Impacts of Emerging Economies and Firms on International Business

One of the most remarkable phenomena of recent times is that a large number of firms from emerging economies have come to define and dominate new markets and enter the class of global innovation leaders. Firms that once specialized in cheap but high-quality substitutes (e.g. Brazil’s Embraer), or those that adopted fast second mover strategies (as the one followed by Korea’s Samsung), or firms that offered outsourcing services (for instance, India’s Wipro) are now firmly at the core of the global productivity and innovation frontier. In addition, many small and medium sized local firms that started as exporting joint ventures have moved abroad on their own account.

The recent trend in large-scale movement of outward foreign direct investment (OFDI) by emerging economies has attracted considerable attention in the International Business (IB) literature. Chinese firms’ OFDI has received perhaps the greatest attention. This development can be viewed in three stages. During the first stage (1978–1991), which began after the Chinese government’s initiation of its open-door policy, OFDI began to be conducted largely by state-owned enterprises (SOEs) and was subject to strong regulations and scarce capital resources. The amount invested was modest and ranged from a low of US$39 million in 1981 to a high of US$5 billion in 1991 (UNCTAD, 2010). The second stage (1992–2002) saw an increase in OFDI stock value that reached US$37.1 billion at the end of 2002 (UNCTAD, 2010). This occurred due to changes in the domestic political environment and the adoption of the ‘Go Global’ policy by the Chinese government (Zhang and Filippov, 2009). In the third stage (2003 to the present), China experienced a sharp rise in both the growth rate and the absolute volume of its OFDI spreading to the world. While China’s ODFI accounts for less than 1 per cent of the total OFDI stocks in the world (although it rose from US$28 billion in 2000 to US$230 billion in 2009) and lags far behind the world average in terms of its ratio to GDP, the spectacular speed at which it is unfolding is noteworthy and deserves greater research attention (Zhang and Filippov, 2009).

Internationalization processes and the factors impacting them have been studied very actively since the 1970s. International Business (IB) researchers have sought to explain why some firms internationalize slowly (see Bilkey, 1978; Johanson and Vahlne, 1977, 1990; Johanson and Wiedersheim-Paul, 1975; Morgan and Katsikeas, 1997) and why some internationalize much faster (see Bell, 1995; Madsen and Servais, 1997; McDougall, Oviatt, and Shrader, 2003; Oviatt and McDougall, 1994). Although a substantive body of research has emerged, there is still not enough evidence with regard to the internationalization of firms from some emerging countries. For example, Sandberg (2009: 108) states that traditional internationalization theories ‘need to be adjusted and complemented to be suitable (…) for studying firms taking off from a turbulent emerging market as China’.

Vision and mission are the basis of corporate strategy (Hill and Jones, 2004). Vision, the ideal view of corporate future development (Li, 2005), is a crucial starting point for strategic management (Palmer and Short, 2008). Scholars have analyzed the importance of mission statements from a variety of perspectives (Campbell, 1997; Stone, 1996). Thus, Pearce II (1982) claimed that mission statements point out the direction of the overall sustainable corporate development, make corporate values specific, and gain approval from the public.

Ever since the opening up of the Indian economy in 1990–1991, firms started pursuing internationalization opportunities. Using outward foreign direct investment (OFDI) as an indicator, we can argue that there is a continuous trend of active internationalization of Indian firms. OFDI stock from India for the period 2000–2009 reached US$75 billion (World Investment Report, 2010) whereas it was only US$700 million in 1990–1999.

The literature has emphasized the importance for multinational corporations to develop a global mindset in order to operate in the challenging environment of global business. It has been argued, for instance, that ‘global managers’ should develop global and integrative perspectives (Kedia and Mukherji, 1999). Furthermore, Bartlett and Ghoshal (1992) comment that global managers must also have ‘a broad, non-parochial view of the company and its operations, yet a deep understanding of their own business, country, or functional tasks’ (Bartlett and Ghoshal, 1992: 132).

The dominant internationalization theories, originating in industrially developed countries, can have limited applicability to developing countries due, in particular, to the failure to acknowledge the context of their activities (Kuada and Sorensen, 2000; Ramamurti, 2009); also because they present generalizations with low levels of abstraction (Ramamurti, 2009). Rugman (2009) compared multinationals from developing countries with those from the West in the 1960s, stating that there is no need to create new theories to explain the internationalization of the former. About ten years ago, some authors asserted that the existing literature on the internationalization of companies from developing countries was scarce compared with that of developed ones (Condo, 2000) and found it still to be in an embryonic stage (Kuada and Sorensen, 2000). Ramamurti (2004) holds that the literature on the internationalization of companies from less developed countries is undergoing a structuring process.

During the last two decades, international economics and business researchers have produced a number of theoretical and empirical studies on evolution patterns and determinants of foreign direct investment (FDI). The focus of these studies has been on two main areas. The first one is associated with the dynamic development of multinational companies (MNCs) from developed countries. It aims to reveal the extent to which the global distribution of value-added activities has shaped the dynamics of these firms in the process of globalization. The second area explores determinants of FDI, including the economic, institutional, and social factors affecting and shaping MNCs’ strategies worldwide. These studies suggest that localization decisions influence overseas investments of MNCs. Moreover, their operations in different markets require firm-level adaptations and changes, which are especially demanding in the case of emerging economies. Through the global distribution of value-added activities, MNCs have become agents of value chain integration and economic development worldwide. In this global organization of MNCs’ operations, emerging economy MNCs (EEMNCs) have become important players, determining the competitive environment in an ever increasing number of markets all over the world.

