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Emerging market multinationals (EMM) are those firms which have their origination from a developing country but have been operating successfully worldwide. These EMMs are globalizing aggressively which is evident from the examples of Tata motors from India acquiring Jaguar, the Lenovo group-the Chinese computer maker buying IBM's 11billion pc business and Johannesburg brewer SABMiller PLC is challenging Anheuser-Busch Cos in the U.S. These companies are young when compared to their counterparts in the western world but they are definitely making up for the lost time. Petro China the Chinese oil with a stock market capitalization of almost US$1 trillion became the world's largest public company in November 2007. Brazil's Embraer has become one of the world's largest aircraft manufacturers and Bharat Forge of India is the world's second largest forging company. EMMs have been expanding aggressively with more than 1,100 mergers and acquisitions worth some US$ 128 billion in 2006 (Hatton, 2008). This paper focuses on the opportunities and challenges faced by the EMMs on their path to globalization.
POTENTIAL OPPURTUNITIES FOR EMMs
Globalization and Liberalization of trade policies have opened up opportunities for the firms from developing countries to expand abroad. Though many of these emerging multinational are late comers in their respective fields according to UNCTAD (2006) they posses competitive advantage over their counter parts from developed countries in terms of ownership of key assets such as technologies, brands and other intellectual properties. According to a study done by Boston consulting group (2006), the new global challengers have a competitive edge in terms of their access to low cost resources, their access to huge talent pools and relatively modern and efficient plants and equipment. Another advantage they possess is that their products appeal to a price-conscious customer which is also one of the key factors for their success during the recession. More over these advantages open up different business opportunities in the market which can be exploited by the EMMs to withstand the stiff competition given their competitors.
2.1 POTENTIAL BUSINESS OPPURTUINTY 1-LOW COST RESOURCES
The most important advantage that EMMs have is their access to low cost resources like low cost raw materials, low cost equipment or property and low cost labour. This is also one of the reasons why MNC's from developed countries have been outsourcing their operations to developing countries in order to become cost effective.
According to Boston consulting group (2006) the following advantages have been observed.
Labour based costs in emerging markets are 10 to 20 times less than that of in highly developed markets.
Setting up a manufacturing site in developing countries costs 60% less when compared to developed countries owing not only to low labour costs, engineering and architectural but also to low cost construction materials.
Machinery and equipment costs 20 to 60% less when compared to developed markets.
Another area of savings is finance. Many firms have access to generous debt markets and some are also supported by government to promote their international growth. For example Chinese telecommunications equipment industry.
This cost advantage of EMMs is translated into a net savings of 20% to 40% in their costs which reflects in the cost of many products and services landed into target markets which should give them a competitive edge over their western counter parts. For example taking advantage of low cost manufacturing China's Pearl River Delta, and the country's manufacturing sector grew annually at 11.4% from 1993 to 2003 and India's large pool of low-cost, technically trained talent can be attributed to the nation's growth as a global leader in providing IT services.
2.2 POTENTIAL BUSINESS OPPURTUNTIY 2-ACCESS TO HUGE WORKFORCE AND TALENT POOLS
Demographics play a critical role in the growth of any business and the EMMs have an advantage of having access to huge work force. Currently 31% of the Emerging Market population consists of individuals under the age of 15, providing a growing and able bodied workforce compared to the aging population of the developed nations, with a mere 18% under the age 15. Majority of the future growth in the global labour force up to 2050 will occur in the emerging world (Accenture 2008).According to Boston consulting group in 2010 china is expecting to graduate 800,000 engineers, mathematicians and technicians while India will graduate 600,000 which is 12 times greater than of US universities. Indian software industry has exploited this opportunity effectively. Indian software firms like Infosys, TCS and Wipro used the availability of abundant software talent in India to provide services for a cheaper price than their counter parts in the developed countries. Availability of high quality of talent for relatively lower cost has created an opportunity for the Indian software firms to globalise themselves.
2.3. OTHER POTENTIAL BUSINESS OPPURTUNITIES-DOMESTIC MARKET ENVIRONMENT
According to The Economist (February 2008) Emerging economies are better at adopting new technologies which means firms based in these countries have access to relatively modern technology, plants and equipment. With regards to Boston consulting group (2006) some of the emerging markets are among the fastest growing markets in the world. Large businesses can be built in such significant markets which eventually try to exploit others markets with similar conditions. For example Haier group in China established itself in the domestic market by developing wide range of domestic appliances and even cell phones. China being such a big country with large population Haier started manufacturing different product lines to suit wide range of people. It also had to design a new distribution channel to deliver goods in least possible time. Operating in such a market enabled Haier to build innovative strategies which helped in its expansion worldwide. An oligopolistic position of firms and an opportunity to compete with their foreign counterparts at home helps the firms for expansion abroad.
These are the advantages enjoyed by the EMMs in their domestic market which act as launching pad for their expansion abroad but these advantages might open up similar opportunities in the foreign markets.
