Strategies adopted by MNE and TNE when entering an emerging market

      success or failure for TNE and MNE

1. INTRODUCTION

MNE is a synonym for multinational corporation (MNC). It is a firm or company which engages in foreign direct investments by controlling and managing value added services in multiple countries (Peng, 2009). TNE or TNC is also a MNE but differs with the use of transnational strategy, which is the most direct response in the globalization of business. It differentiates capabilities and contributions from country to country, applies interactive “global learning”, uses them in improving core competencies and then shares this innovation throughout its global operations (Daniels et al, 2009). Emerging market is a synonym for emerging economy which is the new term used for developing countries. (Peng, 2009) Some of the emerging economies are Brazil, China, India, Russia, Argentina, South Korea, Thailand and Turkey (Peng, 2006). The sole discussion is about the benefits and threats to be faced by MNEs and TNEs when selecting an emerging market for global business.

2. ANALYSIS

     

2.1 Emerging Economies: -

In emerging economies, the development is taking place in a rapid pace and the government policies also favor the economic liberalization (Wright et al., 2005). “CEOs and top management teams of large MNEs and TNEs, particularly in North America, Europe, and Japan, acknowledge that globalization is the most critical challenge they face today.” Successful MNEs and TNEs develop strategies to expand their business in emerging markets (Khanna et al., 2005). The advantage of MNE and TNE depends on when and how to enter the emerging economy (Papyrina, 2007).

(Five most attractive destinations region wise are mentioned in Appendix – 5)

2.2 Multinational Enterprise (MNE): -

MNEs have strong ownership advantages in respect of branding, advertising, and technology. They have the favor from the host government, which believes that MNEs bring more advanced technology to their emerging market and consumer will also prefer to use products with advanced technology and highly branded. The cultural, administrative, geographic and economic (CAGE) dimensions of host country influence a MNE in choosing an emerging economy (Cuervo-Cazurra and Genc, 2008). MNEs, by entering into an emerging market, can expand sales, acquire resources that cut costs and minimize the risk of swing in sales and profit (Daniels et al, 2009). MNEs can get raw materials and cheap labor in emerging markets. They can make higher profit from the emerging market and balance it with the cost incurred (especially the high taxes) in the home country ().

The challenges to MNEs are the underdeveloped market institutions and political and economic uncertainty characterizing many emerging markets. These institutions are defined as ‘rules of the game in society’. In emerging markets, the host governments play a vital role in FDI decisions of MNEs. The host government may change the FDI policies at any moment, which may affect the entry strategies of the MNE. Henisz (2003) contradicts that the ability to manage the tricks of institutions is one of the key abilities of MNEs. Since emerging markets are different in regime, degree of process and stages of development, it becomes difficult for MNEs to efficiently carry out their strategies dynamically (Hatani, 2009). The disadvantage of MNE would be its late entry into that host country with the same product or services, which some other MNE would have already established some time back. Some difficulties of MNEs in selecting host country can be absence of proper infrastructure and well developed market mechanisms (Cuervo-Cazurra and Genc, 2008).

(Additional Notes on Multinational Enterprise is illustrated in Appendix – 1)

2.3 Transnational Enterprise (TNE): -

While choosing an emerging economy, TNEs competitive advantage is its superior technology, products, etc. which generates direct social and proprietary benefits or maximum profits. TNEs have the opportunity to enhance their structural bargaining power versus workers and states, and thus reduce claims by employees, creditors and owners on their income (Jones, 2000). TNEs have the advantage to “crowd out” domestic industry or damage the upcoming industries of the host nation (Perspective on TNC, 2005).

Openness (referring to lack of obstacles and regulatory) of government for foreign investors increases success or failures for TNEs. Until early 1980s, only Hindustan Motors (HM) and Premier Auto Limited (PAL) were the two car manufacturers in India. Suzuki from Japan wanted to enter into Indian automobile industry. Government allowed Suzuki to set up a joint venture in 1983. The number of car models increased in India and also developed the Indian economy. Hence Suzuki was benefited by choosing India as an emerging market to invest in. The negative impact of openness of government for TNEs would result in high competition in market and thus lower the amount of profit which would have been targeted earlier (Johnson and Tellis, 2008).

