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  1. Global Firms and Emerging Markets in an Age of Anxiety S. Benjamin Prasad Pervez N. Ghauri Editors PRAEGER
  2. Global Firms and Emerging Markets in an Age of Anxiety
  3. Global Firms and Emerging Markets in an Age of Anxiety Edited by S. Benjamin Prasad and Pervez N. Ghauri
  4. Library of Congress Cataloging-in-Publication Data Global firms and emerging markets in an age of anxiety / edited by S. Benjamin Prasad and Pervez N. Ghauri. p. cm. Includes bibliographical references and index. ISBN 1–56720–421–X (alk. paper) 1. International business enterprises—Management. 2. International business enterprises—Cross-cultural studies. 3. Globalization. I. Prasad, Benjamin S., 1929– II. Ghauri, Pervez N., 1948– HD62.4.G5435 2004 338.8 8—dc22 2003062256 British Library Cataloguing in Publication Data is available. Copyright 2004 by S. Benjamin Prasad and Pervez N. Ghauri All rights reserved. No portion of this book may be reproduced, by any process or technique, without the express written consent of the publisher. Library of Congress Catalog Card Number: 2003062256 ISBN: 1–56720–421–X First published in 2004 Praeger Publishers, 88 Post Road West, Westport, CT 06881 An imprint of Greenwood Publishing Group, Inc. www.praeger.com Printed in the United States of America The paper used in this book complies with the Permanent Paper Standard issued by the National Information Standards Organization (Z39.48–1984). 10 9 8 7 6 5 4 3 2 1
  5. Contents Illustrations vii Preface xi Part I Emerging Challenges 1 Chapter 1 On Multinationals after 1989 3 S. Benjamin Prasad Chapter 2 The Bald Eagle Cannot Find Its Way in the Rain Forest 13 Alvaro Cuervo-Cazurra and C. Annique Un Chapter 3 Challenges for the European Auto Multinationals 37 Heike Proff Chapter 4 Multinationals and Technology Development in Latin America and East Asia 61 Andres Lopez and Marcela Miozzo ´´ Chapter 5 Supranational Rules on Strategy Context: Embraer and Brazil’s Aerospace Program 83 Thomas C. Lawton and Steven M. McGuire Part II Changing Contexts 103 Chapter 6 Initial Trust of Joint Venture Partners in Emerging Nations 105 Kwong Chan, W. Harvey Hegarty, and Stewart R. Miller
  6. vi Contents Chapter 7 Family Conglomerates: Key Features Relevant to Multinationals 121 Destan Kandemir, Daekwan Kim, and S. Tamer Cavusgil Chapter 8 International Joint Venture Control: An Integrated Framework 147 Yan Zhang and Haiyang Li Chapter 9 An Analysis of Joint Venture Activities in Southeast Asia 171 Daniel C. Indro and Malika Richards Chapter 10 National Culture in China and Multinationals’ Performance 195 Ji Li Chapter 11 Entering Emerging Markets: Ignorance and Discovery 207 Jan Johanson and Martin Johanson Part III Prospects for Global Firms 225 Chapter 12 Strategies of Multinationals in Contemporary China 227 Peter Enderwick Chapter 13 Rethinking MNE-Emerging Market Relationships: Some Insights from East Asia 251 Mo Yamin and Pervez N. Ghauri Chapter 14 Institutions and Market Reforms: A Logical Guide for MNE Investments 267 Ram Mudambi and Pietro Navarra Chapter 15 On Economic Liberalization in India 285 Rose M. Prasad Looking toward 2010 Part IV 305 Chapter 16 A Look Ahead: Multinational Enterprises and Emerging Markets 307 Pervez N. Ghauri Selected Bibliography 311 Index 313 About the Editors and Contributors 317
  7. Illustrations Tables 0.1 Twenty-Four Books on Multinationals Identified as Unique Structural Forms of Organization 1964–1986 xii 2.1 Summary of Arguments: Difficulties in the Internationalization of DCMNEs in the LDCs 19 4.1 FDI Inflows by Area and Period, 1970–1999 63 4.2 Ratio of FDI Inflows to Gross Fixed Capital Formation for Different Periods, 1971–1998 66 4.3 Share of FDI Inflows in Manufactured Exports and Output 72 5.1 A Comparison of Models 90 7.1 Demographic Profiles of the Family Conglomeration 123 8.1 A Summary of Major Characteristics of the Cases 154 8.2 The Patterns of Task Interdependence, Resource Contributions, and Control 160 8.3 The Dynamic Relationships between IJV Control and Performance 163 9.1 Southeast Asian Joint Venture Sample Description 176
