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Challenges Facing MNEs in Emerging Markets

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Published: Wed, 14 Mar 2018

The literature in this area broadly examines the numerous variables that affect standardization. Both internal and external components impinge upon the decision to standardize the marketing program of product, price, distribution and promotion (Kreutzer, 1988). The magnitude of differences in local physical, economic, social, political and cultural environments, are being invalidated by the globalization of markets. As a result, there may be no differences between domestic and international marketing (Perry, 1990). However, a standardized marketing cannot be set once and for all. Matching firms’ resources with environmental requirements, anticipating changes in consumers’ needs, and forecasting competitors’ behavior (Easton, 1988; Kogut, 1988) are critical business activities for developing effective standardized export marketing initiatives (Akhter and Laczniak, 1989).

The challenges facing MNEs in emerging market

According to Ghauri and Holstius, a company is entering international markets there are dissimilarities in the economic, political, legal and cultural environments that pose incentives for, as well as obstacles to, successful expansion. These differences are especially large in transition economies. This section will focus on the some major challenges that facing by multinational companies in emerging market.

Political and economic environment

The stability of political and economic environment is the key elements to influence the investors ‘decisions. At the recent decade, the political situation in emerging markets has favored foreign investment. Mexico’s open door policy of the early 1990s attracted significant inflows of foreign investment. However, in several transition economies, an ongoing problem faced by entrants into emerging market is their political and economic unpredictable. In China, as an example, has been in the process of developing a ‘socialist market economy with Chinese characteristics ‘. The government maintains control and monopoly over the major sectors including railways, post and telecommunications and allowing private in manufacturing and service sector. In practice, this means that the current constitution (of a one party dictatorship and mainly state ownership) and the legal regime (with its lack of transparency) will resist political reform even though economic reform has deepened since 1992. (Roger strange, Hui Tan) These disaccord of political and economic reform have been created many uncertainty for foreign investment, such as changeable economic policy, market protection as a method of local government to support the development of local economies and the most important is the role of inter document playing in economic governance. The unpredictability of the political and unstable economic climate for foreign investors in emerging market poses a significant challenge.

Legal and institution issue

The legal and institutional environment reflects the overall attitude of a host country towards foreign investment. For a long time the legal and institutional environment are poorly developed in emerging market. In particular, in term of competition policy, regulatory policy, corporate taxation, and definition and enforcement of property rights.( Klaus E. Meyer, Saul Estrin) Moreover, even where the necessary law are in place, their implementation and enforcement is weak due to unqualified accountants, bureaucrats and lawyers. The legal framework is often subject to frequent changes, which creates considerable uncertainty for businesses.

The labor standards in MNE affiliates and subcontractors in emerging economies are major concerns in globalization debates. Some observers fear that the strong bargaining power of multinational firms vis-à-vis their employees, and vis-à-vis potential host countries leads to a lowering of standards and wages (Cerny, 1994; Palley, 2002).

Does the downward spiral of rivalry lower labor standards in MNE operations in developing countries, triggering a ”race to the bottom” (Spar and Yoffie, 1999)?

The theoretical arguments concerning impact on social variables resemble those on environmental impact. On the one hand, concern with global standardization and the firm’s reputation induces many MNE affiliates to pay higher wages and to employ high labor standards with respect to working hours, sick leave, child labor, unionization etc. (Caves,

1996: 228; Moran, 2002). Since MNE’s generally wish to retain their qualified staff, they have incentives to keep them satisfied, unless they are employing unskilled labor with few outside job opportunities. On the other hand, lower labor standards and lower wages present opportunities to reduce production costs. This incentive is generally larger than for 24 environmental issues, as labor costs often account for a larger share of production costs.

Host countries eager to attract investment are said to compromise their standards underpressure from MNEs, thus undermining democratic principles (Cerny, 1994; Scherer andSmid 2000).4

The unease about the ”race to the bottom” is of concern in certain industries, such as textiles, footwear and assembly of electronics. Spar and Yoffie (1999:565) argue that necessary conditions for a race to the bottom are first mobility of firms and goods across borders, i.e. free trade, and, second, that ”regulation and factor costs are heterogeneous –and the heterogeneity leaves gaps that can be turned into the firm’s competitive advantage”. Moreover lowering of standards is facilitated by

  • Homogeneity of products (or components at certain stages of the value chain), such that price is a key competitive parameter.
  • Regulatory differentials are important for the cost structure of the industry, such as labor law for textiles and footwear.
  • MNEs would not incur major transaction costs or sunk costs when relocating a production plant, i.e. location is not sticky.