Corporate multinationalization—once the privilege of firms from developed economies—is now becoming a diffuse phenomenon in emerging economies, including Latin America (UNCTAD, 2007; Goldstein, 2007). Although unprecedented in size and relevance, the current wave of internationalization from developing countries is the third to take place. Already in the 1970s and 1980s, a number of third world countries emerged from their economic status as sources of raw materials or as sweatshops, in which low-wage, low-skilled workers produced goods for the richer nations. They were themselves manufacturing and consuming high-quality, high-technology products and establishing foreign subsidiaries, most often in other developing countries (Wells, 1983).

Economic growth requires energy. The global energy sector is driven by several major trends. The first one is the finite supply of mineral energy resources. The time horizons within which non-renewable fossil sources of energy worldwide will be exhausted or become unsustainable economically, socially, and environmentally are relatively short, thus undermining growth.

The resource-based view (RBV) of the firm highlights the importance of rare, inimitable, and non-substitutable resources for the competitive advantage and performance of firms (Barney 2001a, 2001b, 2007; Barney, Ketchen, and Wright, 2011; Wernerfelt, 1984). Knowledge, especially when tacit in nature, has been recognized as one of the firm’s resources with the potential to contribute the most to its competitive advantage (Barney, 2007; Kogut and Zander, 1992, 2003; Morgan et al., 2003; Nonaka, 1994; Newbert, 2007; Polanyi, 1966; Xu, Huang, and Gao, 2010). Tacit knowledge is embedded in employees, has no explicit form, and is unique to the firm (Kogut and Zander, 2003; Nonaka, 1994). The implicit and unarticulated quality of tacit knowledge possessed by a firm prohibits immediate replication or duplication by its competitors. As tacit knowledge resides with individuals from both within and outside the organization, it is viewed as one of the most critical sources of competitive advantage (Bruton, Dess, and Janney, 2007; Haas and Hansen, 2007; Kogut and Zander, 2003).

Globalization is a process of varied intensity over time that causes changes in the business environment. It stands for the widely acknowledged elimination of barriers and integration associated with transition of firm activities to the transnational level. This is often concomitant with growing interdependence of national economies. The vast changes that have been brought about by the globalization process pose complex opportunities and threats for entrepreneurs. The sourcing strategies, and related to this the issue of value chain modularization and relocation, are a form of organizational innovation created as entrepreneurs’ response to changes in the external environment. Consequently, globalization has changed the way firms have been configuring their value chains (Buckley and Ghauri, 2004).

Recent theory development within small firm internationalization emerges from a group of firms whose internationalization behavior has been said to differ considerably from that of traditional firms (McDougall and Oviatt, 2000; McDougall, Shane, and Oviatt, 1994). These firms have been addressed using different titles, some of these being: ‘born globals’ (Knight and Cavusgil, 2004; Madsen and Servais, 1997; Rasmussan, Madsen, and Evangelista, 2001; Rennie, 1993), ‘international new ventures (INVs)’ (McDougall, Shane, and Oviatt, 1994; Oviatt and McDougall, 2005a), ‘technology based start-ups’ (Autio, Yli-Renko, and Salonen, 1997), ‘global start-ups’ (Oviatt and McDougall, 1994), ‘international entrepreneurs’ (Jones and Coviello, 2005), and ‘micro-multinationals’ (Ibeh et al., 2004). These firms have been found to have a common set of core characteristics, which differentiate them from traditional firms: some of them start international operations before or simultaneously with domestic operations (McDougall, Shane, and Oviatt, 1994; Rennie, 1993), and they have accelerated growth within global markets and develop visions and missions from inception based mainly on global markets and customers (Luostarinen and Gabrielsson, 2002). Where traditional small firms have internationalized by way of a predetermined, gradual sequential pattern of internationalization (Johanson and Wiedersheim-Paul, 1975), these firms have been found to exhibit an array of internationalization patterns.

This chapter draws from International Entrepreneurship (IE) and institutional theories in order to explore the rapid internationalization of family-owned ventures from emerging economies. The chapter has been written in response to a number of gaps and challenges identified in the extant IE literature. For example, since the inception of IE (Oviatt and McDougall, 1994), the research in the field has focused mainly on the inter-nationalization of new high-technology ventures from developed economies (Yamakawa, Peng, and Deeds, 2008)¹ and has paid virtually no attention to the internationalization of new (both high- and low-technology) ventures from emerging economies. Further, the research on internationalization of family-owned ventures in IE is at an early stage (Casillas, Acedo, and Moreno, 2007; Kontinen and Ojala, 2010), with effectively no research on family-owned ventures from emerging economies.² With respect to the above, being positioned at the intersection of international business and entrepreneurship streams of research (McDougall and Oviatt, 2000), it seems that the IE field resists blending these two research streams (Keupp and Gassmann, 2009; Turcan, 2006), and it needs to borrow more actively from other disciplines in order for the IE theory to evolve (Turcan et al., 2010).