Emerging market multinationals, globalization and the rise of the BICs: The era of Dragon Multinatio

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Emerging market multinationals,globalization
and the rise of the BICs The era of Dragon
Multinationals

• Professor John A. Mathews
• Macquarie Graduate School of Management, Sydney
• ENI Chair in Competitive Dynamics and Global
  Strategy, LUISS Guido Carli, Rome
• FDI from Emerging Economies WorkshopUniversity
  of MelbourneSeptember 24, 2009

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Your presenter
Most recent books Tiger Technology The creation
of a semiconductor industry in East Asia
(Cambridge) Dragon Multinational A New Model
of Global Growth (OUP) Consultant World Bank,
UNCTAD, UNIDO Two books to appear in Chinese
translation, Peking University Press, 2008
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Chinese translation of my Tiger TechnologyJishu
Qiaodong Zhanlue Technology Leverage Strategy
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Dragons at your Door
Dragons at your Door How Chinese cost innovation
is disrupting global competition Ming Zeng and
Peter Williamson 2007 HBSP Cost innovation
High quality, customization and advanced
technology at low cost Cases Dawning (IT
servers) Goodbaby (advanced product range)
speciality products at low prices Haier (bar
fridges) CIMC (specialty shipping containers)
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CIMC A Chinese Dragon MNE
CIMC China International Marine Containers
Group Began 1980 as Sino-foreign JV with Danish
East Asiatic Co.) Began producing containers in
1982 in middle of downturn false
start Restructured, new CEO 1991 floated company
with IPO and bought up competitors during
downturn of 1993 Relentless squeezing of
costs 1996 1 in China, and global 1 by
volume 1997-98 Asian financial crisis bought
Asian rivals Then use low-cost platform as basis
for expansion into higher value-added segments
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CIMC A Chinese Dragon MNE (2)
Refrigerated containers new specialist co.
Shanghai Reefers Licensed technology from Graaf
Transportsysteme (Ger) appointed Graaf expert as
CEO of Shanghai Reefers Absorbed German
technology then scaled it up Acquired Hyundai
plant at Qingdao at low price Then found way to
substitute steel for aluminium further cost
savings 1997-2003 CIMC becomes global leader in
refrigerated containers (2005 Buys patents from
bankrupt Graaf) Then did same for tanker
containers (defeating South African
incumbents) Corporate slogan learn, improve,
disrupt
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Another Chinese Dragon MNE Haier

• From the beginning of its globalization, in 1995,
  Haier was active in more than five countries
  within five years (including USA). By 2006 it
  had has set up 10 industrial parks worldwide and
  22 plants overseas.

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• 20 years ago
• Founded in 1984 as Qingdao Refrigerator Plant
• Post a loss of RMB 1.47 million in 1984

• Today
• Revenue RMB 103.4 billion
• Over 30 market share in China Refrigerators,
  refrigerating cabinets, air conditioners and
  washing machines
• Over 240 subsidiary companies throughout the
  world
• Over 50,000 employees throughout the world

CHINAs General Electric
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Product Direction Manufacturer of a wide range of
home-appliances over 15,100 different
specifications under 96 categories.

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Haier Group

Haier Group Internationalization Process
Source Institute for Manufacturing
http//www.ifm.eng.cam.ac.uk/cim/chimnet/research/
projects/ kaimei_haier.html
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Revenue relation with Globalization
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International expansion a major transformation of
firms

• Moving into the international domain becoming
  integrated with international economic activities
  - Push or pull?
• Typical case of MNC moving a tested product
  offshore to new markets then, moving a business
  offshore, and expanding its functional
  responsibilities
• But with Dragon MNEs, the expansion provides
  opportunity to access new markets, new resources,
  new capabilities
• Compare Haier with two Dragon MNEs from Latin
  America and Central Asia (Turkey)

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White goods (1) Grupo Mabe

• In 12 years, since 1986, Mabe expanded from
  Mexico and was producing through JVs in five
  external countries, all concentrated in South
  America, and it continued to build a strong
  presence in South and Central America, as a
  regional force. Brands Mabe, Easy and IEM
  (Mexico) Regina (Venezuela) Durex (Ecuador)
  Inresa (Peru) Centrales (Colombia) Dako
  (Brazil) Patrick-Fagor (Argentina).

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Grupo Mabe Milestones

• Milestones for Grupo Mabe, 1945 - 2006
• 1945Mabe founded starts producing kitchen
  furniture in 1948
• 1959Mabe is Mexicos leading exporter of kitchen
  appliances
• 1986Mabe-GE JV formed
• 1989Mabe expands production capacity and range
  (IEM and GE-Grupo Industrial Saltillo)
• 1990Mabe-GE opens new stove factory and its RD
  Centre in Queretaro
• 1991Mabe-Ceteco JV to produce appliances in
  Venezuela, expanding in 1993 to Colombia
  (Polarix)
• 1994Mabe-Sanyo Compressor established
• 1995Mabe expands into Brazil and Ecuador (Durex)
• 1998Mabe-Fagor JV formed to produce appliances in
  Argentina
• 2003Mabe acquires GE-DAKO and CCE in Brazil
• 2005Mabe acquires Camco in Canada

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White goods (2) Arcelik

• Producer from Turkey
• Within five years of globalization initiated, in
  2000 production established in six countries.
  Foreign sales account for 44 per cent of total
  sales. Brands Arcelik Beko Blomberg
  Elektrabregenz Arctic Leisure Flavel Altus.