  8. viii Illustrations 9.2 Descriptive Statistics and Correlations between Independent Variables 178 9.3 Results of Multinomial Logistic Regressions Examining the Determinants of ASEAN Joint Venture Activities 186 9.4 Summary of Results 187 10.1 Descriptive Statistics 201 10.2 Effect of Home Country Culture on MNEs’ Behavior in China 202 10.3 Effect of Home Country Culture on MNEs’ Performance in China 203 11.1 The Firms and Types of Activity and Discovery 220 12.1 Internal Changes and Their Implications for Business Strategy 235 13.1 East Asian Policies toward Multinational Companies 255 13.2 The Dominance of Pro-FDI Policies in Emerging and Developing Countries, 1991–2000 256 13.3 Share of LDCs in FDI Stocks, FDI Flow, and Number of Affiliates in 1999 257 13.4 Reinvigorating Functions of State 261 14.1 Summary Statistics 273 14.2 Estimating the Level of Reform in 1995: Heteroskedasticity- corrected OLS Estimates 274 14.3 Estimating the Change in the Level of Reform 1990–1995: Heteroskedasticity-corrected OLS Estimates 277 15.1 Fraser Index (1976–1995) for Selected Six Countries 290 15.2 Foreign Exchange Reserves and Liberalization in 11 Emerging Nations 292 Figures 1.1 Theoretical Streams Leading to MNE (Multinational Enterprise) Paradigms and International Corporate Management 8 2.1 Difficulties in the Internationalization of MNEs in the LDCs: A Research Framework 17
  9. Illustrations ix 3.1 Projected Capacity Utilization in the Automotive Industry Classified According to Region and European Manufacturers 39 3.2 Export Intensity and Foreign Direct Investment of German Enterprises As Well As Falling Price Premiums in Germany 40 3.3 Industrialization As a Means of Economic Development 43 3.4 Current and Targeted Linkages in the Automotive Industry under the Malaysian “Cluster Approach” 44 3.5 Industrial Clustering and the Need for Large-Scale Production Capacities 46 3.6 Necesssary Extension of the Theory of Foreign Direct Investment to Include Interactions between Markets to Take into Account Overcapacity and Export Competition 51 3.7 Approaches for Reducing the Negative External Effects of Overcapacity and Export Competition 53 3.8 Possible Responses of the European Automotive Industry to Overcapacities and Export Competition 54 6.1 A Conceptual Framework of Initial Trust of Joint Venture Partners in Emerging Nations 108 7.1 Drivers of Family Conglomerate’s Evolution 129 7.2 Internationalization of Family Conglomerates 134 7.3 Appropriate Market Entry Strategies for Western Companies in Emerging Markets 139 8.1 An Integrated Framework of IJV Control 149 9.1 Description of Southeast Asian Joint Ventures, by Partner Type 181 9.2 Description of Southeast Asian Joint Ventures, by Country 184
  10. Preface Multinationals, as most people would know, recognize, admire, fear, and criti- cize, have been variously characterized for more than three decades. In the 1970s, an American, a British, or a European company that had subsidiaries in two or more countries was called a multinational corporation. In the 1980s, considering the history of foreign investment, a variety of nonmanufacturing companies—such as banks, insurance companies, and trading companies— also came to be recognized as multinational companies. Different authors used different terms. For example, Frederick Donner, in 1967, wrote a book on multinationals with the title Worldwide Industrial Enterprises. Charles Kindle- berger authored a book, titled The International Corporation (1970); Ananth Negandhi and S. Benjamin Prasad coauthored a volume called The Frightening Angels: Multinationals in Developing Countries (1975). The key point here is that the multinational phenomenon is not a contemporary development. At present, most companies can be regarded as global firms. During the past 25 years, many developing countries have followed the advice of the International Monetary Fund (IMF) to privatize, liberalize, and become a participant in the free-market economy. Many countries have dismantled their public-sector enterprises, and have opened up their economies to imports of goods, capital, and technology. As a result, the world is becoming more interconnected than before World War II, with the level of imports, exports, cross-border invest- ments, and movement of managers and executives all increasing in noticeable proportions. In order to capture the essence of what was happening in the industrial and the service world—in, so to speak, the globalizing economy— many writers in the United States and the United Kingdom authored scores of books. A selected listing of 24 vintage books on multinationals can be found
  11. xii Preface in Table 0.1. A complete reference of these books can be found in the bibliography. These 24 books, along with other books, articles, and commentaries, not only described the nature and organization of the multinationals in the post– World War II era, but they also spoke implicitly of the problems of coordi- nation, of relationships with host countries, and of the long-run impact of foreign commercial enterprises forging partnerships and alliances with do- mestic firms and state enterprises, to name a few. The multinational corporate phenomenon can be seen either as an ancient institution (Moore and Lewis 1999) or as a post–World War II development. That is not to say that there were no multinational enterprises in the eigh- teenth or the nineteenth century. There were, but they were few in number, and they were financed not by common citizens, but by either the royalty, the Table 0.1 Twenty-Four Books on Multinationals Identified as Unique Structural Forms of Organization 1964–1986 *Complete titles can be found in the Selected Bibliography.
