A country is considered an “Emerging Market” when its social and business activities are in a marked accelerated growth. The term “Emerging Market” was first put into use by World Bank economist Antoine van Agtmael to define a country that is transitioning from “developing” to “developed”. Ian Bremmer, a political scientist characterizes an “Emerging Market” as a country where economics and politics are equal. The 2008 Emerging Economy Report defines emerging markets as those regions that are undergoing rapid “informationalization” and have limited industrialization. Scholars from both Harvard Business School and Yale School of Management are studying how emerging markets come about but there is a general consensus that emerging markets are developed when there are non-traditional user behaviour, when innovation in technologies and applications are present, and when new user groups utilize the products of innovation. Still, much ground has to be covered to understand fully how emerging markets develop.
There are at least 10 internationally recognized groups that have classified countries as one of the “Emerging Markets”. These are the International Monetary Fund, the Columbia University Emerging Market Global Players Project List, FTSE List, MSCI Barra List, the Standard & Poor’s List, the Dow Jones List, the Frontier Strategy Group List, the BBVA Research List and the Emerging Markets Index. Turkey appears in all of the lists while some countries appear in most of the lists. Only the countries Iran, Hong Kong, Singapore, Israel, Afghanistan, Saudi Arabia, Venezuela, Ukraine, Tunisia and Sudan appear only once in all the lists.
The most interesting aspect of Emerging Markets is the bold prediction of their importance in the global economic landscape. According to the World Bank (2011), six emerging economies will be leading global growth by the year 2025. These economies are Brazil, China, India, South Korea and Russia. Four of these countries (excluding Indonesia and South Korea) are expected to lead global growth and are collectively called “BRIC”. But taken as a whole, these six countries would lead global economic growth by growing at an average of 4.7% per year from 2011 to 2025, more than double that of the 2.3% growth of advanced economies (such as the US, Japan and most of Europe) within the same period. According to Goldman Sachs, the economies of the four largest emerging market players (BRIC) are evolving so rapidly, that their aggregated economies will be greater than the aggregated economies of the current richest countries in the world by 2050. Other fascinating facts about these four economies are shown below.
These countries are already driving growth in other emerging markets through cross-border investments and transactions, through “Emerging Market Multinationals”. The Economist (2008) calls Emerging Market Multinationals as the “Challengers”, companies that are driving emerging markets by investing in their home markets and in other emerging markets and succeeding! According to an article by The Economist, these challengers are taking the global scene by storm, signifying change in the business landscape. According to a report by Manuel Bueno of NextBillion.net on the study published the Boston Consulting Group (2007), there are about 100 companies based in emerging market countries that have total assets of about US$ 520 billion, which is greater than the total assets of the world’s top 20 automobile companies.
This study is supported by a published report from the United Nationals Conference on Trade and Development (UNCTAD) that said of the 100 biggest multinationals, 5 are from Asian emerging market countries. UNCTAD (2006) further reported that these multinationals are responsible for about US$ 174 billion in Foreign Direct Investments (FDI) in emerging markets equivalent to about 13% of the global FDI for the year. This is a market improvement from the 8% global FDI share enjoyed by these countries in 1990. Emerging market multinationals are engaging their cross border business neighbours, with about US$ 123 billion across 1,000 cross-border deals in 2006. No longer is investment flowing from the rich countries to the poor countries by way of Foreign Direct Investments (FDI). It now is flowing from rich emerging market country multinationals to other emerging markets.
According to Sauvant, Maschek and McAllister (2009), the FDI flows from emerging market multinationals have been very dynamic since 2003, with approximately US$ 351 billion invested in developing countries and transition economies. Asia has become the investment destination of choice for FDI as well as the primary developing region investing in other emerging markets. Asian investments in other developing countries are mostly professional and technical services, with some natural resource trade mixed in.
Foreign direct investments are actual and direct investments into production (or manufacture) in a country by a multinational company from another country. Traditionally, this has been accomplished the purchase of shares of stock of an established company or through operational expansion. Foreign companies from developed countries use this tactic to enjoy lower wages, tax exemptions, tariff-free access of equipment, market entry, etc. The net inflows to a country’s economy from FDIs are of long-term nature and are especially beneficial to recipient economies.
One of the most recent findings regarding Foreign Direct Investments and their impact on an emerging market’s economy is the fact that these countries no longer see FDI’s as an end in itself. According to Sauvant, Maschek and McAllister (2009), the FDI is now a tool for advancing an emerging market’s development and is activated privately through emerging market multinationals. FDI’s help integrate a country into the global economy and enables that country to compete with other economies in the global market place. This integration is still in the early stages and much needs to be done, which puts the responsibilities back squarely on the shoulders of emerging market multinationals.
