Anirudh Popli
Word Count – 2086/ PIN - 10202
Liabilities of Origin to Advantages of Origin - The case of Emerging Economy Multinationals! Anirudh Popli 1. Introduction If one were to name the single most important phenomenon that is core to the definition of the twenty first century then it has to be – Globalization, a phenomenon that has brought along with it integration of economies, blurring of regional and national boundaries and free flow of trade. Millions have benefitted from this globalization, whether it is in the form of new growth opportunities for businesses or simply the availability of better and cost efficient products and services for the consumers. Growth stories have been especially colorful in case of the emerging economies, which for the purpose of this paper have been defined as the ones that satisfy two criteria – a rapid pace of economic development, and government policies aimed at introducing economic liberalization. India, an emerging economy for example, has been home to many such interesting growth stories. Firms like Ranbaxy (generic pharmaceuticals) and Infosys (software services) not only rank among the most competitive firms in their respective industries but have also emerged as significant multinational players, operating assets and establishing subsidiaries out of America, Europe, Middle East, Africa and East Asia. But what these success stories don’t reveal easily, are the obstacles faced by these Indian firms in their internationalization programs and the specific initiatives undertaken by them to overcome these obstacles. In this paper, we will try to understand the various interrelated obstacles that firms from emerging economies like India, come up against while venturing into developed economy markets. In the subsequent sections we will turn our attention to some of the strategies that Indian firms have employed to overcome these obstacles and try to evolve a generic framework useful for emerging economy multinationals (EEMs) wishing to succeed in developed economy markets. In the end we take a slightly different take on these liabilities of origin and see if they can eventually evolve into advantages of origin. [1, 2]
2. Liabilities of Origin Expanding into new geographies and catering to new markets has piqued many a business leader. But like everything else there are various costs and challenges associated with going global, which if not understood and dealt with properly could far outweigh the potential
Anirudh Popli
returns. These challenges become much more severe in case of emerging economy firms trying to enter developed economy markets. [1] We discuss these strategic challenges under the below heads: a.) Competitive Context Crippled by slow pace of development in their home countries EEMs are typically late movers in the industries they choose to play in. They are faced by the uphill task of battling well established and deep pocketed incumbents. These incumbents many a time also have the advantage of superior technology, economies of scale and a strong relationship network with the suppliers and buyers on their side making it harder for the EEMs to establish their foothold. b.) Customer Context There are two distinct disadvantages that EEMs entering developed economy markets suffer from: i.)
Liabilities of Foreignness: Irrespective of the origin, a firm entering a new market is at a disadvantage due to poor access to the local information networks and low level of endorsement from host country institutions as well as suppliers and buyers. Expertise that comes naturally and free of cost to a local player needs to be developed overtime and requires expending valuable resources in case of a foreign firm. [1]
ii.) Country of Origin Bias: Country image biases strongly affect the outlook of the potential buyers. Research indicates that negative stereotypes about products from emerging economies prevail and these are further enhanced by the cultural and socio-political distance between the developed country and the home country of the EEM [3, 4]. Further it has been observed that the bias is stronger in case the brand name under which the product is being supplied is relatively unknown or the customer has no prior exposure to the EEMs offering [5]. The performance of the Taiwanese personal computer manufacturing firms in the European markets is a good illustration of such biases.
