Companies in Different Countries and Their Specific Position in the Global Business Arena - Essay Example

1) Introduction This essay deals with the concept of emergence of multinational enterprises from developing economies. The notion of rising numbers of MNEs from developing economies is discussed which throws light on the reasons that are driving companies from the developing markets to expand globally and how has this phenomenon evolved over a period of time. A case based approach has been used to discuss the rationale behind a company’s motivation to expand outside the domestic market. The company in discussion is Haier group from China. The essay also elaborates on the strategy adopted by the company in its pursuit to expand globally. 2) Notion The companies from developing countries started looking for foreign markets first passively, just exporting the surplus stock, and then actively involving in to the global business by the way for M&A etc. The major driving forces behind emergence of MNEs from these countries in the distant past were increased competition in the local market, entry of foreign multinational in to domestic markets, non availability of resources, or risky political or economic climate in the home country. But recently a new force has global aspirations. These companies have now realized that if they can perform in their local market fraught with lot of problems like lack of infrastructure, lack of regulatory bodies, unavailability of technology and manpower, they can also thrive at the global arena provided they replace their local orientation with a global perspective. Literature Review Kyung-Ilg Hym (1980) Studied several phenomena related to emergence of MNE from developing or less developed countries. He studied that the motivation to for foreign investment for a developed country firm may be quite different from that of a company from a developing or less developed country. He identified Market demands and protection, trade restrictions, economies of scale (global scale), raw material sources, investment regulation, investment incentives offered by host government and Labour cost advantages as the major motivations for US companies to go multinational while the reasons for less developed or developing countries were market demands, trade restrictions, economies of scale (regional efficiency), ethnic tie, risk reduction from economic and political instability at home, To solidify business with trade partners and manpower exports He said Albeit, the first two factors, market demand and trade restrictions, seem to be the dominant motivating factors for foreign investments by Less Developed Countries or developing countries there could be a variety of interesting motivations which are quite different from those of the U.S. MNCs. He was optimistic about the future of companies from less developed or developing countries in the sense that these companies can go to other markets which are too small for MNC from developed countries to achieve economies of scale but are big enough for them to achieve regional economies of scale. But this notion has changed with the evidence of many companies from developing markets like Haier, ZTE, Huawei, Tata , Hindalco etc making inroads to developed countries. Dymsza (1984) reviewed the emergence and growth of U.S., Western European, and Japanese MNCs in the post war environment and the recent emergence of Third World MNCs. The paper writes while U.S. foreign direct investments had expanded and continued to be highly significant, some important recent developments were the more rapid growth of Western European and Japanese MNCs like Sony, Toyota etc, the increased role of the U.S. as a host country for foreign direct investments, the emergence of multi business models by MNCs, the more numerous actors involved in global business, and the dramatic, more rapid changes in the world environment. The article explored developments in host- and home-country policies, some of the other major actors in international business, "newer" forms of international participation and by analyzing a few major changes in global environments and multinational management concluded that many MNCs had been engaging in more joint ventures, various contractual arrangements, and counter-trade arrangements and MNCs would continue to face major challenges from rapid changes in global and national environments-including unexpected discontinuities-and from the pressures of other major actors. Khanna et al (2006) warned MNCs from developed countries against underestimating MNEs from developing countries by discussing how MNEs from emerging markets may give their western counterparts a run for their money if not taken seriously. He mentioned three strategies that these MNEs use to their advantage to deal with their western counterparts. They said these MNE firms from developing countries exploit understanding of the product market, leverage familiarity with resource (labour and capital markets) and treat lack of institutions as business opportunities for them. A recent study by Sauvant et al (2009) studied the impact of financial crisis on the outward FDI from emerging countries. The paper argued that OFDI from emerging economies was a significant phenomenon. The OFDI flows from emerging market MNEs had been growing dynamically at the rate of roughly 82% on average since 2003, and would reach