Latest globalization trend being observed is rise inemerging market multinationals FDI. Over the past several years there are manycrucial sources of FDI that have led to flow of FDI from the emerging marketmultinationals. There are many nations like Singapore, Malaysia, India, Russia andChina that are encouraging the promotion of FDI to other countries of theworld. Several emerging market multi-nationals are embarking on the policy ofinternationalization as they are considering their multinational as a uniqueproduct of their home economy (Gilpin, 2001). According to John Dunning’s OLI paradigm, FDI is the mostsuitable form of international business if three advantages are beingsatisfied.
The firm needs to get ownership advantages implying resources of thefirm which can be transferable across borders (Dunning, 1993).Through this the organization is able to get competitive advantages in theoverseas markets. Secondly, MNC have locational advantage which helps themultinationals to create value that it is not able to generate in its homecountry.
Such advantages can be relating to accessibility to local markets andto resources like human capital and raw materials. The third advantage whichmakes a multinational company to diversify its business in the overseas marketsis internalization advantage (Dunning, 1981). Suchadvantages can arise from the transaction cost of international markets.Companies can organize certain operations in a more effective mannerinternally. Traditional theories relating to FDI flows have been mainlyfocusing on firm-specific or the oligopolistic advantages owned by themulti-nationals and this is an important pre-requisite for the FDI flows (Vernon, 1966). Most ofthese theories provide an explanation of FDI as an operation to exploitownership or proprietary assets (Kindleberger, 1969). In this the focus is laid onthe fact that the multinationals performing FDI are mostly economically strongand dominating due to which they are able to enter other markets or countriesfor example Apple company has been able to successfully enter many countries ofthe world.
(Business-to-you.com, 2016)According to many researches conducted lately it has beenfound that there is rising number of multinationals that are being exposed tothe weaknesses or drawbacks of the classical theories that entirely fail to explainthe FDI which is taking place lately from the emerging economies to theadvanced economy of the world (Gammeltoft, et al., 2010).
The changes in the FDI theory have found that firms areseeking to increase their assets by making overseas investments, generally thisis being done in parallel with the asset exploitation operations (Wesson, 1999). OLI paradigm is the leadingtheory for explaining of the FDI flows, but the recent changes in these flowstaking place from the emerging markets multinationals can be explained with thehelp of other theories like LLL (Linkage, Leverage, and Learning) approach.According to this theory firms are making their investments overseas for thepurpose of evolving their competitive advantage by making use of linkage,leverage, and learning (Mathews, 2006). FDI theory are mostlydifferentiating in between FDI that are either seeking new markets or higherefficiency or strategic assets or resources (Dunning & Lundan, 2008). There aremany empirical evidence and case studies which show that emerging marketmultinationals like from China, Taiwan, and Indonesia, etc.
that their firmsare mostly making efforts to expand overseas for acquiring more assets andgetting advantages like more technical know-how or natural resources etc. (Knoerich, 2010). Multinationals from the emerging economies are generallyhaving weak ownership advantages along with firm specific capabilities whenthey are making investments in developed countries of the world from theperspective of competitive weakness (Luo, et al., 2010). It has been observed in severalresearches that even the MNCs from developed countries are at times makinginvestments abroad from seeking assets and advantages (Shan, et al., 1999). Certain scholars are of theview that the multinationals from the emerging economies are systematicallydiffering from the multinationals that are originating from the industrializedeconomies. Due to this there is a need for developing of a fresh theory forexplaining their characteristics (Mathews, 2006).
On the other hand there arecertain scholars who are of the opinion that the existing theories need not beabandoned too early and they are still having the ability to provideexplanation for the expansion of the emerging market multinationals (Narula, 2012). Multinationals from the emerging economies are havingcomparatively less experiential knowledge in performing global activities (Meyer & Thaijongrak, 2013). These MNCsare likely to have higher sensitivity to the locational advantages as well asdisadvantages. Due to this they are likely to have motivation for seeking ofmore learning avenues and are likely to be affected more by entry barriers inhost nations in comparison to their experienced multinationals from theindustrialized nations (Peng, 2012).FDI is now getting attracted to all such locations that areproviding better advantages in terms of markets or resources or there areattractive conditions in concern to infrastructure or institutions (Nadkarni, et al., 2010).
