Concepts of Emerging Markets

Chapter 1

How do you define emerging markets? What are some of the common characteristics?

Emerging markets are those markets in a transition phase from developing to developed markets due to rapid growth and industrialization. Hence, markets which have (a) started an economic reform process aimed at alleviating problems, for example, of poverty, poor infrastructure and overpopulation; (b) achieved a steady growth in gross national product (GNP) per capita; (c) increased integration in the global economy; may truly be called emerging economies.

In defining emerging markets, large populations, rapid growth in GDP as well as increased contribution to world trade can be identified. Increased contribution to the world economy can be observed in increased exports, imports, inward and outward foreign investments. Such markets are often associated by rapidly growing populations and younger populations.

Such markets are also identified by progressive economic reforms and expectations of accelerated economic expansion. High growth rates and industrialization also lead to urbanization in such markets. In parallel, income levels are often increasing rapidly.

Even though emerging markets are very different from each other in terms of culture, political and economic characteristics, market structures and demographic structures, some general trends can be identified in order to understand the rise of such markets, as well as opportunities and challenges presented by these markets.

What are some of the reasons for increased importance of emerging markets in the global economy?

Traditionally, the emerging market environment was characterized by protected domestic firms, high tariffs, weak institutions, conglomerates and business groups, and a turbulent climate. Towards the end of the twentieth century, emerging markets started to go through structural reforms in an attempt to create stability and growth. Due to such reforms, many emerging markets have stabilized their economies and started growing rapidly. As emerging markets adopt a relatively open approach to world trade, they are able to integrate with the global economy.

Increased contribution of emerging markets to world trade is one of the reasons which has led to the emphasis of emerging markets in the global economy. Many of such markets have become major exporters and the interdependency among developed and emerging markets have increased.

Liberalization has also augmented to the focus on emerging markets in the global economy as the markets present major opportunities for foreign investment. Economic growth rates of emerging markets are higher than those of developed economies. Hence, such markets often present better prospects in terms of planning future investments. In parallel, policy reforms in these markets leading to improved fiscal and monetary policies, as well as stronger financial markets, have reduced volatility significantly. Hence, the rise of such countries as potential markets has also heightened their importance in the global economy.

What do the current growth and characteristics of emerging markets show in terms of their future potential?

Over half of the world’s population lives in emerging economies. Figures for 2009 indicate that 42 per cent of the world population is in BRICs and 14 per cent is in New Frontier economies. Emerging markets all have sizeable working age populations and upcoming young populations who will soon enter the workforce. Meanwhile, economic growth within these markets leads to the increase in the education of the upcoming labour force, thereby providing a source of human talent.

Another important demographic trend in emerging markets is the growing rates of urbanization. Urbanization is another result of economic growth and of the focus on industrialization. As the weight of agriculture is reduced within emerging market economies and more job opportunities are provided with economic growth, urbanization rates of such countries has been increasing rapidly. Growth in urbanization indicates the movement of populations from low income agricultural work to rural-based activities such as higher income industrial jobs. The changing population framework also leads to the increase in demand for infrastructure, housing and services in cities.

Urbanization and income levels in emerging markets also indicate their rising potential as markets in the future. Consumption in emerging markets has been increasing rapidly and this increase is expected to prevail in the future. Trade and investment in emerging markets also shows their rising potential in terms of production and supply of goods into the world economy.

What is the role of emerging markets in a multinationals global strategy?

Emerging markets have been increasingly contributing to global growth fuelled by increasing levels of domestic demand. As these countries grow, rising income levels lead to the emergence of a new middle class which will affect the world economy and the global demand significantly in the long run. In terms of a multinationals’ global strategy, emerging markets arise as important consumers, producers and competitors.

Emerging markets are associated with increased growth and consumption. Meanwhile, multinationals are facing relatively stagnant markets in developed countries. Hence, the role of emerging countries as potential markets is more significant.

Increased competition among the multinationals has resulted in splitting value chain activities internationally at increasing rates in the twentieth century. Increased levels of globalization also enable the companies to slice their operations and locate them in the least-cost or most advantageous locations.

Emerging markets have long been centres for manufacturing due to the availability of low-cost and skilled labour which can undertake high quality manufacturing operations efficiently. As intensified competition forces companies to drive down costs, many companies are relocating or investing in manufacturing facilities in emerging markets. Companies are increasingly engaging in global sourcing whereby they procure products or services from independent suppliers or subsidiaries around the globe.

The presence of emerging market multinationals in their domestic economies leads to intensive competition for multinationals trying to enter these economies. In their investments abroad, multinationals generally face the local competition at the lower end of the market and concentrate on high-end markets which are limited in size. In emerging markets, local competitors are endowed with knowledge of the customer, ability to operate at lower costs and strong relations with authorities as well as other players within the value chain. Often, emerging market firms have higher production efficiency than MNEs from developed markets due to their ability to optimize the production processes in emerging market conditions.

Domestic firms in emerging markets have also been growing rapidly. Due to increased liberalization as well as government incentives promoting outward foreign investment, such firms have also started to internationalize rapidly. In parallel, many emerging market firms are fast becoming global competitors.

Chapter 2

How can governments regulate foreign investment and trade?

Governments are able to assist or hinder trade through multiple tools such as financial assistance, tax refunds, tariffs, non-tariff barriers, tax costs and incentives, to promote the preferred type of foreign investment. Trade can be restricted by high tariffs or non-tariff barriers such as quantity restrictions, price restrictions, regulatory restrictions (licensing, domestic content requirements etc.), investment restrictions, customs restrictions and direct government intervention (Heritage, 2011).

In order to attract investment, many governments are offering incentives such as tax breaks, cheap land, easy access to energy sources or duty free imports (UNCTAD, 2000). Attracting investors who can invest in manufacturing facilities creates jobs in the EM economy, and augments the growth of the supplier industries. Moreover, the ability to attract large investors also leads to further investments by other investors who are suppliers. The government can increase the attractiveness of the country for foreign investors by changes in regulations and providing incentives. Some examples of such may be opening up industries to foreign investment, reducing restrictions, or offering tax incentives. Governments can also engage in bilateral agreements through which they commit to binding obligations. Bilateral agreements usually centre on regulations related to the entry of foreign investors, regulations concerning the transfer of capital and profits of the foreign entrant as well as the procedures for settling disputes (Busse et al., 2010).

On the other hand, governments may choose to protect selected domestic industries especially if the domestic company is a large employer, or a national champion. Protection may also arise due to the local company’s networks and connections with the government. These networks may also enable the local firms to influence the government policies and thereby impede the efficiency of the market.

Though the ideal political government for a multinational is a stable government which welcomes foreign investment, such is often not the case. Even when governments are friendly, adverse changes may occur due to elections or government response to an emerging pressure. Thus, a company needs to assess the political climate before entering a market and monitor the changes closely after the entry as well.

What are some of the risks that foreign companies face in emerging markets due to the political and legal framework?

Political risk stems from the probability of adverse effects on a multinational’s business due to the political events in the host country. Many factors such as breach of contract, expropriation, political violence, revolution, sabotage, terrorism and restrictions on currency transfer are included when considering political risks. Political risks may relate to seizing a multinational’s assets, or more commonly, explicit or implicit actions of the government against the set contractual obligations.

Even when governments are friendly, adverse changes may occur due to elections or government response to an emerging pressure. Thus, a company needs to assess the political climate before entering a market and monitor the changes closely after the entry as well.

Many political risks stem from nationalism, which is based on the preservation of a country’s economic independence. Nationalism can lead to restrictions on imports, and tariffs and barriers to trade, in order to promote the consumption of domestic products. Alternatively, countries may restrict foreign investors’ entry and demand that they can only invest in the country as minority interest partners of joint ventures with locals. Many countries also demand that a percentage of the content of a product should be local (Ghauri and Cateora, 2010). Examples of other risks stemming from the political environment can be: exchange controls when the government restricts the flow of funds; tax controls when the taxes are raised without warning; pricing controls when the government sets the prices; or labour problems when the countries control the labour practices of a firm.

In more severe forms, nationalism may lead to governments’ control of the foreign investment or even confiscation of a company’s assets. National legal systems can create challenges to new entrants especially if the laws are focused on limiting or controlling foreign investment. Laws which restrict the foreign investment increase country risk and influence foreign entry into the economy. Governments can also impose restrictions on the firms’ activities within their borders thereby reducing the host firms’ efficiency. In order to discourage foreign entry, governments can complicate the bureaucracy necessary to undertake activities such as exporting, importing or logistics. Other restrictions can be placed on the ownership structure of the foreign firm as many governments seek joint ventures with local firms. Similarly, many governments have local content laws in an effort to boost the domestic economy.

A country may use economic sanctions to make a political statement or political action may be used to enhance the country’s prospects. The power of the political parties is important because the role that businesses are allowed to play in a given country’s market is influenced by the philosophies of those parties. However, other agents such as unions, special interest groups and lobbyists need to be considered as they can have the power to influence the business landscape in a country

How can foreign companies manage the political and legal risks in emerging markets?

First of all, some of the political risks in a given market may not be relevant to the company’s operations at all. Hence, the company may find that they do not need to be concerned about such risks in carrying out their operations in a given country.

The first step in managing political risks is assessing such risks and evaluating how such risks pertain to the company’s operations. In assessing risk structure of a country, consulting local sources often leads to more accurate insights.

One of the main distinctions that need to be considered in assessing political risks is whether the risk affects the sales or the physical assets. If the risks are focused on physical assets, then a company may take advantage of the sales opportunities. In some cases, the growth prospects of emerging markets have also led to the entry of internationals in the presence of political risks which may effects physical assets. In such cases, these companies either controlled the size of the investments or shared the risks with partners.

The political risks that remain a concern for investors can be termed as policy risks – or political uncertainty – based on the risks arising from a government’s ability to change the regulations, adversely affecting the investment; or the government’s failure to enforce contract investment guarantee agencies such as MIGA, as well as bilateral investment treaties, which provide insurance against major political risks.

Companies increasingly try to engage with local communities and governments, and form joint ventures with local enterprises. Companies can maintain personal relations, increase their resource commitments in the host country, stimulate the local economy by purchasing local supplies, employ nationals, or advocate their presence as a responsible corporate citizens in order to improve their relations with the authorities and establish their presence in the market.

