MGX9660: International Business Theory & Practice MNEs in Emerging Economies Week 7 Dr Alex Newman

Growth of EMNEs
In the 1960s 30 Japanese companies and no Korean in the Fortunes 500 list In 2007 Japanese, Korean and Singaporean companies held 92 spots in Fortunes 500 list The Recent trend?

Changes in Investment Environment

Jacob's Creek is in emerging markets such as China, India and Russia

Jacob's Creek recorded net sales growth in 2011-2012 India (up 34 per cent) Thailand (up 32 per cent) Russia (up 16 per cent) Poland (up 20 per cent).
The Age 4 September 2012

CHINESE Investment in Australia

CHINESE investment in Australia almost doubled last year 2011. Sale of Australia's largest cotton producer, Cubbie Station, to a Chinese-led consortium, approved by the Foreign Investment Review Board. Chinese companies - both private and state-owned - invested a total of $3.2 billion in Australia in 2011, an 86 per cent increase from 2010. Australia is the third-most-popular investment destination behind the European Union and the ASEAN countries. The total Chinese overseas investment increased by a modest 8.5 per cent to $US74 billion ($71 billion) last year. In the field of mergers and acquisition, the mining industry remains a hot favourite for Chinese investors, followed by manufacturing, electricity generation and logistics. In crease in the non-financial sector is 53.8 per cent from a year earlier. Capital outflow to the ASEAN 36 per cent and USA 30 per cent of the total respectively. Read more: http://www.theage.com.au/business/chinese-buy-up-big-in-australia20120902-258cq.html#ixzz25S9OVvs2

Trend in Global FDI Inflows

The Debate
MNEs transmit capital, knowledge, ideas and value systems across borders Developing economies have less sophisticated market supporting institutions Fewer locational advantages (Human capital, infrastructure)
(Narula& Dunning 2000; Hoskisson et al 2000)

Origins of Third World MNEs

Import substitution policies Operated in a resource and capital constrained conditions Protected by high tariff walls Competitive advantage was related to local conditions Imported second hand machinery Employed labour intensive production methods
Lall, 1983, Wells 1983, Kumar and Kim 1984

Origins of Third World MNEs

Intra-industry spill overs Productivity spill overs Inter-industry spill overs Industrial clusters Entrepreneurship

FDI Triad to Multiple Poles?

Bipolar Triad Multipolar Outflows from emerging economies jumped from 7% in 1990 to 16% in 2009.

Their share of global FDI outflows jumped from 8% during 1990-1992 to 25% during 2007-2009. EMNEs in knowledge based sectors? Greenfield investment or M&A?

Factors
Asset seeking Resource seeking Leap-frogging internationalisation to fast catch up international competitiveness with conventional MNEs Example:
Indian pharmaceutical companies (Big Farma)

Location/country specific information on these factors is vital for investment decision

Advantage from Non-Equity Mode (NEM) of engagement and transactions

WIR, 2012, Chapter 4

WIR, 2012, p.23

WIR, 2012, P. 38

Indian Multinationals
Foreign asset exploded by 122% in 2006. Primary goal: accumulation of foreign assets Search for strategic and complementary locational assets in metal, gas & oil and other raw materials Foreign assets = USD 13 bn People employed 60,000 (2006)
Indian School of Business and Vale Columbia Centre ranking for Indian MNEs

21s Century Global Business

Monumental transformation of the global economy (WIR, 2009)

The new generation home-grown MNEs The role of Diaspora in homeland FDI (China, India, Brazil, Russia, Mexico, South Africa) Implications of global outsourcing
Ravi Ramamurti (2004), Developing countries and MNEs, JIBS, Vol.34

Diaspora Capitalism
Overseas national (Diaspora) have been an important factor in creating home grown MNEs

China 80% of inbound FDI in the 1980s came from Chinese investors. The non-Chinese investors started coming in the 1990s Australia 39% skilled migrants from China (2010)

(The Australian, August 2011)

27% skilled migrants from India (2010) 56,000 from NZ in 2011

Emerging MNEs
Use outward investment as a springboard to acquire strategic assets needed to compete against global rivals Do not follow the incremental approach Follow leapfrog approach To overcome their latecomer disadvantage Pull and Push factors To overcome trade barriers To get the benefit of reverse investment

EMNEs
Niche entrepreneurs World stage aspirants Transnational agents Commission specialists
Indias Patni (a Mumbai based IT Service provider) is active in the USA. Russias kamez , a machinery and track company is active in the Commonwealth of Independent states Mexico's Mabe, an appliance producer is active in central and Latin America Turkeys Areclik, a home appliance manufacturer is active in investing in UK

