Plugging resource gap through open innovation by an emerging economy multinational.
| Author | Salwan, Prashant |
| Position | Report - Abstract |
Emerging Economy Multinationals
Countries referred to as emerging economies are characterized by their low to medium income generating ability with relatively higher economic growth momentum as compared to the developed economies. The higher growth momentum is usually attributed to the emerging economy governments taking policy decisions that encourage free-market system by opening-up the economy for foreign direct investments (FDIs). Such policy changes have had immediate shocks as well as long term implications for both the domestic as well as foreign firms/investors because of the changing competitive landscape. Firms operating under such frequently changing economic conditions have to deal with the associated uncertainty and risk while taking strategic decisions. Apart from the policy / political instability, the firms operating in or out of emerging economies have to deal with issues related to shortage of skilled labor, underdeveloped capital markets, lack of necessary infrastructure, policy implementation issues etc, in varying degrees. These challenges coupled with negative public sentiment associated with foreign firms derail the FDI in-flow to emerging economies. Though FDI inflows are the primary objectives of liberalization of emerging economies, it has also caused out-flow of funds from these economies.
The outflow of funds from emerging economies to developed or other developing countries, driven by the aspirations of domestic firms to become global players to compete with the multinationals from developed countries, has given rise to many emerging economy multinationals (EEMs). While EEMs entering other developing countries / markets sounds more logical, it has been of interest to study the ones entering the developed countries and successfully competing with multinationals based out of developed economies in their terrain. Some studies have identified acquisition of new resources and capabilities as the primary reasons for EEMs entering developed markets for them to be able to better compete with developed economy multinationals both in domestic as well as foreign markets. EEMs often enter developed markets to explore as they do not possess much from their domestic experience that can be exploited enough or as-is to gain competitive advantage over competitors from developed countries. Successful exploration(s) help EEMs develop absorptive capacity that gives them competitive edge over their rivals in the long run.
Unlike their counterparts from the developed economies, the EEMs do not possess the sophisticated technological and marketing skills / knowhow that are deemed essential for business success in developed markets. Hence, it becomes very much essential for them to develop absorptive capacity as quickly as possible in order to compete. The EEMs are known to expand globally through entry modes ranging from forging pure alliances to minor/majority stake joint ventures to going it all alone through fully owned subsidiaries. Studies have revealed that EEMs are different from the developed country multinationals in terms of their relatively faster international expansions through simultaneous entry into developed and developing countries primarily through alliances and acquisitions, weaker competitive advantages, stronger political capabilities, and better organizational adaptability in general. While the EEMs are better at imitating their competitors from the developed countries, they also innovate on business model front in the context of the customer segment they target. An EEM's origin from an emerging economy makes it capable of working in challenging and uncertain environments that help them adapt to new circumstances when required in the international markets.
Some of the EEMs, e.g. from BRIC nations, have global reach and scale that are quite challenging to achieve given their origins. Vale, Gerdau and Embraer are the well-known examples of EEMs based out of Brazil. Lukoil, Gazprom, and Severstal are from Russia. TCS, Infosys, Wipro, Hindalco, Tata Steel, Tata Global Beverages, Sun Pharma are examples from India. Haier, Lenovo, Huawei are some of the well-known EEMs from China.
Resources & Capabilities Gaps of IT Companies
EEMs, because of their background, operate under constraints typically associated with emerging economies in contrast to the multinationals from developed countries. The EEMs are usually late entrants to most of the developed markets necessitating them to catch up a lot on competition front before being able to play level field with the incumbents. The EEMs are prone to participate in low/mid-tech industries because of the technology knowhow constraints they have had in the past. The multinationals from developed countries, on the other hand, have access to advanced and proprietary technology combined with powerful global brands and marketing ability. Just having access to cheap labor in their home countries does not necessarily make EEMs globally competitive as they need to overcome the burden of making this cheap labor productive as per global standards in order for them to compete globally with added constraints of limited infrastructure at their home countries. EEMs face similar challenges on the intangible assets front such as effective knowledge management, especially when they increase their scale of operation.
Given the technology constraints that EEMs have to operate with, it is interesting to look at how they have fared on high-tech industry. Though there are global giants like IBM, Microsoft, Google, and Apple among others, mostly from developed countries, there are EEMs like Lenovo, Huawei, Acer, TCS, Infosys, etc, that are competing head-on (though in selective areas) with some of these or other giants globally. While the EEMs from China have established themselves well in the computer / mobile hardware industry, the ones originating from India have done well on the IT / IT enabled services front globally. Most of these EEMs started with low-cost strategy because of access to low-cost and semiskilled labor in their home countries. This low-cost business model strategy was not of advantage for long as the developed country multinationals started globalizing their production, and later their R&D activities, in emerging economies (Lij, Kozhikode, 2009). By the time the competitors caught up on cost advantage, these EEMs had started moving up the value chain by differentiating their offerings mainly because of accelerated innovation through implementation of open innovation model to source innovations from outside the firm (Chesbrough, 2003). Open innovation thought shows the way for MNCs to look outside of the firm as well as country boundaries for knowledge creation. (Chesbrough, 2003, Chesbrough & Appleyard, 2007).
Apart from relevant technology related innovation, the Indian IT services EEMs in high tech industry used strategic acquisitions, partnerships, and / or global alliances to close the gap on capabilities front. While the EEMs from China have done some high profile acquisitions, for example, Lenovo acquiring IBM's PC division and Google's Motorola Mobility smart phone business, the services firms from India have stayed away from large acquisitions though they have continuously upgraded their products / services portfolio with acquisitions that were smaller in size but of strategic importance either for the market they are operating or for their global offerings. Indian IT services EEMs that initially lacked IP portfolio and market power to push their own brands have used acquisitions to close the resource gap selectively. To remain flexible, as required by the frequently changing technology landscape of the industry they operate, IT services EEMs have primarily used strategic alliances and partnerships with the technology leaders of the time with the ability to leverage these relationships for their and their customers' benefit to the possible extent. They also invested in process...
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