Generally, in markets where the political risks are deemed high, multinationals can limit operations and lower commitment or focus on increasing firms’ importance politically. Another successful approach to managing political risks is to manage political relations by ensuring the government that the multinational enterprise will contribute to the economic growth of the country by providing technology, employing locals or investing in public resources. In order to build such a relationship with the government, the company must analyse the interests of the particular government, and their attitudes towards the firm’s industry.

What are property rights and how do they affect foreign firms’ strategies in emerging markets?

Property rights are legal rights over a resource and the income which is generated from that resource. A company’s intellectual or industrial property are among its most important assets, as it spends considerable amounts in establishing brand names or trademarks which symbolize quality and image. Intellectual property (IP) refers to property created by intellectual activity and the owners of the intellectual property are granted exclusive rights on this property by obtaining patents, copyrights or trademarks (Onkvisit and Shaw, 2008). IP includes inventions, literary works, music, as well as designs used in commerce (Hill, 2011).

IP theft can result in loss of company-specific know-how and thereby lead to significant issues for multinationals. Many multinationals have also been trying to reduce their exposure to risks stemming from the lack of protection of intellectual property. Some companies have developed technologies that identify their products, such as three dimensional markers or different packaging which is hard to obtain by counterfeiters. Another way to deal with such problems is to work with the local governments, dedicating company resources in order to control the counterfeit operations. For EMs, the endorsement of IP laws arises as a major issue. Many EMs are taking measures to increase IP protection in their markets.

Discuss the main cultural differences between emerging and developed markets.

In EMs, foreign entrants need to understand the culture in order to be able to compete with the local firms, appeal to consumer tastes, and also to do business with local companies successfully. Cultural differences are especially highlighted in the context of EMs due to dissimilar traits of these markets when compared to developed markets.

Many EMs are associated with collectivist cultures which highlight a dependence on the social system and emphasize a person’s role within the group. In parallel with the prioritization of collectivist values, the EM social and business environment is affected by relationships. Hence, in such cultures, building long-term relationships based on trust and loyalty is very important.

In cultures where friendship or relations are essential, focusing on building relations and establishing trust arise as a major aspect of doing business. Focus on collectivist values can be observed in many emerging markets in different ways. For instance, in Confucian societies, individualism is not a desired trait and relationships are very important. The emphasis on relations leads to the dominance of family businesses as well as the dominance of networks in the business landscape of Confucian societies. Such networks are referred to as Guanxi in Chinese society, Ningen Kankei in Japan and Kwankye in Korea. Similarly, in, Latin American countries, ‘compadre’ refers to friendship and friendship arises as a cultural prerequisite for developing effective business relations (Cavusgil et al., 2008).

In terms of Hall’s definitions of high–low context cultures, most EMs are associated with high context cultures. As such, time is non-linear and activities are not scheduled or organized according to specific schedules. In addition the distances among people are narrower, implying less formality, closer relations, and an emphasis on relationships in doing business.

Discuss the main traits of culture in emerging markets in terms of Hofstede’s dimensions. How do differences in terms of Hofstede’s dimensions affect business in emerging markets?

Many EMs are associated with higher power distance scores when compared to developed markets. Hence, companies often have centralized decision-making systems, where the bosses, owners or CEO’s make the decisions. In parallel, companies are less open to diffusing the sharing of ideas through the organization and only a small percentage of employees are able to participate in the decision-making processes. Higher power-distance may enable firms to be more flexible at times due to the ability to make decisions quickly, as only a few individuals are involved in the process. On the other hand, the concentration of decision making and the authoritarian structure can prevent employees from speaking out and contributing to their organization with innovative ideas. High power-distance indices are also associated with structured societies where class differences are well defined. Wealth and power reside in a small percentage of the population in many EMs. In doing business high-power distance scores indicate that the decision making of the EM firm is concentrated at the top level. In parallel, it is also important to engage in discussions with the top executives by employing the top executives from a foreign entrant’s firm.

Many EMs rank lower than developed markets on individualism. China has a very low individualism score, mainly due to the emphasis on a collective society as a result of communism. Low scores indicate close nit societies in which bonds among the members are cherished and strengthened continually. Then the more collectivist nature of BRIC cultures and many EMs can signal the existence of business environments where networks are important and relations affect business practices. In terms of consumption and preferences, collectivism indicates the propensity of the society members to be influenced by each other in making decisions. Business relations in most EMs are influenced by relations, and firms who want to do business in such markets should emphasize building relations and trust.

Uncertainty avoidance varies greatly among the BRIC countries with Russia and Brazil scoring very high on the scale. These cultures prefer to eliminate uncertainty and minimize risks, hence indicating the presence of strict regulations. High uncertainty avoidance can also show a culture’s resistance to change. Companies in high uncertainty avoidance cultures often avoid risky investments and consumers are less willing to try new products. Members of cultures with high uncertainty avoidance are associated with lower tolerance to new ideas and opinions.

Chapter 3

In emerging markets, why do institutional voids occur and what can companies do to operate successfully in the presence of institutional voids?

Institutional voids stem from the inefficiencies in capital, product and labour markets, due to the absence or inefficiency of institutions. Such institutions enable markets to function smoothly. In developed countries businesses can rely on specialized intermediaries such as distribution agents, arbitrators and information providers to operate efficiently. Companies are able to distribute information to customers via advertising, marketing, the web and retail chains. Logistics companies distribute the product, credit card issuers facilitate the purchasing, information agencies provide information on consumption to firms and information on products to consumers. Information-based institutions can provide independent assessments to certify a firm’s credibility, collect and analyse information and provide consulting services. They can also match customers and suppliers and provide distribution services; provide platforms for buyers and sellers; help resolve disputes; and regulate business transactions

In EMs, intermediaries either do not exist or their operations are less comprehensive when compared to developed markets. Informal institutions exist in order to provide for the gap of missing intermediaries but access to informal intermediaries are limited. Weakness or absence of intermediary institutions which provide services; weaknesses in the governance system; weaknesses in the legal system; poor enforcement of regulations; are some of the factors which create institutional voids.

The absence or the inefficiency of institutions increases the transaction costs of the multinationals. Managers need to consider issues arising from institutional voids and determine whether they can reach the customer efficiently, evaluate creditworthiness of the customer, collaborate with supply chain partners, hire qualified personnel, and find reliable partners or not before entering into an EM (Khanna & Palepu, 2010).

Increasingly foreign investors are utilizing the services of third parties with expertise in the relevant areas to gather information. Some examples of third parties may be consultants, ex-government officers, researchers, political risk services, or market information services. For this purpose, software tools such as information extraction software and data mining tools are also employed. Talking to different sources such as government officials, suppliers, academicians, banks and consultants within the market can also mitigate the information gaps to a significant extent. Another strategy of foreign investors is partnering with local firms who have know-how of the market and are experienced in operating in the presence of institutional voids.

What are business groups and how do they develop? Discuss the advantages and disadvantages of business groups.

Business groups are legally independent firms connected by formal and informal ties which often operate in multiple industries. These groups typically consist of legally independent firms, operating in multiple (often unrelated) industries, which are bound together by persistent formal (e.g. equity) and informal (e.g. family) ties; varying degrees of participation by outside investors characterize many business groups around the world.

EMs are associated with market imperfections and inefficient supporting institutions. Business groups can be analysed as organizations formed in response to costs arising from imperfections in product, capital and labour markets. Group members can access the technological, human capital and financial capital of the groups and meanwhile learn from the group’s network. The group name enables the companies under the group to attract talent, raise capital efficiently in the domestic market, and build customer confidence quickly. Business groups emerge as key players in their respective industries due to advantages such as relations with the government, extensive networks, strong brand names and superior access to knowledge. They often have a loyal customer base and a group name associated with high quality and trust. Moreover, they have built extensive distribution networks. In entering multiple industries and continually engaging in unrelated diversification, business groups may have formed a competitive advantage which enables them to undertake such operations efficiently.

Under changing circumstances, the importance and the success of business groups may decline due to increased competition in deregulated economies and increased specialization necessary to generate competitive efficiencies. High levels of diversification in business groups may lead to cost inefficiencies. Lack of specialization may impede business groups from competing effectively in the international arena. Rigidities among the group may also hinder innovation. As the weaknesses in such markets diminish and institutions are developed, the significance of business groups is bound to decline.

How do technological capabilities affect emerging markets? What are the future indications?

EMs have been associated with limited investment in technology. Traditionally, the economies within these markets are based on non-value added production, which is labour intensive. Therefore, many EMs are dependent on the developed economies for technology transfer. EM growth has mainly been facilitated by economic and political reforms and the adoption of existing know-how and technologies. Firms from developed countries are advantaged in terms of technological and marketing capabilities. In contrast, EM firms do not often have firm-specific assets, defined within the context of firms from developed markets. Many emerging market firms still base their strategy on exploiting current assets and focusing on the production of the same or similar products.

Shifts towards market-based economies in EMs result in increased competition for domestic firms, as well as the growing need to emphasize quality and customer satisfaction. As such, domestic firms are faced with the need to update their operations and products in line with the market needs. Though the innovation base and technological capabilities in EMs are weaker than those of developed nations, governments and firms have realized the importance of investing in technological capabilities for global competition and are increasing investments to this effect. Improvements in policies in terms of protection of property rights and macro-economic stability, as well as increased exposure to new technologies, have also contributed to the increased rate of technological advancement in emerging markets.

Competition from MNEs from developed countries has also accelerated the growth of innovative capabilities of EM firms (Gorodnichenko et al., 2008). Even though firms from developed markets are still the creators of new technologies, firms from EMs have been absorbing new technologies more rapidly as their exposure to such technologies increases (WorldBank, 2011).

There is some evidence that some EM countries are undertaking efforts in order to develop technological capabilities. In EMs, people are now empowered with universities and research centres, as well as access to information via improved communication technologies which should transfer into developments in innovation (Sachs, 2008). Meanwhile, many MNEs from developed economies are trying to spread R&D efforts globally and investing in R&D centres in both EMs and developed countries (UNESCO, 2011). Formation of globally distributed R&D networks has been accelerated over the past two decades. Due to the increasing availability of technical personnel in EMs many multinationals have been shifting their R&D investments to such countries, especially to China and India. In order to compete with developed markets, emerging markets need to increase their focus on building technological capabilities. As such, their investments in this area are bound to increase.

How does infrastructure availability and efficiency affect multinationals’ decisions when entering emerging markets?

