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- Global Firms and
Emerging Markets in an
Age of Anxiety
S. Benjamin Prasad
Pervez N. Ghauri
Editors
PRAEGER
- Global Firms and Emerging
Markets in an Age of Anxiety
- Global Firms and
Emerging Markets in an
Age of Anxiety
Edited by S. Benjamin Prasad and
Pervez N. Ghauri
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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.
- 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-
- 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.
- PART I
Emerging Challenges
- 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
- 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
- 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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