The locationadvantage is a major decision for any particular firm while expandinginternationally (Narula, 2012). It is owingto the interaction of the organization’s particular advantages with theparticular location advantages available at the likely host location whichmakes any MNC to operate or diversify in such location. For instance, BhartiAirtel an Indian MNC has been able to successfully expand its mobile network toSouth African countries as it is able to benefit from the advantages availableto it in these locations. All the firms that are diversifying globally are primarilydoing to such locations where they are able to redeploy their globallytransferable proprietary resources or abilities for its profitable use and forexploring of their resource base (Barney, 1991). It is due to this the choice ofFDI flows is being guided by the interaction of the organization with the hostlocation. Several MNCs from the emerging economies are evolving as they areexperiencing the internationalization process (Johanson & Vahlne, 2009). By operatinginternationally, they can gather experience along with other several aspectslike knowledge of the international business environment and in particular ofthe host countries (Clarke JE, et al.
, 2012). This helpsin the evaluation of the different risk and opportunities thus helping inlowering the marginal cost of additional entries. Such knowledge can be easilyshared within the firm’s network or among different companies that are originatingfrom a single nation (Tan & Meyer, 2012). Gathered experience of an organization, its network ofbusiness along with its domicile community is assisting it to take a decisionof a particular location.
MNCs from the emerging nations are generally havingless maturity along with experience in managing the global entry barriers. Dueto this they are stressing on their learning procedures while taking decisionsof making investments in overseas locations (Meyer & Thaijongrak, 2013). As theseMNCs are having comparatively less maturity and experience therefore it isinfluencing the choice of business location in comparison to the MNCs fromindustrialized nations while making their choice of performing business. MNCs from the emerging nations is rapidly increasing due towhich their relative position on the international platform has risen in theinitial decade of the 21st century. The recent increase of MNCs fromthe emerging nations like Russia, India, and China are showing the expansion ofthe increasing diversity of MNCs. Most of the emerging market multinationalsare lacking the popular brands or a cutting edge technology which is beingconsidered to be a main driver of any MNC for the overseas FDI (Rugman, 2009). The main reason for the emerging markets MNCs to diversifyor have outward FDI is due to their possession of capabilities like processinnovations using which they are able to reduce their manufacturing costwithout lowering the quality of their products (Zeng & Williamson, 2007).
Forinstance, Tata Motors innovation of Tata Nano car which was a low cost carproduced in India on the concept of having no frill strategy. This innovationhas helped the company to expand its sales to other countries. Frugalinnovation is concerning production of innovative products which are in thebeginning being designed for the requirements of an emerging economy, but ithelps them to make their entry and get a niche for their products in thedeveloped countries of the world (Govindarajan & Ramamurti, 2011). Forinstance, Biocon is an India’s premier bio-pharma company which has madestrategic approach towards delivering affordable healthcare solutions for thepatients in India. Subsequently, this helped the company to extend itsinnovative products and healthcare solutions across the globe.
Using suchinnovative products it has managed to have a substantial FDI flow to severalcountries of the world. FDI flows from the emerging economies are doing forenhancing growth, output, better productivity, and efficiency, know-how (Kojima & Ozawa, 1984). According toInstitutional theory, Scott provides another framework that is based on threepillars that are the regulative pillar, the normative pillar, and the cognitivepillar. The regulative pillar concerns the formal rules along with theenforcement system that is being controlled and enforced through institutionalactors on which the firms depend like as the state (North, 1990).The normative pillar includes the values and norms of a society that helps indefining the socially accepted behavior of the firm’s actors through comparingthem with the existing created standards. MNCs are being expected to managewith different types of pressures which they have to face on account of thebehaviors, norms and values which are being considered legitimate in variousnations.