Such a race to the bottom would not necessarily be in the business interest.

Infrastructure issue

Generally speaking, most emerging markets lag behind the advanced nation in terms of communication, distribution, and management perceptions. Any one of those factors may threaten the success of international firms. Respecting the communication, in many transition economies are not well functioning as they are in the western part of the world. As one British businessman who had personally been successful in doing business in China commented, ‘You can hardly find any yellow pages in China.’ The personal contact seems as an effective strategy in Chinese market. As Guo and Akroyd argue that the Chinese communication system is technically oriented rather than commercially oriented. In addition, As far as the distribution sector concerned, it is practically poor, even non-existent in smaller town and countryside. Foreign firms have to set up their own distribution system, supply centres and warehouse. This might force the companies to settle in large cities. For this reason, the market for many western goods is also much closer to saturation there than in the countryside, or in the smaller towns. Furthermore, numbers of infrastructural barriers are also identified including: the difficulties of sourcing raw materials, lack of personnel training, as well as problems with the operation and maintenance of transferred technology. In short the poorly developed infrastructure will enlarge investor’s transaction cost.

Institutions failing to ensure efficient functioning of markets are widespread in emerging economies. Formal institutions such as the legal code may be less sophisticated, and, just as important, law enforcement may be inefficient. Local firms may thus rely on network based coordination mechanisms to overcome various forms of market failure (Peng 2000).

Yet how does this institutional heterogeneity interact with FDI? On the one hand, foreign investors may influence the institutional development, but at the same time they adjust to local institutions. Moreover, institutions moderate interactions with local firms and individuals.

The literature has analyzed the issues largely separate: strategy scholars analyze how FDI strategies are adjusted to local contexts, and institutions in particular (Peng, 2000; Henisz, 2000; Meyer, 2001), while development scholars analyze how FDI influences the local context. However, FDI strategies and the local environment in emerging economies are mutually interdependent. Informal institutions may be influenced by the living example of businesses based on different values and norms, and even formal institutions may be influenced by governments changing legislation in view of attracting FDI, possibly even under direct negotiations or lobbying by MNEs. On the other hand, the local environment, in particular the institutional framework, influences MNEs’ entry and subsidiary strategies.


Moreover, institutions moderate many of the afore discussed relationships between foreign and local firms, for instance:

  • Labor market institutions moderate the mobility of people between local and FDI firms, and thus the diffusion of knowledge, but also local firms’ loss of employees to foreign competitors. Labor laws and their enforcement regulate minimum wages and working conditions.
  • Capital market institutions moderate the ease of local sourcing of capital, but also the possible crowding out of local investment.
  • Environmental regulation and enforcement influence the potential negative effects on the local environment.
  • Competition and industry regulation influence foreign investor’s ability to extract monopoly rents or otherwise benefit from market power.
  • Education systems enhance the availability of skilled labor and the absorptive capacity.
  • Special economic zones may attract more FDI, but at the same time limit the interaction with indigenous industry and thus spillovers.

Corporate strategies, institutional change and the development of local resources and capabilities are thus mutually interdependent. This suggests two directions for future research. Firstly, institutions are important moderating variables to be included in many studies of FDI impact. Secondly, scholars should build on recent research on the coevolution of corporate strategies and institutions (Lewin and Kim, 2003) and apply this line of thought to emerging economies (Meyer and Nguyen, 2003). This should lead to clearer empirical evidence on long run processes of institutional and corporate change.

Social issue

The wide gap between rich and poor in emerging markets is a principal cause of social tension. Other social issues include ethnic tensions, such as those that have exploded disastrously in Central Europe. Also in accordance with Helms, in former socialist countries, the socialist legacy is other obstacles leading to the foreign invest flow in. As he argued that owning to the state controlled industries in the past, the alcoholism and absenteeism has been high, which have affected the work habits of today. Further he claimed that handling workers with this attitude can be very difficult.