(The contexts depending on which MNEs and TNEs select an emerging market are mentioned in Appendix – 4)

Venkata Ratnam (1998) said that the government of India was highly stabilized to welcome any MNE and TNE to invest in its market and utilize its high natural and human resources. Hence any MNE or TNE selecting India as an emerging market and entering to establish its office will be highly benefited. A chief executive of a MNC has effectively said, “India has opened its economy with less discrimination than any other country, including the Far East and South East economies at their comparable stage of development.” (Venkata Ratnam, 1998)

The marketing mix and consumer demand in market of an emerging economy also influences a TNE. According to Ghauri and Cateora (2006), the reason behind Wal-Mart’s failure in Germany was due to the wrong understanding of German culture and shopping habits of people. Thus, it turned up to be a disadvantage for TNE (Jonsson, 2008). One of the disadvantages to enter in developing countries is the opaque legal and regulatory systems, corruption, inadequate infrastructure, political uncertainty on the host nation (Perspective on TNC, 2005).

(Additional Notes on Transnational Enterprise is illustrated in Appendix – 2)

3. Vodafone as a TNE choosing an emerging market (India): -

        Vodafone, one of the famous UK-based TNE planned to expand its business in India as an emerging market. The mobile market of India was increasing very fast. At first Indian regulatory was afraid to give the approval because of the fear that Vodafone would breach the Investment rules in India. But later, it agreed. Vodafone studied the Indian Investment rules and government policies and bought 52% stake of Hutchison of Hong-Kong (BBC News, 2007). As the market was quite immature, Vodafone entered with a strategy to impose high call rates and roaming charges and low value contract mobile phones without any interference on the government (Vodafone, 2006).

(The complete news report about the approval of deal of Vodafone in put up in Appendix – 3)

4. Recommendation and conclusion: -

The report enhances the understanding of the benefits and risks for a MNE or TNE to select an emerging economy for business. There are some solutions for TNEs and MNEs which can balance the benefits and risks as well. The presence of Human Resources Department with the MNEs and TNEs helps them to find cheap labor and manages them very efficiently. And to manage this on a global basis, UNCTAD (United Nations Conference on Trade and Development) is set up to check the working conditions.

The business strategies implemented by MNEs for emerging markets need closer examination and broader view of their inter-firm relationships (Hatani, 2009). The success or failure of a MNE or TNE depends on its entry mode. They should also look at the joint ventures or wholly-owned business. To whatever extent the government of the host nation may be stable, the corruption level of the government of emerging market also influences the MNEs and TNEs in selecting the emerging market. (Rodriguez et al., 2005)

The new trend in globalization is in favor of TNEs and the transnational strategy, but it needs to understand the significant organizational challenges regarding the decision making process and structure of organization. For a successful and secure entry of TNE, the forward knowledge flow (home nation to host nation) is most important. There are huge investment needs for infrastructure yet to be met in the emerging markets. TNEs dealing with infrastructure can be advantageous here, if they select the time of entry as to when the host nation is in requirement to develop and manage infrastructure.

        

For Vodafone entering into India has proved to be a successful deal by keeping the investment rules in mind. The disadvantage that they would face in future is the competition, because India is am emerging market for telecommunication.

        Hence it is seen from the discussion that both MNEs and TNEs can excel in emerging markets keeping the entry mode and ‘rules of the game’ in mind.

5. BIBLIOGRAPHY

• BBC News (2007) “Vodafone’s Essar bid is approved”, 27th April 2007

      accessed on 8th November

     2009

• Cuervo-Cazurra, A., Genc, M. (2008) “Transforming disadvantages into advantages: developing-country MNEs in the least developed countries”, Journal of International Business Studies, Vol. 29, pp. 957-979.

• Daniels, J. D., Radebaugh, L. H., Sullivan, D.P. (2009) International Business: Environments and Operations, 12th edition, Pearson International

• Greer, J. and Singh, K (2000) “A Brief History of Transnational Corporations”,  

• Hatani, F (2009) “Pre-clusterization in emerging markets: the Toyota group’s entry process in China”, Asia Pacific Business Review, Vol. 15, No. 3, July 2009, 369–387

• Henisz, W. J. (2003) “The power of the Buckley and Casson thesis: the ability to manage institutional Idiosyncrasies”, Journal of International Business Studies, Vol. 34 (2), pp. 173–184.

