The Rise of MNEs from Emerging Markets - Lenovo - Case Study Example

MIO MANAGEMENT By of the of the of the School 22 January Introduction This paper discusses the rise of multi-national enterprises from emerging markets, the advantages they enjoy, the challenges they encounter and the rationale behind their choices of markets and entry modes. The company used in this case study is Lenovo, which is an emerging company with an origin in China. Kaynak, Mockler and Dologite define multinational enterprises as “enterprises which own or control production or service facilities located outside of the country in which they are based” (2013, p. 3). An MNE can be registered or recognized by more than one country or have its operations in more than one country. MNE’s have been the primary drivers behind the current trend towards globalization. Lenovo is a Chinese multinational computer technology company. It designs, develops, manufactures and sells computers, tablets, smartphones and electronic devices. The Rise of MNE’s from Emerging Markets Emerging markets are less developed markets that are at a later stage of development compared to other developed markets. They are characterized by high growth potential, low market capitalization and poverty (Ulrici, 2007). The most important difference between an emerging market and a developed market is that an emerging market is a market where buyers and sellers are not easily or able to come together. Innovation in the global economy appears to be changing because of the rise of global economies. The poor emerging markets get innovation ideas from developed countries and as time goes by, they also contribute to the emerging economies. An emerging economy can be defined as a developing country. According to Christiansen, “as an emerging market, a country is embarking on an economic reform program which will lead it to stronger and more responsible economic performance levels, as well as building the transparency and efficiency in the capital market” (2014, p. 252). The rise of MNE’S from emerging markets changes the global FDI landscape. It remains unknown how long it will take for the developed countries to accept the new competitors on equal terms, or if they will seek to impose hard and new restrictions upon their entry. The integration of these new global players in the FDI market is a difficult and hard process, especially when they are different or they have different operating styles from other established MNE’s (Marinov and Marinova, 2012). Marinov and Marinova state that “in the case of China (an extreme case), some 80–90 per cent of outward FDI flows and stock are controlled by state-run enterprises” (2012, p. 23). The implication of the rise of an emerging market on MNE’s is that a growing number of the emerging markets among countries like Brazil, China and India no longer view themselves as host countries, but as home countries. When a state has controlled entities, host countries may exhibit some skepticism when it comes to the growing importance of emerging market MNE’s. According to Sauvant, “another implication of the rise of emerging market MNEs and the more differentiated attitude of governments to the form that incoming FDI takes is that considerations of “national interest”” are given a lot of importance (2011, p. 10). This is particularly related to national security and other security interests. In recent years, some of these MNE have been used for terrorist activities. Leading MNE’s are recognizing the emerging markets that were once regarded as markets for getting goods and services and are advancing and changing them in many different ways. Competition from emerging markets MNE’s means advanced country MNE’s face threats in host nations (Sauvant, Maschek and McAllister, 2010). MNE’s from emerging markets are posing new competitive threats to traditional MNEs, both in their advanced and developing country markets operations. The rise of the new MNE’s conflates the already weakened distinction between home and host markets. It is difficult to discern meaningfully where these threats are being played out. An MNE’s specific advantages and performance are similar to firm’s advantages. A firm’s advantages refer to the benefits it derives from specific assets like the intangible assets and capabilities, which bring a superior competitive advantage to it (Rugman, 1996). To be able to compete successfully in a foreign market, a firm must have certain assets namely power, technology and management. The possession of those assets leads to a competitive advantage and ultimately to the firm’s success in the market. Why do companies start companies in other countries? The main reason is natural resource seeking, that is, the search for physical, financial and human capital in a host country. The resources are principles and not proprietary and their availability in the host country leads to the establishment of an MNE. An investment abroad enhances value creation than investment in a home country. A condition to allow such investment is that a host country institutional environment actually allows MNEs to access their resources (Verbeke, 2013). Market seeking is the other reason. This means the search for customers in a host country. Firms seeking markets for their goods and services deploy productive activities and selling in foreign markets that give higher value to the firm than engaging in an investment project at home. The host country’s advantage is the availability of customers willing and able to buy the firms product (Sauvant, 2009). The third reason is strategic resources seeking. This is the desire to gain access to advanced resources in the sphere of upstream and downstream knowledge. These resources include the host country’s location advantage, in contrast to the resources sought with natural resources seeking and marketing