The quality of infrastructure directly affects a country's economic growth potential and the ability of an enterprise to engage effectively in business. When an infrastructure does not develop with an expanding population and economy, countries begin to lose economic development ground. A country can produce commodities for export but cannot sell them because of inadequacies of the infrastructure. Product labour and capital markets cannot function effectively if the physical infrastructure within the country is not developed (Khanna and Palepu, 2010). A distinct difference between developed and emerging economies is the presence of infrastructural inefficiencies in the latter. Still, in EMs, increased investments in infrastructure are being made for sustained growth in world trade.

Distribution represents a major challenge for multinationals in EMs. Due to relatively inefficient infrastructure, absence of professional logistics intermediaries, and the dispersed nature of the population, the logistics processes are inefficient. As logistics provides a major challenge in EMs, establishing an efficient distribution network arises as a major undertaking for multinationals. Distribution and the ability to reach consumers in markets which are more dispersed, arises as a very big opportunity. Hence, some multinationals invest in distribution networks.

On the other hand, in considering the weaknesses in infrastructure, many multinationals partner with locals and establish joint ventures or build relations with local distributors. EM firms have adapted their operations to function efficiently in areas where logistics and distribution systems are not developed. Then the availability and the qualities of potential partners or distributors is an important factor which influences the multinational’s decision-making process. Many companies have also acquired distributors in order to main control over the dissemination of their products. If the company is not ready to invest in their own distribution network, then building successful relations with local distributors as well as ensuring sufficient monitoring of their activities arises as a necessity. In such cases, companies need to analyse the distributor’s operations and make sure that the distributor can fulfil their needs.

Chapter 4

Discuss the implications of changing income distribution in EMs for foreign entrants.

Growth in consumption in EMs is due to economic growth which increases the income levels within these countries. Higher income levels are then translated to the economy as increased demand and a growing middle class. Parallel to the increase in income, consumer expenditure on a variety of goods across industries are changing across EMs. Spending on clothing, housing, household goods and health has increased rapidly throughout these countries.

In developed countries, a firm can market a new product to early adopters and then decrease its price and content to offer it to the majority. In EMs, the income distribution is not smooth (Montiel, 2003). Hence, by simplifying an offering, the company cannot reach the middle income segment because the gap between the middle income segment and the high income segment is very large (Dawar and Chattopadhyay, 2002). Even though middle income consumers in EMs have higher income than they did in the past decade, there is still a wealth gap between the middle income levels of the west and the EM consumers. When multinationals enter these markets with their products designed for the middle income consumers in the West, they can only appeal to the high income customers of the EMs – who constitute only a small percentage of the population. Moreover, middle income populations in EMs do not necessarily have the same preferences as the middle income population in developed economies. Therefore, business models designed for developed economy customers may fail to meet the needs of EM customers both in terms of costs and functionality.

Discuss the issues foreign investors need to consider when trying to capture EM customers. Suggests was to capture opportunities in EMs for new entrants.

For firms from developed markets, emerging markets arise as a relatively untapped area. Often, in EMs firms from developed markets offer products designed for consumers in their own markets based on superior technologies, high quality and design features. Such strategies often fail due to the differences among EM consumers and consumers in developed markets in terms of tastes and priorities.

Although tastes in advanced economies are converging to an extent, such is not the case in EMs (Matusitz and Reyers, 2010). In many EMs even the consumers with high incomes are mostly associated with different spending habits when compared to developed markets (Chavan et al., 2009). Many multinationals from developed markets have been unsuccessful in EMs mainly due to limited understanding of the markets. A major error that such firms make is to offer standard products slightly modified for the market. In EMs understanding the consumer and their needs and offering products customized for the market can arise as a necessity (Chandra and Nelankavil, 2008). In formulating a strategy, firms need to make sure that their product suits the consumer culture, and create value propositions which focus on providing the benefits valued by the EM consumers. As such, firms need to understand the consumer tastes in these markets. Consumers may not be valuing a particular aspect of the value proposition or they may be valuing an aspect not offered by the company. Modifying the offering in line with consumer tastes can help foreign entrants capture a greater consumer base.

Even though many consumers in emerging markets prefer products with lower prices, price is often not the most significant determinant in purchasing decisions. EM consumers are often more cautious than their counterparts in advanced economies, hence they may focus purchasing decisions on quality as opposed to searching for the lowest price (Chavan et al., 2009). Another factor which influences purchasing decisions is the availability of the product. In EMs targeted segments may reside in dispersed locations, or their shopping habits in terms of retail locations may be different. Firms need to make sure that they are able to reach their target consumer base (Johnson, 2011).

In entering emerging markets, treating multiple markets as uniform can be a mistake, as emerging markets are culturally and structurally different from each other. Firms also need to consider differences within an EM. Regions in a given market may be associated with different tastes. Alternatively, different modifications to a firm’s product may be necessary in marketing to different regions within a market, due to the varieties stemming from the environment factors. Such differences are bound to multiply when considering the different lifestyles and infrastructure among regions.

What are some new businesses arising from changes in EMs?

Increased importance of EMs and the need to create or adopt products for these markets has also led to discussions on reverse innovation (Alcácer and Chung, 2011). Reverse innovation occurs when an innovative product is designed for EMs and less developed economies are transferred to advanced economies afterwards. Though examples of such cases are rare, the prospect of operating under different conditions in EMs can lead to further advancements in terms of innovations which could then be exploited in advanced economies as well (Govindarajan and Ramamurti, 2011).

The growth rates of EMs have accentuated the importance of investing in infrastructure because the current state of the infrastructure in many EMs is not adequate to support high growth rates. In countries with accelerated growth patterns, the demand of infrastructure and housing increases rapidly. This pattern especially highlights the need for infrastructure development that the cities will need in order to support the increased population as well as the rapid growth. Multinationals can work with EM governments in undertaking construction activities. Moreover, to finance the infrastructure, governments need funding, which highlights significant opportunities for financial service providers.

The increased presence of female participation in consumption affects consumption patterns, creating even larger opportunities in the consumption of household goods in EMs. Rapid growth of the younger population also highlights business opportunities. The younger generation is associated with a tendency to try new things and this is especially visible in technology products. Internet penetration has been increasing at higher rates in EMs when compared to developed nations and this trend is expected to continue.

Increased concerns of climate change and the need to shift to low carbon economies has generated a new trend in foreign investment. In many EMs especially, younger generations are environment conscious. Although environmental laws in emerging economies are not as stringent as they are in developed countries, firms interested in doing business in EMs over the long term should be aware that the situation is changing fast.

Define the bottom of the pyramid. How can the bottom of the pyramid offer business opportunities?

Bottom of the Pyramid (BoP) constitutes the largest share of the world population with a 65 per cent share, and is also the poorest group globally. The key characteristics of the BoP segment are that BoP:

• is heterogeneous across multiple dimensions;

• includes the portion of the world’s population with the least amount of income;

• contains local enterprises that generally are not well integrated with the formal capitalist economy;

• lives primarily in the informal economy and constitutes the majority of humanity.

The main tenet of BoP is that the aggregate spending of this population can generate new opportunities for firms. Often in BoP consumers do not have the means to save for major expenses such as buying homes or cars etc., hence their spending is focused on products which may improve their life standards. For instance, a sizeable section of BoP owns television sets. Firms can create successful business models designed to meet the needs of this segment of the population. Meanwhile, continued relations between BoP consumers and firms can also help reduce poverty and improve living standards.

What do you think managers need to consider when making the decision to adopt their business models for EMs?

Many companies encountered problems in EMs because they set up the same manufacturing facilities and systems they use to serve developed economies. However, in EMs, multinationals need to compete with local companies who emphasize low cost and are able to achieve operations at such costs due to their efficiency in production with high labour-intensive systems, and their ability to serve the product that meets the needs of the local customer. Then, the multinationals are also faced with the pressure of creating efficient production processes which can compete with the margins of the locals while meeting the customer needs (BCG, 2011). For instance, a company can replace the process to a more labour intensive one and strip the costs stemming from equipment and machinery. To maintain low costs, a company can also strip processes that are necessary in Western markets such as invoicing systems.

Doing business in EMs offers major learning opportunities for firms as they learn to operate in environments which change and evolve rapidly. In this structure firms are met with multiple forces such as rapid urbanization, industrialization and liberalization (Enderwick, 2009). Moreover, they are faced with different consumer cultures and needs. The EM structure often necessitates high levels of customization through which many multinationals are confronted with the need to rethink their business models, in order to create valuable consumer propositions for EM consumers. Through this process, doing business in such environments can lead to product and process innovation in EMs (Ghemawat, 2010). In designing their models, companies need to consider product attributes valued by the EM consumer. In order to provide such attributes, they need to modify their business models to take advantage of country advantages and lower costs.

Chapter 5

Discuss the strategies of emerging market firms in the face of increased competition in their markets.

Faced with increased competition, local firms in EMs followed multiple strategies such as concentrating on local adaptation and protecting their market share, venturing into similar markets in order to sustain growth, focusing on niche products to create a competitive advantage or investing in their capabilities to be able to compete with MNEs.

An emerging market firm may sell out if the pressures in the industry to globalize are very high. The company may also be forced to enter a joint venture or focus on a different area within the value chain where the local advantages can be utilized.

In cases where the pressure to globalize are high but the EM firm has competitive advantages which can be transferred abroad, firms can choose to upgrade their capabilities in order to compete with MNEs globally. Such firms can also focus on a specific part of the process and specialize in that area.

Firms with competitive advantages which can be transferred to similar markets can internationalize even when the pressure to globalize in the industry is low. Firms with competitive advantages which can be transferred to similar markets can internationalize even when the pressure to globalize in the industry is low.

Firms operating in industries where the globalization pressures are relatively low and where the company’s competitive assets are customized for the home market can leverage their local advantages and focus on aspects where MNEs are weak. In many industries, local leaders are more successful than the MNEs because they are able to customize products according to the local demand, and customize business models, taking advantage of the local competitive advantages such as low cost labour.

Firms from EMs can also concentrate on niche markets and compete globally in such markets which aren’t saturated and in which the MNEs from developed markets do not possess major competitive advantages.

Discuss asset seeking motives as they relate to multinationals from emerging markets.

Internationalization literature has often focused on the firm’s ability to exploit competitive advantages derived from their firm specific assets in multiple markets in explaining internationalization. In foreign markets, firms are faced with additional costs and risks as they are not familiar with the market. However, potential benefits from exploiting their advantages in different markets can outweigh the costs. Competitive advantages which lead to firm success in multiple markets are often knowledge-based intangible assets and capabilities of the firm. Some examples may be marketing or technological assets. For instance, a firm can enter multiple markets with a technologically superior product and grow its customer base rapidly. On the other hand, EM firms often lack the firm-specific advantages which are mainly intangible in nature such as managerial, marketing and technological capabilities, which have been considered as the basis of international expansion in international business theories.