• Johnson, J. and Tellis, G. J. (2008) “Drivers of Success for Market Entry into China and India”, Journal of Marketing, Vol. 72, May, pp. 1-13.

• Jones, M. T. (2000) “The competitive advantage of the transnational corporation as an institutional form: A reassessment’, International Journal of Social Economics, Vol. 27, No. 7/8/9/10, pp. 943-958.

• Jonsson, A. (2008) “A transnational perspective on knowledge sharing: lessons learned from IKEA’s entry into Russia, China and Japan”, The International Review of Retail, Distribution and Consumer Research, Vol. 18, No. 1, February, pp. 17–44.

• Khanna, T., Palepu, K. G. and Sinha, J (2005) “Strategies That Fit Emerging Markets”, Harvard Business Review: Risk and Reward in World Market, June, pp. 63-76.

• Kim, W. C. and Hwang, P (1992) “Global Strategy and Multinationals' Entry Mode Choice”, Journal of International Business Studies, Vol. 23, Issue 1, pp. 29-53.

• Laura, D. (2007) “The Multinational Companies and the Emerging Markets”, University Iasi, Faculty of Economics and Business Administration.

• Luo, Y. (2001) “Determinants of Entry in an Emerging Economy: A Multilevel Approach”, Journal of Management Studies, Vol. 38 (3), May, pp. 443-472.

• Papyrina, V. (2007) “When, How, and with What Success? The Joint Effect of Entry Timing and Entry Mode on Survival of Japanese Subsidiaries in China”, Journal of International Marketing, Vol. 15, No. 3, pp. 73-95.

• Peng, M (2006) Global Strategy, Thomson South-Western
• Peng, M (2009) Global Business, South-Western Cengage Learning. ISBN: 0-324-58594-2

• Perspective on Transnational Corporation,

     

• Pincus, L. B. and Belohlav, J. A. (1996) “Legal issues in multinational business strategy: To play the game, you have to know the rules”, Academy of Management Executive, Vol. 10, No, 3. pp. 52-61.

• Rodriguez, P., Uhlenbruck, K. and Eden, L. (2005) “Government Corruption and the Entry Strategies of Multinationals”, Academy of Management Review, Vol. 30, No. 2, pp. 383–396.

• Rugman, A. and Verbeke, A. (2004) “Regional Transnational and Triad Strategy”, UNCTAD: Transnational Corporations, Vol. 13, No. 3, UNCTAD/ITE/IIT/2004/9

• UNCTAD (2001) “Multinational Corporations (MNCs) in Least Developed Countries (LDCs)”, United Nations Committee on Trade and Development.

• UNCTAD (2008) “Transnational Corporations and the Infrastructure Challenge”, World Investment Report 2008 (Overview), pp. 1-36.

• Ventaka Ratnam, C. S. (1998) “Multinational Companies in India”, The International Journal of Human Resource Management, Vol. 9 (4), August.

• Vodafone (2006), “Vodafone plans $13bn move for India group: Vodafone plan move into India’s burgeoning mobile phone market”, 21st December 2006.

     

• Wright, M., Filatotchev, I., Hoskisson, R. E. and Peng, M. W. (2005) ”Strategy Research in Emerging Economies: Challenging the Conventional Wisdom”, Journal of Management Studies, Vol. 42 (1), pp. 1-34.