This is likely to put major impact on the competitiveness along withthe firm’s practices. The third and the final pillar is the cognitive pillar.It is concerning the social values, interpretations, and cultural beliefs whichare getting the cultural support which is being internalized throughorganizations. It is framing the nature of social reality along with frames bywhich an implication is reached (Scott, 2008).Thus, the country specific advantage that is changes in country also promoteemerging multinationals for FDI.Researches have shown that emerging market MNCs are affectedby the local, social, and cultural environment and this is also influencingtheir global strategies (Luo, et al., 2011). These firms areinternationalizing for acquisition of new resources which are not available intheir domestic institutional environments (Wang, et al.
, 2012). For instance Tata Motorsacquisition of Jaguar an international brand has helped it in FDI flows tooverseas markets and in getting a brand which is globally recognized. There aremany empirical researches on the MNCs from China which have reflected aninterconnectivity in between institutional legacies and the management’sdynamic capabilities like political awareness or flexibility in theirstrategies by which they are able to make use of international strategies (Buckley, et al., 2007). Support fromthe government of China to its MNCs has influenced its risk taking capabilitiesand lowered the significance of learning from earlier knowledge and experience.This has provided a boost to the new companies for entering overseas markets. Firms in emerging economies are confronted with businessenvironment having several market imperfections that are generally termed as”Institutional Voids” (Meyer, et al.
, 2009). Thus, suchcompanies make efforts in evolving their capabilities and resources for fillingup the gap or overcoming of these voids. After they have been able to developsuch capabilities, it is able to provide them with a base for its localexpansion along with global expansion.
These are crucial capabilities whichhelp the emerging economy MNCs to get competitive advantage in the domesticmarket along with certain benefits in some overseas markets. From theinstitutional point of view, capabilities accomplished by the MNCs of theemerging markets in their local economy is helping them to diversifyconveniently to such locations where they are able to get same kind ofinstitutional situations or political risks (Del Sol & Kogan, 2007). Porter’s Diamond Model was developed by Michael Porter. Itis a tool that is being utilized for evaluating the external competitiveenvironment or the market place.
This assists the firms to determine theirrelative strength and provide the explanation for the reasons due to which someindustries are becoming competitive or owning regional benefits. This model isbased on four factors that are firm’s strategies and rivalry, factorconditions, related and supporting industries and the factor input conditions.For instance, good automobile brands like Audi have been able to get regionaladvantage in countries such as Germany as they are into the production of highpower cars. The automobile manufacturing industry is having a regionaladvantages in Germany as they are able to suffice the four key elements underthe Porter’s Diamond Model.
As there are several car manufacturers in Germany therefore,there is a strong competition among these companies. It is pressurizing to makeuse of more innovative products that are catering to the changing requirementsof the customers in a better way. Related and supporting industries like ironand steel industry are present in Germany. This is helping it to provide therequired inputs like steel, trained personnel, financial institutions forcapital and IT infrastructure etc. The factor conditions comprise of theskilled and experienced engineers from its leading universities along withstress on scientific research by the government is assisting in giving anencouragement to the automobile industry in Germany.
It is owing to such conditions that are present in advancedcountries that the MNEs from emerging economies are making efforts to expandglobally. Moreover, the MNCs from emerging economies are having comparativeadvantage over the MNEs from industrialized nations when they are required toperform under weak institutional environment. This is because they are havingthe capability in managing incomplete, inconsistent, or unstable institutionalenvironment (Spencer & Gomez, 2011). It is due totheir experience in performing under dynamic institutional environment andtheir close relationship with their home nation governments that is leading tothe strengthening of the MNCs from emerging markets. These MNCs are having thecapability of undertaking risk due to political instability. As they areembedded under inter-governmental relationships which mean that in case ofhostile political actions can lead to getting a supportive response from thehome nation government.
It is due to such reasons that the emerging market MNCsare developing capabilities by which they are able to respond to the marketchanges in a better way. Thus, it can be concluded that it is not only the existingtheories like OLI paradigm of Dunning, but also other theories like porterdiamond model etc., can help in understanding the expanding decisions ofemerging market multinationals at a fast pace. Owing to various reasons likeacquiring of strategic assets in developing countries or for developing theircapabilities for competing in uncertain business environment like in case ofSouth Africa, etc.
that the MNCs of emerging economies are expanding worldwide.