Most countries have the potential to offer benefits to a budding multinational. There are always opportunities to expand abroad and serve new customers who may have similar needs and desires as a firm's customers at home. Such expansions can be very beneficial as the firm can obtain higher returns on previous investments in technology and knowledge. There are also opportunities to expand abroad to obtain inputs in better conditions than those available at home, because they are either available at a lower cost or more sophisticated in other countries. These superior inputs can help the firm improve its operations at home.
The challenge for managers of emerging market multinational corporations (EMNCs) is not really identifying such foreign opportunities. Country indicators and tools are widely available, and many consulting firms offer services that can help managers assess conditions and identify opportunities for foreign expansion. The global mobility of managers also enables them to spot new business opportunities. The greater challenge is to identify which particular country is the most appropriate for the company, that is, whether the company can build advantages over competitors and serve customers there or obtain inputs that will improve its home operations.
Identifying an appropriate country for foreign investment requires, first and foremost, a deep analysis of the firm and its reasons for expanding outside the home country. Understanding the logic for moving across borders can help narrow down the list of potential countries and, more important, determine whether foreign expansion is a potentially value-creating strategy. Moving abroad just because everyone in the industry is doing so is not a good enough reason for doing the same; in this case, the manager is merely following others rather than deciding what is best for the firm. In some cases, deciding not to expand across borders may be the better strategy, never mind what everyone else is doing.
In this chapter, we focus on analyzing the reasons for expanding abroad, distinguishing between expanding to sell more and expanding to buy better. Expanding to sell more requires transferring and using in another country competitive advantages created by the firm in its home country. Expanding to buy better requires accessing and transferring comparative advantages of a foreign country to the home country and using them there.
In some instances, a company can create a disadvantage from the resources it transfers abroad. This can happen if the resources are not appropriate for operating in the host country or because the host country's government or consumers dislike them. This problem is particularly challenging for EMNCs, as individuals not only in advanced economies but also in other emerging countries can have a negative attitude toward emerging country firms and tend to associate them with less sophisticated products.
OPENING CASE: CHINA NATIONAL OFFSHORE OIL CORPORATION'S FAILED BID FOR UNOCAL
The Chinese oil firm China National Offshore Oil Corporation (CNOOC) found out the hard way that its state ownership and Chinese origin were a competitive disadvantage in the eyes of the US Congress when it tried to acquire the US oil firm Unocal in 2005. CNOOC was a Chinese state-owned firm in charge of managing offshore oil and gas projects. It created CNOOC Ltd. as a Hong Kong–quoted subsidiary to undertake exploration and production (E&P) operations in collaboration with foreign firms. CNOOC controlled 70 percent of CNOOC Ltd., with the remaining shares were traded in New York and Hong Kong.
In December 2004, CNOOC Ltd.'s CEO considered acquiring the US independent petroleum firm Unocal Corporation. Unocal had been created in 1890 and over the decades had gained expertise in offshore E&P operations and a good success record in finding hydrocarbons. Unocal expertise and its large operations in Indonesia, Thailand, Bangladesh, and Myanmar seemed a good complement for CNOCC expansion plans.
CNOOC Ltd.'s CEO discussed the possibility of acquiring Unocal with its CEO, but by the time he discussed this action with the CNOCC Ltd.'s board and made a formal offer, the operation turned into a competitive takeover. On April 4, 2005, the US petroleum giant Chevron made a bid for the purchase of Unocal, offering US$62 per share in 25 percent cash and 75 percent stock. On June 22, 2005, CNOOC Ltd. countered this with its offer of US$67 per share in cash. On June 22, 2005, Chevron increased its offer to US$63.01 in 40 percent cash and 60 percent stock.
Once the manager has selected the country that provides the best opportunities and identified the sources of advantage to be transferred and the mechanisms that ensure the transfer happens, the next step is to select the mode of entry that best enables the firm to access the complementary resources that it is not transferring across countries to be able to have a fully functioning operation in the host country. We look at how to do this in this chapter. Complementary resources are resources that support the resources that are a source of advantage but that are not sources of advantage in themselves. For example, a firm's source of advantage may be its technology, and the marketing function may be merely a complement, enabling the firm to sell the technology to its customers. However, if the company lacks complementary resources, it is disadvantaged, because this deficiency will detract from the advantage created by other resources as the company does not have a fully functioning operation abroad. In our previous example, if the firm has a poor marketing function, it may serve its customers poorly and detract from the advantage provided by the technology as customers look for other products that, although not as technologically sophisticated, are better adapted to their needs.
