School Papers

Latest or countries for example Apple company has

Latest globalization trend being observed is rise in emerging market multinationals FDI. Over the past several years there are many crucial sources of FDI that have led to flow of FDI from the emerging market multinationals. There are many nations like Singapore, Malaysia, India, Russia and China that are encouraging the promotion of FDI to other countries of the world. Several emerging market multi-nationals are embarking on the policy of internationalization as they are considering their multinational as a unique product of their home economy (Gilpin, 2001).
According to John Dunning’s OLI paradigm, FDI is the most suitable form of international business if three advantages are being satisfied. The firm needs to get ownership advantages implying resources of the firm which can be transferable across borders (Dunning, 1993). Through this the organization is able to get competitive advantages in the overseas markets. Secondly, MNC have locational advantage which helps the multinationals to create value that it is not able to generate in its home country. Such advantages can be relating to accessibility to local markets and to resources like human capital and raw materials. The third advantage which makes a multinational company to diversify its business in the overseas markets is internalization advantage (Dunning, 1981). Such advantages can arise from the transaction cost of international markets. Companies can organize certain operations in a more effective manner internally.
Traditional theories relating to FDI flows have been mainly focusing on firm-specific or the oligopolistic advantages owned by the multi-nationals and this is an important pre-requisite for the FDI flows (Vernon, 1966). Most of these theories provide an explanation of FDI as an operation to exploit ownership or proprietary assets (Kindleberger, 1969). In this the focus is laid on the fact that the multinationals performing FDI are mostly economically strong and dominating due to which they are able to enter other markets or countries for example Apple company has been able to successfully enter many countries of the world.
According to many researches conducted lately it has been found that there is rising number of multinationals that are being exposed to the weaknesses or drawbacks of the classical theories that entirely fail to explain the FDI which is taking place lately from the emerging economies to the advanced economy of the world (Gammeltoft, et al., 2010).
The changes in the FDI theory have found that firms are seeking to increase their assets by making overseas investments, generally this is being done in parallel with the asset exploitation operations (Wesson, 1999). OLI paradigm is the leading theory for explaining of the FDI flows, but the recent changes in these flows taking place from the emerging markets multinationals can be explained with the help of other theories like LLL (Linkage, Leverage, and Learning) approach. According to this theory firms are making their investments overseas for the purpose of evolving their competitive advantage by making use of linkage, leverage, and learning (Mathews, 2006). FDI theory are mostly differentiating in between FDI that are either seeking new markets or higher efficiency or strategic assets or resources (Dunning & Lundan, 2008). There are many empirical evidence and case studies which show that emerging market multinationals like from China, Taiwan, and Indonesia, etc. that their firms are mostly making efforts to expand overseas for acquiring more assets and getting advantages like more technical know-how or natural resources etc. (Knoerich, 2010).
Multinationals from the emerging economies are generally having weak ownership advantages along with firm specific capabilities when they are making investments in developed countries of the world from the perspective of competitive weakness (Luo, et al., 2010). It has been observed in several researches that even the MNCs from developed countries are at times making investments abroad from seeking assets and advantages (Shan, et al., 1999). Certain scholars are of the view that the multinationals from the emerging economies are systematically differing from the multinationals that are originating from the industrialized economies. Due to this there is a need for developing of a fresh theory for explaining their characteristics (Mathews, 2006). On the other hand there are certain scholars who are of the opinion that the existing theories need not be abandoned too early and they are still having the ability to provide explanation for the expansion of the emerging market multinationals (Narula, 2012).
Multinationals from the emerging economies are having comparatively less experiential knowledge in performing global activities (Meyer & Thaijongrak, 2013). These MNCs are likely to have higher sensitivity to the locational advantages as well as disadvantages. Due to this they are likely to have motivation for seeking of more learning avenues and are likely to be affected more by entry barriers in host nations in comparison to their experienced multinationals from the industrialized nations (Peng, 2012).
