Rise and Growing Role of Multinational Enterprises from the Asia Pacific in the Global Economy
Multinational Enterprises from the Asia Pacific
Instructions: How can we account for the rise and growing role of multinational enterprises from the Asia Pacific in the global economy? Specify your reasons using corporate cases of multinationals from different industries and different countries of origin.
Multinational Enterprises from the Asia Pacific
Rise and Growing Role of Multinational Enterprises from the Asia Pacific in the Global Economy
For the past 30 years, Asia had been the focus of foreign direct investment (FDI). However, in the recent past, the tide has been shifting. The outbound investment from the region has increased. According to the 2013 World Investment report by the United Nations Conference on Trade and Development, the emerging economies from the Asia Pacific accounted for 22.2 percent of the World’s 1.39 trillion dollars FDI outflows in 2012 (Cavusgil et al., 2014). This was a 3.3 percent increase on the amount of FDI outflows from the region in 2010. Currently, the Asia pacific accounts for 20 percent of the first 20 global investor economies. While globalization has been the main driving factor behind the shifting tide, there are other factors such as increased number of transnational corporations from Asia Pacific that made the region to have an increased influence on the global economy.
Reasons for rise and growing role of multinational enterprises from the Asia Pacific in the global economy
There are a number of reasons for the rise and growing role of multinational enterprises from the Asia Pacific in the global economy. One of them is the strategies that multinational enterprises from the Asia Pacific use. MNEs from the Asia Pacific have employed a number of strategies that have enhanced their presence in the global economy. One of the strategies used by these MNEs is use of acquisition (Gugler & Boie, 2008). Most multinational companies from the Asia Pacific use acquisition as the mode of entry in foreign markets. Acquisitions are not the only of entry of MNEs from Asia Pacific into the global market since they use other means such as exports. However, acquisitions are the primary mode of entry. MNEs from Asia are fond of acquisitions because of a number of reasons. One of them is that acquisitions allow them quick entry into foreign markets. By acquiring already established companies in foreign markets, Asian MNEs gain a quick access of the foreign markets. The second reason why acquisitions are a favorite method of entry into foreign markets by Asian multinationals is the acquisition of existing world class brands like such as Volvo or IBM’s PC brand. The acquisition of world class brands by the Asian companies helps them to over one of their major weaknesses, weak branding capabilities (Narula & Dunning, 2010). The third reason as to why Asian companies use acquisition as a mode of entry in foreign markets is empire building and managerial hubris.
Another strategy that is being used by Asia Pacific MNEs is the asset exploiting strategy. Asset exploiting strategy involves transferring of a company’s assets into foreign markets. Most MNEs from the Asia Pacific transfer their assets into foreign markets as a means of exploiting these markets. The use of asset exploiting strategy is determined by three main motivations. These are market-seeking FDI, efficiency-seeking FDI, and resource-seeking FDI. Market-seeking FDI is normally undertaken by companies to protect or sustain existing markets or promote or exploit new markets (Aggarwal & Urata, 2013). There are a number of reasons which make firms to engage in market-seeking efficiency. They include potential for market growth, market size, and need to adapt their products to local needs or tastes, cultural mores, and indigenous capabilities and resources. Most of the studies carried out on Asian MNEs indicate that many of the companies engage in market-seeking FDI to establish themselves internationally. According to a study by Narula and Dunning (2010), most Asian MNEs used market-seeking FDI strategies to establish themselves in foreign markets. According to the study, most of the foreign investments carried out by Asian MNEs were motivated by the attractiveness of the developed country markets. For Asian MNEs, most of their investments follow established export streams and their destinations are both neighboring countries and overseas markets. As Peng (2012) argues, marketing-seeking motivations are the result of export oriented policies that have been adopted by many Asia Pacific countries. Some of the examples of foreign investments that have been carried out by Asian Pacific multinational companies for market-seeking purposes include investments by Haier, Huawei Technologies, and TCL. The foreign investment of these companies was mainly for purposes of gaining markets for their products.
