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International Firms Doing Business in Emerging/Developing Markets

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Introduction

In this day and age, emerging and developing markets are serving as the drivers of world economic growth. This is a shift from previous years when the developed economies were almost the sole drivers of economic change. Emerging markets can be defined as those countries that have some characteristics of the developed markets, but cannot be categorized as developed markets. The emerging market is quickly hurtling towards the status of a developed market. But what is a developed market? Developing markets are countries or regions that boast of highly industrialized economies and usually have large, well organized service sectors. Developing countries tend to have quite high GDP per capita income in comparison to emerging and developing economies (Kodolko, 2003, p.13).

Japan, United States, Australia, New Zealand, Britain, France, Sweden are good examples of developed countries. India, Singapore, Brazil Indonesia, China (excluding the regions of Macau and Hong Kong since they are developed), are examples of the emerging economies. However, a scrutiny of an economy such as China will reveal that it can indeed be seen as developing rather than emerging. This is because despite being the country with the second largest GDP, it also has the highest population in the world (Jain, 2006, p.45). This translates to the fact that the average Chinese citizen’s economic prosperity is a far cry from his/her counterpart in the United States or Australia. However, this argument can go both ways depending on what indicators are given priority. As such, India or China can be described as emerging or developing, considering the context and topic of discussion.

Developing markets represent the opposite of developed markets and only come second to emerging markets. Most African and Asian countries are developing. While they may be showing good promise of economic development in the future, they represent the lowest combined GDP’s in the world and have poor infrastructure, low industrialization and underdeveloped structures of economy (John, 2006, p.25).

The developing and emerging markets now claim the biggest share of global investments. Once only sought after for natural resources and cheap labor, these new markets are now reckoned as the new frontiers of business growth. A growing bigger middle class, rapidly growing populations and sustained economic growth are some of the factors drawing many international companies towards these markets in new, interesting ways (Jain, 2006, p.73).

International Companies Business in Emerging/Developing Markets, Implications and Affecting Factors

In an Economist newspaper article titled “Submerging hopes”, the author writes about various negative implications befalling international firms in foreign lands. In the case of UniCredit, an Italian bank which recently bought one of the largest banks in Ukraine, the ‘chickens are coming home to roost’. In the turmoil resulting from the talk of war by Russia, UniCredit has seen very limited withdrawals from automated teller machines across Ukraine. Additionally, international firms in Russia, such as Renault have reported tumbling share portfolios. This is a classic example of a negative political implication in doing business in emerging and developing countries (Submerging hopes, 2014, p.1).

The turbulence in Ukraine and other troubles elsewhere represent a host of challenges that international firms are contending with in emerging markets. Falling prices, slowed growth, bad investments, weak or changing commodity prices, political turmoil and a myriad other woes usually frustrate the efforts of global companies to operate successfully in the new markets (Witherell, 2008, p.33).

In another article in the Economist, titled ‘Emerge, splurge, purge’, the author explores how turbulences in the emerging and developing markets is affecting fortunes and corporate strategy of international companies, as well as causing governments in developed countries to shift their economic policies in response to the threats of the new economies. The author acknowledges that there have been many positive implications in the foray by firms into international territory, but is quick to point out that there have been disastrous implications as well (Emerge, splurge, Purge, 2014, p.2).

In the case of Vodafone, its mobile sales in the developed world fell as those in the developing markets rose (Emerge, splurge, Purge, 2014, p.3). This is a common implication in many expanding multinational firms, especially in cases where the company’s long term strategy was cobbled up hastily, without regard to the parent markets. As such, corporate strategy will always be disrupted when foraying into new markets (Pillania, 2009, p.26).

Nonetheless, in some cases, the expansion into emerging and developing markets literally saves the day. For instance, a Portuguese telecom firm had its Brazilian branch keep it afloat in the period of the Euro crisis. Mandom, a Japanese cosmetics firm had its Indonesian branch become the largest male cosmetics player in Indonesia, against all expectations. In the case of Procter & Gamble, profits from emerging and developing markets accounted for half of all profits (Emerge, splurge, Purge, 2014, p.3). Basically, what can be drawn from the authors’ writings and research in the same is that, when an international firm invests abroad, the shareholders as well as the host’s citizens stand to benefit. However, no matter the apparent fit between what the host needs and what the foreign firm is offering, success is not guaranteed. Issues such as taxation, immature political systems, bureaucracy, corruption, local competition, economic crisis, differing cultures and societal attitudes often disrupt the greatest of plans and strategies. Therefore, it is only prudent that firms have great foresight, plan meticulously and plan for risk (Hannon, 2014, p.3).

