Rules of the Game for Emerging Market Multinational Companies from China and India
Introduction
Emerging economies as a whole have continued to gain in prominence both, in terms of their contributions to global GDP as well as to foreign direct investment (FDI). By 2009, Japan and the United States' share of the world's FDI stock was falling while that of emerging economies was rising (Ramamurti, 2012). Some evidence also suggests that FDI flows from emerging economies are being targeted towards advanced economies in both resource industries and higher-value adding activities (Aulakh, 2007, Bartlett and Ghoshal, 2000, Cuervo-Cazurra and Genc, 2008, Ramamurti and Singh, 2009). These insights posit an interesting question, such as ‘What factors are leading to this shift from the triad world dominance to the emerging markets?’
International business scholars have conducted substantial research2 on internationalization process (Anderson, 1993, Cavusgil, 1980, Dunning, 2001, Johanson and Vahlne, 1990), multinational companies' (MNCs) strategy (Kogut, 1985, Ohmae, 1999, Rugman, 2003), and foreign direct investment (FDI) (Kuemmerle, 1999, Wells, 1998). We read conversations that identify the various challenges and opportunities faced by traditional MNCs as they enter and operate in the emerging markets (Govindarajan and Ramamurti, 2011). Some others have discussed ‘Reverse Innovation — developing products in countries like China and India and then distributing them globally’ (Immelt et al., 2009, Govindarajan and Ramamurti, 2011). However, the focus of these discussions has mainly been MNCs originating from the developed world and the ones whose competitive advantage is based on technological superiority.
With the emerging markets growth rising and that in the developed nations declining the rules of the game seem to be changing (Aulakh, 2007, Aulakh et al., 2000, Tsai and Eisingerich, 2010). The key players in today's global markets are both, MNCs from developed nations and the Emerging Nation Multinational Companies (EMNCs) that are starting to carve out their place in the global market place. Recent studies (Kothari, 2009, Kothari and Kotabe, 2010a, Kothari and Kotabe, 2010b) provide evidence that the consumption patterns of developed nation consumers is shifting as they: a) use high speed computers with the Chinese EMNC, Lenovo logo on it; b) consume generic drugs manufactured and sold by Indian companies like, Ranbaxy Labs or Dr. Reddy Labs, that have significant shelf space in the local pharmacies; c) deal with financial institutions, airlines, and hospitals that are backed by technology services designed by Indian technology companies like, Wipro Technologies or Infosys Systems; and d) buy cell phone equipment made by Huawei Technologies and use networks supported by ZTE equipment both, from China. This highlights that times have changed and the incumbent MNCs (studied earlier) constantly face threats from the emerging giants.
While these EMNCs are gaining a strong foothold in the global economy we know very little about what contributes to their ability to initiate innovations in the global marketplace. There is some speculation that uniqueness of EMNCs lies in their country of origin (Cuervo-Cazurra and Genc, 2011, Ramamurti, 2012) and institutional environments (Meyer et al., 2011), which shape firms' market as well as non-market advantages (Cuervo-Cazurra and Genc, 2011). However, this is contrary to the conventional wisdom that suggests emerging nations have a plethora of institutional voids. So how do these firms innovate without the resource and ownership advantages? Is it that the conditions in their home market induce EMNCs to create particular resources to compete at home? Under the current location pattern, high value-added activities are largely performed in advanced market economies, with low value-added activities performed in emerging market economies (Mudambi, 2008). So, it is essential to develop some understanding of how EMNCs skill-up these innovations to internationalize and meet the needs of their global customers? And how do EMNCs move up the value chain?