However, apart from the market-seeking motivations which make Asia Pacific MNEs to seek foreign investments, there are also push factors which compel these companies to seek investment opportunities from abroad. One of them is the harsh conditions in home markets. Most Asian MNEs face harsh conditions in their markets. These conditions are influenced by overcapacity and severe competition (Luo, Xue & Han, 2010). Overcapacity in terms of production makes most companies to have more inventory than what the market requires. Due to excessive supply and lower demand, most companies are compelled to sell their products at a lower price thereby making lower profits. The high supply level also increases the level of competition for the available. The severe competition that is compels companies to engage in negative strategies such as price cuts to attract more customers (Globerman, Peng & Shapiro, 2011). However, continued price cuts make it hard for the companies to make profits. The harsh conditions thereby make most Asian MNEs to seek for markets for their products in other countries.
The motivation behind the use of efficiency-seeking FDI among companies is to streamline the structure of market seeking or resource based investment in such a manner that the investing company can benefit from centralized control of geographically distributed activities. These gains are basically those of risk of diversification and economies of scale (Sun, Peng, Ren & Yan, 2012). Studies indicate that efficiency-seeking FDI has also been one of the motivations for foreign investment by Asian MNEs. This motivation is influenced by harsh conditions in their countries in terms of regulations, competitive pressure and government interference and equally better environments in other countries. For example, a study by Govindarajan and Ramamurti (2011) reveals that most Asian MNEs have invested heavily in African countries like Lesotho, Swaziland, Malawi, and Senegal. The investment was aimed to achieve increased efficiency. This is because there are a number of benefits in these countries such as duty free benefits and cheap labor. Resource-seeking FDI aims to acquire particular resources of higher quality at reduced cost in the foreign market. Resource-seeking FDI is normally used in situations where particular are costly to obtain in home country.
The success of MNEs from Asia Pacific can be attributed to the application of the exploiting strategy. While most companies try to exploit the markets they enter, most Asian multinationals look take their resources as well as exploit the existing ones. This has enabled them to not only acquire cheaper resources but also create markets for their products. This explains the sudden appearance and continued growth of these companies on the global economy. As Azman-Saini, Baharumshah and Law (2010) point, the sudden appearance of Asian multinationals in international markets cannot be explained by conventional internationalization strategies. Azman-Saini, Baharumshah and Law (2010) assert that Asian Pacific MNEs have taken a different approach to internationalization and this has enabled them to be successful.
Apart from the use of various strategies such as acquisition and asset exploitation, Asian Pacific companies have also a number of competitive advantages that they have exploited. These competitive advantages include expertise and technology-based features, access to home country resources, and production process capabilities (Sanfilippo, 2010).
Expertise and Technology-Based Features
Expertise and technology-based features are a crucial factor that enhances success for companies operating in a global market. The expertise and technology-based features which are crucial for the success of global companies include specialized and appropriate expertise and technology, sustainable investment in research and development (R&D), and adoption of new technologies (Athukorala, 2011). The advantages provided by these features are mainly significant in industries which rely largely on innovation. These industries include transportation and machinery equipment as well as electrical and electronic industries.
While most companies from Asia Pacific do not possess particular competitive advantages in the expertise and technology-based features, these companies rely on knowledge, expertise, and technology of their foreign partners. Most Asian Pacific MNEs are known to be good at imitating products from other companies rather than producing their own based on their developed expertise and technology. However, despite the heavy reliance on borrowed expertise and technology, there are a number of MNE from the Asia Pacific which engage in technological innovation (Kang & Jiang, 2012). An example is Haier, a household electronics producer and Hisense, a consumer electronics producer, both Chinese companies. In Japan, of the companies which have taken a lead in technological innovation is Toyota. In light of some of these success stories of Asian companies advancing technologically, it has been argued among scholars that the expertise among Asian MNEs does not comprise of knowledge as such but rather in having knowledge of how to deal with challenges that they face. According to Gilpin, (2011), Asian companies engage in accelerated internationalization, strategic innovation, and organizational innovation. This means that these companies develop expertise to deal with the challenges they face such as how to match the established multinationals in terms of innovation. Organizational innovation, on its part, has motivated Asian companies to start their businesses with an international approach from the start. This makes them to have the ability to directly engage in international business instead of adapting their businesses to international environment at a later stage of their operation. Experience in strategic innovation enables firms to engage in licensing models of technologies, contract services, or opt directly for strategic alliances (Pieterse, 2011). As such, Asia Pacific MNEs have thus strove to gain experience and expertise in innovative learning abilities, leverage, and resource generation and utilization.