The above discussion proves that legal, political, cultural and economic differences between home and host countries should be thoroughly considered by multinational firms before foraying into emerging and developing markets.

Macro-environment Factors and Related International Business Concepts/Theories

Macro-environment factors are the external forces that directly or indirectly affect the operation of a business organization. The organization lacks control over these factors. The main macro-environment factors affecting business are: Economic factors, socio-cultural factors, technological factors, environmental impacts and prevailing ethics (Shahzad et al., 2012, p.52).

Economic factors refer to the wider economy and its attachments. This includes employment levels, unemployment indexes, rates of economic growth, the cost of materials and energy, fiscal and monetary policies etc. Socio-cultural factors refer to the culture and social composition of the host location, from which the organization will operate. These will include: levels of education, wealth distribution, social strata and castes, living conditions, lifestyles, age distribution and demographics (Shahzad et al., 2012, p.52). Political forces represent the political stability and modes of governance as well as the attitudes adopted by the political leadership and the inherent political views, beliefs and principles. Political factors are closely entwined to legal factors such as regulations of international trade, restrictions, mergers and monopolies laws, consumer protection, employment laws and a host of other legal issues that affect business. Technological factors encompass issues such as the rate at which technology is adapted, existence of new inventions and their development, adoption and use of information technology, internet connectivity and ecommerce as well as government spending on technological research and funding of related infrastructures (Fernando, 2011, p.24).

Environmental aspects cover factors such as waste disposal, recycling capabilities and requirements, existence or limitation of natural resources, pollution and emission laws etc. Ethics, on the other hand, if taken as a force affecting businesses can refer to the set of values and principles governing the actions, conduct and decisions of individuals and business groups in a given market (Shahzad et al., 2012, p.54). The existence of wrong ethics in market environment will undermine business or even make it impossible to conduct any business profitably.

In my opinion and considering all the aforesaid factors and their influences, the most relevant macro-environment factor when entering emerging and developing markets, is the factor of political forces. Political factors refer to the nature and stature of politics and the attitudes of political leadership, doctrines, movements and parties. This factor directly and indirectly affects all the other factors and is fundamental for the existence and development of these other factors. The government of the day and the overall political leadership sets important policies such as trading agreements, monetary and fiscal policies, including taxation rates, inflation rates, currency exchange rates, interest rates etc. Political factors also influence and determine aspects the important aspects of security, freedom and protection of property and life. In harsh political environments, it is virtually impossible to conduct business honestly and productively (Kodloko, 2003, p72).

The economic concept of Mercantilism and the External Environment Theory

The economic concept of mercantilism and the external environment theory can be used to justify the above opinion. The theory of environmental factors has been well explained above. On the other hand, mercantilism was an economic system prevalent the 16th and 18th centuries in Europe (Wallerstein, 2011, p.61). The main objective of the practice was increasing the wealth of the nation by imposing tough government regulations on all commercial interests. The nation would limit imports by imposing high tariffs while maximizing imports. It was a policy of economy practiced to accumulate monetary reserves by ensuring a positive trade balance, especially when dealing with the finished goods. The essence of mercantilism is to build up the state’s economy by whatever means and the state therefore must find ways and means to strengthen its economic ventures and at the same time weaken the foreign adversaries (Wallerstein, 2011, p.73).

Modern day mercantilism can be seen in China, Russia and even The United States and many European countries. Prior 2000, the Chinese government encouraged direct foreign investments, giving low cost production platforms for international corporations, cheap labour and opening up her markets (Wilson, 2010, p.654). After 2006, that changed as China shifted away from attracting foreign multinationals and started boosting Chinese firms at the expense of existing foreign firms. China has drafted a wide range of measures aimed towards ‘forced localization’. These include mandatory technology transfer, forced joint ventures and large scale domestic production as pre-conditions to access the huge market (Ezell, 2014).

Looking at the case of Ford Motor Company and DreamWorks Entertainment as well as many other multinational companies, they have been mandated to merger with local companies and also build new production units within China as pre-conditions to get a share of the big market. At the same time, there is rampant Intellectual Property theft in China with the vice costing the United States losses of about $50 billion annually (Hannon, 2014, p.4). Other mercantilist policies in China include: currency and standards manipulation; onerous certification, discrimination in government procurements, issuance of unwarranted subsidies for local enterprises etc.