One additional challenge with complementary resources is that because they are not perceived as a source of advantage, their analysis is often neglected. The usual assumption regarding complementary resources is that they can be obtained from external vendors when the need arises. However, in some cases, complementary resources are not readily available, and the lack of them can call the overall success of the foreign expansion into question. This appeared to be the case behind the acquisition of the French firm Thomson by the Chinese electronics firm TCL Corporation (TCL).
OPENING CASE: TCL ACQUISITION OF THOMSON
In November 2003, TCL International Holdings combined with the French firm Thomson and became the world's largest producer of television (TV) sets, making 18 million a year, 6 million more units than Sony. Thomson owned 33 percent and TCL 67 percent of the combined firm, which became known as TCL-Thomson Electronics (TTE). Unfortunately, this provided the Chinese firm with the wrong complementary resources in a rapidly changing industry.
We have been fascinated by emerging market multinationals, and interested in understanding them better, for a long time. In our travels in emerging markets, we observed that emerging market firms were dramatically increasing in size and scope and in some cases expanding beyond their countries at a rapid rate. At the same time, existing recommendations about how to successfully invest in foreign markets did not seem applicable; established theories and models of international expansion were developed by analyzing firms headquartered in advanced economies and did not seem to fit the operating conditions of emerging markets. We thought we needed to go deeper into understanding how such conditions affected the internationalization of emerging market multinationals because we had experienced and observed such differences. All three of us had spent decades analyzing firms in emerging markets.
Sam had direct experience in Asia and Eastern Europe, Alvaro had focused his interests on Latin America, and Bill straddled two continents, having first gained experience in Asia before adding a Latin American focus. We had published extensively on the internationalization of firms, especially emerging market multinationals, but most of these publications were academic. We thought it was time for a managerial book that would sum up our experiences and thoughts and reach a wider audience.
This book started its life as a research project for the Skolkovo-Ernst & Young Institute for Emerging Market Studies (IEMS). In 2012, Sam was the managing director of the Institute and Alvaro and Bill were nonresident senior research fellows. At the 2012 annual meeting, we had animated discussions about the rise of emerging markets and their multinationals and marveled at how some were not only catching up with established competitors from advanced economies but, in some cases, also becoming global leaders. At the time, Sam had just completed his book Rough Diamonds: The Four Traits of Successful Breakout Firms in BRIC Countries (Jossey-Bass, 2013), in which he described the rise of these new global competitors and provided some fascinating stories from his conversations with managers. Later, Alvaro co-edited the book Understanding Multinationals from Emerging Markets (Cambridge University Press, 2014), in which he analyzed theoretical explanations for the emergence and expansion of emerging country multinationals, while Bill co-edited Internationalization, Innovation and Sustainability of MNCs in Latin America (2013) on the internationalization of Latin American firms, which provided additional insights.
In this chapter, we examine the final process issue of our operational difficulties framework related to EMNC expansion. After managers of EMNCs overcome the hurdles associated with establishing operations in foreign countries and integrating these operations into the overall corporation, they must attempt to build upon the initial investments by identifying new business opportunities in the local country and the competitive advantages they can use to pursue them. They may also attempt to build upon MNC networks to identify new business opportunities outside the country that can be served from the local operation and identify advantages that can be used to set up new business operations outside the country in coordination with other subsidiaries. By pursuing these activities, EMNCs may be able to consolidate and supplement their initial investments within a country to develop synergies and a stronger overall presence.
As we have seen in previous chapters, there are differences in institutionalized expectations about organizational practices between developing country home markets and developed country host markets, and EMNCs have relatively little experience operating in these markets to guide them in incorporating local practices into their subsidiary operations. While these issues may be present in any MNC, for EMNCs with operations in developed countries, the possibilities for differences in such role expectations and the need to develop abilities to reconcile them are exponentially higher. In this chapter, we review operational difficulties associated with EMNC expansion, focusing particularly on issues related to learning and innovation and expanding EMNC competencies. We begin our exploration with the case of Tata Motors and its efforts to expand geographically as well as into higher-level automobile categories.
OPENING CASE: TATA MOTORS
Tata Motors is an Indian car company with manufacturing subsidiaries in Argentina, South Africa, Thailand, and the United Kingdom and research and development (R&D) operations in South Korea, Spain, and the United Kingdom. The company had revenues of US$38.6 billion and 66,000 employees in 2014. While Tata had initial success in investing overseas, these investments did not significantly improve the company's reputation, and Tata was primarily seen as a manufacturer of low-cost automobiles, the most notable being the Tata Nano launched in 2009. Partly as a way to combat this, Tata Motors acquired the British brands Jaguar and Land Rover from the US automaker Ford Motor Company in 2008.