And these emerging market multinationals are expanding. In 2008, the UNCTAD counted about 23,000 emerging market multinationals, each trying to acquire locational portfolio outside their home countries. Most of these companies are Chinese (approximately 3,500 significantly sized emerging market multinationals), Russian (1,000 companies), Indian (800 companies) and Brazilian (200 companies).
But why would a multinational from an emerging market invest in other markets? Why not invest in stable economies? The answer could lie in the emerging market’s success. According to Forbes (2012), emerging markets make great investments because they are expected to grow two to three times faster than the US, Japan or Europe. In areas where economic growth is rapid, Forbes postulates that corporate growth is correlated-ly rapid as well. This means that investing in emerging markets will yield significant benefits to the investors. Take the case of US investors who are thriving despite the prolonged recession in the United States. These investors have placed their investments on on-US markets, specifically in BRIC and other emerging economies. Not only have these US investors achieved their growth targets, they are rewarded with diversified holdings as well thus making their investment portfolios relatively less risky.
Emerging market multinationals have latched on to the same idea of investing in their home countries or other emerging markets and have taken a step further in investing directly rather than just passive investments (such as short-term stocks and bonds). Emerging market multinationals have invested in production in emerging markets because of comparatively low production costs, management structure development due to adverse economic conditions, and because of liberalized markets that are more accessible to them due to regional trade and cooperative agreements (such as the ASEAN). By investing in emerging markets, these emerging market multinationals have levelled the playing field against their advanced economy counterparts.
According to the book “The New Emerging Markets Multinationals: Four Strategies for Disrupting Markets and Building Brands” written by Amitava Chattopadhyay, these companies are driven by their ambition and is fuelling their activities through mixing traditional acquisition strategies and entrepreneurial innovations. Because of the confidence boost these companies receive in their home countries, whose economic growth in turn are driven by the same companies, they have been able to navigate their way through other markets and help soften the blow of macroeconomic maladies such as the global recession and the Euro crisis. They have been able to curb their home country recession by providing greater value for money, something that consumers will always seek in a bear economy. The ability of emerging market multinationals to be agile despite their size is something that has lifted their home economies from the domino-like effect of protracted growth in the US, Europe and Japan.
Emerging market multinationals are commonly fast organizations. When they compete in the market, they shake the foundations hard to reveal their competitive edge. This speed of reaching the market is attributable to the fact that most if not all of them, are family owned and controlled despite their public statuses. These companies also enjoy a lot of benefits, such as cheap financing, government tax incentives and other subsidies that enable them to compete well not only in their home countries but in other emerging markets as well. This enables these organizations to compete in the global arena where larger multinationals operate.
Managing risks is common to all players in the global market place. However, emerging market multinationals seem to have edged their competitors in this aspect because they are from those same markets. Take China for example. Establishing a business in China is surrounded by a lot of misconceptions and often these misconceptions are either grossly overstated or ridiculously understated. Establishing a business in China entails going through a series of complex investment procedures that for some businesses are deal breakers. This fact is overshadowed by the potential of the Chinese market, thus the risk of failure due to compliance is understated. No one is as prepared for the Chinese market as emerging market multinationals, having dealt with similar conditions in their home countries and having shared similar growth patterns with China. Another case is Africa, whose market is considered risky but is in fact offering better than average returns according to the United Nations Conference on Trade and Development (UNCTAD). Africa is a growth area that is grossly overshadowed by perceptions.
Emerging market multinationals are taking advantage of these misconceptions. The BRIC countries for example, are setting up shop in these countries and in various countries in adjacent geographies. The investment of emerging market multinationals in these markets now account for about 20% of the global trade, which shows that these companies know where to strike and thrive. At the same time, they are working on entering the more established economies market thus making their operations truly global.
Five effective strategies are being implemented by emerging market multinationals in their pursuit for growth and profitability. An examination of these strategies is important because herein lies the rationale for investing in other emerging markets. The first strategy is the move to take their local brand and turn them into global brands. The best example for an emerging market multinational brand is South Korea’s Samsung. From a small, inconsequential brand to a behemoth technology company, this emerging market multinational has trail blazed with some of the most amazing and innovative electronic products that world has seen. Its competitive nature has enabled the company to deliver products faster than everyone else, become a market leader by instantly making competition obsolete. It owes this competitive nature to the Korean way of life, which was a country that was as poor as impoverished African countries now, 50 years ago. Now Samsung covers all aspects of its business and outsources most of their requirements from other companies originating from emerging markets.