Asian companies have also expertise in managing large and complex markets. A case in point is the attempt by Chinese telecommunication companies to expand their operations in Southeast Asia. The FDI of these companies thereby fits nicely in the standard internalization model. In addition, MNEs that have a western background have experience of operating in stable markets that have weak government influence and transparent regulation (Knox, Agnew & McCarthy, 2014). However, these companies find it difficult to operate in less transparent environments as well as environments that are characterized by a strong government influence on the market operations. For Asian MNEs, operating in difficult environments is not hard for them since they are used to it in their home countries. For example, the Chinese government has strong control over business operations and companies need to follow certain regulations in their operations (Hoskisson, Wright, Filatotchev & Peng, 2013). These companies are thereby used to operating in highly regulated environments and can easily thrive in similar environments. This has made companies from the Asia Pacific to survive in many business environments even where most MNEs from western countries fail.
Access to Home Country Resources
As pointed out by Anwar and Nguyen (2010), the characteristics of the home country play a crucial role in determining the nature of the ownership advantages of the initial firms. According to Anwar and Nguyen (2010), the advantages that are specific to the home country are the major factor that allows a country’s companies to invest abroad. Features that are related to home country resources normally concern clusters of expertise and knowledge, natural resources, access to various forms of financing or funds, and development of infrastructure and utilities. Developing economies are normally characterized by active involvement of the government in business activities through regulation and ownership. This is the case for most Asia Pacific countries and consequences of government involvement on the internationalization of Asian companies are significant (Bhagat, McDevitt & McDevitt, 2010). For example, in China, the government is heavily involved in internationalization activities of the Chinese MNEs. Most of the MNEs from China are offered strategic support from the government. This therefore provides them with a comparative advantage when compared to MNEs from other nations. Some of the support that most Asian MNEs receive from their respective governments includes financial aid and hindering of internal competition to allow the companies to grow large locally before going international. However, while government interference helps Asian MNEs to prosper international, in some cases it hinders their growth.
The strong government interference in the internationalization of most Asian MNEs has resulted in the development of a number of factors which influence the level of success of the MNEs on the international scene. These factors are capital market imperfections and special ownership advantages. Capital market imperfections basically make capital available to Asian MNEs at a lower rate as compared to the market rate in free markets (Johnson & Turner, 2010). Such capital is available through state-approved or guaranteed subsidies or loans. There is strong evidence which indicates that capital market imperfections are a characteristic of most Asian countries especially China. Due to the government involvement of MNEs internationalization, there is a close interaction between businesses and government officials as well as institutions. For example, in China and Philippines, banks supervise the internationalization of MNEs through providing them with funds and foreign currency (Sanfilippo, 2010). The advantages that Asia Pacific MNEs have through access of home country resources have enabled them to gain establish themselves in international markets as well as realize global growth.
Production Process Capabilities
Features related to production process capabilities basically involve production of products and products and delivery and distribution capabilities. Firms, in this case, derive their advantages from specialization. Companies can specialize in certain sectors such as automobile components, electronics, footwear, and garments. Most Asian MNEs specialize in low cost but high quality manufacturing (Athukorala, 2011). These companies thereby exploit these advantages to establish themselves internationally. For the example, the production of high quality products at a lower cost enables them to sell their products at a lower price as compared to other companies. This enables them to attract more customers in international market since most individuals can afford their products.
The increased presence of Asia Pacific MNEs also points out to the economic situation of the region. The Asian Pacific countries have been growing economically in the last 40 years. For example, China is currently an economic powerhouse that is competing with US for economic superiority (Knox, Agnew & McCarthy, 2014). Other countries in the region which have economic superiority are North Korea and Japan. To maintain their economic position in the world, these countries are engaging in foreign investments through MNEs. This explains the huge government support for MNEs from these countries.
Generally, Asia Pacific multinational companies have gained an increased global presence in the recent past. This has been influenced by a number of factors which include investment strategies used by these companies, push factors in their home countries, government support, Access to home country resources, Expertise and technology-based features, and Production process capabilities. The companies have been using strategies such as market-seeking FDI, efficiency-seeking FDI and strategy-seeking FDI which have enabled them to gain a competitive advantage in foreign markets. The MNEs have also government support which has allowed them to compete favorably in foreign markets. The application of technology and exploiting of their production capabilities have also increased the competitive advantages of Asia Pacific MNEs. These factors have therefore enabled the companies to maintain a global presence even when companies from other regions are failing.
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