  12. Preface xiii literati, or the mercantile bankers. At any rate, one is at liberty to take a historical perspective of a multinational such as Ford, Nestle, or Unilever, or alternatively focus on the firms that have metamorphosed into multinationals in the period of 1975–2000. The perspective is in the beholder’s eye, the researcher’s interest, or the strategic intent of reading, thinking, and writing. We have found the historical perspective of multinationals to be a valuable one. The current economic perspective of the multinational enterprise, or even the cross-cultural dimensions of firms, has a legitimate place and the inquiry is worthy of pursuit. Even though economics-based academic publications and their editors insist on robust studies of multinational enterprises (MNEs) grounded in theory, conducting business abroad has almost always remained more of an art than a science. One important aspect of this art has been interaction with the host nations and their governmental agencies. This aspect has taken on added dimensions since the September 11, 2001, tragedy. Sub- sequent to the tragedy, there have occurred numerous changes in the world economic, as well as political, arenas. In short, the landscape for the multi- nationals is, as we see it, completely different. There has been a rapid change in the relationships between guest firms and host nations, the multinationals and emerging nations in particular manifesting the dominant theme of anxi- ety. Multinationals’ environmental uncertainty has gone up; in addition, anxi- ety levels have elevated. The hosts—emerging markets—are now unsure of the strategic implications of the decisions of multinationals. Attracting foreign direct investment (FDI) by means of creating a conducive host-country en- vironment has been a standard approach for many years beginning in the early 1960s in the Republic of Ireland. We ponder whether that approach is now sufficient, in the post–9-11 era, to maintain an increasing inflow of precious capital from abroad. In order to shed light on many of the underlying issues that have surfaced since 2001, we invited a cross section of scholars, who had shown a keen interest in the broad topics of interfirm cooperation, firm-host government relations, FDI, and the general well-being of relatively poorer nations. In order to narrow down the host country universe, we selected the emerging markets—some 25 nation-states. In response, we received 22 papers. Among the 22 papers, 20 of them went through the blind-review process. Each was read by Ghauri, Prasad, and at least one external reviewer who had competence to critique and suggest concrete revisions. Fifteen of the papers were finally accepted after one or two revisions, and readers will find them as chapters dealing with a few key dimensions of managing either the internal efficiency or the external effectiveness of multinationals in the twenty-first century beset by post–9-11 anxiety. We identify external effectiveness as pos- sessing the skills of networking, allying, and interfacing with a host of stake- holders or constituencies. Many of the authors who contributed to this research compendium will-
  13. xiv Preface ingly did so, and we were pleased to note that many of their coauthors were of a younger generation who looked forward to pursuing their professional interests in the global economy. Others were mature scholars who had lived through the decades of the dollar devaluation, the preeminence of Japanese multinationals, the emergence of technology-driven competition, the un- precedented expansion of information technologies, the Y2K threat, the 9-11 tragedy, and the anxiety of threats and of conflicts. Three groups of individuals deserve our gratitude and thanks. First and foremost are the contributors who were patient, responsive to our rewriting requests, and tolerant of minor criticisms. Some of the contributors, as readers will recognize, are senior researchers, and some are younger enthusiasts. To all of the contributors, we extend our heartfelt thanks. The second group is the two editors at the Greenwood Publishing Group. We are grateful to both Eric Valentine, until recently editor of Quorum Books, the imprint that was