A second strategy that is commonly implemented by emerging market multinationals is the use of local engineering excellence and then applying it on a larger scale. Brazil’s Embraer is the world’s jet manufacturing leader. Empresa Brasileria de Aeronautica S.A. (Embraer) is oen of the most successful instances of privatization. Establishjed in 1969 as a government company, Embraer was privatized by 1980s and began manufacturing the EMB-120 Brasilia aircraft, a civilian product but innovative in that it introduced class-leading performance. In 2006, this company made US$ 3.8 billion in sales, all outside Brazil. It has managed to do so by combining superior research and development and cost-efficient production through its partnership with other emerging market multinationals, in this case the China Aviation Industry Corporation II. Its competitive edge is now its ability to keep costs low through efficient global supply chain management.
Narrowing the product category is another commonly implemented. China’s Johnson Electric is a company that specializes in tiny electric motors. It supplies about three million tiny electric motors today to automobile companies throughout the world, or any manufacturer that would require an electric motor that require less than one horsepower in throughput. Johnson Electric has managed to export these tiny motors to their clients and produces them at these client’s exacting requirements.
A fourth strategy is the use of natural resources at home and then coupling this resource with global-level marketing and first-class distribution. An emerging market multinational that utilizes this strategy very well is Vale, a Brazilian company that exports iron core to global clients. In the second quarter of this year, the company produced 80.5 million metric tons of iron ore, 0.4% higher than their 2nd quarter production of 80.3 million metric tons in 2010. Of course this strategy is sometimes problematic, especially since natural resources are mostly government controlled. Vale has had its share of run-ins with the Brazilian government that may have affected its current performance.
The fifth and last common strategy implemented by emerging market multinationals is the adoption and generation of improved business models that are suited for the markets they enter and do business in. Mexico’s Cemex is one of the best leaders in the implementation of this strategy. Cemex is the world’s biggest supplier of building concrete and has revenues of about US$ 14.1 billion in 2011. The company has 55,000 employees in about 50 countries all over the world. In the markets that they have entered, they have tailored fitted their business model to suit the domestic market conditions.
With all these opportunities, the most evident challenge for emerging market multinationals is the development of their human resources. Unlike most multinationals from developed economies that have had lengthy experience in global operations, most emerging market multinationals are venturing out with as little as 10 years of solid track record. Integrating a global operation is a formidable challenge and coupled with an aggressive locational acquisition strategy, could be a daunting task for a relatively young organization.
Adapting to change is a mantra that is common in emerging market multinationals. Because of the stark difference between the global business landscape today and a decade ago, emerging market multinationals have risen to become a force to reckon with. Their effect on the global economy will be profound, to say the least and will continue to do so in the foreseeable future. Their swift adoption of clear, effective and multipliable investment and operating strategies make these companies nimble, relevant and powerful. Truly it is just a matter of time for these companies to dominate in the world market place.
Works Cited
1. Broadman, H. 2012. Navigating the Risks and Opportunities in Emerging Markets. Retrieved from http://www.pwc.com/us/en/view/issue-15/navigating-risks-opportunities-emerging-markets.jhtml
2. Bueno, M. 2007. BCG Publication: Top Companies from Emerging Markets. Retrieved from http://www.nextbillion.net/blogpost.aspx?blogid=889
3. Cheng, Leonard K. and Zihui Ma (2007). ‘China’s outward FDI: past and future’, Retrieved from http://www.nber.org/books_in_progress/china07/cwt07/cheng.pdf
4. Davies, K. 2009.‘While global FDI falls, China’s outward FDI doubles,’ Columbia FDI Perspectives, No. 5, May 26.
5. Deutsche Bank Research. 2009. ‘BRIC outward FDI: the dragon will outpace the
6. jaguar, the tiger and the bear’, Talking Point, February 9, Retrieved from http://www.dbresearch.com/servlet/reweb2.ReWEB?addmenu=false&document=PROD0000000000237372&rdLeftMargin=10&rdShowArchivedDocus=true&rwdspl=2&rwnode=DBR_INTERNET_ENPROD$NAVIGATION&rwobj=ReDisplay.Start.class&rwsite=BR_INTERNET_ENPROD
7. Defencetalk.Com. 2012. The Rise of Embadaer. Retrieved from http://www.defencetalk.com/the-rise-of-embraer-42182/
8. The Economist.Com. 2008. Emerging Market Multinationals: The Challengers. Retrieved from http://www.economist.com/node/10496684
9. Forbes.com. 2012. What Makes Emerging Markets Great Investments. Retrieved from http://www.forbes.com/pictures/eglg45gdjd/why-invest-in-emerging-markets-2/
10. Goldman Sachs.Com. 2012. Our Thinking. Retrieved from http://www.goldmansachs.com/our-thinking/
11. International Monetary Fund. 2009. ‘Global economic slump challenges policies’, World Economic Outlook Update, January 28 (Washington, DC: International Monetary Fund).
