Probable Challenges in Globalization of Companies based in Emerging Economies

8/11/2019 Probable Challenges in Globalization of Companies based in Emerging Economies

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International BusinessStrategyProbable Challenges in Globalization of Companies based in Emerging

Economies

Sahil Chhabra 8/15/13 Roll No 39A


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Table of ContentsIntroduction ............................................................................................................................................ 2

Specific Issues ......................................................................................................................................... 2

Lack of Capital ..................................................................................................................................... 2

Lack of Quality (Conformance to Standards) ...................................................................................... 3

Lack of Brand Equity ........................................................................................................................... 3

Environmental Clearances .................................................................................................................. 3

Common Issues ....................................................................................................................................... 4

Talent Management ............................................................................................................................ 4

Pricing Pressure (Currency Volatility) ................................................................................................. 4

Market Risks ........................................................................................................................................ 5

Emerging Technologies ....................................................................................................................... 5

Social Acceptance Risk (Liability of Foreignness) ................................................................................ 5

Other Risks .......................................................................................................................................... 6

Cross Cultural Risk ........................................................................................................................... 6

Operational Risk .............................................................................................................................. 6

Geo Political Risk ............................................................................................................................. 6

Conclusion ............................................................................................................................................... 6


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Introduction

Globalization is the buzz word these days and specially in the business lanes of the emerging

nations. Organizations in these countries are now looking west-east-north-south everywhere (incontrast to the look east policy of the developed nations).

But, in this mad race to get globalized or enter the so-called MNC league sometimes the

organizations fail to do their homework. As goes the old sayingA tree with weak roots cannot

develop strong branches and hence the companies that jump into the decision of going global face

a lot of challenges. Even if we set aside the unprepared small companies, the bigger organizations

with deep pockets and great muscle power are also finding it tough to sustain in the global markets.

We can take the example of Ford Motors in this case that is struggling in the Asian markets.

While risk continues to dominate the business agenda, competition is becoming just as dominant

a feature. Market volatility, pricing pressure, variations in market performance, demanding

stakeholdersall have contributed to a global economy that encourages competitive drive. And

with that drive comes opportunity. And it is this opportunity after which everyone is running.

In this essay we will examine the challenges faced by companies of emerging economies in setting

up businesses at a global level. We will also touch upon some of the ways that these companies

use to circumvent the challenges or to overcome them. Most of these challenges are common to

any company that is growing globally irrespective of its country of origination. However, some

specific issues will also be discussed.

We will start with a few specific issues faced only by companies of emerging nations. After that

we will move on to the common issues faced by organizations worldwide.

Specific Issues

Lack of Capital

This issue can directly be translated to the issue of access to credit. Usually companies based in

emerging economies do not have the liberty to have huge investments for business expansions.

Specially looking at the associated risks and high competition in global markets the access to capital

becomes tougher for these companies.

Foraying into the international markets requires a lot of capital intensive work like advertising,

setting up of plants/offices, recruitment etc. and thus this cost becomes a major consideration forcompanies when they plan to globalize.


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One of the ways in which companies handle this issue is acquisitions in the country of interest.

This reduces the risk on the initial investment in the international market and also gives the

investors a sense of assurance. Moreover, this also gives the company a head start into the

international market by gaining some market share upfront.

Lack of Quality (Conformance to Standards)

The quality control norms of the western world are too stringent and at times are too complex for

the companies of the emerging economies. This is one of the major issues faced by organizations

these days. The quality norms especially for the food and pharmaceutical industries are very

stringent and must be strictly adhered too. One must mention here the FDA regulations present

in USA which are considered to be the most stringent in the world. In fact, according to a study,

it was revealed that most of the products being sold in the emerging and the under developed

world will not be able to pass the FDA and EU norms of quality in their current forms.

For any company venturing into these markets has to invest carefully and heavily in the R&D of

the products to adhere to these norms. One of the ways in which the companies address this issue

is to enter into a technology transfer/sharing partnership with a company that is already present

in these markets. Such an arrangement exposes the new entrant to prevailing best practices and

the quality standard requirements.

Lack of Brand Equity

This is applicable only for companies venturing into developed western markets. The brand equity

enjoyed by the local products in these countries is too much and unless the product has a special

geographical indicator tag it stands nowhere in competition with the products of the foreign

companies. For example we can take the case of Micromax: If Micromax wants to enter the US &

European markets it wont be able to compete with the brand identity of Apple and Samsungeven

if its product us superior in quality.