In order to understand how EMNCs alter their strategies and business models to fit the changing environment and participate in the global market we conduct in-depth historical analysis of eight EMNCs that originated from two key emerging markets China and India. While China is the “workshop of the world” and it is competitive in manufacturing, India excels in skill-intensive services with a ratio of trade in services to GDP of 15%, versus 7% for China (Luo et al., 2011). Both these countries bring a different set of players to global marketplace. Since this study aims to understand the rules of the game, we choose to study a variety of EMNCs as they represent different industries and nations and originate from both manufacturing and service sectors. In this longitudinal study we use content analysis tools to analyze the evolution of the EMNCs through their life span and to understand how these EMNCs have expanded into foreign nations. Through a computerized content analysis, we attempt to examine how EMNCs devise strategies to circumvent the institutional uncertainties in their home markets and develop routines and key capabilities that lead to their competitive advantage when they transition to developed nations. Based on our historical analysis of these EMNCs, we outline the factors that contribute EMNCs' capability of surviving in their institutional environments in their home (emerging) countries and to simultaneously scale-up and adapt their innovations to the developed nations with significantly different institutional environments. The results of this inductive approach suggest that EMNCs' foreign expansion is, on one hand, based on their ability to acquire resources and absorb them to build their own advantage (supply-side-argument). On the other hand, it is based on EMNCs' ability to find some market niches, i.e., entering into markets untapped by traditional MNCs (demand-side-argument). Finally, an in-depth analysis of our sources suggested that there was a similar pattern in the histories and behavior of all eight firms over time even though the timing (actual years) did not correspond for the firms. So, we propose a dynamic stages model suggesting that EMNCs foreign expansion can be explained in three stages viz, licking the dirt to carve out the way; taking off with speed and strength; and around the world with excellence.
The paper is structured as follows. The first section provides a summary discussion on existing literature and its ability to explain the innovation by EMNCs. We then briefly describe the method used to conduct the historical-analysis of multiple companies. Finally, based on our in-depth analysis we identify a dynamic stages model followed by a brief discussion of the potential contributions of this study.
Section snippets
Literature review
Prior studies suggest that firms are not encouraged to innovate in weak institutional environments, as inadequate intellectual property protection does not ensure appropriability of rents generated from innovative skills (Teece, 1986) and this hampers FDI outflow from these nations (Murtha and Lenway, 1994). Further, it is claimed that EMNCs are unlikely to be as strong in technology-based ownership advantages compared to MNCs, since the institutional environment in emerging markets is not
Research methodology
Unlike the developed economy companies, the EMNCs are characterized by an absence of systematic data sets and consistent data sources (e.g., publicly available financial statements) through which one can study the EMNCs' performance systematically. Hence we chose historical analysis, a method of discovering, from records and accounts, what happened in the past (Marshall and Rossman, 1998). In historical analysis, researchers consider various sources of historical data such as historical texts,
Semantic networks
The semantic network maps generated from the CRA files provide patterns and themes for the eight EMNCs. These maps highlight the most central concepts and connections embedded in the titles and stories of all the articles analyzed for the eight EMNCs. Each of these networks is derived with an influence cut-off of 0.015. To be especially comfortable that the words captured create coherence through their influential betweenness, we chose an influence cutoff of 0.015 for inclusion (Crawdad
Evolution of the firms
On the one hand, both China and India fairly recently opened up their nations to foreign firms, with India having done so in 1990, almost a decade after China. This move resulted in fierce competition in the domestic market that forced the EMNCs to innovate to be able to survive. Further, some of the centralization aspects of the government policies, such as controlling FDI, controlling EMNCs' ability to raise foreign capital or acquire foreign firms, and lack of intellectual property
Rules of the game — stages model explaining the dynamic foreign expansion of EMNCS
Based on the rich qualitative analysis afforded by the historical research about the evolution of the EMNCs over the 60-year period, and our understanding of the interrelatedness of the various supply and demand factors we propose a dynamic stages model. This model, as shown in Fig. 1, explains the various phases involved in the foreign expansion of EMNCs to developed nations.
Discussion and conclusion
Accelerating growth in emerging economies and the simultaneous slowing down of developed economies have shined the spotlight on consumers' needs in emerging markets and the EMNCs. Compared to the flow of innovations and technology from rich to poor countries, flows in the opposite direction are evolving. Our results suggest that the innovations by the EMNCs are increasingly finding their way to the rest of the world, including developed economies. Although, the innovations by EMNCs are probably
Road map for managers
The three stages outlined in this manuscript carve out a road map of foreign expansion for emerging market firm managers. The study emphasizes that despite the challenges posed by the institutional environments in the home markets, emerging market firms can attain success in the global markets. Additionally, managers of emerging market firms should use proactive strategies to identify the appropriate developed nation players that can be long-term performers in the game. By carefully gaining
Acknowledgments
A note from the Guest Editors: This paper was reviewed solely by the guest editors and the editorial team for this special issue.
Authors: We would like to thank the special issue editors and the anonymous reviewers of the Journal of International Management for their helpful comments and feedback on the earlier versions of this manuscript.
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