c.) Institutional Context The institutional characteristics of home countries have been shown to significantly influence the competitive advantage of firms abroad [6]. This translates into a serious disadvantage for EEMs vis-Ă -vis developed economy firms on the latter’s home ground since emerging economies are marked by “underdeveloped economic and institutional
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infrastructure�. This significantly limits the ability of EEMs to access two broad types of resources – risk capital and management talent with global experience. The absence of a mature institutional and financial market infrastructure not only reduces the ease of capital access but also makes capital more expensive in emerging economies. This makes it difficult for the EEMs to generate sufficient profits and sustain their international operations. The problems are compounded because of the other scarce resource – managerial talent. A lack of experience in working in trans-national operations on one hand hinders the pace of growth and on the other makes the firm prone to judgment errors. d.) Organizational Context The way firms in the emerging economies view opportunities and risks is quite different from the way their developed economy counterparts view them. The problem arises when firms carry the same mindset to their developed economy operations. EEMs find it quite difficult to conduct a realistic judgment of the offerings potential. Some firms are plagued by a self doubt while some are blinded by over ambition both eventually leading to failed internationalization attempts. The other problem that EEMs face is that of establishing the credibility of their vision. They cannot provide tangible evidence that such a foray would succeed nor can they cite tradition in justification of the foray, since such initiatives would be largely unheard of in the community of firms to which our EEM belongs. This makes it difficult for the EEMs to field motivated champions for its global forays. [7, 8]
3. Overcoming the Liabilities Are these liabilities insurmountable? The answer is a resounding NO. Despite all the liabilities firms from the Indian software and pharmaceutical industries have been able to compete successfully in developed economy markets. Let us now look at what they did right and build a generic strategy for firms wishing to go global: a.) Competitive Context Infosys started its global operations at the time when US firms were looking for cheap IT expertise. Infosys exploited its cost advantage to respond to this need which in turn helped it in establishing its credibility in the US market. Similarly Ranbaxy started its international operations in the generics category of pharmaceuticals where cost is the major factor of play. [9] In both the examples firms were quick to respond as well as leverage their home country advantages to establish a toehold in the new markets.
Find the Next Wave to Ride On - New Business Strategies in the Changing World
Anirudh Popli
b.) Customer Context Both the software and the pharmaceutical firms faced the challenge of establishing their credibility and reliability. Software firms took a two pronged approach to achieving this, as a collective whole they embraced the Capability Maturity Model developed at the Carnegie-Mellon University and at an individual level they constantly worked towards delighting their customers by providing them significantly better value propositions. Similarly the Pharmaceutical firms used the FDA approvals to signal quality to their customers. [9] Hence in both the cases we see that firms on one hand leveraged key host institutions to establish their credibility and reliability and on the other delighted their customers through enhanced value propositions. c.) Institutional Context Poor access to capital plagued both Infosys and Ranbaxy. As a response both the firms ensured that their activities remained thoroughly cost efficient. Another interesting thing that Infosys did was to get listed on NASDAQ the stock index prevalent in US. This ensured that Infosys had an easy access to capital and that too on much more competitive terms. Ranbaxy dealt with the problem of experienced managerial talent in an interesting way. It got into joint ventures with global pharmaceutical majors like Elli Lilly to help it develop its US market. This not only expedited the market entry for Ranbaxy but also enhanced the experiential learning for Ranbaxy’s managers. [9] Clearly firms need to exercise their creativity and come up with new ways of raising capital while at the same time ensuring that they refine their processes to remain cost efficient. d.) Organizational Context If we look at the leadership of both Infosys (Mr. Narayana Murthy) and Ranbaxy (Mr. Parvinder Singh) at the time of their internationalization we find individuals strongly passionate about going global. They not only challenged the status quo but also fostered a sense of possible amongst the people by putting enabling structures and processes in place. [9] The analysis of the strategies followed by the Indian software and pharmaceutical firms especially Infosys and Ranbaxy indicates distinct similarities at the conceptual level. These patterns have been extracted and presented in the form of a framework below.
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Figure 1: Framework for overcoming the liabilities of origin
Figure 2: Firm level strategy for overcoming liabilities of origin
Find the Next Wave to Ride On - New Business Strategies in the Changing World
Anirudh Popli
The underlying strategy can be summarized as a three phase process as also shown in figure 2: a.) Country Specific Advantages: In the initial stages the firm should leverage its country specific advantages to gain a toehold in the new developed economy market. b.) Industry Specific Competence: The firm should then build this hold by developing and seeking recognition for industry wide competences. c.) Firm Specific Capabilities: Eventually the firm should build distinctive firm specific capabilities that differentiate its offering from the rest of the industry.