The perceived quality of a settled brand and the image associated with it is hard to break especially

for a brand/product from an emerging nation.

Environmental Clearances

This is a small but very important issue for companies of emerging countries trying to set up

business in advanced economies. The environmental and emission norms of the developing

countries are not so strict and when companies from these countries set up manufacturing unitsin developed world they might face a lot more stringent scrutiny and monitoring. This issue looks


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small but is very important and may even result in lock down and black listing and hence should

be taken as top priority.

Apart from these specific issues there are few common issues that are faced by any company that

is trying to go global, irrespective of the country of origin. We will be discussing few of these issuesbelow:

Common Issues

Talent Management

Managing talent in a foreign land is one of the biggest challenges for any organization. Almost all

sectors are grappling today with this issue. The major question that arises in front of the

management is: What is the correct mix of local and home country employees at a specific location.

The problems with hiring an all- local work force are multiple: Firstly it is tough to train the

complete staff about the company culture and values. Also, it may pose a challenge of language

difference and hence may be tough to collaborate with the team at the home country.

At the same time an all-foreign work force may alienate the company in the foreign land and people

may not be able to connect with it. Also, as per regulations in some countries the percentage of

foreign work force on a companys pay roll is restricted.

In this regard example of Infosys in US can be given. The company has faced many issues in the

United States regarding staffing of its offices.It has been at the centre of many controversies

because of this reason.

Pricing Pressure (Currency Volatility)

Pricing pressure builds up for any company that enters into a mature market. In most of the cases

companies incur losses on their offerings for the initial period of their entry into the foreign

markets. This is done to capture market share by offering lower than competitive pricing. But this

is not a sustainable strategy and eventually the prices are brought to a level.

The major drivers of this type of risk are surprisingly political and regulatory pressures especially

in the countries that are undergoing austerity drive and are forcing to cut prices. However, for

most sectors, pricing pressures appear to be predominantly market-driven. The global recession

that followed way in many developed nations, has brought home the reality of a structural shift in

market conditions. In many European and North American market segments, market maturity,


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declining populations, population aging and slow economic growth are producing slow or even

negative organic growth for companies.

Another source of pricing pressure is the exchange rate volatility. Companies that are involved in

cross border production and distribution face this risk.

Market Risks

Market risks are a new entrant to the risk radar, combining challenges such as real estate market

volatility which have become threats to many sectors in the wake of the global financial crisis. Such

risks are very tricky in the sense that they cannot be forecasted and may arise from a totally

unexpected sector like: The banking sector may collapse again or climate change objectives require

intervention that constrains liberalized electricity sectors.

The re-elevation of the state to the status of active market participant, as a result of financial sector

bailouts and the rise of more state-oriented emerging economies, among other factors, is

apparently creating a wide array of challenges for both the private and public sectors.

Emerging Technologies

This challenge can rather be termed as a blessing in disguise for companies. Companies from

emerging economies get exposed to recent technological advancement in the industry and globally

followed best practices when they enter into an advanced market. This even though, may be an

immediate challenge for the company to adapt to the technology shock but in the long run this

makes the company more efficient and confident in using the same technologies and best practices

for their operations back home.

We can rather call this as a learning opportunity for the organizations going global.

Social Acceptance Risk (Liability of Foreignness)

The difficulties as a result of the different norms and rules that constrain human behaviour,

including culture, language, religion and politics; companies may lack the knowledge and networks

to understand the different norms and rules of how to operate successfully in a foreign country.

With the advent of mobile communication and I&B networks any slip ups cannot go unnoticed

be it in any part of the world. Even if an organizations has faced false allegations in any part of the


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world it will be judged and scrutinized by people as they already have the information and suspect

the company of following unfair practices.

Other Risks

Apart from the challenges mentioned above there are few other issues that are usually faced byorganizations. However these are general business risks that any organization can face at any point

in time and there are well documented methods to avoid and mitigate these risks:

Cross Cultural Risk

Operational Risk

Geo Political Risk

ConclusionGoing global is a big business decision and should not be taken in a hurry or in me too type of

situation. The pros and cons of the decision may be well debated and the decision should be taken

only if the whole exercise adds value to the company bottom line.

Once taken, the decision should be well planned with all probable challenges and risks analysed

and their mitigation strategies in place. Only then the company will be able to concentrate in its

core competency otherwise all its resources will be engaged in handling the challenges that couldhave been well handled if not avoided.

Documents

Probable Challenges in Globalization of Companies based in Emerging Economies