How did emerging market multinationals internationalize successfully?

Emerging market multinational enterprises (EM-MNEs) are the new kids on the block. When Forbes magazine first released its list of the world’s largest 2000 companies in 2003, the list was dominated by companies from the USA, Japan, and Britain. In the latest “Global 2000” list, companies from China and other emerging markets feature prominently. In 2014, 674 companies came from Asia, compared with 629 from North America and 506 from Europe. The world’s three biggest public companies and five of the top ten companies are Chinese. How did these EM-MNEs internationalize so successfully?

As a start, you should forget about your prejudice. EM-MNEs did not primarily internationalize successfully because they produced cheap goods. Or because they cut corners and flouted environmental standards at home. Or because they received lots of government subsidies. Cheap labour or government subsidies can occasionally help, but they cannot even begin to explain the success of so many EM-MNEs especially those companies that become key global players in their sector and are able to rival North American or European companies in terms of sophistication and technology. Think of China’s Haier in white goods or Brazil’s Embraer in regional passenger aircraft.

In some ways, EM-MNEs are not that different to the Western or Japanese firms that first internationalized in the 20^th century. EM-MNEs initially expanded gradually step-by-step, first in countries close to home and then to more distant countries. For example, Nigerian companies first expanded to other West African countries (especially English-speaking and culturally close Ghana) before expanding to more distant countries. In this way, they gradually acquired knowledge about international markets, which gave them the confidence and a better understanding of international business before expanding to more distant markets. Nigerian companies found that they could compete very successfully in Ghana, just as Chinese companies found that they were often in a better position to compete in Malaysia or Indonesia than Western companies.

But, compared with Western or Japanese firms in the 20^th century, EM-MNEs have speeded up their internationalization efforts much more quickly. For example, China’s Haier first expanded to Indonesia, Philippines, and Malaysia. But, within just two years, Haier felt that it had gained enough knowledge about international markets that it decided to expand to a sophisticated distant market – the United States. To give you an idea: the Japanese company Matsushita waited for almost thirty years between the start of international exports and the establishment of an overseas plant. Haier did it in less than ten years. It took Matsushita twelve years from building its first overseas plant to its first acquisition of a foreign company, while Haier achieved the first acquisition after only five years.

Unlike Western or Japanese firms in the 20^th century, many EM-MNEs did not wait until they felt that they were competitive enough at home to expand internationally. Many EM-MNEs come from countries that have inadequate legal protection and political uncertainties, as well as technological and infrastructure limitations. They learned how to make more out of less and how to cope better with uncertainty, and they became obsessed about continuous learning. Consequently, many EM-MNEs used their foreign expansion to developed countries as a springboard to acquire critical new resources (e.g. technology, skills or other resources) that they wanted in order to compete more effectively against their global rivals and in order to overcome technological or infrastructure limitations at home.

This international expansion showed incredible ambition on the part of these companies. Haier’s CEO Zhang Ruimin recounted: “We started exporting to developed markets first because if your products are good enough for consumers in Europe and in the US, you will have better products in developing markets”. Haier quickly established research and development centres in the United States and Europe to increase the speed of learning. Zhang Ruimin’s philosophy was simple: “First we observe and digest. Then we imitate. In the end, we understand it well enough to design it independently”.

EM-MNEs have also quickly learned how to apply modern management practices to help their global expansion. We recently conducted research with three Brazilian multinationals and we were surprised to discover that performance management practices within these companies are not based on indigenous Brazilian practices, but rather, are heavily influenced by global best practices. In all three cases we studied, performance management practices were used as a strategic human resource practice to enable the company to evaluate and improve corporate and subsidiaries performance against pre-set objectives that are aligned with its global strategy. An HR Director of a big Brazilian multinational firm explained to us:

“The company as a whole has global systems regardless of cultural differences because that’s the only way to ensure global mobility. It’s difficult to move to another country where you find a different way to manage talent, to manage competencies”.

The ambition and the speed of learning by EM-MNEs are very impressive. North American or European companies can certainly learn a few things from these companies.

Featured image credit: “Shanghai skyline”, by hbieser. Public domain via Pixabay.