Emerging market multinational corporations (EMNCs) can become successful global players across a wide spectrum of industries, as demonstrated by companies such as the Brazilian airplane manufacturer Embraer, the Mexican bakery Bimbo, the Russian information technology (IT) firm Kaspersky Labs, the Indian conglomerate Tata Group, the South African brewer SABMiller, and the Chinese computer manufacturer Lenovo. This has resulted in a plethora of publications that discuss how such companies can challenge established multinationals from advanced economies and the distinct sources of competitive advantage they develop to achieve this.
However, the paths EMNCs take toward global leadership have not always been smooth. Although many have benefited from the lessons learned from the mistakes made by their predecessors in advanced economies and the advice of academics and consultants on how to select and operate across countries, many also face new challenges that have been largely ignored in previous studies. These new challenges emerge from the conditions of EMNCs’ countries of origin, for example, lack of supporting institutions or weak innovation systems, and from firm characteristics that are more prevalent among multinationals from emerging countries, such as family or state ownership.
A large number of authors have analyzed topics that reflect on different aspects of EMNC behaviors. A first set has focused on providing managers of advanced economy multinational corporations (MNCs) with guidance on how to operate more profitably in the challenging conditions of emerging markets. This line of research tends to concentrate on how managers can use and modify capabilities developed in advanced economies in the differing contexts of emerging markets. A second set has focused on understanding how EMNCs represent new competition to MNCs from advanced economies. This line of inquiry tends to present case studies of leading EMNCs and discuss the different business models they have developed. A third set analyzes how the actual behavior of EMNCs differs from current theoretical expectations.
Rather than focusing on how EMNCs emerge as new competitors, and praising their advantages, in this book we take a contrasting and more critical stance, analyzing the challenges that these firms face and drawing lessons from past mistakes. We do, of course, marvel at many of these firms’ accomplishments in the last few decades; however, these achievements present a skewed picture of the reality of these firms. Everybody praises the success stories without realizing that, in many cases, firms have struggled in countless unacknowledged ways.
In the previous chapters we analyzed the challenges that accompany the decisions of EMNCs to establish operations in foreign countries. We now turn our attention to the operational difficulties that occur once an overseas subsidiary has been established. Whereas much attention has been devoted to the initial challenges of expanding abroad, it is less common to give adequate consideration to postinvestment operational issues, which can lead to unexpected problems and ultimately contribute to poor subsidiary performance. This lapse of attention may occur because managers are overfocused on completing a deal quickly and secretly, particularly in the case of cross-border acquisitions. In the case of joint ventures and other strategic alliances, difficulties can also arise in working with partners that seemed like good fits on the basis of their competencies but have incompatible organizational cultures. The lack of experience in operating in different types of environments, which is often the case for managers of EMNCs, undoubtedly contributes to these difficulties as well.
The liability of foreignness, which we discussed in detail in Chapter 4, can create difficulties for firms across multiple aspects of their operations. For EMNCs, these difficulties can be exacerbated due to characteristics associated with their home countries and their collective stage of development within their home markets. Broadly speaking, these difficulties involve identifying the relationship between the EMNC and its customers in the local environment, identifying the advantage of the local operation in comparison to competitors, strengthening sources of competitive advantage, protecting them from mutation and substitution, and identifying new sources of competitive advantage. These issues also involve identifying and meeting institutional and social expectations in the host country.
While these general operational difficulties involve a wide range of activities, based on our examination of actual issues faced by EMNCs, the most common difficulties fall into two main categories: limitations in experience in managing overseas operations and reputational issues. While these difficulties could apply to some degree to any newly internationalizing company, EMNCs are particularly vulnerable due to their lower levels of international experience and sophisticated home-country capabilities when expanding abroad. For example, despite their abundant labor supply, many emerging multinationals find their international growth is limited by the lack of qualified people with the necessary cross-cultural and overseas management skills.
Expanding across borders can be a highly beneficial growth strategy for a company. It can find new markets for its products, new sources of raw materials, cheaper labor, or more sophisticated technology. For this reason, increasing numbers of firms are moving out of the confines of their home markets to export products and services, import production factors, and invest abroad to control access to customers or suppliers. Even if managers were not aware that the firm's products could have a market abroad, they may have been contacted by customers or entrepreneurs looking to distribute new products and convinced that the positive prospects in the new country would lead the company toward foreign markets.
