Advanced Corporate Strategy

ST104x

Challenges faced by EMNEs: liability of origin

Professor Sai: Let us first talk about how firms from emerging markets should respond to
entry of MNEs. And then let’s talk about how firms from emerging markets can become MNEs
themselves.

As you know, MNEs have several advantages over domestic firms in emerging markets. MNEs
tend to be much larger and thereby enjoy economies of scale. They have superior products
and technology, well-known brands and better management capabilities. They also have
deep pockets, which means that they can bear those losses for several years while building
up their market share. In the face of such competition, how should firms from emerging
economies respond?

Professor Srinivasan: Dawar and Frost suggest that there are four distinct ways in which firms
can position themselves.

If they are in an industry in which the pressures to globalize are low, they can become a
defender and focus on market segments where the MNEs are likely to be weak. They can use
their knowledge of local conditions to their advantage and focus on customer needs that are
unique to the country.

Take for example, Ayurveda. Ayurvedic pharmaceuticals and FMCG products are more
popular in India than in other countries. In such kind of markets, competitors like the
Himalaya Drug Company have been successful in defending their position against MNCs
attempts at creating products using Ayurveda as a principal.

Professor Sai: Even in hair care we see MNEs these days and going back to your example of
Ayurvedic products Hindustan Unilever has launched several competing products in this
space. So, given that can domestic firms ever defend themselves in a domestic market?

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 Advanced Corporate Strategy

ST104x

Professor Srinivasan: I think it boils down to what the source of differentiation is. if the source
of differentiation is product development or building branch, I think MNEs will be very
stronger. But if the source of core scientific knowledge like core Ayurveda I think the domestic
firms can build sufficient capabilities.

Professor Sai: These defendable firms can also become an extensor if they have resources
and capabilities that are useful in other countries. Asian Paints global expansion is a good
example of such an extender strategy. They are the leading paints company in India, and they
have capabilities in marketing and supply chain management. They have expanded to
countries in Asia and Africa where they can leverage these same exact capabilities.

Professor Srinivasan: If they are in an industry in which the pressures to globalize are high
but their resources and capabilities are customized to the local market, they can become a
dodger. They can sell out to MNEs like the Parle Group did in India by selling out to Coca-Cola,
they can form joint ventures, or they can focus on narrow, locally oriented part of the value
chain where a domestic company can compete successfully such as distribution.

Professor Sai: In contrast if they are in an industry in which the pressures to globalize are high
and If they have the capabilities to go beyond their borders, they can become contenders
themselves. That is, they can become MNEs themselves, starting with niche markets and then
expanding their breadth.

For example, the Indian IT companies have expanded globally by exploiting their low-cost
advantage. Over time, they have been improving their capabilities, expanding their breadth
of offerings and now they are trying to compete against global majors such as IBM and
Accenture.

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