seeking. The growth of the Chinese economy has been staggering for the last 20years. Until recently, most of its growth had come from the labor intensive, low value added goods (Petti, 2012). The beginning of Lenovo dates back to 1984, when it established a New Technology Developer Inc., which gave way to the Legend Group Ltd. Lenovo business as a large producer of PCs, mobile devices and tablets is built on product innovation, high degree of localization and customization in each country. Its rise to the global market was not easy. Most of its companies were state-owned, since they had full autonomy in the management and personal decision and given that the parent company’s only provided limited capital. Lenovo became the largest among the domestic PC makers, but domestic companies trailed behind them. However, it was not easy as tariffs on imported PC’s into China were reduced and quotas eliminated. During this time, foreign PC makers had a price advantage over the local made goods. Foreign companies typically produced millions and millions of units yearly. This reduced the input prices and the labor costs across a large number of goods. As a result, Lenovo set out representatives in America and Japan (Petti, 2012). Lenovo believed that in order to become a global and great brand, it was not about being identified as a global firm. They established their presence in more developed and highly globalized regions such as the United States and Europe. This was essential for Lenovo’s overall strategy. This process became beneficial as Lenovo gained management expertise from Hong Kong operations and from other foreign partners. Much of its success can be attributed to the mix of operational autonomy and state intellectual property resources. Strategies changed as the company continued to grow; it was an effective way for it to enter emerging and developed markets (Petti, 2012). Lenovo continued to build its advantage over foreign companies as it developed domestic Chinese sales. During the 1990s, the Chinese government restricted foreign companies from establishing distribution and retail operations in China so that foreign companies used Chinese firms to sell and service their computers. This was an advantage for Lenovo as it built extensive distribution channels and the Chinese PC market grew rapidly. In a few years, Lenovo over took the state-owned great wall as the largest PC distributor in China. Lenovo made its profits at this time from selling foreign brands, with a small portion originating from the sales of its own brand of PCs (Gamble, 2007). Its strategy was focused on localizing and on the customer market. While many foreign PC companies used to have users customize their own PCs, Lenovo brought localized solutions to the end users, in terms of software and assistance with internet connectivity. In China, Lenovo still holds a commanding lead as the largest vendor of PCs. After the accession of China to the World Trade organization, Lenovo thrust into a much more competitive environment. Despite the lifting of quotas and removal of tariffs, the main advantage was that the government conferred upon Lenovo at the exclusion of its international rivals, the right to distribute and service networks. This would end with WTO accession. Faced with juncture, the legend had a choice to either go global or stick with the domestic market. They were reluctant to go global because of the failures of internationalization of some major Taiwan PC makers like Acer. As a result, Lenovo decided to stick with the local Chinese market. This helped solidify its status as a leader in China. Later, Lenovo started to focus on international markets and the domestic market served as a financial foundation and launching pad (Marshall Cavendish International, 2013). When Lenovo’s domestic market share reached 30%, it realized that expanding further would be difficult given the stiff competition in the emerging and developed economy (Petti, 2012). This is because there were other companies competing with it. It started to look for more international markets; the company realized that the brand name it was using was already taken internationally, so it rebranded itself as Lenovo. Lenovo made its first big international establishments in Japan and the United States. Its markets share may be still small, but its sales growth is increasing and the recent joint venture with Japan’s NEC has helped it increase its Japanese market penetration. Advantages enjoyed by MNEs An MNE seeking to enter a foreign market must make important strategic decisions on which entry mode to use. The choice of entry mode for an MNE should be influenced by “ownership advantages of a firm, location advantages of a market, and internalization advantages of integrating transactions within the firm” (Luo, 1999, p. 140). MNEs should possess superior assets and skills that can earn them economic rents, which are high enough to counter the high costs of operating in a market. Wholly-owned mode: Different entries provide MNEs with different levels of control and resources. A parent firm will have full control over subsidiaries. In addition, transfers are internal to the firm, hence reducing the possible transaction costs of an external market. The joint mode of entry facilitates access to the local market and the resources of a host country, while allowing a foreign parent firm to have control over the operations and the decision-making process of the local firm (Larimo, 2011). The lack of firm’s specific advantages and entry mode: A firm which has inadequate resources and wishes to engage in an international expansion might need a cooperative relationship with other firms in a specific host country. The partnership needs an international joint venture which hence contributes to a local partnership in different ways such as through