It is not only the culture and language problems, also the awareness of society setting the barriers for investor. For small ambitious firms in emerging economies, access to such production networks is of increasing importance, yet the long term-nature of supplier relationships and the global reach of incumbents raise entry barriers. Incumbents benefit from their longstanding relationship, their reputation and their customer-specific know-how. Also, large firms are better able to guarantee quality and just-in-time delivery. Thus attaining access to an international value chain is a major challenge for small firms in emerging economies. This key role of clusters for economic development, and the potentially central role of MNEs in clusters, raises many research questions. First, how convincing is the empirical evidence for spillovers to occur at sub-national level? On aggregate level, it is not very strong. Aitken and Harrison (1999) and Smarzynska (2002) test for the spillovers Pertaining to a “local” region smaller than the host economy, but they find no evidence to support this claim in respectively Venezuela and Lithuania. However, Zhang (2001) finds positive evidence of spillovers at regional level within China, as does Sjöholm (1999b) in Indonesia. More favorable evidence comes from case research, showing how FDI can facilitate cluster development. For instance, Patibandla and Petersen (2002) argue that the early investment by Texas Instruments in Bangalore was instrumental in developing the Indian software cluster. Similar case evidence shows contributions of FDI during the inception phase of industrial clusters, such as the textile industry in Bangla Desh and Mauritius (Rhee and Belot, 1990) and the electronics industry in Penang, Malaysia (Altenburg, 2000). Yet are these typical? Under which conditions do they emerge? To assess the questions beyond the case study approach, future research needs better ways to delineate clusters to capture intra-cluster spillover effects.

Secondly, how do MNEs contribute to cluster evolution? The contribution of the foreign investor may lie in both transfer of knowledge to local partners, possibly in exchange for other knowledge, and in their role as intermediaries in the international crossfertilization of knowledge clusters. By establishing operations within a cluster, MNEs can both contribute to and benefit from the knowledge exchange within the cluster.

Longitudinal case studies have followed global industry evolution over several years or even decades to observe both winners and losers, tracing the emergence of new clusters in a dynamic context and recording not only entries, but also exits (McKendrick, Doner and Haggard, 2001; Murtha, Lenway and Hart, 2001). Research on industrial clusters needs more such longitudinal studies. This qualitative research may then stimulate theoretical development applying for instance theories of organizational learning, knowledge creation and evolutionary economics, as well as focused empirical tests.


All in all, it is widely believed that Foreign Direct Investment made a major contribution to the economic development of emerging markets. Meanwhile; emerging markets play a vital role in the global strategies of many multinational enterprises (MNEs), notably those with ambitious growth targets. However, due to the political and economic uncertain, poorly developed the legal and institution framework and the lack of market information and communication system and so on. Such factors posed significant challenges and threaten for investors in accessing the emerging market. Therefore, in order to reduce the risk and transaction cost, the several entering model have been provided. Each model has their own characteristics, choosing the proper one can certainly eliminate the risks and reduce the transaction cost. Of these, joint venture is preferred entry model despite the apparent disadvantages of shared control JV offers the opportunity to establish a business operation in a foreign country when establishment of a Greenfield site is not feasible or too expensive. (Buckley and Casson 1976, 1998, Hennart 1988, 2001). Moreover it provides the foreign company with a local partner, which helps the investors easily access to local market. That especially benefit for pioneering without much local knowledge. However, by sharing control with local partner can lead to coordination conflicts, especially if their objectives are not compatible or cultural barriers inhibit communication. A Greenfield site gives the opportunity to create an entirely new operation but it is most risky entry model since the regulatory framework in transition countries is complex. An acquisition facilitates quick entry and immediate access to local resources. Acquisitions internalize certain markets, and bring together complementary resources, but these resources need to be integrated effectively (e.g. Haspeslagh and Jemison 1991). It is suitable entry strategy if acquired companies function in a westernized manner, and have local knowledge and contacts. A Brownfield, as a hybrid mode of entry, can substitute for either acquisition or Greenfield if they are not feasible or too costly. (Klaus Meyer, 2003) Brownfield projects can utilize more sources of resources enabling projects that neither the foreign investor nor the local firm could implement themselves. Through the Brownfield foreign investors can overcome obstacles arising from the limited availability of certain assets or from high transaction costs in specific markets by considering a wider choice of potential target firms. However, Brownfield typically incur high integration costs because the investor engages in deep restructuring and in major resource transfer.

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