consolidated with the Praeger Series. Praeger is now headed by editor Hilary Clagett who, during the past six months, has made numerous valuable suggestions, and the end result is the current title of this book: Global Firms and Emerging Markets in the Age of Anxiety. We believe that, at present, we are all living in an era of anxiety, but we hope the anxiety shall be ephemeral. Finally, the third group comprises our faculty associates and the graduate/ undergraduate students who were extremely helpful in the preparation of the manuscript. We would also like to thank Dr. Rose Prasad of the Finance Department, Management Departmental secretaries Marsha Dinkfield and Mary Jones, and student assistants—Amber, Alisha, Avinash, Gopal, Pratik, Satish—at Central Michigan University. We owe a debt of gratitude to some of our colleagues at UMIST, United Kingdom, including the staff of the international business unit and in particular Anna Zuyeva and Gillian Geraghty. Errors and omissions are those of the authors of the chapters. February 27, 2003 S. Benjamin Prasad York Research Center, New Jersey Pervez N. Ghauri UMIST, U.K.
  14. PART I Emerging Challenges
  15. CHAPTER 1 On Multinationals after 1989 S. Benjamin Prasad Since World War II, within the realm of industrial management and econom- ics, the influence of international events has been significant. If one were to identify the basic factors leading to industrial development, then management is clearly an important dimension for economic growth. Management litera- ture contains definitions of the term, management, as a process, a set of co- ordinated functions in a firm, a type and level of skill and ability, or a cadre of people. Most of these definitions are culture-oriented, and they are legiti- mately so. Yet, one ought not to take the culture route too far, because cultural explanations will have limits too. When we, in the United States, consider management and organization, it is often in terms of the values and ends to which we are accustomed, and also, as the terms relate to the conduct of business enterprises as we see them in North America. The American economy has been an archetype of what is loosely known as the Western world. But since the 1980s, an Eastern influence has swept in—initially in terms of the soft skills that catapulted Japan to num- ber one in the world in those skills, and later in the 1990s, in terms of the enterprise software that has been a boon to American business, to its cost effectiveness, and to its productivity. International management is concerned with effectively managing a firm’s resources abroad. Many multi-disciplinary approaches have been advanced toward this goal, as can be seen in Figure 1.1 (p. 8). The real challenges to global firms are in the emerging nations. The industrial revolution began, not in the United States but in England, with the seminal observations made by Adam Smith in an English pin factory, on the beginning and growth of modern industrialism, conceptualizing the
  16. 4 Global Firms and Emerging Markets in an Age of Anxiety merits of specialization in the notion of division of labor. Industrialism, as most recognize, is a general organization of a society built largely on mech- anized industry (or tertiary industries) rather than agriculture, craftsmanship, or commerce. It is different from mercantilism albeit the newly industrialized states often pursued mercantilist policies. Commerce, from times immemorial, has been conducted on a small as well as on a large scale. Moore and Lewis (1999) identify some of the earliest trading companies and guild-like colonies established by the Phoenician mer- chants, the princes of their society. However, it is worth noting that in sev- enteenth century China, the Qing (Ching) dynastic emperors from the north (that is, the region of Manchuria) did not view the pursuits of the merchants in the southeast, as an accomplished modus vivendi (Spence 1990). The Brit- ish rulers also “regarded merchants as a lesser breed in the hierarchy of im- perial breed” (Keay 1991). MULTI NATI ON A L S A F T E R 1 9 8 9 Multinationals after 1989—the year in which the Berlin Wall came down— have undergone a variety of changes and have faced many new challenges. The best way to capture the essence of these changes is a two dimensional issue. First and foremost is for academics to learn how multinational firms— American or other parents—have weathered the storms of change. Some of the consumer multinationals, armed with global brands and appealing adver- tising, such as the Coca-Colas and the McDonalds were in the limelight at one time. Other consumer durable multinationals have either gone