Middle Eastern capital moving to Malaysia and few selected countries (China & Australia)

China
50 million people of Chinese origin live in Asia Pacific region Many of them pooled their capital, resources and technology Their access to export market with cheap Chinese labour to produce Chinas export boom
Ravi Ramamutri (2004), JIBS

Outward FDI (OFDI) from China

What is the motivation for Chinese OFDI? What is the Rationale? Concentrated investment portfolios In the period 1979-2002, 62% of Chinese outward FDI went to
Hong Kong United States Canada Australia
(UNCTAD, 2005)

Why China Prefers Advanced Economies

Investment Climate

High Technology

Advanced Management Methods

Go Global Strategy

Deng, 2007, Business Horizon

Haier Group
Appliance manufacturer Greenfield investment in the USA More than $40 mn in 1999. 4000,000 family sized refrigerator Established R&D centres Develop, acquire and transfer technology

Lenovo Chinese MNE

Lenovo belongs to Legend Holdings Group established in 1984 by Liu and 10 other scientific researchers. Lenovo is the worlds third largest manufacturer of personal computers (PC) after Dell and Hewlett-Packard Go Global policy of the Chinese Government policy announcement in 2002 Company introduced a new brand name Lenovo Le (from Legend) and novo (new in Latin) A small company manages affairs, a large company manages people (Liu, CEO Lenovo) Focus on human resources

Reasons for Acquisition

Opportunity for further expansion in domestic market was limited. Global PC market was estimated at around $200 billion. Huge potential outside China Reasons to go abroad:
1. Lacking of brand name that is required for global expansion 2. Lenovo had no strong presence in the global market 3. No human capital to run and manage global companies
Chuan Zhi Liu (2007), Lenovo: An example of globalisation of Chinese Enterprise, JIBS, 38( 573-577)

India
Two waves of Indian MNEs internationalisation
1. 1970s and 1980s 2. Post liberalisation phase in early 1990s

Indias software and knowledge based industries Indian Diaspora in UK, USA and Europe
Know-how Market access Capital

How did Indian Firms Internationalise?

Poor on average, but rich and advanced in specific pockets
1. Development of technical capability (uninterrupted) 2. Low cost base 3. Sophisticated capital market 4. Strong entrepreneurial tradition 5. Booming internal market 6. High quality managerial class 7. Political stability and democratic polity

RIO Tinto and Chinalco

RIO Tinto and Chinalco alliance to invest in the Simandou iron ore field in Guinea, in west Africa, at an expected cost of $US12 billion ($A13.1 billion). If a deal is approved by the Chinese and Guinean governments, it is likely that Chinalco will finance the next stage of pre-development, and that Rio will remain the senior partner in the joint venture. Simandou has exceptionally high-quality iron ore and some say it has the potential to become the world's third-largest mining province, after Western Australia's Pilbara and Carajas in Brazil. The Guinea-China link began in the 1950s. BusinessDay believes the two companies have confined talks to potential "synergies" such as utilising Chinas geo-political clout, financing capabilities and infrastructure development projects in Africa. Rio Tinto has big technological advantages in international mining exploration. Rio Tintos interest in Mongolias Oyu Tolgoi which Rio says is the worlds biggest undeveloped copper and gold

Brazilian MNEs
CSA FSA Access to nearby economies Petrobas takeover of Argentine Company Patrez Companc Changed its focus from oil to energy Petrobas is now currently developing biofuels and extending its operation and refining activities in African continents
Amsden, A (2009), Brazilian Multinationals, in Ramamurti and Sing eds, Emerging Multinationals in Emerging Markets, chapter 4.

MNEs from Israel

Challenge the traditional IB theories
Small country State founded by a migration of settlers Defense needs created major leverage for developing sciencebased industries The need for security focus on mutual cooperation Focus on superiority of collective decision making Welfare state concept 7 million people. Israel has 135 engineers per 10,000 people, USA has 85 per 10,000. Highest number of medical doctor per capita in the world Highly educated workforce

Niche Strategy
Most Israeli MNEs invested in niche areas
First ingestible video camera Check point created the market for network security

Lessons from Israeli Experience

Focus on well defined market segment Specialisation to meet customers needs High degree of flexibility Optimised use of global value chain Fast response to changing global market needs Superior service Reduction of marketing costs Ability to identify targets for acquisition and capabilities of integrating the acquired firm to gain synergies
Aharoni, Y (2009), Israeli Multinationals in Ramamurti and Singh eds. Chapter12.

Accenture, Winning Emerging Market. 2008