Emerging markets multinationals: focus on Chinese giants

Lourdes Casanova is an academic, Professor at Cornell University and Director of the Emerging Markets Institute. She provides us with the latest academic findings on emerging markets.

Emerging markets multinationals: focus on Chinese giants

The latest academic research on emerging markets shows that large companies from emerging countries have a strong potential for growth and global expansion. This is a widespread phenomenon, particularly when analysing Chinese multinationals. These now represent 108 of the 500 companies listed in the Global Fortune 500. By comparison, 133 companies on the list are from the USA.

Until recently, the academic literature has nuanced this phenomenon by arguing that, despite their large profits, Chinese companies were essentially national in scope. But last year, Capital IQ data revealed that most of them are, in fact, located in more than two countries. Here is a particularly telling figure: four of the five largest banks in the world are Chinese. Last year, China was the second largest buyer in the world.

How are emerging multinationals expanding? Naturally, they start by conquering the national market and their natural market (sub-regions, neighbouring countries). Then, following their models, they try to expand towards the countries of the South or the West. We have noticed that Latin American multinationals move immediately to the United States or Europe after having conquered their immediate environment, while China extends firstly to the South (Africa and/or Latin America), before taking the big jump into the European and American markets. And, since the crisis of 2008, they are increasingly present in Europe.

The implementation strategies differ according to the countries in which these multinationals wish to develop: in the case of South/South investments, there is a 70% chance that the strategy will be to create activities ("greenfields"), whereas there will be more mergers and acquisitions in developed countries, in 60% of cases, particularly in Europe. It should also be noted that the global expansion of companies in emerging countries is decreasingly taking place in traditional sectors such as energy and materials, but increasingly in high-tech goods serving new sectors such as renewable energy.

Another characteristic of these emerging market companies is their tremendous flexibility and ease of recovery from a crisis. They have the ability to rapidly evolve their strategy and organization to meet growth needs. The pursuit of profit is not necessarily a priority. They produce diversified products at modest costs (because labour costs are relatively low), without sacrificing quality. Thus, while multinationals in emerging countries, particularly those of Chinese origin, have so far been seen as competitors playing on their low costs, it is important to recognise that these companies today rely on the quality and efficiency of their entire value chain: "beyond cost leadership" ; with, however, a relatively weak image and recognition of their brands worldwide.

Clearly, this potential of Chinese companies could not have been realised without the strong support of the Chinese government, which is implementing a strictly capitalist agenda. The governance of Chinese companies is closely coordinated by political decision-makers: for example, in state-owned companies, a member of the Communist Party sits at the same level as the leader of the company. When it is a private sector company, the government can request to become a shareholder. For example, according to an article in the Wall Street Journal, the government recently expressed a desire to acquire a 1% share in Weibo, Tencent and Alibaba. This public/private marriage exists in most countries of the world, but it remains occasional and confined to ad hoc partnerships. In China, it is close planning that links business and political power.

These recent analyses provide a fresh look at the growing power of multinationals from emerging countries, particularly China. Not to mention, moreover, that these large firms have a strong knock-on effect on smaller companies, which in turn are beginning to expand outside their national or regional borders.


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