International Business Strategy

Key challenges likely to be encountered by the businesses in the emerging

economies internationalizing at a fast pace?

Submitted to Prof. Rohit Mehtani

Indian Institute of Foreign Trade, Delhi

Utkarsh Modi, 52C

Batch of 2013-15
IIFT Delhi

Introduction
The emergence of firms from developing countries as important players in global markets has been a
distinctive phenomenon of globalization in the twenty first century. Not only have the emerging
market economies been among the top destinations for foreign direct investment (FDI), but the
outward FDI flows from these economies have also been growing steadily.
As global businesses look to emerging markets for growth, sourcing, and outsourcing, the right
strategy and execution in these markets have become crucial to global success. How should
executives think about emerging markets, and in particular key issues like market assessment and
entry strategy, operating best practices and leveraging shared services operations? What are the
most important cultural, organizational and human capital issues to focus on? And what are the
unique considerations in Central and Eastern Europe, as distinct from the BRIC countries (Brazil,
Russia, India, and China) and other emerging markets?
Emerging-market multinationals (EMMs)companies based in emerging markets with operations in
more than one countryare expanding at a speed and scale to make even the largest Western
multinationals take notice. Emerging economies now boast 70 companies in the Fortune Global 500
list of the worlds biggest companies, up from just 10 a decade ago. Within the last year alone, the
number of emerging-market companies in the Fortune Global 500 grew by nine. They have been
expanding and acquiring new businesses at a frenetic pace, conducting more than 1,100 mergers
and acquisitions, altogether worth US$128 billion in 2006.
Expansion is being driven by a search for new markets, efficiencies, innovation and sources of inputs
and, in some cases, by less tangible elements of national prestige and government policy. Timing
also has proved important. The rapid emergence of EMMs has coincided with a period of plentiful
supply of cheap capital, domestic policies intended to liberalize investment and advances in
information technology.
Challenges faced by Businesses in Emerging Economies
Talent: Resolving the Paradox
Favourable demographics mean that most of the future increase in the global labour force will occur
in the emerging world. Yet Executives from emerging-market multinationals (EMMs) overwhelmingly
cite talent as a key challenge. In this seemingly abundant environment for talent, why are EMMs
having such problems?
One reason is that talent pools are shallower than they appear at first glance. High numbers of
students are graduating, but not all are suitable for work in international business. Professor
Abraham Koshy of the Indian Institute of Management, Ahmedabad suggests, there is a supplydemand gap when it comes to talentnot in terms of total numbers but in terms of quality. Only
five of the top 100 MBA programs are in the emerging world.
Another reason is that rapid economic growth has increased the opportunities for the best recruits.
Shortages - The shortage of talent is particularly acute at the management level. In India and China,
one legacy of the Licence Raj and the Cultural Revolution is a lack of management age talent with a
keen grasp of market forces. Two out of five Chinese companies find it difficult to fill seniormanagement positions in China. Turnover rates at the manager level in China are 25 percent higher
than the global average.

Much of the workforce lacks relevant experience, either in terms of years worked or exposure to
the business practices and culture of multinational companies.
In many parts of Asia, competition for talent already goes beyond the traditionally thorny areas of
science and engineering undergraduates and management level talent; there are also severe
shortages of lawyers, accountants, aircraft pilots and doctors.
Growing demand for a small pool of suitable graduates means that competition for all levels of
talent is only going to get fiercer. Wage pressures will bite as well. Average wages in 2007 were
increasing at an annual rate of 20 percent in Venezuela, 14 percent in India and 11percent in Russia.
Changing demographics also alter the talent picture for EMMs in different ways. Aging populations,
shortages of women in some countries and health problems will each affect certain emergingmarket workforces. Chinas workforce will shrink in the decade after 2015 as a result of an aging
population and declining birth rates, whereas Indias will grow. The average age in India will be 29
years in 2020, compared with 37 in China. Labor shortages in China will affect employee turnover
and wage increases across the whole of Asia.
People, Trust, and Cultural Issues
Understanding the cultural drivers of current behavior is one of the keys to operating effectively in
emerging markets, proposed IBMs Tony Fricko. In some formerly communist countries, he noted,
while engineers never developed mistrust of outsiders, sales and business people whod had to
navigate the communist system developed instincts and methods for protecting their turf. So when
you say how about reporting or how are things in Poland, he explained, what they hear is so
here is Big Brother watching me. But A.T. Kearneys Bill Dewey argued that this is changing: these
companies are increasingly staffed with people who are educated in accordance with western norms
and standards, beneficiaries of company sponsored training programs, as they in some cases theyve
experienced expatriate assignments off-shore, they bring all of that back with them.
Infrastructure quality issues
Several participants warned that inadequate infrastructure continues to be a key obstacle to
leveraging shared services operations in emerging markets. Ciscos Boston noted that the cost of
delivering browser-based services is dramatically higher in some emerging markets, and that local
telecom companies are often protected from competition by regulations and can take months to
install needed circuits.
Key Strategy Challenges for Emerging Market Multinational Enterprises (MNEs)
Perhaps the single most important challenge that emerging market MNEs face relates to their
human resources. Building a successful, integrated international production network is a formidable
challenge in and by itself. To do so through the successful integration of acquired firms is an
additional challenge. It places considerable demands on their human resources, in particular on their
managerial skills and capacity. Moreover, the scale of the challenge is relatively greater for emerging
market MNEs: internationalizing often at an early stage in their development, they have had less
time to develop such skills and capacities.
Emerging markets MNEs that have undertaken OFDI more recently are less likely to have built up
expertise and capacity in integrating acquisitions and managing foreign affiliates. This skill and