capital, human resources, market access, local knowledge and the bargaining power. Economic development: Developing counties and economies have due advantages related to MNEs that have liberalized their MNE regime and attracted investment. It has been recognized that to maximize benefits of MNEs in a host country can be significant and these include spillover, human capital and enhancement of competitive business environment. Helps improve the environment and social conditions: All these benefits contribute to high economic growth, which is the main tool to alleviating poverty in the economy. Capital: MNEs invest in long-term projects, taking on risks and profits when the projects yield returns. The free flow of capital across countries was preferred by many economists since it gave them access to capital and seeks out the highest rate of return. MNEs by virtue of their large size and financial advantage have access to financial resources that are not available to host countries. Transferring knowledge: MNEs increase the existing stock knowledge in a host country through training, transfer and new management. This holds benefits for the host country as employees gain new skills through explicit and implicit training. This training in foreign firms maybe of higher quality given that only the most productive firms trade. Workers take skills with them when re-entering the domestic labor market. Distribution network: Lenovo’s early days as a distributor of foreign PCs served it well as it embraced its own brand. Lenovo invested heavily in setting-up and maintaining its distribution network in China, which still gave it a distinct advantage in the Chinese market. Lenovo’s distribution channels in China are less fragmented than those in international markets. This creates barriers to entry for companies not already established in China. The company has extended its control in the Chinese distribution. In-house manufacturing specialization: Lenovo focused on in-house manufacturing specialization to lower its marginal costs, serving as a one stop shop with its product line covering the mid and high-end products. This approach has brought Lenovo certain advantages. First, the company’s domestic manufacturing operations have benefited from access to reliable suppliers in China. Second, is the use of vendor-managed inventory; it was a cooperative strategy between the manufacturer and the raw material supplier. Lenovo VMI implementation has improved logistical efficiency and cut down costs. Labor: Saving on labour costs is important for a company. Responding to the rising labor cost in China, Lenovo announced plans to build inland factories. Government support: The Chinese Government has protected its domestic PC infant industries from foreign competition through high tariffs on foreign-made PCs (Finkelstein and Cooper, 2010). China’s tariffs on imported computer parts allowed companies like Lenovo to generate income and revenue through trading imported computer parts. Tax advantage: MNEs enjoy tax advantages. Lenovo has had several tax advantages by capitalizing on the location of its investment and the company holding the status of the leading Chinese PC company and a high technology innovator. Challenges facing MNEs Discrimination: In some developing countries, discrimination has been rampant especially on the basis of personal characteristics. In fact, in recent years, it has become a norm (Punnett, 2013). The challenge arises when people are unfamiliar with the international and anti-discriminatory legislation. For example, some companies do not allow women to be employed with men. This usually becomes a challenge for MNEs, especially due to the fact that this does not apply in host countries and if a company ignores this, it risks facing legislative suits. Culture shock: Companies face new and different expectations, norms and regulations in a host country. An MNE’s home country management is likely to experience culture shock when deployed in another nation (Ozbiligin, Groutsis and Harvey, 2014). Selecting and training of the home country management is crucial under these circumstances. The management needs to be trained so that the members are able to accept realities and work effectively in the host country. Some countries are against globalization: This includes a wide spectrum of displeasure with modern life and market economies (Baldwin and winters, 2004). There are still regions where globalization is viewed as a way of polluting trade and economies. Opposition: There are always accusations against multinationals. Many MNEs have been accused of paying low wages to host nation or local workers and having moved to other nations in order to take advantage and earn much higher profits. Generally, they are accused of exploiting helpless and desperate workers and taking advantage of host nations resources for own benefit. They are seen to repress a host country’s growth by forcing out local firms and obstructing their technological progress. Risks: MNEs face high risks and this also applied to Lenovo. If IBM PC failed to become profitable, then Lenovo stood to lose and this is usually devastating. Given that Lenovo was unknown in the United States, it was definitely taking a risk. Competitors: When Lenovo emerged into the global market, it met already existing businesses offering the same services as they did (Zompanti, 2009). Dell and HP continued to maintain a stable gross margin despite the poor economic conditions. Lenovo suffered a negative shock reflecting different priorities. Lenovo’s competitors essentially maintained and improved an operating margin. Conclusion As multi-national enterprises rise from emerging markets, they stand to enjoy a number of advantages. This however does not mean that they do not encounter challenges. 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