Advanced Corporate Strategy

ST104x

Performance of EMNEs

As we discussed before, the empirical evidence on the performance effects of geographic

diversification has not been conclusive.

What about the performance of EMNEs; The Emerging Market Multi-National Enterprises?

Again, there is mixed evidence but the broad conclusion that we can draw is that FDI is
associated with poor performance for EMNEs. This is not surprising given the liability of
foreignness, which is even higher for EMNEs and the disadvantages that EMNEs have in
comparison to MNEs from developed countries. When emerging market companies go global,
they face many difficulties. These companies have a liability of origin.

For example, a product with a “made in India” or a “made in China” tag may be perceived as
low quality in some European markets. Their late entry into globalization may mean that they
did not have the scale to compete. They may lack access to capital, managerial talent,
suppliers who can produce high quality components, demanding customers who can push
them to become more efficient and an eco-system that supports innovation.

Does this mean that firms from emerging markets should stay away from
internationalization?

Definitely not. Given the current levels of globalization and the advantages that MNEs
possess, there is really no option of focusing only on domestic markets. If firms from emerging
markets want to stay relevant, they have to become contenders themselves. Even if the
financial performance does not improve in the short term, there is evidence that
internationalization leads to more sales and more innovation, which in turn can lead to
superior performance in the long term.

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 Advanced Corporate Strategy

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Then, we can rephrase the question. If emerging market firms have to internationalize, what
do they have to do to ensure success?

Khanna and Palepu suggest three ways in which EMNEs can overcome these weaknesses.

I. First, they can replicate their business model in countries that have structural
similarities.
II. Second, they can adapt their business models to developed markets.
III. And third, they can acquire global capabilities to compensate for institutional voids.

Let us look at the first two options in a comparative manner. Should EMNEs first go to other
developing markets before entering developed markets, like Huawei has done? Or should
they first enter developed markets and then enter other developing markets, like Haier has
done?

There are good arguments for both options. An EMNE’s liability of origin will be lower in other
emerging economies as compared to developed economies. They are likely to face weaker
domestic competitors in emerging economies as compared to US, Europe or Japan. The
growth rates in emerging economies are higher than those in developed economies. The
saturated markets in developed economies makes it difficult for a new company to enter their
markets. Finally, the “administrative distance” and “economic distance” is likely to be lower
for other emerging economies.

If a firm knows how to operate under difficult conditions in its home country – poorly
developed infrastructure, under-developed institutions and low per capita income- then they
can operate in other countries that have similar conditions. Thus, it makes sense for an EMNE
to target other emerging economies.

Indian consumer product companies such as Dabur and Godrej have followed such an
approach. Both these companies have expanded to the Middle East, Africa and South East

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 Advanced Corporate Strategy

ST104x

Asia where they have been able to leverage the capabilities that they have built up in their
domestic operations.

Interestingly, there are good arguments for going first to developed countries as well. The
markets in developed countries are huge. This is where the customers are – the customers
who can pay for products and services.

The developed countries are also great markets for procuring inputs such as skilled employees
and advanced technology. Selling products or services in a developed country can be
challenging for an EMNE. But it is these challenges that can push an EMNE to improve its
capabilities and become globally competitive. And once the EMNE establishes itself as a
player that can sell its products in developed countries, it actually becomes easier to go to
other emerging economies. This is exactly how Haier has become one of the largest players
globally in the consumer appliances industry.

The third option suggests acquiring global capabilities to compensate for institutional voids
and overcome liability of origin. What are the different ways this can be done?

I. First, EMNEs can acquire firms from developed economies and then transfer
capabilities from the subsidiary to the parent, which is the opposite of what happens
in a typical internationalization process. For example, Tata Motors, the Indian
automobile company bought Daewoo Commercial Vehicles of Korea. By acquiring
Daewoo, Tata Motors was able to get access to the technology and capabilities for
building trucks that are heavier than what Tata Motors produced.

II. Second, they can hire expatriates who have the necessary skills or procure technology
from developed countries. Tata Motors has hired expatriates with expertise in the
automobile industry in developed countries. This company also has opened design
centres in Europe to develop automobile designs.

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 Advanced Corporate Strategy

ST104x

III. Third, they can list themselves overseas and get access to low-cost capital. Such
overseas listing also requires costly changes in financial reporting, which only high-
quality firms can bear. So, overseas listing can be a credible signal of quality to both
customers and suppliers. The scrutiny that comes from an overseas listing can also
push a firm to improve its operations and capabilities.

Overall, we can say that it is a long process that requires patience and if done well, can help
an emerging market firm become an MNE that can compete as an equal with MNEs from
developed countries.

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