expertise gap may be further compounded by an unwillingness to hire non-national managers.

Levels of foreign employment among leading Brazilian MNEs are almost half those of the 100 largest
developing country MNEs. This low level is the result of a combination of two factors: family
controlled MNEs seeking to avoid any dilution of their control and high levels of in-group
collectivism. Such limitations in building an international management network do not bode well
for the ability of those MNEs to create integrated international production networks.
There are also broader challenges. MNEs face the continuous challenge of balancing opportunities
and risks. The rapid pace of globalization and industry consolidation has led in many cases to a mindset of hunt or be hunted (Price Waterhouse Coopers 2007, 5). One illustrative industry in this
respect is mining, where record commodity prices facilitated the paying down of debt incurred to
pursue acquisitions. Industry players saw consolidation as essential to achieving economies of scale
and synergies in operations. Today, however, the dominance of resource based firms in the OFDI of
a number of emerging markets brings its own set of challenges: natural-resource-based firms
account for four-fifths of the foreign assets of the top twenty-five Russian MNEs, and their rapid
expansion took place on the back of high commodity prices. High levels of debt coupled with falling
commodity prices make for an uncertain future, in which divestiture and further industry
consolidation may be the only options available.
Risky Political and Economic Environment
Having developed in riskier political and economic environments, emerging market MNEs notions of
risk can be very different from those of developed countries MNEs. The greater the level of political
risk in the home country, it appears, the greater the tolerance for risk that MNEs develop. The
Multilateral Investment Guaranty Agency (MIGA) outlines the factors that shape perceptions of
political risk for south based MNEs. These include the location, sector and size of an investment, as
well as the home country environment and the MNEs experience and history in outward
investment. Interestingly, in terms of entry mode, while greenfield investments are considered
economically more desirable and less politically risky in developed countries, emerging market MNEs
consider them more risky in other emerging markets since the presence of a domestic partner
tends to reduce risk perceptions.
Challenges for Home Country Policies
Today, while the landscape of home country OFDI policies is very uneven, the vast majority of
emerging markets do not provide a supportive environment for the OFDI activities of their firms,
placing them at a competitive disadvantage vis-a-vis their developed country counterparts. The
principal challenge for home country policy in emerging markets is, therefore (and within the
constraints of limited resources and widespread needs), to create an environment and policy
framework that supports domestic firms. This framework should enhance their competitiveness,
enable them to compete effectively in the global arena and, ultimately, secure the benefits of OFDI
for the home country. Certainly, the substantial rise in outward investment from emerging markets
is a relatively new phenomenon, and national policy is not written, or rewritten, overnight. On the
one hand, if emerging market firms are disadvantaged by a continued lack of supportive policies, and
thus are hampered in their competition on the world market, they may, in extreme cases, shift their
base to another country in order to stay competitive. On the other hand, the scope of government
action and policy-making is constrained by economic reality - limited resources, scarce foreign
reserves and potential concerns over the export of capital and jobs.

