Tutorial Week 4

Strategy and Governance in Emerging

Markets:
Case study of Embraer
International Patterns of “Corporate
Landscapes”
 LMEs: UK/USA models of “shareholder
supremacy”/“shareholder activism”
 CMEs: “Relationship Governance”
➢ The governance roles of banks in Germany
➢ Models of family control (India, South-East Asia)
➢ Governance in business groups (South Korea, Japan)
➢ The role of State in management and governance in
transition/emerging market economies
Emerging/Transition Economies:
Institutional Context
 From state control to liberal market economies?
- the State used to be the dominant owner of production and
distribution assets, including land and natural resources;
- state bureaucracy controls pricing mechanisms;
- limited alternative employment outside public sector

 A need to create private ownership and private enterprise, but:

- no developed capital markets and private banking;
- low levels of individual savings;
- rampant corruption

 Political pressures to undertake a rapid transition and

modernization
- a need to create support among emerging middle classes;
- pressures to stay competitive in global markets
 State-controlled Holdings: A
“Hybrid” Model?
 Created through privatisation of state assets
 The State authorities move from “setting the rules” to
direct involvement in decision-making and governance
 Government’s involvement in strategic decisions, such as
M&A, divestments, product diversification
 Strategic objective to create “national champions” – EM
multinationals (EM MNEs)
 A “hybrid governance”: Western governance systems
combined with administrative/State control
- Private owners but also state shareholding (sometimes
through a “golden share“ – Embraer in Brazil)
- The State‘s veto over board decisions
- Board members have government connections.
Case Study: Gazprom (Russia)
 Controls a third of the world's gas reserves
 Accounts for 92% of Russia's gas production
 Major supplier of natural gas to Europe
 The World’s third largest corporation
 Annual earning maxed in 2006 to £31.55 billion
 Employed 432,000 people
 Listed abroad (New York, Frankfurt, and London)
 The government of Russia owns 50.002%
Case Study: Gazprom (II)
 Chairman of the Board - Russia’s Special Presidential
Representative for Cooperation with the Gas Exporting
Countries Forum
 Board members include 2 state ministers, chairman of
state-owned bank, etc.
 Gazprom’s political connections are seen as the keystone
to its viability as an enterprise
 Gazprom has become a central player in Russia’s recent
political conflict with the EU and other Western countries
Emerging Market MNEs: Key Advantages

 The high-growth markets are in their own backyard

 They are familiar with emerging market institutions, consumer
preferences, logistical challenges, dealing with political instability
and uncertainty, being used to the strong role of the state—all
things with which MNCs from advanced economies struggle a lot!
 They have unique capabilities in low-cost production – an
advantage in industries that don’t require high-tech or high levels
of marketing intensity (e.g., white goods, where Haier (China) is
the market leader)
 They have access to local resources - cheap labor, natural
resources
 They are often backed by the state - political connections give
them preferential access to key resources, such as financial
resources
EM MNEs: Specific Disadvantages
 They frequently miss state-of-the art technology and capabilities
 They (still) have very little international experience; top
managers are usually local and are ill-prepared to internationalize
 EM MNEs don’t enjoy a strong brand value - this constrains them in
their pricing strategy
 They face greater opposition compared to Western firms when
engaging in M&As abroad (in particular the U.S. is quite hostile
vis-à-vis Chinese FDI)
 May suffer from a ‘Liability of emergingness’ – this goes beyond
and is qualitatively different from liability of foreignness
 Weak institutional environment in EMs may deter private
investors

How can they overcome these disadvantages?

Case study of Embraer.
Tutorial Week 4
Case study: Embraer

- How did the transition from full state ownership

to commercial, privatized enterprise help
Embraer to become one of the largest aircraft
manufacturers in the world?
- What are the continuous corporate governance
improvements in Embraer, and what else needs
to be done for it to be successful in Western
markets?