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Multinationals and emerging markets

Article  in  Business Strategy Series · February 2009

DOI: 10.1108/17515630910942232

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Multinationals and emerging markets
Rajesh K. Pillania

Rajesh K. Pillania is Introduction

Professor, Management
Emerging markets are increasingly becoming the growth drivers of the global economy.
Development Institute,
There is increased scrutiny and interest in emerging markets since the 1990s. The interest
Sukhrali, India and Visiting
can be viewed from a demand and supply perspective. With a huge population and
Fellow (2006-2009),
increasing income, emerging economies provide a big market for goods and services. Also,
Northumbria University,
Newcastle upon Tyne, UK.
with talented manpower and low costs, emerging economies are supplying more and more
goods and services to the world. Multinational corporations (MNCs) play a very important
role in global business and economy. There is an increased interest in research and
explanation for emerging markets and MNCs (London and Hart, 2004; Meyer, 2004;
Ramamurti, 2004; Khanan et al., 2005).
This paper examines emerging markets and MNCs. It consists of six sections, including this
introduction. The next section gives the definitions of the three concepts, namely, MNC;
emerging economies; and emerging markets multinationals. The third section discusses
various aspects of multinationals and emerging markets. The fourth section highlights the
internationalization models whereas the fifth sections shows emerging markets
multinationals in the Fortune 500 list. The last section concludes the research paper.

Definitions
It is necessary to be clear about the three concepts, namely, MNC; emerging economies;
and emerging markets multinationals. The following are the definitions we are going to use
for this research paper:
B MNC. An MNC is a corporation headquartered in one country and having operations in
more than one country (Rugman, 2005).
B Emerging economies. The term ‘‘emerging market’’ was originally coined by the
International Finance Corporation (IFC) to describe a fairly narrow list of middle-to-higher
income economies among the developing countries, with stock markets in which
foreigners could buy securities. The term’s meaning has since been expanded to include
more or less all developing countries (Sustainability Think-Tank, 2008).
B Emerging markets MNCs (EMCs). MNCs head quartered in an emerging market and
having operations in more than one country is defined as EMC, for this study.

MNCs and emerging markets

MNCs and emerging markets have become a popular subject of interest in international
business in recent years (Meyer, 2004). There are four aspects to this. First, MNCs from
developed countries are targeting emerging markets. However the success record of these
MNCs in emerging markets, particularly that of American MNCs has been far from
satisfactory. This has prompted researchers, particularly in leading American universities to
study the reasons for MNCs failure in emerging markets (Khanan and Palepu, 1997;

PAGE 100 j BUSINESS STRATEGY SERIES j VOL. 10 NO. 2 2009, pp. 100-103, Q Emerald Group Publishing Limited, ISSN 1751-5637 DOI 10.1108/17515630910942232
Ramamurti, 2004). MNCs need to reinvent strategy for emerging markets and look beyond
the transnational model (London and Hart, 2004). The concept of institution void is one such
explanation available. According to this concept the lack of regulatory framework, contract
enforcement mechanism, and specialized intermediaries in emerging markets is the reason
for failure of developed countries MNCs in emerging markets. MNCs need to adapt their
strategies according to the context (Khanan et al., 2005).
The second aspect of the MNCs and emerging markets is the increasing number of
emerging markets MNCs (EMCs) going to developed countries. These EMCs are fighting
with established MNCs from developed countries for market share and growth. There is a
manifold increase in merger and acquisition activities of EMCs from emerging markets into
developed countries. They have been expanding and acquiring new businesses at a
frenetic pace, conducting more than 1,100 mergers and acquisitions, altogether worth
US$128 billion in 2006 (UNCTAD, 2007, Accenture, 2008). Acquisition of IBM hardware by
Lenevo; Choros by Tata group; and, recent acquisition of Jaguar and Land Rover from Ford
group by Tata are few examples. EMCs are expanding at a speed and scale to make even
the largest Western multinationals take notice (Accenture, 2008).
The third aspect is increasing competition and fight by EMCs in other emerging markets to
MNCs from developed countries. Because of their experiences of operating in emerging
markets, EMCs have an advantage in understanding another emerging market as well as of
lower costs as compared to developed markets MNCs. For example, automobile and
electronics MNCs from South Korea are much more successful in India as compared to MNCs
from Europe or USA or even Japan. Even the well-established Maruti Suzuki Company has got
tough competition from Hyundai. Emerging markets MNCs have the potential to change the
basis of competition in both Western and emerging markets. This is because they are:
managing a broad range of risks comfortably; mastering the art of improvisation; and, keeping in
tune with the importance of culture and localization (Accenture, 2008).
The fourth important aspect is the increasing competition among EMCs, particularly in third
world countries. EMCs require substantial resources, particularly natural resources, for their
ambitious growth. To obtain access and control such resources, EMCs are engaged in
intense competition in developing world countries. Chinese and Indian oil giants, supported
by their respective governments, are fighting each other in African countries for control of oil
and other natural resources (Pillania, 2008).
The fifth aspect is the increasing power and impact of EMCs. Many of the companies from
emerging markets have already become well known across the world. When the Chinese oil
company PetroChina floated on the Shanghai stock market in November 2007, and became
the world’s largest public company based on market capitalization – double that of its
nearest Western counterpart. Such events signal an enormous challenge to received
wisdom as well as a seismic shift in the economic landscape. They are like nothing we have
seen before (Accenture, 2008).

