Challenges likely to be encountered by businesses in

emerging economies, internationalizing at a fast pace

Vibhav Joshi, 55B
The emergence of firms from developing countries as important players in
global markets has been a distinctive phenomenon of globalization in the
twenty first century. Not only have the emerging market economies been
among the top destinations for foreign direct investment, but the outward
FDI flows from these economies have also been growing steadily. All these
have resulted in a resurgence of interest in internationalizing firms from
emerging economies, a number of which have been transforming
themselves into 'third world multinationals.
But the path of internationalising is not easy at all. All these firms from
emerging economies have to face various challenges, when trying to
internationalise. Some of them arise from to political, social differences
while some are of pure economic nature. Some of these challenges are
discussed below:

Late Mover Disadvantage

We all have discussed the first mover advantage to great lengths in our
classroom, but now we should learn to appreciate the other side of the
coin. All the first world firms, who led the globalisation torch, felt a certain
upper hand when they entered less developed markets. Their product was
novel to the market and the resource acquisition (for production) was less
competitive.
But, when the firms from the emerging markets enter foreign markets,
they face extreme competition from existing firms. Due to faster
technology diffusion in this age, many native and foreign firms are present
in almost all the attractive markets, which leads to heavy competition and
low sales. Low sales further slows the process of achieving Economies of
Scale and thus competitiveness.

Resource Crunch
When TMNCs try to expand aggressively, they feel resource crunch.
Discussing only the raw materials, Government policies at home are
generally cautious to prevent accumulation of natural resources with a
few firms. In target markets, there is again a fierce competition to acquire
limited available resources. This stalls the expansion process for TMNCs.

Currency Woes
Emerging market currencies are generally weaker compared to those of
developed nations. This generally helps TMNCs to be competitive in

foreign markets. But as the emerging economies are growing, their

currencies are strengthening. This is causing a fall in the competitiveness
and thus ROI for TMNCs and is again preventing them to expand freely.

National Inexperience
Most of todays developed countries were the imperial and colonial powers
of the past, and occupied emerging markets for the long time. They had
the detailed knowledge about social and cultural aspects of emerging
markets. When the firms from developed countries internationalised, they
leveraged this knowledge to create profitable businesses.
On the other hand, the firms from emerging markets are devoid of any
such knowledge. It takes them longer time to absorb culture of foreign
markets and adapt their offerings accordingly. This companies are
generally banking on cultural similarities to carry their products. Firms
from developed countries are more capable of developing novel products
or creating desire for their products.

Fierce Competition
Most TMNCs do not have an upper hand in technology, quality, patents or
creativity. In other words, many of them tend to provide similar products
or services. The lack of originality and uniqueness puts everyone in a price
war, which eventually eliminates profit.

Skilled Workforce Deficit

Many of the emerging countries are rich in human resource. But they are
struggling with the issue of skill development. Due to lack of quality
education, the human resource is not skilled enough to meet the industry
criteria. As the result, TMNCs are facing a shortage of skilled work force to
carry their business forward.

Financial Management Challenges

Valuation of foreign firm, which is being acquired are generally very high
and the high premium paid of such acquisition doesnt easily translated
into real benefits which in cash. Most Indian firms are small in size and
many of the target firms which are being acquired are much large in size,
posing challenges with assimilation of these firms
Raising debt/cash in emerging markets is difficult and expensive, because
of high interest rates and under developed bond market. Underdeveloped
Foreign exchange markets in emerging economies pose another challenge
as Indian currency is very volatile and leads to frequent forex losses
for TMNCs

Cultural Differences
Because of cultural difference, it is difficult to integrate acquire firm fully
in terms of workforce. Also inexperience of TMNC managers in this area is
posing major challenges in fully integrating the facilities. TMNCs are
generally not known for leaders in Innovation and research, which is
challenge to acquire firm which are innovation centric.
Work environment in developed markets is much more flexible and this
difference sometimes creates dissonance when TMNCs go for inorganic
growth in foreign markets.

Protectionism
In developed markets, governments are very protective of their own
businesses. To insulate them from completion from foreign firms, they
create many trade barriers for TMNCs. This may range from rejection of
export consignments to blocking of any potential acquisition.

Stricter Standards
In emerging markets, the product standards are generally not very strict.
But developed countries are very rigid about health, environment and
quality standards for products. As a result, when TMNCs enter these
markets, the feel the need to completely overhaul their production
processes and cost structures to meet the given standards.

Lagging Technology
In developed markets, firms usually bank on innovation to beat the
competition and invest heavily in R&D activities. TMNCs are, in generally,
banking on the cost advantage to stay competitive. This leads to lowering
of profit margins for them and which in turn reduces the capital available
for expansion process.
This submission has sought to place the rise of TMNCs in context, in light
of the current economic downturn and the challenges inherent in their rise
for MNCs themselves as well as for home and host countries. Whatever
the tensions and temporary setbacks, the great number of firms
undertaking FDI will build an ever more interconnected and integrated
international production system. Furthermore, rather than focusing on
differences between emerging market MNCs and their developed country
counterparts, it is vital to understand why different emerging market
MNEs adopt different approaches to OFDI, as well as their effects.
Growth can be sustained only if TNCs can ensure continued access to
inputs such as talent, energy, raw materials and capitala difficult task in
the face of increasing competition. Adapting to the needs and tastes of
local consumers has been a key strength of TMC development. As TMCs

grow and serve increasingly diverse consumer markets, they will need to
maintain this local knowledge on an international scale.
TMCs show themselves to be consummate improvisers when it comes to
innovation. In the future, however, many will need to undertake
innovation activities in a more replicable fashion and diversify from a
focus on product development to include more invention and concept
generation.
The key challenge facing all aspirational TMCs is how to achieve growth on
a global scale while maintaining the local practices and mind sets that
made them so successful in the first place. Evolving business models that
combine the best of both worlds will be essential if they are to prevent
their growing pains from becoming a constraint on their expansionand if
they are to achieve and sustain high performance.