The lack of a supportive policy framework in developing countries stands in contrast to developed
countries, which have built an extensive and comprehensive policy framework over decades, policies
that have evolved in tandem with, and complement, their economic situation. The result has been a
gradual but persistent shift in home country policy from restricting and controlling OFDI, to
permitting it, and finally to promoting OFDI actively, reflecting the recognition that, in a global
market, firms must be globally competitive, with OFDI being one source of such competitiveness.
These measures can be grouped into seven categories: (i) the provision of information and
technical support, (ii) financial support, (iii) fiscal incentives, (iv)investment insurance and
guaranteed, (v) support of national champions, (vi) international investment related concordats and
agreements, and (vii) official development assistance (ODA) programs. However, as the authors
note, even with a detailed understanding of the policies implemented in developed countries,
challenges remain for emerging markets. While the lack of a clear policy framework leaves domestic
firms at a competitive disadvantage, changing the situation is not without its own challenges, given
the lack of domestic experience and competence in this area, the risks of regulatory capture and the
absence of a significant social safety net. Importantly, in many respects, the lessons for emerging
markets are less in terms of policy and more in terms of management and other types of human
capital augmentation at home.
Business implications for emerging-market multinationals
Adapt the M&A model: The long-term success of M&A deals is not guaranteed, and they are usually
a difficult endeavor for any company. In an environment where two-thirds of M&A deals fail to
deliver increased financial returns, EMMs should follow an M&A model that builds on the respective
strengths of each party through adaptation rather than prescription. Given their relative
inexperience, some EMMs also should seek expertise in M&A to identify targets, structure deals and
capture post transaction synergies.
Master corporate governance: As EMMs globalize and become more exposed to sophisticated
markets and consumers, attention will increasingly focus on transparent fiscal reporting systems,
organizational operations and investor relations. This is particularly pertinent for those seeking to list
on international stock exchanges or raise capital in international markets. Public relations expertise
will be necessary to manage interactions with external stakeholders and sustain market position.
Organize for growth: Beyond corporate governance EMMs will need to maintain the right mix of
cultures, management frameworks and leadership styles to sustain their growth without
encountering serious difficulties.
Operate within an evolving regulatory framework: Going global requires learning how to maneuver
through a myriad of regional and international rules and regulations governing trade and
investment, as well as sector-specific and environmental requirements in both regional and
developed markets.
Manage protectionist backlash: Waves of protectionist pressure may hinder the capacity for
multinationals to expand, particularly in strategic sectors such as energy. Consequently,
multinationals may need to explore different expansion strategies. The uncertainty raised by the role
of governments as owners and investors signals the potential for further protectionist pressure.

Addressing Challenges: The China Story

China is an example of how one particularly important emerging market has addressed the
challenges for home country policy and, in particular, the shift from OFDI restriction to promotion.
Chinas OFDI policy has evolved in three phases from 1984 to 2008. Adopted largely out of economic
necessity in 1984, early policy involved strict controls on OFDI: from project approval by the National
Planning Commission or State Council to limits on project value and the repatriation of all foreign
profits. In 2000, funds were established to encourage the internationalization of small and mediumsized firms. The year 2000 also saw the unveiling of Chinas Going Global policy and the
differentiation of OFDI policies into policies of regulation, guidance and support. This involved the
simplification of the approval process; an increase in the threshold value of projects for which
approval was required; the dissemination of information on investment projects; the development
of government guidelines; and the dissemination of information on problems previously
experienced. China offers a particularly interesting example: it embraced Open-Door policies only
three decades ago but, in a relatively short period, OFDI flows have grown considerably, from only
US$44 million in 1982 to US$51 billion in 2008. Furthermore, the prominent role of SOEs in the
Chinese economy and the countrys OFDI, allows the government a degree of direct influence,
impossible for most other national policy makers. Yet, despite the highly structured process and
policies in place in China, this remains a trial and error path.
Conclusion
EMMs face significant challenges in maintaining their extraordinary growth.
Gaining access to talent, capital and Resources, Growth can be sustained only if EMMs can ensure
continued access to inputs such as talent, energy, raw materials and capitala difficult task in the
face of increasing competition.
Staying local, Adapting to the needs and tastes of local consumers has been a key strength of EMM
development. As EMMs grow and serve increasingly diverse consumer markets, they will need to
maintain this local knowledge on an international scale.
Filling innovation gaps, EMMs show themselves to be consummate improvisers when it comes to
innovation. In the future, however, many will need to undertake innovation activities in a more
replicable fashion and diversify from a focus on product development to include more invention and
concept generation.
Combining global scope with local focus, The key challenge facing all aspirational EMMs is how to
achieve growth on a global scale while maintaining the local practices and mind sets that made them
so successful in the first place. Evolving business models that combine the best of both worlds will
be essential if they are to prevent their growing pains from becoming a constraint on their
expansionand if they are to achieve and sustain high performance.

References
http://www.prenhall.com/behindthebook/0131738607/pdf/CKR_Emerging_Markets.pdf
http://www.unido.org/fileadmin/import/userfiles/puffk/mrak.pdf
http://www.accenture.com/SiteCollectionDocuments/PDF/MPW2.pdf
http://www.voxprofessori.com/eden/Publications/strategyinemergingeconomies.pdf