In international business, firm internationalization is also regarded as a gradual process. Within this process, internationalization is considered as a gradual movement starting from investing into similar economies and increasing exposure as the firm develops knowledge and experience in these economies. Emerging market firms often internationalize directly to developed markets which are very different from their own domestic markets. Moreover, they are able to internationalize with seemingly limited firm-specific assets. This behaviour has led to the discussion of a strategic asset-seeking pattern in analysing emerging market firms.

Firms from EMs may internationalize in order to acquire strategic assets, which enable them to compete with MNEs from developed countries. Such strategies are designed to gain access to resources such as technology, brand and managerial capabilities, which EMs need. Then, in venturing abroad, such EM firms are motivated by the need to acquire assets that may generate a competitive advantage. An advantage of the EM firms is that the complementary assets they need such as R&D capabilities are available in the form of smaller enterprises, as larger MNEs are becoming integrated and focused (Hennart, 2009). Many MNEs are willing to sell business units in order to dilute slow businesses and align their strategy with competencies, thereby EM MNE acquisitions are possible (Luo and Tung, 2007).

However, even when firms acquire resources, efficiency of the acquired information or resource is dependent upon the firms’ internal efforts. While some EM firms choose to acquire assets directly, many EM firms export or gain foreign presence first in similar environments or with low priced undifferentiated products, and then start building up on their strategic capabilities like marketing, or technology. Firms can gradually build technological capabilities, create products good enough for other EMs and later on focus on producing world class products and engage in innovation activities, however this process is dependent on the firm ability to learn, disseminate and internalize knowledge (Teagarden and Cai, 2009).

What are some of the advantages of multinationals from emerging markets when compared to companies from developed markets?

A major advantage of the EM firms both in their domestic markets and in similar international markets is their local know-how and deep understanding of the consumers. In fact, the ability of EM firms to meet the demands of the local customer more efficiently than the MNEs from developed markets has often been cited as a reason for the limited success of the MNEs in EMs. In competing with MNEs, many EM firms make the competition irrelevant by answering the local customer needs more effectively by using their knowledge of the market. Foreign firms in EMs often concentrate on high-end consumers because MNEs’ cost structure and the standardized nature of product offerings limit their target market.

Often EM firms have higher production efficiency than MNEs from developed markets, due to their ability to optimize the production processes in EM conditions (Ramamurti, 2008). Firms from EMs often use the availability of low-cost labour as an advantage and rely less on automation.

Institutional voids or the ability to work around the institutional voids can become an advantage for EM firms. Institutional intermediaries in developed markets provide a large base of services such as providing funds, analysing information, and providing services during transactions. Such services often require local know-how such as culture, language, or regulations. In contrast, in EMs, intermediaries which provide information, capital and supporting activities within the value chain, are either non-existent or are in the growth stage. EM firms, then, have established their operations in ways that minimize issues stemming from institutional inefficiencies. For example, local firms can also access local talent easily and select the highly skilled personnel, while foreign MNEs often experience problems in selecting and employing the right talent. Moreover, large EM firms and business groups have often established in-house training programs to build a talent pool and can overcome the challenges associated with finding skilled labour.

In EMs networks can provide access to resources in the presence of market imperfections. Networks can also constitute advantages for EM firms both in the domestic economy and in internationalization.

Many firms from EMs are latecomers. Latecomer advantages can be exploited via several strategies such as taking advantage of changing consumer preferences, benchmarking against established industry parameters, investing in new technology, and by utilizing improved information dissemination channels to buffer demand.

How can multinational from emerging markets compete globally?

Despite the flourishing position of EM firms in the current economy, with increased liberalization, the importance of firm-specific assets such as local know-how, and cost efficiency can decrease because MNE presence in EMs enables these firms access to similar assets as well.

In some cases EM firms are able to utilize their local knowledge and create a niche market of similar customers internationally. In other cases, EM firms can invest in developed economies in order to access strategic assets and know-how. In doing so, while many firms from EMs have engaged in acquisitions, others have chosen to internationalize gradually, increasing their commitment level in parallel to accumulation of experience and know-how in the developed economy.

Many EM MNEs are concentrating on undertaking value chain activities and specializing in these areas and thereby investing in developed markets by following their MNE customers. They can specialize in a section of the production chain globally.

Chapter 6

What are the drivers of growth in different emerging markets?

Many of the EM countries have faced severe economic crisis in the 1990s and had to implement new policies ensuring better conditions and better financial systems. As a result, EMs started to go through structural reforms in an attempt to create stability and growth. Often governments implemented wide-ranging economic reforms, adopted stricter fiscal policies, reduced the external debt, and brought inflation under control. Due to such reforms, many EMs have stabilized their economies and started growing rapidly. As EMs adopt relatively open approaches to world trade, they integrate further into the global economy.

Liberalization, rapid economic growth, as well as increased improvements in the business environment, have attracted significant levels of foreign investments to many EMs. EMs have been contributing to global trade at growing rates as they increasingly integrate into the world economy. In fact, when compared to developed countries, the trade volumes of emerging market countries are growing at significantly faster levels. Movement from import substitution policies towards export--led growth policies has led to increased trade and foreign investment in many emerging markets and can be identified as a major driver of growth. Such growth is further fuelled by increasing numbers of free trade agreements signed.

Another driver of growth is many EMs is the reallocation of resources leading to increased investment and focus on value-added activities. Hence many are able to move upmarket in manufactured products or have developed significant manufacturing capabilities. In many EMs industrial growth and increasing commodity prices led to higher revenues which were directed to the economy to boost domestic consumption. In such cases, EMs were able to take advantage of the opportunities of having large populations resulting in large domestic markets.

Discuss those factors which could impede sustained growth for emerging markets in the long run.

One of the main factors which may impede sustained growth in emerging markets stems from deficiencies in infrastructure. Such inefficiencies are further intensified by increasing needs which arise due to rapid economic growth. Most EMs have increased investment in infrastructure however if such investments fall short of the need in the future, their growth may be hindered. In many EMs poor infrastructure remains as a major challenge for foreign investors.

Another factor which arises as a challenge for many EMs is their dependence on foreign demand and on revenues derived from natural commodities. Dependence on such profits such as from the oil and gas sectors, increases the vulnerability of the economy in the face of fluctuations in foreign demand and in commodity prices.

Disparities in income and high levels of poverty are also major challenges faced by many EM economies. Though such economies have been trying to install sound reforms and reduce volatility, political instability, corruption and lack of transparency are often persistent and the prevalence of such issues may hinder future growth.

Among some of the EMs which specialize in provision of low cost manufacture, the competition has increased. Prices within such markets are also rising. The competition is further fuelled by new entrants’ increasing specialization in low cost manufacture. Hence, such EMs are faced with the need to upgrade their operations in order to sustain growth. To upgrade capabilities, such countries need to invest in building know-how and also invest in increasing the capabilities of the labour force. On the other hand, limited availability of skilled personnel and weaker education systems arise as a major issue in many EMs.

Discuss the effects of the global financial crisis of 2008 on different emerging markets.

The financial crisis affected emerging economies less than the developed nations and their recovery was more rapid, while the industrialized nations still struggle with higher taxes and persistent unemployment. Most of the emerging market countries have faced severe economic crisis in the 1990s and upon such crises have implemented new policies ensuring better conditions and a sound financial system. Such policies assisted in their recovery from the financial crisis of 2008 as many emerging market countries have come out of the crisis with relatively fewer issues as opposed to their counterparts in industrialized nations. The rapid diffusion of the financial crisis of 2008 highlighted the interdependence of the economies around the globe (WorldBank, 2011).

Mainly due to export-led growth policies, many emerging markets generated current account surpluses which in turn helped reduce risk ratings and perceptions of such countries globally and propelled further foreign investment (Griffith-Jones et al., 2010). Globally, emerging markets have been increasing contributions to foreign direct investment both as sources and destinations and this contribution is expected to increase. The trend towards further internationalization of production continues. The focus of foreign investment activity has been shifting from manufacturing to services and primary sectors (WIR, 2010). Global liberalization of financial markets and increased usage of financial intermediaries and instruments have increased interconnectedness among countries globally. Reliance on international funding has enabled the growth of many EMs but also exposes such countries to shocks in advanced economies as experienced in the global financial crisis of 2008 (Claessens et al., 2010). Among emerging markets, the largest Asian countries such as China and India have intense trade relations with the developed countries however the business cycles among the countries are not strongly correlated. However, with increased trade and integration in the world economy, interdependence among emerging markets and developed countries has been increasing (Fidrmuc and Korhonen, 2010).

EM economies were affected by the global crisis of 2008 in various ways. Decline in demand in advanced economies affected trade performance of EMs as demand exports contracted. Rapid decline in foreign capital inflows from advanced economies also affected many EMs adversely (Llaudes et al., 2010). A major impact of the global financial crisis is the decline in lending which also means the decline in cross-border lending. After the financial crisis of 2008 financial institutions in advanced economies were faced with reduced liquidity and ‘credit crunch’, hence credit available for cross-border trade, as well as investment, is restricted. In parallel, credit available for investing into emerging markets or credit available for emerging markets from institutions in developed markets is also restricted (Griffith-Jones et al., 2010). Financial institutions as well as corporations in EMs which rely on lending from institutions in advanced economies are facing major challenges. Meanwhile, countries whose financial systems relied more on domestic deposits were able to better shield against the crisis (Llaudes et al., 2010).

Among the EMs, countries which relied on domestic demand for growth fared better during the crisis. For instance, domestic demand in Indonesia which amounted to 90 per cent of the GDP as of 2007 enabled the country to rebound from the crisis rapidly despite the contraction of demand in its major trading partners (Llaudes et al., 2010). Especially after the global crisis of 2008 the necessity to reduce dependence on advanced economies is highlighted. Many EM’s economies are faced with the challenge of boosting consumption in their economies and reducing their dependence on foreign capital inflows (Rajan, 2010).

