International Firms and Emerging Market

The world's emerging economies are witnessing demographic growth. The increase in population has resulted in the establishment of consumption hubs for multinational corporations. Product and service demand has increased in China, Mexico, Russia, South Africa, and Brazil. Multinational corporations have taken advantage of increased demand to extend their activities into these countries, resulting in increased growth and earnings. Similarly, the host countries saw an uptick in exports, an improvement in their balance of payment and currency reserves, decreased unemployment, access to higher technology, and an increased fiscal situation as a result of their overseas activities. However, there are political, cultural and economic differences between host and home country that is likely affect the multinational corporations as they move to emerging markets. Thus, this paper aims to analyze the cultural, political, legal and economic implications for international firms operating in emerging markets as well as address the most relevant macro-environmental factor that companies should consider as they strategize to move to the developing markets.

Implications for International Firm Doing Business in Developing Country

Developing nations have been the fast-growing markets around the globe since the 1990s for consumption of the services and products. The increase in the use of product and services in these markets has continued to attract multinational corporations that aim to expand their operations and profitability (Aenlle, 2017). However, the multinational corporations face legal, political, cultural and economic implications as they move to the developing nations.

Political Implications

The difference in political systems influences the operations of international firms in the emerging markets. A country political system has an impact on its labor, capital market and products (Cavusgil, Knight, & Riesenberger, 2012, p.129). In socialist societies such as China, employees cannot form independent labor unions, and this affects the wage level. The effect is that the international firms can enjoy low wages in their production endeavors. In other emerging nations such as South Africa, the social environment significantly affect the operation of multinational corporations (Henisz and Zelner, 2010). The government in South Africa pursues a social objective where it requires the local companies to transfer assets to disenfranchised native communities. The transfer uses the arbitrary measure to price property, and this makes it difficult for the international firms to determine the value of South African companies, and this affects their assessment of potential partners.

Similarly, the conflicts between regional, ethnic and linguistic groups in the emerging markets also affect the multinational corporations. In Malaysia, for example, the international firms should only enter into a joint venture after determining if the prospective associates belong to the dominant Chinese community or the majority Malay community (Khanna, Palepu and Sinha, 2005). The move is to avoid the likely conflict with the government asset transfer policy from Chinese to Malays. The system was meant to prevent tensions between the Malay have-nots and Chinese have’s. Similarly, the ongoing war against the ISIS militants has a considerable effect on the multinational companies exploring oil in the region. In south China has also been experiencing an escalation of tension that can negatively affect multinational investment in these lands

Moreover, most of the emerging economies are new democracies characterized by weak legal systems (Doole & Lowe, 2004, p.16). They are also likely to experience nationalistic sentiments and ethnic tensions particularly when there is an economic slowdown. Majority of people tend to blame external factors, and in most cases, it can lead to expulsion or victimization of important economic segments such as multinational companies. The riots and conflicts can result in confiscation of the properties of international companies. It some cases the tensions can lead to the formation of fractures along ethnic and religious lines. The impact is the lack of peace and suitable environment for investment. In some cases, a rise in unemployment in these economies can lead to uprising and instability that may negatively affect foreign investors. In South Africa for instance, the falling commodity prices in the first quarter of 2014 led to labor unrest which significantly affects the multinational firms in the mining industry (Khanna et al., 2005). In developing nations such as China and Russia that covers larger geographical areas, such unrest can lead to an untold effect on the investment of multinational companies.

Cultural implications

Culture can also have an impact on the operations of the multinational corporations in emerging markets. Doole & Lowe (2004) defines cultures as an accumulation of beliefs, behavioral patterns, social values and norms of people living in a given society (p.8). Therefore, culture represents a collection of experiences of a society and its impact on individual reaction and decision-making concerning everyday activities. The difference in culture can exist in religion, language, and social standards and this can influence the behavior of local consumers as well as business customers of a multinational company operating in emerging markets (Adekola & Sergi, 2007, p.2). International companies face challenges having cross-cultural competencies in the emerging markets.

The Business Model of Intercultural Analysis highlights some of the cross-cultural challenges that firms are operating in developing countries faces (Hummel, 2012). Communication is a cultural aspect that has a significant effect on business operations. The use of English with non-native speakers and the nuances of non-verbal communication can affect the ability of a company operating in cross-cultures to achieve its business objectives. In emerging markets in East Asia such as China and Japan, communication is very indirect and subtle. Therefore, direct style of communication used by firms from America such as Ford motors can easily lead to serious offense despite the best intentions (Rogers, 2017). The Asian message rarely uses the word “no.” Therefore, an American manager operating in China may hear Chinese use “we shall see,” “we shall study it” and “maybe” without knowing that these words represent no in China (Hummel, 2012). Failure to know these cues lead to time and money wastage, communication failure and loss of business relationships and opportunity.

The communication challenges also arise in global branding, corporate values and messaging. Companies operating in developing countries may have difficulties translating the global brand, and message in a manner that is culturally fluent. An international firm also needs to localize it messaging. For example, an American company such as Google that is expanding in emerging markets such as India need to translate every aspect of its communication to meet the cultural communication aspects of India (Purnell, 2017). In most cases, the value proposition may be valid, but it may occur in a way that violates the cultural expectations and norms.