2.4. POTENTIAL BUSINESS OPPURTUNITY 4-NETWORKING ADVANTAGES
These new comers have adopted strategic partnerships and acquisitions to enter and succeed in new markets in order to overcome the entry barriers and understand the market better. Therefore networking provides great opportunities for them to expand.
CHALLENGES FACED BY EMERGING MARKET MULTINATIONALS
EMMs face great challenges on their path to globalisation as internationalising a business is never a smooth ride. EMMs face competition not only from their domestic counterparts but also from the global rivals once they enter international markets. The challenge is to create new markets and to sustain development in these extremely competitive and complex markets. According to Boston consulting group (2006) the major challenges confronting these companies include a lack of deep relationships with overseas customers, a slow rate of innovation, lack of strong brands, a lack of access to effective distribution channels and limited experience in managing international business. These new firms enter the market at the bottom of the value chain and lack brand equity compared to the ones in the developed countries. Supply chain management is also another challenge that they have to face. For example the Asia-US supply chain takes an average of 60 to 90 days from order to arrival at the point of sale and adds 10 to 30% to manufacturing costs. Moreover 20 to 60% of the supply chain costs are caused by stock outs, emergency shipments. These additional costs disturb the cost effective strategy adapted by most of the EMMs.
In order to ascend the value chain EMMs have to innovate new products and services to attract the target audience in the new market. As a Slow rate of innovation is a major challenge confronting EMMs which is evident from the small number of patents the companies from emerging markets hold. Companies based in Japan and Germany obtained 166,000 and 54,000 patents respectively in contrast to only 3,900 U.S. patents obtained by companies based in five largest emerging markets from the year 1999 to 2003.With regards to Accenture (2008) though the EMMs have access to huge work force and talent pools they lack talent suitable for international business. There is an acute shortage of talent at management level in India and China. Much of the work force lacks relevant experience and exposure to business practices and culture of multinational enterprises.
On their path of expansion the EMMs also face political and regulatory challenges. Political practices and regulations in certain countries might be of little assistance to their growth. But the challenge is to overcome the difficulties posed by them while abiding by rules and regulations in the host country. Trade policies in certain countries also challenge the growth of the EMMs for example FDI policy enforced by the Indian government restricts direct investment by foreign companies in retail industry. However the foreign companies can invest through joint ventures with Indian firms. Example for such alliance is the join venture between the Wal-Mart and the telecom giant Bharati enterprises.
Corruption is also one of the biggest challenges faced by the EMMs today especially when they are venturing in similar developing countries. In few developing economies like Africa bribery is the only way get things done and refusing to pay leads to loss of business for a while. This problem has been experienced by IBM in Africa and Mark J Harris the managing director of IBM south Africa says not bowing down to local corruption is the only way to get the message across to the local government officials (Business week ,October 2008).
INFOSYS AN EMERGING MUTLINATIONAL COMPANY
Indian software industry has placed India on the world map with companies like TCS, Infosys, and Wipro emerging as world class software service providers. Often referred as 'India-3' they have been adding 30,000 people to their work force every year. Infosys Technologies Ltd which is the second large software company in India was started in 1981 with a mere investment of 250$.Today Infosys is a soaring high with revenues over US$ 4 billion. Infosys defines designs and delivers technology-enabled business solutions that help around 2000 global companies. Infosys has over 50 offices worldwide with development centres in India, China, Australia, the Czech Republic, Poland, the UK, Canada and Japan. Infosys and its subsidiaries have 105,453 employees as on September 30, 2009. Infosys pioneered Global Delivery Model (GDM), based on the principle of taking work to the location where the best talent is available, where it makes the best economic sense, with the least amount of acceptable risk.
With giants like IBM, Accenture, Electronic Data systems and Delloite rapidly expanding in India, Infosys faces major challenges in future ahead.
MAJOR DIFFICULTIES FACED BY INFOSYS
5.1. CHALLENGES FROM COMPETITORS:
Multinational companies like IBM, Accenture Ltd., Capgemini SA, Delloite and many other multinational service providers have realised the benefits of low cost, high-quality workforce of software and IT professionals India. To benefit from these low cost conditions these firms have been setting up their offices in India while Infosys is expanding globally to increase its visibility and to create close customer relationship to compete in high end consulting services. Hence Infosys now faces competition in its home country not only from the domestic counterparts as Wipro, TCS etc but also from its counterparts from the western world. Since the well established firms are also becoming cost effective, Infosys is losing its competitive edge as it is known to be providing quality services at relatively low price when compared to the established MNCs .
Another Challenge is the increase in demand for software professionals in India is causing a brain drain for the company as its employees are moving to the big firms which offer better salary packages. This is evident from the rising attrition rate of the company reported by brokerage CLSA Asia-Pacific which says about 4,000-4,200 employees have resigned in February 2010 (The wall street journal, 2010).Infosys has announced a hike in wages effective April 2010 in an attempt to retain its staff which shows that the company is struggling to keep staff from being snatched away by its global rivals such as IBM, Accenture and Delloite who hire thousands of professionals every year and offer a better pay scale.