The crisis also highlights the dangers of stemming from volatility in capital flows in emerging economies. A significant factor which contributed to the growth of many emerging markets is increased foreign investment. The volatility of such investment has created problems for some EMs in the past. For instance, one of the reasons for the financial crisis in Turkey in 2001 was the immediate withdrawal of foreign investment. More recently, the global financial crisis has highlighted potential risks due to the volatility of foreign capital flows (Griffith-Jones et al., 2010).

What are the advantages of having a local representative/agent in emerging markets? Discuss some of the issues that a firm may encounter with local agents/representatives and suggest ways to minimize these issues.

Especially in EMs where relations are more pronounced, building business relations with the right agents takes precedence. Companies can identify suitable agents by participating in trade fairs, visiting potential companies, researching through countries’ business directories and trade associations.

Agents and representatives can provide access to networks in emerging markets. They can also help foreign entrants in learning about the business environment and processes. Working with local agents can be especially helpful in dealing with some of the institutional voids. For instance, local agents can help foreigners in various ways such as enabling distribution, finding qualified local personnel to manage operations, providing information related to the players in the industry, providing access to key network members – which may be helpful in doing business in the market – or helping the foreign firm throughout the negotiations.

New entrants can encounter issues with prospective agents or representatives. A few examples of issues among the foreign firm and the local agent may be conflicts among the interests of the foreign firm and the local agent, the inaccuracies in evaluating the capabilities of the local agent or weaknesses in communication regarding the expectations of both parties.

In emerging markets, business environment is dominated by family structures, and players who have built relations among each other. This structure is further endorsed by the culture of these markets which values relationships. In parallel, the advantage of having local representatives or agents for foreign firms entering emerging markets is substantial. Similar to exporters who are advised to retain local agents or distributors upon entry, firms interested in joint ventures are recommended to work with local partners. Local partners’ knowledge of the conditions in Indonesia, their networks as well as their approach to local customers provide significant advantages for foreign entrants.

However, potential foreign entrants need to be thorough in choosing local agents/representatives. Such firms need to make sure that the specialities of the agent or representative they choose is aligned with the foreign firm’s business. They also need to make sure that the agent/representative has the suitable background and resources necessary to undertake the task agreed upon by the parties. Foreign firms also need to confirm the network position of the potential agent/representative and make sure that the counterparty can help the foreign firm establish business networks. In doing so, the foreign firms also need to consider the interests of the local agent and make sure that their interests are not conflicting. Another point that the foreign firms need to consider is their approach in dealing with the local agent. They need to be clear about their expectations, provide accurate information and training if needed.

Discuss the main features of emerging markets which increase their attractiveness for foreign investors. Suggest some strategies for emerging markets in increasing their country’s attractiveness to foreign investors.

One of the reasons which increase the attractiveness of an emerging market for foreign investors is the growing customer base. The size of the market and increasing income within the market highlights possible growth areas for the operations of multinationals. Moreover, many industries within such markets are growing rapidly. Such growth as well as the additional demand due to such growth increases, creates opportunities for multinationals. Another reason which escalates the appeal of emerging markets for potential entrants is the presence of natural resources in many of these markets.

In order to draw foreign investment, governments in most emerging markets have instilled favourable legal frameworks, favourable investment policies as well as engaging in multiple trade agreements. Furthermore, many governments provide additional incentives to multinationals in order to attract foreign investment. Such changes also increase the country’s attractiveness for foreign investors.

Chapter 7

Discuss trade based contractual and equity based entry models in terms of control and commitment.

Contractual entry modes in international business refer to activities such as licensing and franchising, where the firm engages in agreements with international partners enabling the partner to use their intellectual property in exchange for fees.

Investment entry modes or equity based business activities involve direct investment abroad. The investment may result in joint ventures, wholly owned subsidiaries, mergers and acquisitions, depending on the type of deal. But, all such strategies involve ownership of equity and investment of capital.

In contractual entry modes or business activities, commitment of the foreign firm is often lower when compared to equity based entry modes or business activities. In contractual business relations, firms generally do not provide significant levels of financial or managerial resources. In such arrangements, the foreign firm often has minimal control over the operation.

The acquisition of control is often parallel with higher commitment. In equity based business arrangements, the foreign entrant shows a higher commitment displayed by the greater level of resources directed to the business. The higher commitment enables the foreign firm to attain control over the activities.

A firm’s continuous exposure to multiple experiences abroad leads to experiential knowledge which lowers perceived costs of internationalization, thereby increasing the firm’s commitment. Experiential knowledge consists of business, market and institutional knowledge. Then, the movement across the stages is generated by increased experience resulting in experiential knowledge which reduces the psychic distance and enables the firm to increase commitment (Johanson and Vahlne, 1977). International expansion helps companies to acquire market knowledge, and adapt to differences among markets (Bianchi, 2009). Firms with limited exposure to a market often choose to start with trade-based entry strategies in an effort to minimize risks stemming from unfamiliarity

In choosing an entry form, control has been regarded as a critical factor because by holding control the firm ensures that it retains the responsibility of decision making, coordinating actions and pursuing or changing strategies and assuming a larger share of the profits. However, control has a high price in the form of resource commitment and creating additional responsibilities for the firm as well as switching costs (Anderson and Gatignon, 1986). In parallel, higher degrees of control demand higher levels of commitment. Risk and flexibility are also dominant considerations in choosing an entry mode (Mascarenhas, 1982). Entry modes which require substantial commitment are more risky. As it is harder to cease operations after high levels of resources are committed and further commitments are made in operating in a foreign country, the flexibility also decreases with entry strategies associated with high levels of control. For instance, a company can direct their exports to another market if the regulations are changed in one of their markets, but it would be considerably more difficult for the company to divest from a wholly owned venture without incurring significant costs. Each entry mode such as licensing or having a subsidiary indicates different levels of control for the firm. In parallel, each form of entry is related to different levels of resource commitment by the firm (Ghauri and Cateora, 2010).

If the firm is engaging in home-based international trade activities, then it does not necessarily have to commit a significant amount of resources in the host country. The level of this commitment can increase if the firm is engaged in considerable levels of global sourcing or exporting, and is dependent on these types of activities in its business, however, the firm does not invest in the international trade partners. The firm at the active or committed stage is more dependent on exports than are the firms at non-exporting or reactive exporting stages.

What are the motivations of multinationals from developed markets in entering joint ventures with locals in EMs? What are the motivations of EM partners? How do these motives affect the ventures?

Joint ventures are a special type of ownership-sharing in which equity is owned by two or more companies. Joint ventures are a common form of participation for firms moving beyond the exporting stage to regular overseas involvement, in which local participation is advantageous. Depending on the equity share of the companies, they may be classified as majority, minority, or 50-50 ventures. Joint ventures, in many cases, may be the only feasible form of investment participation in countries in which sole ownership is prohibited or discouraged.

Joint ventures provide a mutually beneficial alternative for foreign and Western businesses to join forces. For both parties, ventures are a means to share both capital and risk and make use of each other’s strengths. Problems may arise in these ventures when more than one party is involved in the decision-making process. Joint ventures can be managed successfully with the patience and flexibility of both partners. Usually, however, one of the partners must play the dominant role to steer the business to success.

The most critical decision in a joint venture involves the choice of a local partner. For that reason, joint ventures are often compared to marriages. Likewise, joint ventures frequently end in divorce when one or both partners conclude that they could benefit more by severing the relationship. In EMs which are relatively unfamiliar to multinationals, the importance of partner selection is further highlighted (Li et al., 2009). As networks and relations are very important within these markets, forming informal relations within the selection processes becomes essential.

Forming a joint venture with a local company in EMs provides multiple advantages for multinationals, such as the ability to access local know-how related to the market and the consumers. Moreover joint ventures may also provide access to networks such as suppliers or distributors and thereby contribute to the efficiency of the operation. Networks can also take the form of regulatory authorities or interest groups and the ability to leverage the local partners’ relation with such networks can significantly accelerate the multinational’s operations in the market (Hitt et al., 2000). In some cases, in an effort to protect local firms and to boost their operations, governments may demand compulsory joint ventures as a condition of entry (Onkvisit and Shaw, 2008).

Each partner enters a joint venture to gain the skills and resources possessed by the other partner. The contribution of the foreign entrant to a joint venture depends on both its own capabilities and those of the local partner, as well as the joint venture’s purpose and scope. Usually, the key contribution of the partner from a developed market consists of technology and products, and the local partner provides the knowledge and skills necessary to manage the operation. Under this scenario, both partners face risks (Rui and Yip, 2007). Alternatively, the local partner, having accessed the know-how, may default from the venture and continue operations using the knowledge gained. In order to prevent the local partner from accessing knowledge and disrupting the venture, many multinationals try to limit the transfer of technological know-how to the local partner. In such cases however, the level of contribution of the foreign investment in the local economy is restricted (Saebi and Dong, 2009). In order to prevent such occurrences, a pre-selection period becomes integral to forming a joint venture in an EM economy. Here, within the process, a multinational needs to ensure that their goals are aligned with those of the local partner and they both envision the venture as a long-term partnership (Hite and Hesterly, 2001).

In operating joint ventures, each firm takes an active role in decision making. This may include distribution, manufacturing or R&D arrangements. Joint ventures have costs for each partner but if the partners recognize that cooperation will result in better performance, they will engage. In joint ventures, the resources of a firm can improve its bargaining power, however the firms’ need to cooperate can decrease the bargaining power. The bargaining arrangements determine the conditions of the joint venture, inputs necessary, outputs expected, and the control mechanism partners need to use to ensure that benefits expected are received (Kamminga and Van der Meer-Kooistra, 2007). Especially in developing countries, joint ventures have been used to cope with uncertainties and the need to meet the demands in local markets.

Discuss the costs involved in entering different markets. How can these costs be managed and reduced?

In choosing an entry mode, costs play an important role. The geographic distance makes physical distribution more difficult. Firms have to deal with multiple environments, such as public policy, traditions of trade, barriers to trade, and competitive forces. Firm specific difficulties that the internationalizing companies face in new environments stem from the liability of expansion which increases operational and scale costs, liability of newness in the presence of competition and liability of foreignness in a new institutional setting with new customers (Cuerva-Cazurra, 2007).

Firms engaged in global marketing have to deal with multiple currencies and exchange-rate variations; and transactions in various currencies entail administrative costs and difficulties.

Firms engaged in international marketing are often in conflict with their home governments, because they take employment opportunities and other resources out of the country. These firms are also often in conflict with host governments with regard to remittance of their profits back to their home countries or head offices, ownership of local facilities, and competition with local firms.