approximately US$351 billion in 2008. The emerging market MNEs invest not only in developing markets but they are also capturing developed markets like US and Europe., mostly investing in services including trade-supporting services. Though Outward FDI had been growing at a phenomenal rate before 2008, it came to temporary halt in 2008 – 2009. While the financial crisis and global economic downturn impacted global FDI flows, particularly OFDI from developed countries, the OFDI flows from emerging markets increased in 2009, though marginally. The paper also discussed that different emerging markets Multinational enterprises adopt different approaches to OFDI and suggested further research should happen in this area to investigate effects of the different ownership structures and funding systems and the advantages of investment, that can be transferred from MNE to host country. The paper cited that there are inherent risks in OFDI from emerging markets and if MNEs from these countries acquire new skills, both organizational and political and adopts CSR whole heartedly the risk can be mitigated. Nirmalya (2009) in his article argued that companies from developing countries were faring much better at M&A stage than their counterparts from more developed countries. He said M&A is used by MNEs from developing countries as their main globalization strategy and that these MNEs generated more value from takeovers than their counterparts from the developed world. To explain this he reasoned that there is huge difference in the way the MNEs, from the developing countries approach M&A than their western counterparts do. He pointed out the following points as major differences in the approach. While Western companies use M&A primarily to promote efficiency or instant growth, the emerging economy companies approach M&A for strategic reasons. MNEs from developing countries leverage takeovers to obtain technologies, competence and knowledge while their western counterparts do that just to lower the cost. MNEs from developing countries shun overturning acquired firm’s management structure or people which results in smoother integration of the two entities. More over their actions are guided by a long term vision so they are willing to wait for the take over to payoff. A paper by IBM institute of business value and School of Management at Fudan University discusses the prospects and challenges for Chinese companies planning to go global. The paper advised that chinese companies with clear, focused strategies and strong execution capabilities may become future global leaders in their industries. The potential rewards of going global are great not only for Chinese companies, but also their foreign partners with whom they may form alliances to win in the global marketplace, including within China . Rationale Rational behind Haier expanding its business globally Every company would ultimately like to expand on a global level as in this globalized world which either necessitates going global due to encroachment of domestic turf by foreign multinationals, over capacity in the domestic market, or offers many advantages which may include access to foreign technology and world’s management practices, access to newer markets, economies of scale, rising up in the value chain, access to cheaper labor or natural resources etc and many necessities also etc. The major driving forces for a company to go global may be quite different from that of another company. The major reasons for Haier to expand globally were majorly the increasing competition na fierce price wars by local players and imminent threat of multinationals taking away market share. Haier, which was getting defunct before 1984, emerged as a strong brand in China, one commanding 30 % share of China’s RMB 129 billion white goods market and consolidating its position in black goods market also. But in 2004 Qindao Haier, a Haier group saw its profit margins declining to 2.6 from 9.4 % just five years earlier. The main reason as quoted by industry analyst was, rising competition by local and multinational players. National capacity in China was as high 30% in white goods and other appliances market. Moreover Chinese players were engaged in fierce price wars, cutting prices 10 to 15 % annually. The heavy loses drove away all the smaller players and Haier was left with more formidable local competitors specializing in mainly just one or two sectors like refrigerators etc. The chronic price wars, prevalent in refrigerator sector hurt almost all the leading players and forced them to sell stock even below at cost just to clear piled up inventories. Analysts pointed out to the fact that many money losing small players, sustained by government funding, prevented leading local players to reach their full capacity. While Haier was contemplating on the strategies to deal with the intensified local competition, China’s entry in to WTO in 2001 increased its apprehensions. Entry in to WTO would lead to further intensifying of competition by presence of foreign competitors like Siemens, Electrolux, Samsung, LG, Matsushita, Sony, GE, and Whirlpool. Haier came under huge pressure to save its home turf from these multinational players. The multinational were fiercely more competitive than local players because of their strong design innovation capabilities and global talent with exposure to best management