FDI is now getting attracted to all such locations that are providing better advantages in terms of markets or resources or there are attractive conditions in concern to infrastructure or institutions (Nadkarni, et al., 2010). The location advantage is a major decision for any particular firm while expanding internationally (Narula, 2012). It is owing to the interaction of the organization’s particular advantages with the particular location advantages available at the likely host location which makes any MNC to operate or diversify in such location. For instance, Bharti Airtel an Indian MNC has been able to successfully expand its mobile network to South African countries as it is able to benefit from the advantages available to it in these locations.
All the firms that are diversifying globally are primarily doing to such locations where they are able to redeploy their globally transferable proprietary resources or abilities for its profitable use and for exploring of their resource base (Barney, 1991). It is due to this the choice of FDI flows is being guided by the interaction of the organization with the host location. Several MNCs from the emerging economies are evolving as they are experiencing the internationalization process (Johanson & Vahlne, 2009). By operating internationally, they can gather experience along with other several aspects like knowledge of the international business environment and in particular of the host countries (Clarke JE, et al., 2012). This helps in the evaluation of the different risk and opportunities thus helping in lowering the marginal cost of additional entries. Such knowledge can be easily shared within the firm’s network or among different companies that are originating from a single nation (Tan & Meyer, 2012).
Gathered experience of an organization, its network of business along with its domicile community is assisting it to take a decision of a particular location. MNCs from the emerging nations are generally having less maturity along with experience in managing the global entry barriers. Due to this they are stressing on their learning procedures while taking decisions of making investments in overseas locations (Meyer & Thaijongrak, 2013). As these MNCs are having comparatively less maturity and experience therefore it is influencing the choice of business location in comparison to the MNCs from industrialized nations while making their choice of performing business.
MNCs from the emerging nations is rapidly increasing due to which their relative position on the international platform has risen in the initial decade of the 21st century. The recent increase of MNCs from the emerging nations like Russia, India, and China are showing the expansion of the increasing diversity of MNCs. Most of the emerging market multinationals are lacking the popular brands or a cutting edge technology which is being considered to be a main driver of any MNC for the overseas FDI (Rugman, 2009).
The main reason for the emerging markets MNCs to diversify or have outward FDI is due to their possession of capabilities like process innovations using which they are able to reduce their manufacturing cost without lowering the quality of their products (Zeng & Williamson, 2007). For instance, Tata Motors innovation of Tata Nano car which was a low cost car produced in India on the concept of having no frill strategy. This innovation has helped the company to expand its sales to other countries. Frugal innovation is concerning production of innovative products which are in the beginning being designed for the requirements of an emerging economy, but it helps them to make their entry and get a niche for their products in the developed countries of the world (Govindarajan & Ramamurti, 2011). For instance, Biocon is an India’s premier bio-pharma company which has made strategic approach towards delivering affordable healthcare solutions for the patients in India. Subsequently, this helped the company to extend its innovative products and healthcare solutions across the globe. Using such innovative products it has managed to have a substantial FDI flow to several countries of the world.
FDI flows from the emerging economies are doing for enhancing growth, output, better productivity, and efficiency, know-how (Kojima & Ozawa, 1984). According to Institutional theory, Scott provides another framework that is based on three pillars that are the regulative pillar, the normative pillar, and the cognitive pillar. The regulative pillar concerns the formal rules along with the enforcement system that is being controlled and enforced through institutional actors on which the firms depend like as the state (North, 1990). The normative pillar includes the values and norms of a society that helps in defining the socially accepted behavior of the firm’s actors through comparing them with the existing created standards. MNCs are being expected to manage with different types of pressures which they have to face on account of the behaviors, norms and values which are being considered legitimate in various nations. This is likely to put major impact on the competitiveness along with the firm’s practices. The third and the final pillar is the cognitive pillar. It is concerning the social values, interpretations, and cultural beliefs which are getting the cultural support which is being internalized through organizations. It is framing the nature of social reality along with frames by which an implication is reached (Scott, 2008). Thus, the country specific advantage that is changes in country also promote emerging multinationals for FDI.