Cross-cultural interaction also creates challenges for international businessmen. Differences in language, business customs and ethics, lifestyles and values, and other cultural dimensions often cause uncertainty and a psychic distance (Conway and Swift, 2000). This type of distance is related to how we perceive a certain market and is different from physical distance. For example, for a US firm, in psychic distance terms, the United Kingdom is a closer market than Brazil or even Mexico.

Liability of foreignness (LoF) is generally defined as the extra cost incurred by the international firm in the host economy. Such costs may arise due to distance, unfamiliarity with the environment, market, know-how and the institutions of the host country(Zaheer, 1995). LoF encapsulates costs of learning about new cultures, as well as costs related to operating an international firm and functioning within a different institutional framework (Contractor, 2007). In a different country, firms are faced with different customers who are not necessarily knowledgeable about the firm’s products and whose consumption needs are already met by existing firms in the domestic market. Moreover, the firms do not have relations with members of the value chain such as suppliers, agents or distributors. Foreign entrants face costs in acquiring knowledge about network members, and do not enjoy the advantages of long-term relations that the locals enjoy and may incur costs in organizing their activities efficiently (Cuervo-Cazurra and Genc, 2008).

In deciding on an entry strategy and assessing their options, firms then need to consider the liability of foreignness and additional costs that will be incurred due to their unfamiliarity with the country. In minimizing the costs of liability of foreignness, multinationals need to assess their strengths and their weaknesses (Enderwick, 2007). For instance, if a multinational needs to transfer their business structures to gain a competitive edge, they may opt for a wholly owned structure. Through this structure, the company can install their practices and transfer and protect know-how as they have control over the new establishment. On the other hand, if cultural distances are high and difficulties arise from unfamiliarity with members of the value chain, multinationals may prefer a joint venture entry mode through which local know-how regarding the customer and the business landscape can be obtained from the partner. Effective strategic alliances formed with the right partners can compensate for this gap, providing access to diverse information and providing opportunities for learning which help the firm overcome its liability of newness (Li, 2007). As a result, alliances can be used to overcome the liability of foreignness (Wu and Pangarkar, 2006), and provide access to the new market’s resources (Bausch et al., 2007). High cultural distances can also be minimized through local partners, as the partner can help reduce the cultural distance and enable the company’s acceptance by the host economy consumers.

Discuss the advantages and disadvantages of outsourcing. How do firms make decisions related to outsourcing?

In past decades, multinationals have been spreading their activities across borders and forming global value chains which consist of a network of affiliates and partners. They coordinate the operations of the network members which are related to the firm through multiple arrangements ranging from subsidiaries to contracted suppliers. Multinationals make the decision regarding internalizing and externalizing activities by assessing risks and opportunities while prioritizing the protection of their core competencies. Then activities which are externalized or outsourced are mainly those which are peripheral to their operations. In this way, greater efficiencies can be generated both by increasing the cost effectiveness and the quality of the non-core activities and enabling management focus on the core activities. As such, outsourcing is no longer considered purely on a cost basis, but rather as a function of overall business strategy (Van Weele, 2009).

In order to maintain competitiveness in the current business environment, multinationals need to consider moving each activity to the most efficient locations whether in terms of cost advantages or improved quality. On the other hand, spreading activities across a global or even a regional value chain significantly increases coordination and monitoring costs. As such, the multinationals can be diverted from focusing on their core activities and may face inefficiencies in undertaking non-core activities, as such activities are often not their specialization. Internalization of activities enables the firm to protect its know-how, and eliminates the challenge and the cost of finding and managing relationships with partners (Oshri et al., 2009). In formulating international value chains, coordination arises as an important consideration for the firm. Entry mode decisions are affected by the level of control which is necessary for efficient coordination of the value chain. When firms internalize activities, they are faced with fewer concerns related to control and monitoring. They can also protect their know-how and are not burdened with challenges stemming from vendors’ management. In contrast, when firms externalize activities, they may be able to find specialized vendors who can increase efficiency, then the management can focus on other areas and lower costs. However, firms also face the risk of losing know-how and additional burdens related to vendor monitoring and control. Overall, the decision to internalize or externalize an activity is affected by the level of control necessary and firms prefer to maintain control over activities involving know-how.

Considering that most of the activities which are outsourced are not the firm’s core activities, the firm can also improve efficiency and quality by externalizing the non-core activities to third parties who specialize in the particular activity. In addition, firms can also access the third parties’ tangible and intangible resources by outsourcing (Oshri et al., 2009).

Outsourcing relationships by definition lead to transfer of the management and/or the delivery of a process or a given task to a third party. Most issues stem from the vendor and the company trying to maximize their own utility instead of acting together in collaboration. A considerable level of the outsourcing relationship can be managed by establishing long lasting relationships, thus the success of the outsourcing arrangements in part relies on the success of the company’s managers and their ability to clarify what is needed, choose accordingly and handle issues with vendors successfully. In this respect, trust and minimisation of cultural issues gain considerable attention.

Developing trust is a key component in reducing risk in outsourcing relations (Moe and Šmite, 2008). Academics and researchers alike focus on efforts to improve communication in global relations through emphasising collaboration and continuity (Bhat et al., 2006). Collaboration is working together with the vendor to improve performance, continuity is working with the same vendor over a long time building a relationship of trust and improving performance through the expectation of a long relationship (Gottschalk and Solli-Sæther, 2006).

Chapter 8

Discuss the strategies that negotiators need to consider in international business.

While negotiators do not need to consider factors such as culture and language in the domestic environment, they need to think about such differences in international environments. Differences in culture and business customs can affect the negotiation process. Each negotiator is partially affected by his own culture and customs even before starting the negotiation process. Thus, each negotiator then faces the risk of misinterpreting the other side’s attitude or motives if he evaluates the other side solely on the basis of the norms of his own culture

Preparation

With this in mind, the best strategy for successful negotiating is good preparation (Zhang and Zhou, 2009). Knowing as much as you can about your partner’s position and your own will help reduce anxiety, as well as provide you with more insight towards achieving your goals. As with all negotiations, stress and pressure are the real enemies to making a good deal. Stress makes us tired, and when we are tired, we make more mistakes. It is important to analyse every offer for what it is worth, rather than accept or reject it because we feel the need for some kind of conclusion. Negotiation teams need to try to learn about the other party, focusing on issues such as the other party’s culture, organization’s culture, and their options.

Acquiring information about the counterparties

An acute knowledge of your negotiating partner is also very important (Galinsky et al., 2008). This includes information about the company as well as political, social, cultural and strategic factors. These things make up the background against which negotiations are played out. A more complete understanding of the environment in which your partner operates will help you understand their position and lend insight into how they will approach negotiations.

Acquiring information about the country and the business environment

Knowing the political climate of a country is extremely important, not only because it will affect the stability of your investment but also because it shows how a foreign partner might approach a binding agreement. In countries without a strong legal system, a company may see a written agreement as an indication of intention. Trying to hold a company to an agreement in a country with a weak legal system may be difficult or impossible. Moreover, in many countries in which businesses cannot rely on legal recourse, business culture may insist on more rapport-building efforts to establish a relationship.

In preparing for negotiations, negotiators have to learn about the other parties especially on essentials such as the type of decision making process, the accepted norms in presentations and the negotiation strategy commonly employed.

Creating alternatives and maintaining flexibility

Creating alternatives ahead of time is one way of remaining flexible. Your ability to appear willing to do business and work toward a mutually acceptable agreement will be easier if you know your position ahead of time, have a good idea of the other party’s position, and can readily present alternative solutions to expected impasses. Anticipate things now because it will be harder to come up with solutions under pressure. Keep asking yourself, “What should we do if they won’t accept this?”

How does culture affect the negotiation process?

Negotiating in international business starts by building relations, a process which is highly influenced by the cultural differences. Such differences may occur at the individual level of the organization, since people are affected by different norms within their national culture, social culture as well as organizational culture inadvertently. Then, the international negotiator is faced with the challenge of understanding the counterparty free from cultural biases (Rudd and Lawson, 2007).

To communicate efficiently, negotiators need to understand the culture of the other parties. Such understanding also entails the nuances stemming from silent language displayed through manners, gestures, and customs. As such, negotiators need to prepare and learn about the host’s culture from their values, ethics, religion to the political structure (Ghauri and Cateora, 2010).

A familiarity with social and cultural conventions of a given country will prevent you from inadvertently offending your partner during negotiations and will also facilitate the methods and strategies you might employ (Adair et al., 2004). An international business executive quickly learns that business in one country is simply not like business in another country. Despite the universality of basic business motives and methods, culture plays a large role in how people perceive and evaluate things.

Culture and belief systems affect how we perceive, judge, think, and decide about the world. Normally, culture plays only a very subtle influence in our daily communications because we are surrounded by people of the same culture. However, when we are placed within the vicinity of another culture, negotiating these differences becomes a very dynamic process. Human beings tend to project cognitive similarity onto other people. This means that we assume that other people will think the way we do, which is not always the case (Ferraro, 2002).

For example, given the emphasis on teamwork and social harmony in Japan, the role of the individual is often downplayed. In cultures like this, direct confrontation will probably be avoided and found distasteful or uncomfortable. Rather than give a direct “no” to a proposal, a Japanese negotiator might sidestep giving an answer, stall, or simply fall silent. In contrast, Americans are very often outgoing and direct. Not hearing a definite “no” might be interpreted as a “yes” or perhaps not be acknowledged as an impasse. In order to mitigate issues stemming from misunderstandings, it is pertinent for negotiators to familiarize themselves with the business customs and the culture of the counterparties. Some of the main concepts that need to be understood in thinking about cross-cultural negotiations are time, focus on the decision making, communication patterns and emphasis on personal relations (Ghauri and Cateora, 2010).

A main cultural factor which needs to be highlighted within the context of international business negotiations is the perception of time. Time has a different meaning in different cultures as identified by Hall, as previously discussed. Cultures may view time differently. They can have a ‘monochromic’ or a linear approach to time and prioritize the task at hand. Then, members of such cultures focus on timeliness, and adhere to schedules.

In most emerging markets, time must be set aside to establish personal relations and get acquainted prior to the negotiation. On the other hand, many Western businessmen view time as a resource which should not be wasted and they try to minimize the time in building relations which is viewed as a necessity in many cultures.

