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Relevant reading

Why the new giants could grow so fast

by Hans Dembowski

In depth

Making refrigerators for Haier.

Making refrigerators for Haier.

Business scholars emphasise the management skills that are prevalent at multinational corporations from emerging markets. Other authors emphasise the relevance of government policies and speak of “state capitalism 3.0”.

Mauro Guillén and Esteban García-Canal (2013) claim to have been observing the trend of companies from disadvantaged world regions expanding across borders for two decades. Their book offers many interesting success story from Latin America to North Africa through to Asia. Companies they cover include Bimbo, a bread-making company from Mexico, Embraer, a manufacturer of small passenger airplanes from Brazil, Orascome Telecommunications from Egypt, the Indian IT companies Wipro, Infosys and Tata Communications, Haier, the household appliance giant from China, and Acer, the Taiwanese computer manufacturer. It would be wrong to speak of case studies, however, because the two authors basically offer anecdotal evidence and do not list many references.  

Guillén and García-Canal distil catchy slogans such as “scale to win”, “cater to niches”, “embrace chaos” or “expand with abandon” from their stories. Their insights, however, are probably too generic to be applicable in any systematic way. The stories are  interesting nonetheless. The authors show that newcomers from disadvantaged world regions typically are adept at improvising in their home markets, which tend to be less orderly and predictable than G7 economies are. They are thus used to taking pragmatic decisions fast and grasping opportunities that more-established corporations overlook, for instance in niche markets. Another strong point is that many newcomers are not expected by shareholders to maximise business results every three months, so they can take long-term approaches.

Unfortunately, Guillén and Carcía-Canal are fond of making overblown statements. The very first sentence of their book states that, when future historians will debate what marked the world economy in the past two decades, they will neither opt for “the bursting of the high-tech bubble”, nor the “global financial crisis”, nor the “rise of state capitalism in China”, nor the “near unravelling of the Eurozone”. The essential thing, in the authors’ eyes, will be the “spectacular growth of globe-spanning businesses in the developing world”. What they miss is that all five phenomena are interrelated, and that the liberalisation of markets matters too. Future historians will surely try to explain how one phenomenon contributed to the other rather than argue about which was the single most important. Probably they will not find Guillén and Carcías book very helpful.

John A. Mathews (2002) wrote a stronger forerunner a decade earlier. Three of the five companies he portrayed as a new kind of player on the world stage – Acer, Cemex, the Mexican cement producer (note essay by Virginia Mercado), and Ispat, an Indian-owned steel corporation which is now called Arcelor Mittal - have since become even stronger and more influential. Mathews thoroughly assesses the early phase of these companies’ rise. In his view, they excelled at finding footholds in highly competitive markets and building management structures that allowed them to respond very flexibly to changing situations.

According to Mathews, the newcomers first inserted themselves into existing value chains and then built new partnerships to expand operations. Acer, for example, initially produced components for other computer makers, and only introduced its own brand later – and only in Taiwan at first. Once the brand was firmly established there, the corporation began to sell hardware under the Acer name abroad. Partnerships helped. To get a foothold in India, for instance, Acer teamed up with Wipro. As Mathews pointed out a decade before Guillén and García, the emerging market multinationals excelled at grasping market opportunities that more established competitors from rich nations neglected. Moreover, managers cleverly acquired foreign businesses that were making losses and turned them around by using methods invented elsewhere.   

Mathews’ book praises the budding giants’ organisational prowess. They were not steered top-down from the corporate headquarters, but relied on country-level managers taking decisions and assuming responsibility. The hierarchies inside the corporations were efficient, according to Mathews, but they were not strictly formalised. Crossborder coordination was flexible and fast, making innovative use of the Internet and reaping maximum benefits from the competitive advantages of different countries. 

Policies matter   

While management skills certainly matter, they are not everything. A collection of essays edited by Andreas Nölke (2014) shifts attention to the institutional and political background. The contributors show that home markets still matter very much to rising multinationals.

A great merit of the book is that it really puts recent trends into a long-term historical perspective. Nölke uses the term “state capitalism 3.0” which differs from the versions 1.0 (protectionism) and 2.0 (centrally directed capitalism). Nölke argues that emerging markets are a the third generation of economies that are catching up. They cannot adopt the strategies used by earlier generations because the world has changed. Various trade agreements at global and regional levels now have a bearing on what is feasible. Neither is protecting markets with tariffs and quotas viable anymore, nor is the kind of state-planned expansion that Japan, for instance, practiced after World War II. But that does not mean that governments do not have instruments at their disposal to promote corporate interests. According to Nölke and his contributors, moreover, it makes sense for them to do so because strong multinational enterprises boost their own influence and power.

Nölke points out several domestic support measures, including subsidies, state ownership, state shareholdings, the provision of low-cost labour, selective protection of intellectual property rights, sector-specific regulations and support for outward foreign investments, for instance in the form of low-interest loans. At the international level, moreover, governments conclude trade agreements and represent corporate interest in multilateral and bilateral affairs. The “less-than stringent implementation of global norms” can also benefit domestically based corporations. Moreover, China and other countries have managed to invite foreign direct investment with the result of boosting the development of national industries and the acquisition of know-how, Nölke writes.

To analyse matters, it is not always helpful to distinguish between private-sector and state-owned companies, Nölke argues. He makes this case in a separate chapter on China. He points out that  informal contacts of managers with government officers matter. Moreover, formally private companies may actually be run by government-owned holding companies. In other cases, state agencies own sizeable stakes in corporations (note interview with Doris Fischer).

Transparency International (2013) has assessed the reporting practices of emerging-market multinationals. Basically, the international non-governmental organisation applied the same methods it used a year earlier to rank multinationals from advanced nations. The survey checked how companies report on anti-corruption programmes, how transparent their organisations are and to what extent they report financial data country by country.

Generally speaking, emerging market multinationals performed worse than their peers from the rich world. Their average score concerning anti-corruption programmes was 46 % (with 100 % meaning perfect reporting). The more established competitors achieved a 68 % average. In regard to transparent hierarchies, the emerging-market multinationals scored 54 % whereas the figure for the established giants was 72 %.

In regard to country-by-country reporting, however, the newcomers were better with a score of nine percent opposed to the rich world’s four percent. As the Transparency authors point out, India made the difference, as Indian companies scored 29 % on country-by-country reporting. The reason is that Indian law requires them to provide more data than corporations from other countries must.  

Transparency advises all corporations to apply high reporting standards voluntarily. The best performers belonged to the Indian Tata group, reflecting legislation as well as corporate commitment (note contribution by Aditi Roy-Ghatak). At the same time, the authors argue that governments and civil society have a role to play in fostering greater transparency.

Hans Dembowski is editor in chief of D+C Development and Cooperation / E+Z Entwicklung und Zusammenarbeit.
[email protected]

 

References:

Guillén, M., and E. García-Canal, 2013: Emerging markets rule – Growth strategies of the new global giants. New York: McGraw Hill.
Mathews, J. A., 2002: Dragon multinational – A new model for global growth. Oxford: University Press.
Nölke, A., 2014: Multinational corporations from emerging markets – State capitalism 3.0. Basingstoke/New York: Palgrave Macmillan.
Transparency International, 2013: Transparency in corporate reporting – Assessing emerging market multinationals, Berlin: TI.
http://www.transparency.org/whatwedo/publication/transparency_in_corporate_reporting_assessing_emerging_market_multinational

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