5.1 Web References

•  accessed 4th November 2009
•  accessed 4th November 2009

APPENDIX – 1

Additional notes on MULTINATIONAL ENTERPRISE

MNE emphasizes international replication of the home country competencies like, production scales, distribution efficiencies and brand power. It is easy to be implemented. It tries to maximize the low-cost advantages in host country. In MNE, the flow of information or innovative ideas is one sided, i.e. from home country to host country (Peng, 2009). A MNE can adopt international division, geographic or global product division structure when entering into an emerging market. These structures are easy to implement and handle with regard to the flow of information. It uses product division, department division or region division managers or head to carry out its operations. In these structures the company solely depends on a single entity worldwide. The problem of local responsiveness still persists. (Peng, 2009)

The two main challenges of a MNE are pressure for cost reductions and local responsiveness. An example is MNEs outsource their call centre functions to India and Ireland in order to reduce cost in operations. The consumer preferences, distribution channels and host country demands show the pressure of local responsiveness for MNEs. For ex, the famous beef-based hamburger of McDonald’s found no customers in India because cows are sacred in India. The way of advertising a product and its packaging influences the MNEs entrance and success in the host country. (Peng, 2006)

Sometimes host country governments use a combination of ‘tax incentives and free infrastructure upgrades’ and ‘threats to block market access’ to attract the MNEs to invest in higher value added areas. (Peng, 2009) MNEs need to choose a head to be appointed in the host nation for operations. They either appoint a home country national, or host country national or a third country national as head to manage the operations with ease. (Peng, 2009)

MNEs will get cheap raw materials and labor force in emerging markets. MNEs get a revenue generating potential from emerging markets. The MNEs can produce low-cost goods in emerging markets and sell them at a higher price in their home country. The main disadvantage for MNEs here is the poor basic marketing infrastructure, little or no market data, poorly developed distribution systems and business regulations frequently changing. Due to these problems, MNEs can create innovative distribution process and transfer them to developed countries (Laura, 2007).

A major challenge to MNEs in selecting an emerging economy is, whether their traditional “global strategy” be extended and adapted with very less changes in emerging economies. MNEs may also gain benefits from their own domestic markets. (Wright et al., 2005) If the government is stabilized and has proper policies which do not change frequently, then it is an added advantage to the MNEs. But if the government is unstable and frequently changing policies, then it turns out to be a disadvantage for MNEs (Cuervo-Cazurra and Genc, 2008).

APPENDIX – 2

Additional notes on TRANSNATIONAL ENTERPRISE

TNEs in the host country of emerging economy have the power to control and coordinate operations. It is flexible in nature and ready to move to any geographical region by the sharing of innovation among the subsidiaries. TNEs expand national economy, create jobs and spreads technologies (). The advantage of TNE is that it can exploit and share locally created knowledge worldwide (Jonsson, 2008).

TNE exploits location economies, influences core competencies effectively and pays attention to local responsiveness. It is difficult for TNE to build and poses serious challenges like coordinating value activities, and is prone to shortfalls. The firms that face high pressure for cost reductions, high pressure for local responsiveness, and where the opportunities to increase core competence is very high in company’s global network, should go for transnational strategy (Daniels et al, 2009).

TNE is cost efficient and locally responsive. It gives rise to global learning and diffusion or dispersion of innovation. The one-way flow of innovations is challenged to have two problems: the innovative ideas generated by home country are not necessarily to be of highest quality and it may happen that the host country has some good ideas to be implemented elsewhere. The innovations in TNE flow from home to host country and vice versa. (Peng, 2009)

One of the greatest strength of TNEs is the ability to overcome market imperfections keeping an eye on national markets and to develop systematic firm-specific advantages (Rugman and Verbeke, 2004). TNCs are the enterprises which control economic assets in its subsidiary countries, i.e. it controls about 10% of share of such an asset. These have high financial resources, vast technological resources and extensive global reach (Perspective on TNC, 2005).

A TNE adopts the global matrix structure, which shares and coordinates responsibilities between product division and geographic areas making it more cost efficient and locally responsive. TNE normally appoints a host country national as head of the product or region based division, so that the head can take care of local responsiveness and manage efficiently the cost to the company. The organization structure in TNE is complex and difficult to implement. The huge amount of the sharing of innovations may slow down the decision speed. (Peng, 2009)

The global matrix structure of TNEs allows them to delegate non-essential activities to sub-contractors and minimize the risk related to market uncertainties. TNEs can focus on high value-added activities based on proprietary knowledge. TNEs have a competitive advantage of “hard” factors like physical assets, proprietary technology, flexible production systems and product portfolios and “soft” factors like organization culture, tacit knowledge, management skill and experience. They are also blessed with politically obtained subsidies and privileged market access.