12. International Monetary Fund. 2009. World Economic Outlook: Crisis and Recovery (Washington, DC: International Monetary Fund).
13. International Financial Services London (2008). ‘Sovereign Wealth Funds 2008’, April, Retrieved from www.ifsl.org.uk/upload/CBS_Sovereign_Wealth_Funds_2008.pdf
14. Karl P. Sauvant,K., Maschek, WA., and McAllister, G. 2009. Foreign Direct Investment By Emerging Market Multinational Enterprises, The Impact Of The Financial Crisis And Recession And Challenges Ahead. Retrieved from http://www.oecd.org/investment/globalforum/44246197.pdf
15. Kalotay, K. 2009. ‘Take-off and turbulence in the foreign expansion of Russian multinational enterprises’, in Karl P. Sauvant with Wolfgang A. Maschek and Geraldine McAllister, eds., Foreign Direct Investment from Emerging Markets: The Challenges Ahead (New York: Palgrave Macmillan).
16. Kell, G. & Ruggie, JG. 1999. ‘Global markets and social legitimacy: the case of the “Global Compact,”’ Retrieved from http://www.unglobalcompact.org/NewsandEvents/articles_and_papers/global_markets_social_legitimacy_york_university.html
17. Lima, Luis Alfonso and Octavio de Barros 2009. ‘The growth of Brazil’s outward investment and the challenges it faces’, Columbia FDI Perspectives. No. 13, August 17.
18. Loewendahl, Henry 2009. ‘Foreign direct investment landscape 2009-2013: insights and intelligence from the Financial Times Ltd’, February 16, (London: FDI Intelligence), mimeo.
19. Reddy, M. 2012.Will Multinationals from the Emerging World Takeover? Retrieved from http://knowledge.insead.edu/world/emerging-markets/will-multinationals-from-the-emerging-world-take-over-575
20. Reuters.com. 2012. Analysis: Brazil's Vale's challenges go beyond iron ore. Retrieved from http://www.reuters.com/article/2012/10/11/us-vale-brazil-idUSBRE89A1KO20121011
21. Samboh, E. 2011. Republic of Indonesia May Become One of Six Major Economies. The Jakarta Post. Retrieved from http://www.thejakartapost.com/news/2011/05/18/ri-may-become-one-six-major-economies.html
22. Spinetto, JP. 2012. Biggest Iron Miner Vale Lifts Output as Brazil Rain Eaes. Bloomberg News. Retrieved from http://www.businessweek.com/news/2012-07-18/vale-second-quarter-iron-ore-output-climbs-on-biggest-mine
23. SMH.Com.AU. 2012. Faster, Higher, Stronger: The Rise and Rise of Samsung. Retrieved from http://www.smh.com.au/technology/technology-news/faster-higher-stronger-the-rise-and-rise-of-samsung-20120813-244df.html
24. UNCTAD 2008. World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge (Geneva and New York: United Nations).
25. UNCTAD 2009. ‘Global FDI in decline due to the financial crisis, and further drop expected’, UNCTAD Investment Brief Number 1 (Geneva and New York: United Nations).
26. UNCTAD 2009. Assessing the Impact of the Current Financial and Economic Crisis on Global FDI Flows (Geneva and New York: United Nations), April.
27. Wikipedia.com. 2012. BRIC. Retrieved from http://en.wikipedia.org/wiki/BRIC#cite_note-Ref-1-4
28. Wikipedia.com. 2012. CEMEX. Retrieved from http://en.wikipedia.org/wiki/Cemex
29. Wikipedia.com. 2012. Emerging Markets. Retrieved from http://en.wikipedia.org/wiki/Emerging_markets#cite_note-25
30. Wikipedia.com. 2012. Foreign Direct Investments. Retrieved from http://en.wikipedia.org/wiki/Foreign_direct_investment
31. Zhan, J. and Ozawa, T. 2001. Business Restructuring in Asia: Cross-border M&As in the Crisis Period (Copenhagen: Copenhagen Business School Press).
