Navigating Multinational Corporations in Emerging Markets

By: Júlia Heindel

From: Sciences Po Menton

An emerging market refers to an economic system undergoing substantial economic growth. These are systems from countries that display several attributes of a developed economy, which are undergoing a transformation from an underdeveloped, low-income, typically pre-industrial economy to a modern, industrial economy characterized by an enhanced quality of life.

The growing presence of multinational corporations (MNCs) conducting operations in emerging markets and less-developed regions has become a defining feature of today's global economy. In such environments, enterprises contend with more lenient environmental regulations, limited labour protections, abundant natural resources, lower-quality institutional systems, weak innovation networks and lower labour costs. Yet, they are also characterised by rapid economic growth and increasing consumer demand, which undoubtedly attract MNCs seeking expansion. Therefore, numerous multinational corporations have successfully executed internationalisation strategies in response to the advantages prevalent in such environments. This article provides a comprehensive analysis of the impact of MNCs in emerging markets, emphasising both the opportunities and challenges.

It must be noted that emerging markets comprise an heterogeneous range of countries, each with its unique appeal to MNCS. Nevertheless, how can enterprises effectively initiate and oversee business operations within a host nation, especially when competing with local firms, in circumstances where foreign investors face a lack of familiarity with the local business environment? This may be overlooked as a disadvantage for the foreign investor; however, enterprises venturing into foreign markets assuredly possess a substantial competitive advantage capable of surmounting the inherent challenges (Hymer, 1976). Given the nuanced advantages held by multinational corporations, there arose a necessity to formulate the theory of internationalisation. This theory scrutinises corporate conduct on the global stage. An enterprise expands by assimilating new markets, and it persists in doing so until the associated costs of further expansion surpass the accrued benefits (Buckley, 2020). While it is essential for companies to market their products in their home countries to maintain proximity to their clients, they tend to prioritise operating with greater efficiency in other countries, capitalising on their specific advantages. Thus, while expanding their activities to international borders, companies are searching for enhanced productivity.

Many emerging markets offer a competitive advantage in terms of lower labour costs, which is particularly appealing for manufacturing, outsourcing, and service industries. Competitive advantage involves the methods by which a company outperforms its rivals in producing goods or providing services, leading to enhanced profit margins and value creation for the company and its shareholders. It is internally generated and serves as a distinguishing factor that sets the business apart from its competition. For instance, the Philippines is being evaluated as one of the most prospective destinations for software development. The growth of the business process outsourcing (BPO) industry in the Philippines, powered by global tech companies such as Google, Accenture, Facebook and IBM, showcases the implication of lower labour costs. The IT industry in the Philippines, which not only ranks among the most rapidly advancing fields but has also experts skilled in a wide range of tech stack, holds over 1 million workers in the IT outsourcing spheres (Sirosh, 2021). This BPO industry experienced a growth in revenue, escalating from $26.7 billion in 2020, to $29.5 billion in 2021 and further reaching $32.5 billion in 2022 (Danieles, 2023).

Furthermore, the abundance of natural resources, such as agricultural products, oil and minerals amplifies the appeal of emerging markets for industries heavily reliant on natural resources. Angola, for example, being the second largest oil producer in Africa, has captivated Exxonmobil's attention on undertaking ventures for oil production and exploration (Azevedo et al., 2022). The oil and gas supermajor has the potential to allocate up to $15 billion towards the exploration and development of hydrocarbon reserves in the offshore Namibe Basin of Angola by the year 2030 (Energy Capital Power, 2023). Nevertheless, Angola's fiscal stability and incentives for investment are also a highly compelling factor designed to draw the attention of global investors (Bond, 2023).

Rising foreign direct investment (FDI) in India is another example of an emerging market's potential to create opportunities for MNCs. India exhibits the capacity to allure FDI inflows totaling $475 billion within the forthcoming five years (KAPADIA, 2022). The reasonably lower wages, duty & tax exemptions and an evolving tech ecosystem attract MNCs to execute their operations in the country, especially regarding the retail sector, which overcame regulatory changes to create a more favourable business environment. Amazon, Walmart, IBM, Coca Cola, Nestle and Microsoft are some of the various MNCs which entered India's hub (Gupta, 2023).

Moreover, while deriving advantages from investments in emerging markets, MNCs also simultaneously contribute to the growth of those markets through capital investments, job creation, improving the proficiency of the workforce and the introduction of advanced technologies. MNCs may also invest in infrastructure projects, developing facilities such as telecommunications and other infrastructure projects. The Chinese MNC, Huawei, has played a role in the expansion of telecommunications infrastructure in Africa, thereby not only enhancing connectivity in the region but also building about 50% of Africa's 3G networks and 70% of its 4G networks (Xi, 2021).

Additionally, the burgeoning footprint of multinational corporations in emerging markets engenders a host of challenges and concerns. Shifts in governmental policies, political instability, increasing prices in transportation and regulatory ambiguity can pose risks for multinational corporations engaged in operations within these markets. The political instability in South Sudan, for instance, has introduced risks to multinational corporations operating in the oil industry. Companies such as TotalEnergies and ExxonMobil have struggled with a challenging operating environment characterised by political unrest, wars and contentious disputes concerning oil resources (Energy Voice, 2014).

Certain MNCs have also been condemned for their environmental impacts in emerging markets, including issues such as oil spilling, deforestation and pollution. The release of hazardous chemicals and the production of unsustainable manufacturing goods have raised concerns, manifesting in various MNC investment contexts. These issues encompass occurrences of deforestation activities associated with palm oil producers in Indonesia and Malaysia, as well as within the mining industry in Peru and water bottling industries in Pakistan (JONG, 2023).

As MNCs increasingly establish their foothold in emerging markets, they hold the potential to stimulate economic growth, facilitate knowledge and skill transfer, and contribute to infrastructure development. Nonetheless, this presence also gives rise to a spectrum of challenges spanning regulatory compliance, cultural nuances, ethical considerations, and competitive dynamics. Achieving equilibrium between profit-oriented objectives and social responsibility becomes indispensable for the enduring prosperity of these corporations in the context of dynamic and swiftly evolving markets. With the ongoing ascendance of emerging markets, the influence of multinational corporations will undeniably retain a pivotal role in shaping their future.

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