Module 2

Multinational Enterprises
and Emerging Markets

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 Multinational Enterprises (MNEs)
• Multi + National = Multinational
• Multinational Enterprise is abbreviated as MNE
• MNE is sometimes called as multinational corporation (MNC),
multinational or international corporation.
• MNE:
– Any business that has productive activities in two or more countries.
– An enterprise that produces goods or delivers services in more than one
country.
– An enterprise whose business activities are spread among at least two
countries.
– An enterprise that operates in its home country, as well as in other
country/countries (host country/countries)

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 Definition of Emerging Markets
• Emerging Markets/Emerging Countries/Emerging Economies

• An economy that is transitioning into a developed economy

• Countries that are transitioning from “developing” phase to the

“developed” phase.

• “Emerging markets” is a term that refers to an economy that

experiences considerable economic growth and possesses
some, but not all, characteristics of a developed economy.

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 Characteristics Emerging Markets
• Growth and Investment Potential: Emerging markets are often
attractive to foreign investors due to the high return on investment.

• High rates of Economic Growth: Governments of emerging

markets tend to implement policies that favour industrialisation and
rapid economic growth. Such policies lead to lower unemployment,
higher disposable income per capita, higher investments, and better
infrastructure

• Transitional Nature: Emerging markets are moving from a closed

economy to an open economy.

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 Attractiveness of Emerging Markets for
International Business
• High Return on Investment: Emerging markets are cable of
growing at a faster rate.

• High Growth: The biggest advantage of emerging markets

investment is the potential of high growth.

• Increasing Income level of middle class population

• Few Domestic Competitors

• Abundant Resources

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 Attractiveness of Emerging Markets for
International Business
• First mover advantage: Advantage gained by the MNCs as a
result of being first to the market.

• Economic Reforms

• Availability of high skilled but low cost workforce

• Growing consumer spending

• Cultural Shifts: Higher demand for personal products, private

education and healthcare services

• Demand for products and services from developed countries

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 Risk of Emerging Market
• Political Risk: Emerging market may have unstable, even volatile
government. Political unrest can cause serious consequences to the
economy and investors.
• Economic Risk: Emerging market may suffer from insufficient raw
materials, skills, and unregulated market. All of these factors may
cause a threat for the investors.
• Foreign Exchange Rate Risk: Foreign investments will typically
produce returns in local currency. As a result, investors will have to
convert the local currency back into their domestic currencies.
Decrease in the value of local currency in comparison with the
domestic currencies of the investor will have negative impact on
return.
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 Risk of Emerging Market
• Lack of Liquidity: Emerging market is less liquid than that
found in developed economies. This market imperfection
result in higher brokerage charges.

• Difficulty in Raising Capital: A poorly developed financial

system will prevent firms from having the access to financing.

• Poor Corporate Governance: Emerging market sometimes

suffer from poor corporate governance.

• Cultural differences and sensitivities:

• Inadequate Infrastructure (Physical and Legal):

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 Challenges of Emerging Markets
• Underdeveloped Financial Infrastructure:
– Financial infrastructure is the core of financial system which facilitates
flow of funds from the surplus sector to the deficit sector.

• Political Instability:
– Reduces the manager’s ability to forecast business conditions

– It discourages inward investment and reliable business environment

• Market Volatility:
– It is much higher in emerging markets. This is a concern for investors.

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 Challenges of Emerging Markets
• Currency Risk:
– The value of the emerging market currencies in terms of USD tend to
decrease

• Bureaucracy, Red Tape, and Lack of Transparency:

– Excessive requirements of license, approvals, and paper work all delay
business activities.

• Corruption:
– It is one of the major concerns in emerging market. Many emerging
markets have a culture of corruption.

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 Challenges of Emerging Markets
• Partner Availability and Qualifications:
– MNEs seek alliances with well-qualified local companies
– Well-qualified partners are not always readily available in emerging
markets

• Likely Resistance from Family Conglomerate (FC):

– FC is a large, highly diversified company that is privately owned.
– FCs control majority of economic activity and employment in emerging
markets
– FCs hold the largest market share in different industries in its country.
– FCs have various competitive advantages in their home countries,
including government protection and support, extensive network in various
industries, superior market knowledge, and access to capital.

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 Success Strategies Followed by MNCs for
Emerging Markets
• MNCs should avoid imposing global business models and practices
on the emerging markets.

• The strategies followed by MNCs in mature advanced-economy

markets are often inadequate for the emerging markets.

• Customisation for Emerging Market Needs:

– Building constructive relationships with the communities

– Understanding local conditions

– Earning customer respect and loyalties

– Setting prices appropriate for local conditions

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 Success Strategies Followed by MNCs for
Emerging Markets
• Partner with Family Conglomerates (FC):
– FCs have a deep understanding of local markets and customers.

– FCs often have political influence which will help in building helpful relationship with
governments and other key local players

– This will help in overcoming infrastructure related barriers.

• Target Governments in Emerging Markets:

– Securing EM government contracts.

– EM governments regularly announce tenders.

– EM governments formulate economic plans to build or improve national infrastructure.

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