The Rise of Multinationals from Emerging Economies

The spread of particularly American multinational enterprises (MNEs) in the first half of the last century marked an increasing domination of the world economy by these firms. In the second half of the twentieth-century the dominance of American firms was challenged by a wave of MNEs from Europe, Japan and Newly Industrialised Economies. At the turn of the century it is, however, a group of rather ‘unexpected’ firms, such as Embraer, Huawei and Tata, from emerging economies that have stamped their mark on the world stage. Since then more MNEs from emerging economies are joining their ranks. The rise of emerging economy MNEs (EMNEs) has coincided with a shift in many aspects of production from industrialised countries to emerging economies and the accelerating dispersion of international R&D activities. In some emerging economies, this process is accompanied by the rise of a type of state capitalism. These changes pose challenges and bring opportunities for all participants in international business, including EMNEs themselves, developed economy MNEs (DMNEs), governments and multilateral organisations such as the World Trade Organization (WTO).

This chapter presents the keynote speeches delivered by Peter Buckley (University of Leeds) and Jean-François Hennart (University of Tilburg) in the Academy of International Business, UK and Ireland Chapter Annual Conference in April 2014. The session was chaired by Yingqi Wei (University of Leeds) (co-chair of the conference).¹

In September 2014, the people of Scotland will vote in a referendum proposing that Scotland should become an independent country. If voters in Scotland accept the proposal, Scotland would become a new country. The White Paper containing the case for independence (Scottish Government, 2013) clearly states that an independent Scotland would continue to be an open economy. In these circumstances, foreign direct investment (FDI) both inward and outward, and foreign trade, would be central to the Scottish economy. In effect, a yes vote leads to the creation of a new small developed economy that is heavily integrated into the global economy. In different parts of the world, separatist movements are seeking to break away from the countries they currently are part of, for example, Wallonia and Flanders in Belgium, Catalonia, and the Basque Country in Spain, Quebec in Canada, various parts of Indonesia and in many other places. International business research has not investigated the implications for FDI and trade of the possibilities of successful separatist movements creating new small open economies. It is possible that a number of new small open economies could emerge in the coming years. There is research, but not much, on existing small open economies and FDI and trade (Barry and Kearney, 2006; Hooley et al, 1996). This work reveals that small open economies can prosper and attract considerable volumes of FDI that often stimulates exports.

Situated within the broader conference theme of historical change, this panel session brought together international business and economic geography perspectives on multinational enterprise (MNE) evolutionary trajectories. The panel session follows a series of past conference sessions aimed to increase dialogue and interaction between economic geographers and international business scholars. These included several sessions at the Royal Geographical Society and Institute of Geographer’s Annual Conference in 2010 and the Association of International Business in 2012. The aim for this conference panel session was for panellists to offer a range of empirical and conceptual observations to interrogate our existing understandings of the spatial and historical development of MNEs. While space and time often provide distinct lenses on the operations of MNEs, the panel discussed the ways in which the two can be combined to provide more nuanced conceptualisations and frameworks for analysis, which can powerfully complement existing conceptual frameworks and methodological approaches in international business. This chapter is a record of the panel session and, as such, offers a direct representation of the speakers’ presentations, their discussions and their question and answer session. The chapter begins with Martin Hess’ discussion of continuity and change in MNEs and global production networks, followed by Rudolf Sinkovics’ analysis of the uptake of economic geography work on global sourcing by international business.

Foreign investments by emerging-economy multinational enterprises (EMNEs) have recently generated much scholarly interest (Buckley et al., 2008; Mathews, 2006; Williamson and Raman, 2011). Key theoretical debates have focused on how this investment differs, if at all, from that by developed-economy multinationals. This work has revealed key insights into the nature of EMNEs and the implications of their activities for international business theory (e.g. Annushkina and Colonel, 2013; Gameltoft et al., 2012; Mathews, 2006; Ramamurti, 2012; Sinkovics et al., 2014). In particular, research has highlighted two key factors that distinguish outward foreign direct investment (OFDI) by emerging-economy firms compared to their developed-economy counterparts. First, home-country governments play a relatively prominent role in promoting foreign investments by EMNEs, especially mergers and acquisitions (Buckley et al., 2007; Child and Marinova, 2014; Ramamurti, 2012; Sauvant, 2009; Zhang et al., 2011). Second, EMNEs often acquire firms abroad for their superior capabilities (Mathews, 2006).

Over the past few decades, scholars have demonstrated that government policies and supports can foster innovation, help new firms to overcome liability of newness and provide conditions for local firms to thrive (Chu, 2011; Edquist, 2011). It has also been demonstrated that such supports can provide the basis for local firms’ competitive advantage (Petersen and Pedersen, 2002). However, scholars have remained relatively silent on how government support for state-owned enterprises (SOEs) can become a source of liability and even lead to such firms’ failure (Doganis, 2006). This dearth of scholarly work is puzzling given that such research has the potential to enrich our understanding of government policies, processes and factors that lead to business failure.

Internationalisation of multinational enterprises (MNEs) has received considerable attention in the international business (IB) literature in the past decades. Survival of MNEs’ subsidiaries is of great interest to both academicians and practitioners. Although there has been discussion whether foreign direct investments (FDIs) or subsidiary performance is positively correlated with subsidiary survival, several studies have found that subsidiary survival positively correlates with financial performance and investors’ satisfaction (Geringer and Hebert, 1991; Vermeulen and Barkema, 2001). Further on, subsidiary survival provides good information related to dynamics of foreign subsidiaries, which is useful to policymakers in the host country (Dhanaraj and Beamish, 2009). In this study, the goal is to analyse firm-, industry- and institution-specific determinants of subsidiary survival of Nordic MNEs in China from 1982 to 2012.