5.2. CHALLENGES ARISING FROM COST STRUCTURE
With its plans to expand abroad the cost structure of Infosys is definitely going to increase. In contrast its global rivals expanding in India to gain access to low cost resources and services their cost structure is going to decrease. Owing to its global expansion Infosys has announced that it would hire 1000 onsite staff and 1000 lateral hires with specialised skills which increases its wage bill. Increase in operating expenses is reflected in the rates at which the firm bills its customers which went up marginally by 0.4 per cent on a reported basis, even though it declined 1.1 per cent on a constant currency basis (Business today, October 2009).
5.3. NEED FOR INNOVATION
The slow rate of innovation is another challenge that Infosys faces. Indian IT industry has been using its cost effective strategy to attract and retain clients. Since their global rivals like IBM, Accenture and Delloite are also benefiting from low cost resources in India and employing a similar strategy it is time for the Indian IT industry to be more innovative in its products and services, in developing next-generation tools, languages, technology concepts, and standards to gain a competitive edge in the market. It is high time that firms start investing in R&D to develop new products. Infosys R&D spending was only 1.3% of the revenues generated. In contrast in June 2006, IBM has announced that it would be investing 6 billion US$ in the following three years in R&D in India (IBM India 2006).That is 2 billion US$ a year which is half of the revenues generated by Infosys in a year.
5.4. INFRASTRUCTURE RESTRAINTS
As India a developing economy there is a lack of infra structure like many other developing countries In Bangalore, Indian technology firm Infosys Technologies Ltd. spends $5 million a year on buses, minivans, and taxis to transport its 18,000 employees to and from Electronics City where the head office is located. N.R. Narayana Murthy the co founder of Infosys says "If the infrastructure gets delayed, the economic development, job creation, and foreign investments will get delayed'' (Businessweek,2007). India lacks world class universities that it can boast of apart from the IIT'S which hinders the production of employable work force in the advent of growing demand for talent. With regards to Accenture report 2008 only five of the top 100 MBA programs are in the emerging world. Apart from IIM'S (Indian Institute of Management) and ISB (Indian school of business) most of the universities in India often fail to provide quality education appropriate for business, focusing too much on theory and less on application.
5.5. LIMITED EXPERIENCE IN MANAGING INTERNATIONAL BUSINESS
According to Accenture 2008 report most of the Chinese and Indian firms face shortage of talent at management level. There is a lack of diversity in leadership in Indian IT industry with very few companies headed by a non Indian. In Infosys it is worse as most of its top management is occupied by south Indians no room even for a north Indian. In contrast its biggest global rival IBM is known for building a multi cultural workforce .Therefore to become truly global there is a need for Infosys to be more open minded in inculcating cultural diversity in its leadership.
5.6. POLITICAL IMPEDIMENTS
Infosys adapted global delivery model which means producing where it is most cost effective and selling where it is more profitable. It uses a mix of onshore and offshore employees to deliver high quality and cost effective services. Infosys has most of its clients based in the U.S and decreasing H1 visas is a growing concern which would decrease the number of offshore employees the company can send to the U.S to work on the onshore projects. The controversial Durbin-Grassley visa reform bill is much talked about in the U.S if gets approved will prohibit companies with more than 50 US employees from obtaining any additional work visas if more than 50% of their entire US workforce is made up of H-1B or L-1 visa holders. The provision would essentially prevent Infosys from hiring more Indian workers to work in the US which would eventually increase its wage bill (Rediff business, June 2009).
5.7. THE REGULATORY CHALLENEGS
An opinion poll conducted by the National Association of Software and Service Companies (NASSCOM) and the Information Technology Association of America (ITAA) has found that 82 percent of customers of Indian IT companies are concerned about their data protection. This security concern provides a competitive edge to the rivals in the market over Infosys as security has become a critical selling point. Despite the high quality low cost strategy of Infosys is attractive security issues remains the major concern in an unregulated environment.
In this paper we have looked at the opportunities and challenges that a multinational company from an emerging market faces in the global market. Some of the challenges faced by these firms have been illustrated through the example of Infosys technologies LTD. Recent years has seen the emergence of these EMMs and they are growing in size and number owing to their access to low cost resources, work force, raw materials, access to new technologies and strong base in large domestic markets. However the credibility of these EMMs goes beyond being cost effective as they are coming up innovations which are on par with their western rivals. Despite challenges mentioned earlier in the paper most of the EMMs are soaring high with profits reaching a new scale with house hold names like haier, Indian drugmaker Ranbaxy, and Russia's Lukoil making an impression globally. The key factor behind their success is being innovative and accepting challenges as an opportunity for growth. However the growth can only be propelled with little intervention from the local governments in improving infrastructure like roads and transportation, investing in improving quality of education in order to produce efficient work force, through abolition of corruption and fair trade policies.