under, restructured, or have emerged as born-again multinationals. New market op- portunities have accompanied new competitive challenges. Even when cultural and social differences between the American and other firms are intentionally set aside to model the homogenized global firm, other differences remain. The most obvious is the difference in the currency val- ues—various exchange regimes between the dollar and the other currencies have prevailed. However, since 1989 the free market maxim has caught on, currencies have floated rather than being pegged, and some of the developing countries have been transformed into global manufacturing platforms—even knowledge economies. The present volume highlights the fresh research con- tributions—post-September 11, 2001—included as chapters 2 through 15 in the following pages. In the present research volume, several new topics have been addressed. Arbitrarily, we as editors have identified three important categories: part one deals with emerging challenges, part two highlights the changing contexts, and part three relates to the future prospects of global firms. Below is a chapter-by-chapter synopsis of the 14 research papers, excluding the present introductory chapter, and the final concluding perspective by Pervez N. Ghauri. In part one, “Emerging Challenges,” the ensuing four chapters focus on the
  17. On Multinationals after 1989 5 challenges faced by the firms and the host nations. The theme of chapter 2 describes the difficulties that multinationals encounter in the emerging mar- kets. Cuervo-Cazurra and Un analyze the sources of and potential solutions to the hurdles that multinational enterprises (MNEs) from industrialized na- tions encounter in the less developed countries. Despite being highly com- petitive and having large resource pools, these MNEs continue to encounter difficulties. The authors apply the resource-based theory, and the related knowledge-based view of the firm, to develop the internationalization litera- ture pertaining to the problem. They explain that such difficulties arise from the countries’ lack of advantageous resources, the presence of disadvantageous resources, and their lack of neutral complementary resources. They further discuss the characteristics of the firm, and the different types of difficulties they face, and analyze how such formidable challenges can be overcome by means of management and development of resources, particularly knowledge. One point of emphasis in the chapter is that managers of the MNEs must view the emerging markets not as difficult markets to be avoided, but as mar- kets that require different sets of resources and knowledge that would con- tribute to the success of the firm and to profitable operations. Heike Proff, in chapter 3, which explores the theme of industrial clustering, development and overcapacity, concentrates on export competition as a major challenge to the European automotive firms. In Proff’s view, the developing countries are increasingly resorting to a developmental approach anchored on the basis of industrial clustering in order to enhance the value of networks through input-output linkages. Under this approach, investment promotion measures by the host country in selected core industries, such as automobiles, provide potential for economic rent—a matter of keen interest to the Euro- pean automotive firms that are on the look out for such opportunities in their globalization efforts. However there are negatives. Overcapacity in the in- dustrial networks tends to depress prices in the export market. How European automotive firms have coped with the issues arising from global overcapacity, including plans to reduce multi-market contacts, is a topic of current interest. The intriguing question remains: Do other industries go the same way as the auto firms? Researchers Lopez and Miozzo, in chapter 4, take a comparative approach ´ to the recent developments in Latin America and Asia, in particular, East Asia. The role of the multinational corporations (or multinational enterprises) is seen as both the most important source of new technology and management know-how, and a significant contribution to the host country’s technological modernization. On the other hand, host countries may be worse off thanks to the rent-extracting power of the multinationals—loss of control over na- tional strategic sectors, displacement of indigenous firms resulting in the loss of jobs. Lopez and Miozzo, in this context, focus on the successful develop- ´ ment process in South Korea and Taiwan, and the less successful industriali- zation experiences of Argentina, Brazil, and Mexico.
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