Internationalization models
Five models of international expansion
Although there is no set blueprint governing the ways in which EMCs expand their business
internationally, studies have identified at least five different models:
1. Full-fledged globalizers tend to be older, more established EMCs that have attained a
scale and geographic span on a par with the biggest Western multinationals.
2. Regional players aim to break out of their domestic markets in search of greater scale but,
for reasons of cultural affinity and geographic proximity, they fix their sights – initially at
least – on neighbouring regional markets.
3. Global sourcers are interested principally in selling to their domestic market but, because
of resource constraints at home, they source internationally.
4. Global sellers are the mirror image of global sourcers; they primarily manufacture or
source at home but seek new consumer markets abroad for sales.

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VOL. 10 NO. 2 2009 BUSINESS STRATEGY SERIES PAGE 101
 5. Multi-regional niche players tend to be smaller companies operating across multiple
regions in niche sectors, usually on the basis of innovative technology or processes
(Accenture, 2008).

Fortune Global 500 and EMCs

The number of MNCs from emerging markets is on the rise in the Fortune Global 500
corporations ranked on the basis of revenue. Emerging economies now boast of 70
companies in Fortune Global 500 list of the world’s biggest companies, up from just 20 a
decade ago (Accenture, 2008). Traditionally the list was dominated by USA, Western Europe
and Japan. Now the number of MNCs from these countries has been reduced whereas the
number of MNCs from emerging markets has increased in the list. Table I shows increasing
number of MNCs from Brazil, Russia, India and China. However, there is a difference in
ownership among the two groups. Whereas MNCs in Fortune Global 500 from developed
countries have private ownership; most of the MNCs from emerging markets, particularly
BRIC countries have government ownership. Also most of the MNCs from emerging markets
belong to resource sector like energy industry or financial sector like banking industry.
Table II shows the Indian MNCs in Fortune Global 500 list. Out of the six, five are in public
sector. Also, four are in energy sector and one is a public sector bank. Indian Oil Corporation
used to be the only MNC from India till 2003 in this list and even today it has the highest
ranking among the six companies from India.

Conclusion
Emerging markets are increasingly becoming the growth drivers of the global economy both
from demand and supply perspective. MNCs play a very important role in global business.
Multinationals and emerging markets have become a popular subject of research in
twenty-first century. The success record of MNCs from developed countries in emerging
market has been mixed. The MNCs from emerging markets are now expanding and
acquiring companies in developed countries at a rapid pace in recent years. This is reflected
in the increasing number of emerging markets MNCs in the Fortune Global 500 list. EMCs
are providing substantial competition to developed country MNCs in other emerging
markets as well as third world countries. The EMCs power and impact has increased
significantly and many of them have become household names across the world.

Table I Fortune Global 500 MNCs

Year
Country 1999 2000 2001 2002 2003 2005 2006 2007

Brazil 3 3 4 3 3 3 4 5
Russia 2 2 2 3 3 3 5 4
India 1 1 1 1 4 5 6 6
China 10 10 10 11 15 16 20 24

Sources: Fortune (1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007)

Table II Indian MNCs in Fortune Global 500

Revenues
Country rank Company Rank ($ millions)

1 Indian Oil 135 45,216.6

2 Reliance Industries 269 25,158.9
3 Bart Petroleum 325 21,862.2
4 Hindustan Petroleum 336 20,935.6
5 Oil & Natural Gas 369 19,237.4
6 State Bank of India 495 15,119.4

Source: Fortune (2007)

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PAGE 102 BUSINESS STRATEGY SERIES VOL. 10 NO. 2 2009
Directions for future research
This work was an exploratory attempt to understand the complex subject of multinationals and
emerging markets. Further in-depth research needs to be carried out to understand various
issues like why industrialized MNCs fail in emerging markets; why EMCs are able to out-perform
industrialized country multinationals in emerging markets and developing countries; are there
any common characteristics or model of EMCs; and, what are the challenges faced by EMCs?

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Further reading
Bartlett, C. and Sumatra, G. (2003), Multinational Management, McGraw-Hill Publishing, London.

Corresponding author
Rajesh K. Pillania can be contacted at: r_pillania@yahoo.com

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