The United States government and its NATO allies have exhibited rampant mercantilist policies such as frequent imposition of trade embargos and punitive sanctions to uncooperative states, regimes and governments. These have been used to achieve regime change and coerce submission in a world of fierce political and economic competition. Cuba was saddled with extremely punitive, harsh trade embargos including port blockades at the height of the cold war (Fischer, 2000, p.125). This led to adverse effects on its economy and businesses and this continues to date. The trade sanctions placed on the authoritarian regime of North Korea and the Islamic Republic of Iran in the face of their nuclear armament are other examples of the use of strong-arm economics to enforce political gains. The anarchist country of Somalia has virtually zero multinationals operating in her soil, maybe with the exemption of The United Nations, for obvious reasons (Ezell, 2014). The recently formed republic of South Sudan has been showing tremendous progress and attracted many multinationals until ethnic war broke out early this year, rendering business unpalatable. The same is being witnesses in the Crimea region, formerly in Ukraine and now annexed by Russia. Palestine has suffered the same in the annexation of huge portions of land by Israel. Companies and individuals conducting business with sanctioned states have been threatened with sanctions themselves (Hannon, 2014, p.3). Business suffers as a result.

Other privileges expended in mercantilist policies and in favour of local firms include bailouts, subsidized loans, disincentive subsidies or outright payments, resource privileges, tax exemption, trade protection and monopolistic privileges. In lieu of all the above, the powe of political forces to influence businesses cannot be overstated.

References

Ezell, S. 2014. China’s Economic Mercantilism. [online]. Available at: <http://www.industryweek.com/public-policy/chinas-economic-mercantilism> [2 May 2014].

Fernando, A.C., 2011. Business Environment. NewDelhi: Pearson Education India.

Fischer, T.C., 2000. The United States, the European Union and the “globalization” of World Trade: Allies Or Adversaries? Portsworth: Greenwood Publishing Group.

Hannon, P., 2014. Emerging Markets Take Largest Share of International Investment in 2013. The Wall Street Journal. [online]. 28 January. Available at: <
http://online.wsj.com/news/articles/SB10001424052702303553204579348372961110250> [Accessed May 2, 2014].

Inflows in Pakistan: The Moderating Role of Political Stability», Business and Economic Research, vol. 2, no. 2.

John, S. C., 2006. Emerging Economies and the Transformation of International Business: Brazil, Russia, India, and China (BRICs). Northampton: Edward Elgar Publishing.

Kodloko, G. W. 2003. Emerging Market Economics: Globalization and Development-Transition and development. Farnharn: Ashgate.

Pillania, R.K. 2009, «Multinationals and emerging markets», Business Strategy Series, vol. 10, no. 2, pp. 100-103.

Peyton, R.M., Lewis, G.G., Pitts, S. & Kamery, R.H. 2003, «FACTORS INFLUENCING AFRICAN BUSINESS MARKETS», Allied Academies International Conference.Academy for Studies in International Business.Proceedings, vol. 3, no. 1, pp. 39-44.

Shahzad, A., Al-Swidi, A., Mithani, D.A., Bt Fadzil, F.H. & Bin Golamuddin, A.G. 2012, «An Empirical Investigation on The Effect of Business Environment Factors on The FDI.

Thomas, D.E. 2001, Who goes abroad? International diversification by emerging market firms into developed markets, Texas A&M University.

Witherell, B. 2008, A BRIEF TOUR OF EMERGING MARKETS, Rogers Publishing Limited, Toronto.

Wilson, J. & Brennan, R. 2010, «Doing business in China: is the importance of guanxi diminishing?», European Business Review, vol. 22, no. 6, pp. 652-665.

2014. Submerging hopes: The boom in emerging-market investment by rich-world firms has led to plenty of disappointment. The Economist, [online]. 8 March. Available at: <http://www.economist.com/news/leaders/21598640-boom-emerging-market-investment-rich-world-firms-has-led-plenty> [Accessed May 2, 2014].

2014. Emerge, splurge, purge: Western firms have piled into emerging markets in the past 20 years. Now comes the reckoning. The Economist. [online]. 8 March.Available at: <http://www.economist.com/news/business/21598642-western-firms-have-piled-emerging-markets-past-20-years-now-comes > [Accessed May 2, 2014].

Wallerstein, I. 2011. The Modern World System II. Mercantilism and the Consolidation of the European World Economy. Berkeley. California UP.