Researches have shown that emerging market MNCs are affected by the local, social, and cultural environment and this is also influencing their global strategies (Luo, et al., 2011). These firms are internationalizing for acquisition of new resources which are not available in their domestic institutional environments (Wang, et al., 2012). For instance Tata Motors acquisition of Jaguar an international brand has helped it in FDI flows to overseas markets and in getting a brand which is globally recognized. There are many empirical researches on the MNCs from China which have reflected an interconnectivity in between institutional legacies and the management’s dynamic capabilities like political awareness or flexibility in their strategies by which they are able to make use of international strategies (Buckley, et al., 2007). Support from the government of China to its MNCs has influenced its risk taking capabilities and lowered the significance of learning from earlier knowledge and experience. This has provided a boost to the new companies for entering overseas markets.
Firms in emerging economies are confronted with business environment having several market imperfections that are generally termed as “Institutional Voids” (Meyer, et al., 2009). Thus, such companies make efforts in evolving their capabilities and resources for filling up the gap or overcoming of these voids. After they have been able to develop such capabilities, it is able to provide them with a base for its local expansion along with global expansion. These are crucial capabilities which help the emerging economy MNCs to get competitive advantage in the domestic market along with certain benefits in some overseas markets. From the institutional point of view, capabilities accomplished by the MNCs of the emerging markets in their local economy is helping them to diversify conveniently to such locations where they are able to get same kind of institutional situations or political risks (Del Sol & Kogan, 2007).
Porter’s Diamond Model was developed by Michael Porter. It is a tool that is being utilized for evaluating the external competitive environment or the market place. This assists the firms to determine their relative strength and provide the explanation for the reasons due to which some industries are becoming competitive or owning regional benefits. This model is based on four factors that are firm’s strategies and rivalry, factor conditions, related and supporting industries and the factor input conditions. For instance, good automobile brands like Audi have been able to get regional advantage in countries such as Germany as they are into the production of high power cars. The automobile manufacturing industry is having a regional advantages in Germany as they are able to suffice the four key elements under the Porter’s Diamond Model.
As there are several car manufacturers in Germany therefore, there is a strong competition among these companies. It is pressurizing to make use of more innovative products that are catering to the changing requirements of the customers in a better way. Related and supporting industries like iron and steel industry are present in Germany. This is helping it to provide the required inputs like steel, trained personnel, financial institutions for capital and IT infrastructure etc. The factor conditions comprise of the skilled and experienced engineers from its leading universities along with stress on scientific research by the government is assisting in giving an encouragement to the automobile industry in Germany.
It is owing to such conditions that are present in advanced countries that the MNEs from emerging economies are making efforts to expand globally. Moreover, the MNCs from emerging economies are having comparative advantage over the MNEs from industrialized nations when they are required to perform under weak institutional environment. This is because they are having the capability in managing incomplete, inconsistent, or unstable institutional environment (Spencer & Gomez, 2011). It is due to their experience in performing under dynamic institutional environment and their close relationship with their home nation governments that is leading to the strengthening of the MNCs from emerging markets. These MNCs are having the capability of undertaking risk due to political instability. As they are embedded under inter-governmental relationships which mean that in case of hostile political actions can lead to getting a supportive response from the home nation government. It is due to such reasons that the emerging market MNCs are developing capabilities by which they are able to respond to the market changes in a better way.
Thus, it can be concluded that it is not only the existing theories like OLI paradigm of Dunning, but also other theories like porter diamond model etc., can help in understanding the expanding decisions of emerging market multinationals at a fast pace. Owing to various reasons like acquiring of strategic assets in developing countries or for developing their capabilities for competing in uncertain business environment like in case of South Africa, etc. that the MNCs of emerging economies are expanding worldwide.