Communication patterns of different countries differ due to cultural characteristics as well. Communication types will be discussed further within this chapter. In terms of pattern, cultures may lean towards explicit/implicit and direct/indirect methods which can create difficulties in communicating with members of other cultures. Some cultures may make use of implicit communication which is rather vague, and failure to interpret the vagueness appropriately can lead negotiators to the wrong conclusions.

What are the steps in the negotiation process? What should international negotiators consider at each step?

The process of international business negotiation presented here is divided into five different stages. A stage of the process refers to a specific time and includes all actions and communications by any party pertaining to negotiations made during that period. Parties communicate with each other to exchange information within each stage. A particular stage ends when parties decide to proceed further into the next stage or to abandon the communication if they see no point in further negotiations. In the offer stage, parties attempt to understand each other’s needs and demands and decide either to proceed with the following stage (informal meetings) or not to proceed further due to incompatibility of each other’s demands, whereupon the negotiations end without agreement.

Offer stage

The offer stage begins with the first contact between parties concerning a particular venture and ends when the vendor submits a final offer. During this stage, some negotiations take place, and counter-offers are made, often resulting in a revision of the vendor’s offer. The dynamism of the process can be observed at this early stage, when parties begin to understand one another’s needs. It is important that vendors realize that in submitting an offer, they are committing themselves to their part of the deal. It may be necessary to make concessions on many issues.

Informal meeting

Parties meet to discuss the offer and to get acquainted. After the buyer receives the offer, informal meetings take place as the parties examine each other’s positions. Whether the parties continue to the next stage of the negotiation process will depend on the perceived level of cooperation or conflict, power or dependence, and the degree of distance. The process often ends in failure if excessive conflict or distance is sensed or if a successful future relationship seems doubtful. In this stage, the parties should truly see how they are going to solve the problem, whether it is realistic to achieve the objectives of both sides, and identify the obstacles that have to be overcome to achieve the objectives.

Informal meetings are often more important than formal negotiations in many emerging markets. Social, informal relationships developed between negotiators at this stage can be of great help. Trust and confidence gained from these relationships not only increase the chances for agreement but also decrease the psychic distance between parties. One method of establishing such contacts is to invite individuals from the buyer’s side to visit the seller’s office/factory in an attempt to develop trust. The prime objective here is to discover each other’s priorities. It is important to understand what the other party wants, why they want it, and their underlying interests and objectives, because this information helps the parties find solutions that are acceptable to both sides.

Strategy formulation

Parties begin to formulate their strategy for face-to-face negotiation if Stage 2 has ended in success and they decide to continue the process. By strategy, we mean a complete plan regarding problems, the solutions available, and preferred choices relative to the other party’s choices and preferences. At this stage, parties try to build up their relative power. The buyer compares the offers submitted by different vendors, makes checklists, and assigns pro and con arguments or competitive advantages to all competing vendors. The seller decides on possible points of concession and their extent. A volatile environment can severely upset established relative power positions. It is essential that negotiators continue to monitor changes in the environment to protect their power position in this stage.

Face-to-face negotiation

The parties should be aware that each side views the situation, or the matter under discussion, in its own way. Not only do they have a different perception of the process, they also have different expectations for the outcome. It is therefore important to start face-to-face negotiations with an open mind. At this stage, the parties should evaluate the alternatives presented and select those that are compatible with their own expectations. The best way is to determine criteria for judging the alternatives and then rank each alternative against these criteria. Here, the parties can even help each other in evaluating these alternatives and discussing the criteria for judgment. The main issue is to explore differences in preferences and expectations and then try to reach an agreement.

Implementation

At the implementation stage, all terms have been agreed on. The contract has been drawn up and is ready to be signed. Experience has shown that writing the contract, and the language used, can be a negotiation process in itself, because meaning and values may differ between two parties. In cases involving Western firms and emerging-economy parties, the language used and the writing down of issues previously agreed on can take considerable time. This stage can lead to renewed face-to-face negotiation if there is negative feedback from background factors and atmosphere.

Discussion should be summarized after negotiations to avoid unnecessary delays in the process. The terms agreed on should be read by both parties after concessions are exchanged and discussions held. This is facilitated by keeping minutes of meetings. This is helpful not only in writing and signing the contract but also in its implementation. Trouble may arise later during implementation of the contract if parties are too eager to reach an agreement and don’t pay enough attention to details. The best way to solve this problem is to confirm that both sides thoroughly understand what they have agreed on before leaving the negotiating table.

Discuss background factors in the framework for international business negotiations. How would these factors be in an EM setting?

This group of variables serves as a background to the process. They influence the process of negotiation and atmosphere. The effect of different variables on the process and its different stages varies in intensity. One of these variables may influence one stage positively and another negatively. A positive influence means that the process saves time and continues smoothly, whereas a negative influence causes delays and hindrances. Background factors include objectives, environment, market position, third parties, and negotiators.

Objectives are defined as the end state each party desires to achieve. They are often classified as common, conflicting, or complementary. For example, parties have a common interest: both want a successful transaction to take place. At the same time, their interests may conflict because profit to one may be cost to the other. In terms of complementary interests, buyers in international deals are concerned with acquiring appropriate technology to build an infrastructure. Sellers want to enter a particular market and expect to do future business with it and the surrounding countries’ markets. Common and complementary objectives affect the negotiation process directly and positively, whereas conflicting objectives have negative effects. These effects in turn influence the atmosphere and the outcome. The opportunity for an agreement decreases as conflicting objectives dominate in a relationship; it increases as common and complementary objectives dominate.

The environment refers to the political, social, and cultural milieu of the parties. There are greater chances of interaction interferences when unfamiliar parties, having different behaviours, interact with one another. Some of the characteristics directly influence the process, whereas others directly influence the atmosphere. Political and social aspects influence the process, and cultural aspects plus the behaviour of the parties influence the atmosphere.

The party’s market position is another background variable influencing the negotiation process. The number of buyers and sellers in the market determines the number of alternatives available to each party, which in turn affects the amount of pressure imposed by its counterpart within the market. The process and bargaining position of the buyer or seller can be affected if either one has monopolistic power in the marketplace; for example, if there is a large number of sellers and only one buyer, the latter can dominate.

Chapter 9

Discuss common traits which can influence the negotiation process in emerging markets.

Collectivism – Individualism

Negotiation outcomes are assessed differently depending on the collectivist or individualist values within the culture. For instance in China or Indonesia group decision making is the norm and decisions are made through a process of building consensus. Pakistan, Peru, Mexico, Philippines, and Turkey also emphasize reaching a group consensus in their decision-making process (Moore and Woodrow, 2010). In collective cultures, indirect confrontation can be a better route in resolving conflicts, as such cultures often emphasize social harmony. Harmony can be damaged by conflicts, and direct confrontation can disturb harmony by leading to aggressive communications and implying blame. With indirect confrontation, negotiators can avoid blaming and disrespecting the other side while resolving issues (Brett and Gelfand, 2005). Instead of direct confrontation, negotiators can seek help from third parties who have relationships with both sides in order to overcome cultural gaps or express their concerns privately. They need to be patient and focus on expressing the benefits of the relation throughout the negotiation process and handle the disputes progressively. Cultures emphasizing harmony, often prioritize ‘saving face’ and preserving everyone’s honour. To that end, negotiators should refrain from openly criticizing and disagreeing with the other side throughout the business relationship (Katz, 2006).

Business environment in EMs is strongly affected by relationships (Constanza, 2009, Black and Morrison, 2010). In parallel, foreign firms trying to do business in these markets need to concentrate on building relationships which may translate into a longer term commitment as building relations takes time and requires frequent communication with prospective business partners (USCommerce, 2011a, UKTI, 2011). Then, negotiators need to account for the time and the effort necessary to build a relationship and to gain trust. In this effect, seeking help of outside contacts who can make the necessary introductions to initiate relationships may be helpful. In most EMs, changing members of the negotiation teams during the negotiation process may be damaging when the relationships are concerned (Katz, 2006).

Hierarchy

A major difference among many EMs and Western cultures is the emphasis on hierarchy. In most cases, EMs tend to be more hierarchical and bureaucratic. In terms of Hofstede’s cultural dimensions, this can be interpreted as having higher power-distance scores. Decision making in hierarchical structures is often by top management and subordinates need to consult with multiple authorities throughout the negotiation process. In bureaucratic societies, such as Russia or India continuous exchanges and approvals are often needed to reach decisions. In contrast, in individualistic societies, decisions are made by autonomous individuals or an autonomous group, so gaining consensus through the hierarchy or gaining the approval of the sole decision makers at the top is not necessary (Moore and Woodrow, 2010). When faced with hierarchical structures, negotiators need to consider the process of reaching consensus through the levels of the hierarchy or obtaining approvals from external influences. Foreign negotiators need to account for the time necessary for the approval process and also consider meeting the needs of each stakeholder by providing comprehensive information. Another challenge is identifying decision makers and contacting them through the negotiation process, or trying to reach a mutual agreement even before the negotiations. In hierarchical societies, negotiators also need to consider the necessity of involving senior executives in their organization, at least in the initial stages of the negotiation process in order to show respect and commitment (Katz, 2006).

Perception of time

Many EMs have a polychromic perception of time; thereby schedules may not be as rigid as Western nations. However, foreign negotiators need to take into account that they are expected to be on time for meetings and schedule their meeting ahead of time in these markets. Still, due to different perceptions of time, the meeting may not start or end in time, or follow an itinerary. Another aspect of a polychromic perception of time which influences the negotiations process is the negotiation style. Cultures with a polychromic perception do not single out and discuss selected topics in order, but rather issues are discussed simultaneously during the negotiations process (Morrison and Conaway, 2006).

Suggest strategies for foreign firms to handle issues in the negotiation process in EMs

Establishing relationships – building trust

Business among companies increasingly focuses on establishing long-term arrangements. Parties engaged in the transaction can often increase their benefits by building a long-term relationship. First, trust enables companies to lower monitoring costs. Secondly, by viewing the party as a long-term partner, each side increases their commitment. Moreover, companies are less willing to engage in risky or greedy behaviour in anticipation of future benefits. A partnership also increases reciprocity through which both sides can benefit. Thus, in building relations as well as through the negotiations, an emphasis on a long-term vision can be advantageous.

In emerging markets building trust and gaining respect is very important at the onset of negotiations. In parallel, throughout the negotiation process, foreign firms may benefit from providing detailed information and from their willingness to provide support throughout the business activities.