4. Advantages of Origin The discussions under section 2 and 3 show how liabilities of origin inhibit emerging economy firms from going global. The firms that eventually succeed in their international forays despite these liabilities not only undergo significant organizational change but also create an entire ecosystem to make for any institutional deficiencies of their country of origin. They create a sort of island of excellence at par with the global best yet remain firmly entrenched in the value system of their home country. In this section we argue that such an evolution in fact equips our EEMs with certain distinct advantages: a.) Operational Efficiency Lack of resources forces the EEMs to constantly improve their processes for efficient resource utilization. An implication could be that EEMs are in general better equipped to deal with resource crunches. b.) Financial Creativity Underdeveloped institutional and financial market infrastructure necessitates the EEMs to find novel ways of raising capital like cross-funding, joint ventures, equity instruments etc. providing them with much desired financial flexibility in the long run. c.) Product Offering Successful EEMs work closely with their customer’s to ensure that they thoroughly understand their customer’s needs. This insight allows them to perfect their product offering and create significantly greater value for their customers leading to strong long term relationships.
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d.) Cross Development Presence in developed economies exposes EEMs to latest technology and business knowhow which can in turn be leveraged by the EEMs to enhance the performance of their home or other emerging economy offerings on both cost and quality front. e.) Sales Stability A portfolio of developed and developing economy markets provides certain stability to the overall sales figures by mitigating the effects of economic cycles. Hence the very obstacles that EEMs have to overcome in their journey of internationalization prepare them for adverse situations like market downturns, providing them with what we call advantages of origin.
5. Conclusion A firm entering a new market faces certain disadvantages vis-Ă -vis the local firms already catering to that market. These disadvantages are enhanced multifold in case the firm trying to enter the new market has its origins in the emerging economies. In this paper we look at the interrelated set of challenges that an emerging economy multinational (EEM) faces when it ventures into developed markets. These challenges also known as Liabilities of Origin manifest in the form of tough competitive landscape, low credibility with potential customers, underdeveloped home country business environment and low self belief. Although daunting in nature these liabilities can be easily overcome by the EEMs if they opportunistically leverage their existing resources and incrementally build new capabilities. Further the paper argues that an EEM which has succeeded in entering a developed market despite its liabilities of origin in fact is in a position of advantage compared to firms from both developing economies and developed economies. This so called advantage of origin stems from the fact that EEMs entering developed economies have to put in extra effort to create an unparalleled value proposition for the customer while remaining cost and process efficient. Hence emerging economy firms rather than shying away from global opportunities should rather work towards capturing them for this would not only bring about new growth for them but also prepare them well for adverse situations like market downturns.
Find the Next Wave to Ride On - New Business Strategies in the Changing World
Anirudh Popli
References
1.) Ramachandran & Pant, 2006. The Liabilities of Origin: An emerging economy perspective on the challenges of venturing abroad. Indian Institute of Management Bangalore 2.) Bartlett & Ghoshal, 2000. Going global: Lessons from late movers. Harvard Business Review 3.) Verlegh & Steenkamp, 1999. A review and meta-analysis of country of origin research. Journal of Economic Psychology 4.) Insch & Miller, 2005. Perception of Foreignness: Benefit or Liability? Journal of Managerial Issues 5.) Jo, Nakamoto & Nelson, 2003. The shielding effects of brand image against lower quality countries of origin in global manufacturing. Journal of Business Research 6.) Hitt, Dacin, Tyler & Park, 1997. Understanding the differences in Korean and US Executives Strategic Orientations. Strategic Management Journal 7.) Porter, 1990. The competitive advantage of Nations. Harvard Business Review 8.) Ghemawat, 2001. Distance still matters: The hard reality of global expansion. Harvard Business Review. 9.) Websites: http://www.infosys.com & http://www.ranbaxy.com
Global Initiatives Symposium in Taiwan 2009