practices. The foreign multinationals started taking market share away from Chinese players. In 2001 and 2002 the market shares of multinational brands refrigerators, in terms of unit sales were 26% and 31 % and the same figures for automatic washing machine were 31% and 38 %. The rates at they were snatching market away from Chinese firms was disturbing. Equally disturbing was the fact that western retail models like Wal-Mart etc were being introduced in major cities of China, and WTO mandated opening of rest of china in 2004 would have made these retailers all pervasive in china rather than just in major cities. The companies like Siemens and GE arrived at the same time when these retailers were entering china’s major cities, and the fact that multinational companies like Siemens and GE were not only familiar with this channel but they had good relationship with these retailing companies because of their close relation in developed countries. Though, Haier was confident about its ability to meet the needs of Chinese people better than any multinational. Bing local has always kept them closer to evolving needs of Chinese and Haier had always responded quite well to them. This became evident when Haier realized the summer lifestyle of people and launched a tiny washing machine which was an instant hit in Shaghai and later exported to Europe as well. Another such instance was, when, in china’s rural place Sichuan Haier found that people were washing sweet potatoes and other vegetables in washing machines meant to wash clothes. It responded immediately by modifying the design to accommodate their needs. Haier also had strong distribution channel in china. But as quoted in HBR article (1)“Some Haier executives were cautious about relying on their strengths in the distribution and service networks, or even on superior knowledge of the domestic market.” They believed very soon these foreign companies could access similar resources through third parties and become fiercely competitive as a result of the combination of their multinational or global strengths and the knowledge of local china acquired through third parties. Mr. Zhang Ruimin, the man behind raising Haier from nothing in 1984 to a multinational status by 2004, realized that to be competitive in future and grow the brand they can’t rely on just their knowledge of local Chinese market or distribution set up in the country. The local advantage was short term phenomena and they have to grow strong by growing large to take on these foreign multinationals in Chinese as well other markets. To grow large it had to look for foreign market to access newer customer segments and to grow strong it had to enter difficult markets like US and Europe first before entering easier markets like south Asia. 1) Haier : taking Chinese Company global an HBR article 2006. 5) Strategies Adopted by Haier for Internationalization Haier’s internationalization strategies started being formulated from its initial stages of development. It started as an importer of technology and equipment from a Germay company, Liebeherr. The arrangement later led to Haier manufacturing refrigerators based on Liebeherr standards, and then exporting back to Liebherr. In 1986, Haier’s total exports stood at US$3 million. Haier participated in the global market as an OEM producer till 1999. Haier’s going global plans were every ambitious as it was not willing to follow the same old proven path of Chinese companies. Haier’s Internationalization strategy was in sharp contrast with that of other Chinese firms whose main objective was to “export to earn foreign currency” but Haier’s main objective of going global was to “export to build the brand”. Thus Haier’s strategy was to sell in foreign markets under its own brand and not as an OEM supplier to the client from foreign country. Major features of Haier’s Internationalization strategy in brief First focus on difficult markets and the enter easier ones Departing from the conventional wisdom and taking a counter intuitive path Haier determined to pursue “difficult” developed markets first and after establishing itself as a strong brand there, would it start eyeing the “easier” markets like emerging countries in south Asia. The reason for this move was that Haier wanted to raise itself to the highest level in terms of quality which is prerequisite to thrive in developed markets as to take multinational like GE, Whirlpool, and Siemens etc you have to have the best quality standards and be the first to innovate. Another reason for this was the brand perception of people towards Chinese brands. Though it would be difficult to break into the developed markets in the initial phase but once it’s established there, the spillover effect will ensure its success in the emerging markets automatically. As when people from emerging markets, while travelling to the US or other developed country find Haier placed in Wal-Mart, best buy etc, they will perceive Haier to be reputable brand. The entry in to US and European markets i.e. outside south Asia sensitized them to cross cultural differences in customers and employees which they would not have learned in case they had entered other south Asian countries. Enter the Niche segments first Though very ambitious but people at the helm of the company were also realistic and they appreciated the fact that taking head on these companies