A TNC has the ability to create competitive advantage from facilities not available to a domestic firm trying to compete in its home market. These facilities include cross-subsidization, support from both host and home nation government and superior protection from currency fluctuations (Jones, 2000).

TNEs dominate the industries where outputs and markets are oligopolistic or depend on small firms. TNE is an enterprise which includes sales, distribution, manufacturing and R and D in more than two countries, so that it can carry out its operations with ease. Moreover, its management decisions are free to be taken from any subsidiary. TNEs can rise or lower the price of goods depending on the rate of tax imposed by the government of host country (Greer and Singh, 2000).

TNE focusing on the three ways of knowledge flows, forward (home to host), reverse (host to home) and lateral (between subsidiaries), is a big advantage for it. To create a competitive advantage, a deep knowledge of integration with the local environment is necessary for a TNE (Jonsson, 2008).

         The legal bindings of the host country’s government regarding the repatriation of the MNE or TNE are of high importance. If the government imposes a fixed number of years for repatriation, then it becomes a disadvantage for the MNE, whereas for a TNE it is advantage, because TNE can change its marketing strategy and meet the customer demands to sustain in the market. The government of host country forces the TNEs and MNEs to obey local regulations and provide benefits to employees within the country. “For example, in Brazil, the companies need to pay bonus to employees once recruited. In India, companies are supposed to pay rent allowance and termination payment of fifteen day’s salary for every year worked.” This is a disadvantage for MNE and an advantage for TNE because they can manage the employees well and increase production as well as marketing in the host country. In this way, the MNEs cannot work according to their profits and expenditure increases (Pincus and Belohlav, 1996).

APPENDIX – 3

VODAFONE (tne) CHOOSING INDIA AS AN EMERGING MARKET FOR ITS TELECOMMUNICATION BUSINESS

Vodafone Group Plc, ranked 2nd among the world’s top 100 non-financial TNCs, ranked by foreign assets, 2007 and ranked 9th among the top 100 most valuable global brands 2009 according to Millward Brown Optimor planned to launch a joint venture with Hutchison Essar in 2007. “Indian regulatory officials had held up the approval of the deal to ensure that it did not breach Indian investment rules and put too much of Hutchison into foreign hands.”  UK-based Vodafone bought 67% of Hutchison in February. The approval was pending from Indian Finance Minister, but it was believed that he would simply rubber-stamp the plans of Vodafone. India’s economy is growing very fast and its mobile phones market is rising very high. Vodafone, the world’s largest mobile phone company (TNC), was looking at an emerging economy like India for earning growth because the markets of Europe and US were getting saturated. Indian investment rules said that a foreign company can only hold a maximum stake of 74% in a domestic company. With the deal, Vodafone bought 52% of Hong-Kong based Hutchison Telecommunications holding in Indian mobile company. India is the largest growing mobile phone market in the world, with an expectation of more than 150 million people to own a mobile phone within few years. (BBC News, 2007)

“As India is relatively immature in terms of its mobile phone market and offerings, Vodafone can easily enter the fray using some of its old tactics to bring in revenue such as high roaming charges and low value contract mobile phone bundles without having to worry about competition or the government regulating the prices for some time.” (Vodafone, 2006)

Source:  BBC News (2007) “Vodafone’s Essar bid is approved”, 27th April 2007

      

     accessed on 8th November 2009

     

     And

     Vodafone (2006), “Vodafone plans $13bn move for India group:

     Vodafone plan move into India’s burgeoning mobile phone market”,

     21st December 2006.

APPENDIX – 4

Mapping Contexts in Brazil, Russia, India, and China

The five contexts (below) can help companies spot the institutional voids in any country. An application of the framework to the four fastest-growing markets in the world reveals how different those countries are from developed nations and, more important, from one another.

Source: Strategies That Fit Emerging Markets”, Harvard Business Review: Risk and Reward in World Market, June, pp. 63-76.

By: - Tarun Khanna, Krishna G. Palepu, and Jayant Sinha

APPENDIX – 5

Source: UNCTAD-DITE, Global Investment Prospects Assessment 2004, in UNCTAD (2004c), P 6.