However, expansion across borders is also challenging. Success at home does not always result in success abroad, no matter how well liked the products are at home and how desirable they seem to be to customers abroad. Venturing abroad entails serving customers with different preferences, facing new and, in some cases, stronger competitors, and having to deal with cultural, economic, technological, social, legal, and political differences between countries. These will affect the overseas success not only of emerging market multinational corporations (EMNCs) but also of highly successful firms from advanced economies. For example, the US retailer Walmart entered the German market in 1997 but was unable to operate profitably there and decided to exit in 2006. Although Walmart was the largest retailer in the world and had a highly sophisticated logistics system, it could not understand the preferences of German consumers and was unable to counter the strengths of low-cost local competitors. Moreover, failure in the German market was not a unique occurrence for Walmart; it was also unable to understand Korean consumers and had to exit that market as well. And failure abroad was not restricted to Walmart; the first foreign venture of the US retailer Target into Canada in 2013 was also a failure, this time because of difficulties in the management of its supply chain and an inability to face domestic rivals, which led to its exit in 2015.
EMNCs face many of the same challenges as multinational corporations (MNCs) from advanced economies, but they also have to deal with additional challenges that are unique to the conditions of their country of origin and affect not only their operations at home but also their international expansion.
After overcoming the initial tasks of establishing a subsidiary within a foreign country, and often simultaneously, managers of EMNCs must address governance issues to ensure the integration of the new operation with the rest of operations in the multinational. Managing the relationships between HQ and their overseas subsidiaries, along with the optimal management and integration of MNC networks, is a major concern for MNCs. The integration of foreign subsidiaries is also a major area of importance for developed country MNCs, but some specific characteristics make this a particularly problematic area for EMNCs. Inefficiencies caused by organizational structures developed to compensate for the deficiencies in institutions and market intermediaries in the home country, the so-called institutional voids, along with limited capabilities in corporate governance, make integration issues within EMNCs troublesome. These compound the relationship between the foreign subsidiary and the parent corporation. Effective integration includes identifying the mandate of the local operation and its relationship with HQ and other subsidiaries – in other words, how the subsidiary fits within the overall MNC network.
There are additional governance challenges that EMNCs tend to face because of their state and family ownership. For example, some large EMNCs have inherited the bureaucratic structures of their original state-owned enterprises (SOEs), which may complicate the management of overseas subsidiaries. Issues of current government ownership and legacies of recent government ownership are much more prevalent in emerging markets than in developed countries, where they tend to be associated with only a few select industries. Additionally, family-run enterprises, another major component of the emerging market landscape, can also have organizational structures that stifle overseas managers.
Hence, in this chapter, we examine the integration of the new subsidiary within the network of subsidiaries of the EMNC. Specifically, we analyze integration between the subsidiary and HQ and throughout the firm's broader intersubsidiary network, as well as coordination with alliance partners and acquisitions. We also discuss governance issues relating to organizational ownership by the state or family-owned business groups.
OPENING CASE: HAIER'S ACQUISITION OF SANYO
The acquisition of the Japanese Sanyo's white goods operations by the Chinese white goods manufacture Haier illustrates the difficulties EMNCs face in establishing subsidiary roles and controlling overseas operations effectively. The Haier group operated a global network of subsidiaries producing home appliances and consumer electronics.
Along with the fast growth of emerging markets over the last couple of decades, there has been a surge in a new breed of global players from these countries. Their entry into the global market has disrupted the competitive landscape and presented a threat to traditional global leaders from developed countries. The sources of competitive advantage and unique capabilities of these newly emerging global challengers and leaders have been well documented in academic research and consulting reports. So far, most research on EMNCs has focused on how they differ from incumbent advanced-economy global players, especially in terms of their direction of global growth and modes of entry into selected countries. However, scant attention has been paid to the operational issues these new players face at all stages of their global expansion, from country selection to managing local growth.
Based on in-depth case studies of a large pool of EMNCs from various emerging markets, we have examined factors relating to the operational difficulties EMNCs face when they invest overseas. While there are differences specific to certain sectors and countries, we have been able to identify common elements of these operational challenges. In Chapter 2, we presented our findings in a process-oriented framework that provided the structure for our discussion of issues related to the operational challenges occurring at different stages of EMNC development. We divided these challenges into two broad sets – challenges EMNCs face as they seek to enter and start operating in a foreign country and challenges managers face once the firm has established operations overseas. In Chapters 3 to 8, we systematically reviewed these issues with the aim of producing more operationally successful EMNCs. In this concluding chapter, we summarize some key lessons and our final thoughts on managing successful EMNC operations. Each of the companies we have discussed experienced particular challenges in moving abroad, some of which detracted from their ability to benefit from the perceived advantages and opportunities of internationalization, due to resource, capability, and environmental issues. Nevertheless, we can distill some lessons from the analysis of these firms that will be useful to managers of emerging market firms that are considering taking their companies abroad.
First, it is important to consider the country of origin. Operating in emerging markets provides many comparative advantages, including lower labor costs, underdeveloped natural resources, and new, young consumers, which provide a base for continuous growth.
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