Facing fierce global competition, firms often establish international joint ventures (IJVs) with foreign firms (Kwon, 2013). However, researchers notice a high rate of IJV failure (e.g. Hennart, Kim and Zeng, 1998). One of the key reasons is that firms often have different goals and ways of communications. Another reason is that inter-partner conflicts often lead to dissolution of partnership (Fey and Beamish, 1999; Pajunen and Fang, 2013). Thus, understanding conflict is crucial to organisations (Boonsathorn, 2007, Das and Kumar, 2010; Krone and Steimel, 2013) since conflict resolution strategies of parent firms affect IJV performance (Fey and Bearmish, 1999; Lu, 2006; Yavas, et al., 1994). Lin and Germain, 1998) suggest that foreign parent firms differ in their choice of conflict resolution strategies (CRS). Wang, Lin, Chang and Shi (2005) notice that conflict handling styles of partner firms becomes an important topic in IJV research, and White III, Joplin and Salama (2007) maintain that conflict resolution strategy is an underexplored area in the international business and management literature.

Emerging economies are increasingly becoming long-term investment locations for Multinational Enterprises (MNEs) from developed countries. An important facet of foreign firms’ strategies in emerging economies is to engage in the policymaking process of these economies, as a means to reduce the negative impact of uncertain institutional environments and to shape host-government policy in a way that is conducive to their long-term business operations (Ahuja and Yayavaram, 2011; Li, Zhou and Shao, 2008; Luo, 2001, 2006; Sun, Mellahi and Thun, 2010; Zhou, Poppo and Yang, 2008). A key decision for firms in this regard is about their nature of participation in the policymaking process (Hillman and Hitt, 1999; Hillman, Keim and Schuler, 2004). While some firms may choose to participate in the policy process on an individual basis — that is, without co-acting with other firms, others may decide to participate collectively, or in a collaborative manner, such as through associations of firms belonging to the industry/sector or with those that collate the voices of firms across industry verticals (Astley and Fombrun, 1983). By engaging in collective action, foreign firms can influence policy and governance issues such as product quality standards, codes of conduct and environmental protection that are of collective interest (Boddewyn and Doh, 2011).

Modern venture capital is recognised as an important catalyst for fostering entrepreneurship, innovation and economic growth, especially in emerging economies (Lerner, 1999). Venture capital firms seek to support enterprises that progress within a relatively short space of time from start-ups or small beginnings to high growth firms (Shane, 2008). Value-adding activities by venture capitalists (VCs) can result in higher survival rates for investee firms compared to similar ‘non-venture capital’ ventures (Arthurs and Busenitz, 2006). Yet, the input of VCs does not always result in positive outcomes (Zacharakis and Meyer, 2000), and failure or weak performance in investee firms is frequently explained by conflict in the entrepreneur-venture capitalist (E-VC) relationship (Higashide and Birley, 2002; Yitshaki, 2008). Indeed, conflict is almost unavoidable in a relationship often defined by control rather than trust (Das and Teng, 2001) and where power asymmetry typically favours the investors (Pfeffer and Salancik, 2003). The root of much conflict is a failure to agree on the goals to be achieved by an investee firm or the strategy to be adopted in pursuit of those goals (Jehn and Mannix, 2001).

Forming an international joint venture (IJV) is a strategically important step that shapes a firm’s internationalisation process (Park and Ungson, 1997) and is a strategy intended to quickly achieve geographical diversification or organisational growth. Many IJVs have been created for partners to comply with local restrictions on foreign ownership in host economies. Although there are many other reasons, one agreed upon point regarding IJV creation is that IJV learning is essential for a firm’s sustainable growth in highly heterogeneous and competitive international markets (Bresman, Birkinshaw and Nobel, 1999; Hamel, 1991; Lane, Salk and Lyles, 2001).

There exists a growing body of literature examining firms that internationalise soon after their inception. Such firms are commonly referred to as international new ventures (INVs) and are defined as ‘business organisations that from inception seek to derive significant competitive advantages from the use of resources and the sale of outputs in multiple countries’ (Oviatt and McDougall, 1994: 49). Although many terms now define the phenomenon, those of ‘born global’ and ‘international new venture’ have become somewhat interchangeable, as have the criteria used to categorise them. In this chapter we mostly use the INV term because this can be seen as more encompassing.

The welfare-enhancing role of spillovers from foreign direct investment (FDI) in a host country generates significant interests and debates among policymakers, long after a wide range of regulatory changes in favour of FDI in the late 1980s and the 1990s. The expectation of positive spillovers reinforces the development of government policies to attract multinational enterprises (MNEs) to the host country. However, as is documented in surveys of the literature on FDI spillovers (Görg and Strobl, 2001; Havránek and Irsová, 2012; Meyer and Sinani, 2009; Wooster and Diebel, 2010), the empirical evidence on FDI spillovers is rather mixed. The surveys highlight two important factors that might offer the explanations of mixed findings. First, the degree of foreign ownership is a primary factor in determining the strength of linkages between domestic and foreign firms and thereby affects spillovers (Javorcik and Spatareanu, 2008). As argued by Görg and Greenaway (2004), MNEs may be effective at preventing spillover effects of firm-specific assets. This is connected to the ownership strategies of MNEs that often use wholly owned subsidiaries (WOS) to better control the technologies they transfer to their foreign locations. Second, absorptive capacity of domestic firms and the strength of linkages between domestic and foreign firms are critical for spillovers. However, studies taking these factors into consideration are sparse. According to Havránek and Irsová (2012), among 1205 horizontal spillover estimates from 52 studies, only 5.7 per cent and 7.8 per cent control for absorptive capacity of domestic firms and the strength of linkages between domestic and foreign firms, respectively.