Accessing decision makers

In many emerging markets decisions are made at the top level thus foreigners need to focus on meeting the top management. Local agents with connections may be helpful in facilitating such contacts. The autocracy also leads to the negotiation teams consistent need to obtain confirmation from superiors or to multiple negotiations through which foreign firms move through the ranks of the emerging market firm. Foreign firms need to respect the hierarchical nature of the business environment.

In cultures which emphasize hierarchies, using information obtained from experts as well as high level executives can be advantageous during the negotiation process. Such cultures often value status and presence or support of senior executives can also be helpful.

Considering all stakeholders

Foreign firms entering emerging markets need be prepared to defend their position to multiple stakeholders. They need to consider that the business environment is affected by external parties such as authorities and bureaucrats who can influence negotiations.

For instance, most Asian countries can be described as consensus cultures. Negotiations often involve a long process where different stakeholders within the firm as well as external stakeholders need to reach an agreement. As consensus cultures often focus on relationships in business, the negotiation process in Asia is affected by the Asian team’s focus on forming a relationship with the other side as a prerequisite of doing business with them.

Avoiding confrontation

In many emerging markets, direct confrontation is often avoided and saving face is very important. Negotiators from emerging markets can sometimes focus on small details as problems as to prevent offending the counterparts. Saving face is very important thus private discussions in dealing with issues may be helpful. Intermediaries may also be helpful in avoiding direct confrontations and delivering messages without leading to visible conflicts.

Why are relationships emphasized in discussing business in EMs?

In entering an EM and in negotiating with counterparties within the market, foreigners need to build relations with the right actors and cultivate such relations. In this respect, many of the developed nations differ from EMs in their emphasis on relations in doing business. Managers are often aware of the importance of establishing, developing, and nurturing productive business relationships.

The influence of market forces and firm capabilities in business transactions in liberalized economies is more pronounced (Kumaraswamy et al., 2012). In emerging markets, existence of institutional voids coupled with cultural influences, often result in excessive dependence on relationships in business (Constanza, 2009). Networks and social ties can be strategic resources in dealing with the uncertainty of the environment, and in overcoming institutional voids (Sheng et al., 2011). Local firms can utilize their relations throughout the value chain as they already possess connections with the network members. Such relations can enable local firms to access markets more efficiently, obtain information easily, and carry out their operations efficiently (Constanza, 2009). Business relations may enable firms in emerging markets to reach market information which is not freely available (Sheng et al., 2011).

A major factor augmenting to the importance of relations in most emerging markets is culture. In fact, many firms and groups in such markets have built business models based on their own cultures. For instance, Guanxi is an effective force influencing negotiations in China and social capital becomes important within the process. Guanxi is also strengthened by the system of reciprocity and a favour is never forgotten and is returned in the long run (Graham and Lam, 2003). Building trust is essential in business relations and a way to accomplish that is using an intermediary and thereby using Guanxi. In order to build trust and loyalty, informing the counterpart of the firm’s intentions beforehand can be a helpful strategy signalling openness and good will. Firms may also focus on providing detailed material and presentations to reduce the trust issues (Ghauri and Usunier, 2003).

Discuss the criteria involved in selecting partners in EMs.

The partner chosen for the venture can influence the overall mix of available skills and resources, the operating policies and procedures, and the viability of the venture. Hence, even if one or a few viable partner prospects exist, screening these firms for suitability as collaborative venture partners is still a critical task (Duisters et al., 2011). At a minimum, the partners should be able to provide complementary capabilities that in both the short and the long term are necessary to enable the venture to be competitive (Langfield-Smith, 2008, Culpan, 2009).

In selecting a partner firms need to consider partner-related criteria as well as task-related criteria.

Partner-related criteria

These criteria refer to qualifications of the partner, both tangible and intangible, that are not specific to the type of operation but affect the risk(s) faced. More specifically, they include what we might call the ‘personality traits’ of the partner, such as business philosophy, reliability, motivation, commitment, intellectual property protection approach, and some general characteristics, such as experience, reputation, and political connections.

Task-related criteria

Task-related selection criteria refer to those variables, both tangible and intangible, human and non-human, that are relevant for the venture’s viability in terms of its operational requirements. Hence, these variables are specific to operational resources and skills related to the venture (i.e., financial, marketing, organizational, production and R&D resources, and customer service). In looking at such variables, assessing the complementarities of the resources among the partnering firms becomes critical.

How can foreign firms manage relations with foreign partners and governments in EMs?

A firm may decide to enter an EM in a joint venture with a foreign partner, appoint a foreign distributor, or use a foreign firm for sourcing. In this section, we refer to all the above-mentioned foreign counterparts as partners. Firms need to build relationships at both the formal and informal levels with the foreign partner’s firm. In many cases, it is important for the foreign firm to identify the decision makers in the organization. The best strategy for managing relationships is to have cross-functional teams from various organizational levels building relationships with each other. This assures that if the principal contact of the foreign firm leaves for some reason, the business relationship between the two firms continues to survive. There are various benefits of maintaining and developing good relationships with the foreign partner:

· Working toward common goals in the long term becomes easier if a sound working relationship is built with a foreign partner. Conflict resolution also becomes faster with a good relationship with the foreign partner.

· Managing relations with foreign governments is extremely important for foreign businesses especially in EMs because small changes in a foreign government’s trade policy can create a tremendous impact on the firm’s business (Luo, 2001).

Foreign entrants need to find a fit between what they can offer (capital, infrastructure development, technology, new jobs, etc.) and what the foreign government needs for their economic, political, and development programs (Zou et al., 2011). Priorities of the foreign firm and the EM government may not match, and in such cases foreign firms can use the following strategies to manage relations with the government (Austin, 2002, Ghauri and Holstius, 1996):

· Alter: The firm can bargain to get the government to alter the policy, the instrument, or the action of concern.

· Avoid: The firm can make strategic moves to bypass the risk or impact of the government’s action.

· Accede: The firm can adjust its operations to comply with a government requirement.

· Ally: The firm can insulate itself from risks by creating strategic alliances.

While preparing for negotiations with government officers, foreign managers must remember that all four strategies require some give-and-take. Minimizing conflict and building a common ground for negotiations remain the two most important first steps toward successful business in EMs.

Chapter 10

Discuss the factors that need to be considered in aligning company capabilities with company strategy.

It is a well-documented fact in management literature that poor performance results when a company fails to align its capabilities with its business strategy. Whenever a company decides to internationalize its business, it should reassess its capabilities or strengths and weaknesses and try to find a fit between its capabilities and the internationalization process. This may involve an evaluation of the company’s resources, technology, business processes, and products or services that the company wishes to sell from the target foreign market perspective. We recommend five key areas that a company must investigate before committing resources to exporting or other forms of internationalization. These areas are:

· Business background (the size and the resources of the firm, experience in international operations, the availability of resources for expansion);

· Motivation for going international (the reasons that the company wants to internationlize, for instance does the company want to increase its market, reduce risks, utilize know-how, increase global presence etc?);

· Top management commitment (management approach, experience and commitment to internationalization);

· Product strengths (the unique value associated with the product, the transferability of the value and the ease of marketing the product in multiple markets);

· Market-specific strengths (the compatibility of the product in other markets and the feasibility regarding the production/sales process of the product in other markets).

What are some of the key processes in going international? Discuss such processes in the context of internationalizing EMs.

All companies large and small need to have a well thought out strategy for going international. This strategy should be aligned to a company’s own organizational capabilities and environments and the capabilities of the other organization or company with whom it is building a partnership for entering a specific market. A company can complement its own capabilities with that of other organizations, such as banks, freight forwarders, different government offices, trade associations, and market-research companies. A good alignment among these two capability sources will facilitate the process of going international and formulating an efficient marketing strategy.

Whenever a company decides to internationalize its business, it should reassess its capabilities or strengths and weaknesses and try to find a fit between its capabilities and the internationalization process. This may involve an evaluation of the company’s resources, technology, business processes, and products or services that the company wishes to sell from the target foreign market perspective.

In developing strategies to enter emerging markets, firms need to (a) assess market potential and look at opportunities to access the market and; (b) create a strategy in terms of market entry and establishment. Although each of these steps is critical, the initial assessment of opportunities is especially important in emerging markets. In assessing opportunities, firms can use various techniques such as gathering background information (desk research), evaluating unsolicited inquiries from foreign customers, and monitoring competitor activity.

Discuss the factors that firms need to consider in researching EMs

In emerging markets, the limited availability of information as well as the reliability poses challenges in analysing the markets. Multinationals are accustomed to operate in environments where reliable information related to the consumers, competition, suppliers and distributors is easy to access. Moreover, in their home economies, they are able to benefit from the expertise of intermediaries which provide information as well as analysis such as market research firms. In contrast, information is not readily available in emerging markets and may sometimes be inaccurate. Even when the information is available, it may prove to be misleading if the analysts interpret the data with the assumption that the market structure is the same as their own. In their analysis on emerging markets researchers need to (a) consider additional factors stemming from the differences in the environment which can affect the firm’s business and; (b) understand the emerging market environment and interpret data accordingly.

In analysing the figures for emerging markets, understanding the background of these figures and the driving forces in the economy is essential. Not only may the figures be inaccurate but also the measurement concepts may be different or the figures may be influenced by seasonal effects. Thus, looking at the numbers without considering the market, its structure, and the forces that affect it may lead to erroneous conclusions (Pacek and Thorniley, 2007).

Analysing inward and outward investment flows can help understand the market. For instance if a current account deficit is large but the foreign investment flows are significant, the deficit may not indicate a serious risk as foreign income can enable the country to reduce the deficit. Alternatively, if the government is able to borrow at acceptable rates, then the budget deficit may not be a significant risk. In contrast, if the country has a history of dealing with the budget deficits by printing money or the country has no sources of funds such as access to international loans or export capability, rising budget deficits can lead to high inflation. Foreign investment flows also signal the structure of the economy and its vulnerability in the face of external shocks. An economy heavily dependent on a few export or import items is more likely to be affected by external volatility. Similarly, if the foreign flows are dependent on a single country, then the market is bound to be affected by any change in that country (Pacek and Thorniley, 2007).

Factors such as skills and flexibility of the population or available infrastructure and level of technology influence business activities. However, before looking at the data, it is important to determine which characteristic of the economic environment is relevant for a given business. For instance, a producer of fine food products may define the economic system as population size and age structure, disposable household income, level of urbanization, climate, transportation, and communication.

© S. Tamer Cavusgil, Pervez N. Ghauri and Ayse A. Akcal 2013