Cultural themes may also affect business in the developing countries. Every society in the world has it unique themes that influence how they carry out business. In China, for example, cultural ideas have their roots in Confucian values such as thrift, endurance, filial piety and trustworthiness (Hummel, 2012). These values have rooted in Chinese consciousness. For instance, Chinese negotiation teams usually seek protracted negotiation to test how they counterpart can endure. They can start the bargain with a low offer to allow for extensive bargaining so that they can show endurance and evaluate how the other partners demonstrate that quality (Hummel, 2012). If there is a disconnect or a company fail to show patience, it will lose a business opportunity.

Legal Implications

The operation of an international corporation in the emerging markets is influenced not only by home country laws but also by the legislation of the host country and those present in the international arena (Doole & Lowe, 2004, p.12). However, most firms that operate in the developing countries face adaptability and flexibility challenges concerning the law and other legal issues in these markets. The problem arises because a firm has to understand three dimensions of legislation that is local, international and domestic laws (Korutaro and Biekpe, 2013, p.42) Multinational companies may experience a rise in the cost of production duct to high taxes imposed in the developing nation. These firms may also be forced to bear the risk of lack of intellectual property protection that may adversely affect their competitiveness in these markets (Doole & Lowe, 2004, p.15). In some cases, they may have to grapple with ambiguous rules and regulations as they carry out their day to day operations.

Still, these companies have to face policy risk. Most governments of these emerging market reduce the financial returns of foreign companies through discriminatory changes laws and regulations instead of outright seizures. For example, in 1998, the Georgian government interfered with U.S.-based AES-Telasi Corporation ability to pass cost and another risk to the consumer that would make it earn 20% return (Henisz and Zelner, 2010). The Georgian government demanded that Telasi pay taxes for what it had not received and this resulted in a shareholders loss of $300 million.

Economic Implications

Economic factors can also influence a company operating in the developing countries. These factors include government economic policies, economic systems, interest rate, the rate of inflation and business cycle. For example in 2014, developing world economies such as South Africa, Russia, Argentina and Turkey experiences significant currency devaluation due to the tapering of the federal monetary stimulus the U.S. The fluctuation caused foreign firms to cool their financial position in these countries (Flota, 2014, p.52). Furthermore, more most of these developing nations have high wealth disparities. While these markets are open and have new consumers with high purchasing power necessary for exporting firms, the disparity of wealth in rural and urban areas is likely to affect the business operations of international companies. For example, China possesses significant resources and has a larger population that U.S. and EU but its capita income are one-sixth that of a worker in U.S. The disparities lead to operational challenges for international firms (Giachetti, 2016, p. 330). A similar trend is also present in other countries such as Brazil, Mexico, and India.

The presence of cheap labor and raw materials in most developing nations is an advantage to most firms that want to expand their operations to these markets (Rogers, 2017). Most of these countries have low per capita income. Take, for example, China that has a large population than U.S. but has lower per capita income. The low-income among the citizens implies that there is also cheap labor. Similarly, most of these nations are less industrialized and so unable to convert their raw material to finished product (Giachetti, 2016, p. 334). The availability of this raw material is an opportunity for investment for most multinational companies.

Therefore, a firm that wants to invest in the developing nations should have a good grasp of the political atmosphere prevailing in the potential host country, the cultural aspect of the society, the regulations and laws governing business transactions as well as economic factors that can impact its operations and profitability. An international should consider the political stability and the will of government on overseas investments. It should also endeavor to carry out a cross-cultural study to these countries. Finally, it should consider the legal and economic factors such as taxation laws, fluctuation in currency as well as distributions of income before making any overseas investment.

Most Relevant Macro-environmental Factor for a firm investing in Emerging Markets

Companies aiming to expand their operations to developing countries should consider political, economic, legal, and cultural factors because they have a profound effect on business activities. Even though a firm should examine all these factors before making an overseas move, culture remains the most relevant aspect that any international company should consider (Cavusgil et al., 2012, p.127). As mentioned in the previous section, culture is broad and complex because it differs from society to society. It also has dimensions including language, religion, norms, beliefs, and social values. These factors influence one's behavior and opinion. They also affect the actions of business customers and consumers in the emerging markets. The attitudes and customs of a given society influence the production of a good or a service and how it is distributed to the community. They also affect the way a consumer respond and use these services and products. Therefore, before production takes place culture plays a central role.

Communication, for example, would influence how the company communicates its message to consumers and business partners. The language of communication would dictate whether the message is culturally acceptable and can be heard by the intended audiences. It will affect negotiations and contractual agreements, all of which are vital for any business operations. Similarly, an understanding of group dynamics can have a great impact on sales. In individualistic cultures, for example, those in the U.S. consumption decisions are made by a single individual. However, in socialist cultures such as those in China, groups dictate the decision to use a given product or service. These examples demonstrate that beliefs and social values play a considerable role in a very aspect of business activity from production to sales to use by the consumers. Therefore, an understanding of culture is the most important endeavor that any international company should acquire.



































References

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