Knowledge

Inputs for assets (reclamation) Scientists

Assets Land titles Patents

Services of assets Rentals Licensing patents

Firms holding the Buying firms sitting Buying firms with

assets on land patents and tacit
knowledge

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 Optimal bundling in an emerging market (e.g. China)

Knowledge held by the Western MNE

Easy to transfer Difficult to transfer

3 MNE is sole
Easy to residual claimant
Distribution transfer =
held by local
wholly-owned
Chinese firm affiliate of the
MNE
2 Chinese firm 4 Joint venture
Difficult to imitates, rents or between MNE
transfer t buys knowledge and Chinese firm
from the MNE
= wholly-owned
Chinese firm

Source: Hennart 2009

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How can EMMs afford these asset-
seeking investments?
Who captures the gains from the bundle?
The party whose assets have fewer substitutes
(who has monopoly power)

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Division of the Gains of Selling the Bundle in an emerging market

Knowledge held by the MNE

Low bargaining power High bargaining power

(many substitutes) (few substitutes)

Low bargaining 1. Consumers 3 MNE captures

power capture most of the most of the
(many value of the bundle value of the
substitutes) bundle
Distribution
held by local High bargaining 2 local firm 4 MNE and local
owner power (few captures most of firm share the
substitutes) the value of the value of the
bundle bundle
t

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 Bargaining power of CSA owners in
emerging markets?

Created private monopolies

–Local firms are incumbents
–First mover advantages of incumbents
• Preemption of scarce assets
• Buyer switching costs

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 Examples
• Lenovo
• Haier
• Bimbo
• CVRD/Vale

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 Lenovo
• Developed an add-on card that could read
Chinese characters
• Became distributors of HP and AST
• Set up motherboard manufacturing in Hong
Kong
• 1988: Started to make own brand computer
Acquired IBM PC Division
Now world’s largest PC seller
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“Lenovo has emerged as the dominant player in the
Chinese PC market because of its huge distribution
network” (Chen, Qin, Ye, Yin, 2001)
“Lenovo..created a distribution network that has
proven nearly impossible for foreign and even
domestic competitors to imitate. It has continued
with this strategy as it has extended its capabilities
into manufacturing and R&D” (Xie & White,
2004:18).

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 Haier
Own logistic network
Service and repair with own employees

Joint ventures in Indonesia, Philippines, Dubai,

Iran, Algeria, Jordan, Pakistan, Bangladesh
Greenfield plant in USA in 1999
Acquired Italian firm in 2001
In 2016 bought GE appliance division
8 overseas design and 6 overseas R&D centers
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 Bimbo
• Mass produces bread and distributes it everywhere
in Mexico (in late 1990s 14,000 trucks making
420,000 daily deliveries)
• Resisted 1991 attack by Pepsi
• 1989 expansion to Latin America
• 2008: With the acquisition of Weston Foods,
becomes the largest US baker
• 2010: acquires Sara Lee North America Fresh Bakery
Group
• Now world’s largest baker
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 CVRD/Vale
• Set up by UK investors as free-standing firm
• Acquired by Brazilian government in 1942
• 1977: discovered and developed the Carajas
mine in Amazon
• 1999 to 2007: acquires all Brazilian
competitors and becomes sole Brazilian
exporter of iron ore
• 2006: Bought INCO
• Now the world’s largest iron ore and nickel
producer
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Government monopolies
–Natural resources
–Governments as monopolistic
purchasers and sellers

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 CRRC
• Mid-1990s: China MOR decides to build high
speed train network
• Negotiates with Alstom, Siemens, Bombardier
and Kawasaki contracts for train sets to be
produced in Chinese joint ventures
• Chinese absorb technology and are now
competing with their former teachers on
international projects

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Inefficient market for acquisitions in
Emerging Markets
–Restrictions
–Due diligence
–Digestibility

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 Bargaining power of FSA owners is
declining (1)

Low barriers to imitation and further

innovation
• Weak protection of intellectual property
in emerging markets
• Advantage of imitation
less trial and error
no sunk costs

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Bargaining power of FSA owners is declining (2)

• Markets for technology are becoming more

competitive
greater codification
more specialists
modularization
expatriates and returnees

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Source: Kaidong Feng, Catching Up or Being Dependent, PhD thesis, University
of Sussex, 2010

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 Bargaining power of FSA owners is
declining (3)

• Efficient market for corporate control

in innovating countries
due diligence
restrictions
digestibility

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Optimal bundling in an emerging market: international oil industry

Knowledge held by MNEs (oil majors)

Easy to transfer Difficult to transfer

3 MNE is sole
residual claimant =
Easy to wholly-owned
transfer affiliate of the Oil
majors
Oil reserves
held by local
firms (NOCs) 2 Local firm steals, 4 Joint venture
rents or buys between oil major
Difficult to t knowledge from the and NOC
transfer MNE = wholly-
owned NOCs

Source: Hennart 2009

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Case study: the International Oil
and Gas Industry

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 Case study: world oil industry

• Oil majors share of world oil and gas reserves fell

from 85% in the 1950s to 10% today (90% owned by
companies of countries with the deposits = NOCs)
• Oil majors share of oil production in steep decline
• Technology available from independents
(Schlumberger, Baker-Hughes..)
• Oil major-NOC production-sharing agreements leave
75% of the profits with NOCs
• 6 of the largest 10 oil and gas companies are NOCs

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Company Production (m Reserves (bn
barrels/day) barrels)

Saudi Aramco 12.7 307

Gazprom 8.4 112
NIOC 6.1 311
Exxon Mobil 4.1 25
Petro China 3.6 23
Kuwait Petroleum 3.3 112
Shell 3.3 8
Pemex 3.2 11
BP 3.0 7
Chevron 2.9 9
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 But…

• Challenge of digesting acquisitions

– Geely-Volvo

• Cost of political embededness

– Reputation spillovers (e.g. Huawei, Lenovo)
– Inefficient allocation of resources
• By governments
• By firms (e.g. Geely)

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• Not all governments in emerging markets have
used their monopsony power to acquire
technology for local firms
• Even the Chinese government is not always
successful
– Semiconductors (only 10% of semiconductors
used in China are Chinese)
– Car industry

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 Conclusions
• Transaction Cost theory of the MNE is able to
explain the rise and the modalities of
Emerging Market MNEs.
• Local owners of complementary assets have
sometimes strong bargaining power and may
be able to capture most of the gains of the
bundle
• They can use their monopoly power to barter
access for technology, or the gains to finance
intangible-seeking investments
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• Markets for technology (including markets for firms)
are often more competitive than markets for local
complementary assets
• Allows EMMs to catch up technologically, in part
through FDI (greenfields and M&As)
• Bundling theory underscores Western
underestimation of the importance of
complementary local assets
• …and overestimation of the profitability of radical
innovation vs. imitation
• This adds up to an underestimation of the
competitiveness of Emerging Markets MNEs

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