like GE, Siemens, Whirlpool will not be possible as they were too big in terms of capital, revenue etc in comparison to Haier. Thus Haier decided to circumvent these MNCs by focusing on market segments, which have been either neglected or overlooked by these multinationals. This offered one more advantage that it will not have to invest heavily while targeting these smaller niches and the returns were generally much higher than mainstream products. Haier kept continually innovating to meet the diverse needs of the people and to keep differentiating itself from the competition. Higher produced innovative products like compact refrigerators, which can be converted in to computer desk targeted specifically dorms and compact wine cellars. The products also helped Haier in getting attention of the large retailers like Wal-Mart and Best Buy and after establishing relationship with them other retailers also started considering Haier products seriously. Once they were well entrenched in the niche segments they started getting in to mainstream bigger segments like apartment refrigerators, air conditioners etc. Hiring Local Talent Chinese firms have two inherent challenges with them when they go out global expansion: they don’t have many people with global experience, and the compensation packages for employees in developed markets were very higher than that in china. The first challenge calls for hiring local people from the host country but that would lead to hiring local talent which would be very costly in case of developed markets. But Haier took up the first challenge and hired; local talent only as they believed that local people would know local market very well. And more than that Haier hired people from the similar industry background which ensured that they got people who understood the business and market both. But they did maintain some of their employees from china as they wanted to be in the know of what was going in the market. Overall, to deal with negative perception towards Chinese brands Haier started producing from America only so that people would perceive that Haier is from America. But apart from this Haier under took many initiatives to challenge the perception by maintaining 18 design institutes, 13 overseas factories and industrial complexes in US, China, Pakistan and Jordan. The strategies followed by Haier have had mixed results in the sense that though Haier could take way large share from niche segments very soon, establishing itself as a formidable player in main stream segment has been a challenge. Conclusion The companies from developing countries have also started going global after observing the phenomenon by their counterparts from the developed countries. The forces behind surge in motivation to go global among companies in different countries have been different because of their specific position in the global business arena. But there do exist at a general level some reasons which can be common among companies across developing countries. In the recent past, number of MNEs from developing countries has been on the rise. The outward FDI flows from developing countries remained positive in 2008-2009 even after the financial crises, while OFDI flows from developed country went negative during the same period. China is leading among Asian developing countries with highest numbers of multinationals. The globalization motives for companies from developing countries have cited to be different from those of companies from developed markets. The developing countries have had more strategic perspective towards FDI and they are more disciplined that they are willing to wait for their investments to pay off in short they are not in a rush to take the world by storm. Their disciplined approach with global aspirations and increasing competition in the local market both by domestic and foreign multinational players are going is going to take more and more of them in to global arena. References 1. Kyung-Ilg , Hym (1980) ‘Multinational enterprises from the third world’, Journal of International Business Studies, vol. 11, no. 2, pp. 118-122 , Available : JSTOR 2. Karl P., Wolfgang A., Maschek and Geraldine M., (2009) ‘Foreign direct investment by emerging market multinational enterprises, the impact of the financial crisis and recession and challenges ahead’, OECD Global Forum on International Investment VIII, December, pp. 1-4. 3. William, A. (1984) ‘Trends in multinational business and global environments: a perspective’, Journal of International Business Studies, vol. 15, no. 3, pp. 25-46. 4. Nirmalya, K., (2009) ‘How emerging giants are rewriting the rules of M&A’, Harvard Business Review, May. 5. Khanna, t., Palepu, K.,(2006) ‘Emerging giants building world class companies in developing countries’, Harvard Business Review, October. 6. Klaus E., (2004) ‘Perspectives on multinational enterprises in emerging economies’ , Journal of International Business Studies, vol. 35, no. 4 ,July, pp. 259-276 ,Available: JSTOR . 7. ‘Going global Prospects and challenges for Chinese companies on the world stage’ IBM institute for business value, pp. 7-12. 8. Palepu, K., Vargas I., and Khanna, T., (2006) ‘Haier: taking a chinese company global ‘, Harvard Business School Case, May. 9. Farhoomand, A., (2007) ‘Haier: How to turn Chinese household name into a global brand’, Asia Case Research Centre, Available: HBR. Read More