In recent times, emerging markets have attracted a great deal of attention from the rest of the world because they have become the motors of global economic growth. This has been accompanied by two distinct trends: a boom in investment from corporations in developed nations, and the rise of homegrown multinationals. A recent book by Wharton management professor Mauro F. Guillén and Esteban Garcia-Canal, professor of business at the University of Oviedo, explores the winning strategies of emerging multinationals as well as the lessons that can be learned from today’s more globalized distribution of power.
Knowledge@Wharton spoke with the authors of Emerging Markets Rule: Growth Strategies of the New Global Giants to examine this phenomenon in greater depth.
An edited version of the transcript appears below.
Mauro. F. Guillén: Emerging markets have become key launching pads for new multinational firms. Many enjoy production cost advantages in the home country. Others have ventured abroad using the brands and technologies developed in an emerging economy, which have proved to be useful in developed markets as well as other emerging economies. They have also learned in the home country how to deal with government regulation. The global economy has become a two-way street: Firms from emerging economies are now every bit as capable and competitive as companies from the U.S., Europe and Japan. The global playing field is now level.
K@W: In terms of their numbers, how important are emerging-market multinational firms?
Esteban Garcia-Canal: Very important indeed. About 41% of new flows of foreign direct investment in the world originate from emerging economies, and about 30% of the 100,000 multinational firms in the world come from emerging economies. At the current pace, companies from China, India, Mexico, Brazil, Indonesia and other emerging giants will soon represent more than half of the universe of multinational firms and foreign investment in the world.
K@W: Are emerging-market multinationals mostly active in low-tech or natural resource-intensive fields?
Guillén: Not at all. Consider the example of Embraer, a Brazilian firm that has recently become the largest maker of regional jet aircraft. Haier of China has become a powerhouse in household appliances, and it is already the world’s largest brand by market share. Argentina’s Tenaris makes high-tech steel tubing for oil exploration and extraction, and also is the world’s largest firm in its segment. Other firms to watch are the Indian IT giants, like Infosys and Tata Consultancy Services. These examples show that it is simply not true that emerging-market multinationals are unsophisticated or ill-prepared to compete in this knowledge-based economy. They have learned fast how to compete in a technology-driven world.
K@W: Some emerging-market multinationals have come up with interesting business models. What, for example, is “the Cemex way” and what can be learned from it?
Garcia-Canal: It is a value-creation program established by Cemex, a company that has grown in a very aggressive way through acquisitions. This Mexican firm has become one of the world’s largest cement producers. When you acquire a company, a good part of the synergies comes from the coordination of the operational and management processes of the acquirer and the acquired. This program was launched by Cemex specifically to smooth out and correctly execute this process of integration.They focus on detecting the best practices for all of the internal corporate procedures and transferring them throughout the entire corporation. The process begins with benchmarking and involves transfers of both entire best practices and cherry picking of specific practices before transferring them.
Guillén: This Cemex program shows that a large number of emerging multinationals have learned how to expand internationally through acquisitions. But, generally speaking, emerging multinationals have provided many examples of know-how not only when it comes to managing the companies they bought, but about buying sensibly — i.e., acquiring those companies whose incorporation made strategic sense and generated added value to the company as a whole. Tenaris, an Argentine firm, is a good example. This company managed to become the world leader in steel tubing thanks to its bold strategy of globe-spanning acquisitions, which gave it the necessary geographical reach to provide its customers — the major oil companies — with fast deliveries throughout the world
K@W: What can you tell us about the experience of Natura Cosméticos, a Brazilian firm, that is making great international inroads?
Garcia-Canal: Natura proves that cumulative experience in niche markets in the home country can be a launching pad for international expansion. Natura sources ingredients from the Amazon jungle, extracting them sustainably and responsibly. This positioning, along with its system of door-to-door distribution, has left Natura without rivals in market segments that are inaccessible to conventional multinationals, whether or not those rivals sell door-to-door or are positioned in lower-priced niches. In this way, these niches are an excellent foundation for international expansion because they enable the company to compete with more established rivals using different competitive tools.
Guillén: It is important to realize that being a niche player in just one country does not allow you to grow much. But pursuing a narrow bridge in a large number of national markets can be a winning strategy.
K@W: What lessons can American, European and Japanese multinationals learn from emerging multinationals??
Garcia-Canal: Generally speaking, the most salient common element characterizing the global expansion of multinationals from emerging nations is their accelerated pace of internationalization. Most of the emerging-market multinationals were purely domestic competitors just a decade or two ago. They have expanded globally without hesitating much about the sequence of countries to enter or whether they had all of the needed resources at their disposal. What they have done is make a virtue out of necessity. Taiwan’s Acer, the world’s second-largest computer brand, is a classic example in this respect. Given that they lacked the financial and organizational resources to enter multiple foreign markets, they created a global network of alliances with local partners, which also enabled them to be very effective at local market adaptation.
K@W: In the final chapter of your book, you talk about the need to challenge sacred cows. What style of leadership do you suggest for American and European executives who want to lead successful global firms?
Guillén: Basically, the style of leadership that is required today is creative and simple at the same time. We argue in the book that there are seven basic principles: executing before strategizing, catering to the niches, scaling to win, embracing chaos, acquiring smart, expanding with abandon, and taking on the sacred cows. Many companies in Europe and the U.S. have lost touch with the new realities of the global economy and are reluctant to change their ways, thinking that the emerging-market multinationals are a temporary phenomenon. A few like GE, Philips and Volkswagen have reinvented themselves by implementing these principles. The success of the emerging giants can be emulated. That’s the main message of our book.
Originally published by Knowledge@Wharton on December 17, 2012.