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Arcelik milestones

• Arcelik milestones, 1955 - 2006
• 1955Establishment of Arcelik
• 1959Production of first washing machine in Turkey
• 1960Production of first refrigerator in Turkey
• 1988Start of OEM exporting to US (Kenmore brand
  for Sears Roebuck)
• 1991Establishment of RD Centre
• 1997Start of OEM exporting to Europe (Whirlpool)
• 1998Promotion of 6-sigma quality program and
  reorganisation of KH household appliances
  division
• 1999Arcelik-LG Klima JV established
• 2000Adoption of Beko brand for exports
• 2001Unsuccessful bid for French Brandt
  2002Acquisitions in EU (Blomberg, Elektra
  Bregenz, Leisure and Flavel)
• 2002Romanian household appliance company Arctic
  acquired
• 2005New Chest freezer production line established
  at Arctic
• 2006New production line in Russia inaugurated (14
  October) acquisition of Grundig brand

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White goods (3) Haier

• Haier milestones, 1984 - 2006
• 1984Founded as Qingdao General Refrigerator
  Factory under new CEO Zhang Ruimin
• 1991Haier is Chinas leading refrigerator
  producer Qingdao Refrigerator Factory merged
  with Qingdao Air Conditioner General Factory
• 1992Haier Industrial complex established, Qingdao
• 1993Haier begins to produce for foreign MNEs
  under OEM contracts. JV with Mitsubishi Heavy
  Industries to produce air-conditioners in China.
• 1995JV in Indonesia with local producer of
  refrigerators and air conditioners
• 1996Haier starts manufacturing in Malaysia
• 1997JVs in the Philippines, with local company
  LKG, and Yugoslavia for manufacturing air
  conditioners sales of own brand products
  launched in Germany
• 1998JV with Philips of the Netherlands
  1999Establishes manufacturing facility in USA
  (Camden, North Carolina)

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Haier milestones (cont)

• 2001JVs in Pakistan and India (Bengal)
  Meneghetti acquisition in Italy establishment of
  Haier Middle East Trading Company in Jordan (JV
  with Syrian and Lebanese partners)
• 2002Haier-Sanyo created in Japan manufacturing
  JVs in Iran and Algeria 2004Haier recognized as
  one of worlds Top 100 brands (only one from
  China)
• 2005 Industrial complex established in Jordan
  plants opened in Algeria, Egypt, Nigeria and
  South Africa
• 2006 Unsuccessful bid for Maytag JV with Sanyo
  to supply Japanese market and control over plant
  in Thailand.

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Strategic keys to Haiers expansion

• Haier expanded faster than any other newfound
  white goods company
• (And founded later than Mabe or Arcelik)
• Accelerated internationalization one of the keys
  to successful global strategy for latecomer
• To what extent are the patterns of expansion of
  Haier et al similar to those of other Dragon
  MNEs?

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The Rise of Dragon MNEs

• Six of the worlds 100 largest TNCs are from
  emerging economies

No. of companies from emerging economies in
Fortune Global 500
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56
62
71
90
99
Source Fortune Global 500
Source UNCTAD.
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The global economy in the 2000s
More than 60,000 MNEs Control 800,000
affiliates 9.5 trillion in output 3.5 trillion
in assets (accumulated FDI) Foreign affiliate
exports account for 33 of world exports Sales of
foreign affiliates growing faster than world
trade FDI in 2000 exceeded 1.24 trillion
UNCTAD World Investment Report 2001 MNEs the
driving force behind dynamics of global economy

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New zoology of the international economy
What kinds of firms inhabit the international
economy? Some are huge MNEs -- the household
names But the majority are SMEs with
international scope Micro-MNEs Global
start-ups Latecomers Newcomers But even the
giants vary enormously in their degree of
globalization ABB TNI 96.5 GM TNI 30.5
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General features of the new players
Accelerated internationalization Incremental,
but fast coverage Global scope and
outlook Geocentric rather than ethnocentric or
polycentric (Perlmutter) Strategic innovation eg
new patterns of linkage and leverage Organizatio
nal innovation eg new global cellular
clusters All exploit inter-linked character of
world economy
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Latecomer MNEs
Examples Ispat, Cemex, Acer, Li Fung, Samsung,
Haier, Infosys Overcome initial
disadvantages eg accelerated global coverage
through linkage and leverage OEM
contracts Second sourcing Global scope --
bypass earlier ethnocentric and polycentric
phases
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Ispat International
Small company, origins in India Rapid expansion
in NICs Late 1990s penetration into US, Europe
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Ispat now a global player?
1989
2003
2005
Nova Hut, Czech RepublicIspat Nova Hut
Iron Steel Company of Trinidad
TobagoCaribbean Ispat
36.67 Stake in HunanValin Steel Tube
WireChina ISG Acquisition Completed Created
Mittal Steel Europe Mining Development
Agreementwith Liberian Government KryvorizhstalU
kraine - Mittal Steel Kryviy Rih MoU with State
of Jharkhand, India Acquired Stelco subsidiaries
in Canada
2001
1995
Alfasid Ispat Annaba, Algeria
Ispat Hamburger-Stahlwerker, Germany
Iron Ore Mines purchased from FERFOS, Ouenza and
El Boukhadra
Sidex Ispat Sidex, Romania
FormedIspat InternationalIspat Shipping
1998
Inland Steel Group ISG), USA
Ispat Karmet, Kazahkstan
Unimetal,France
Formed Mittal Steel
2006
2 MillsSkopje, MacedoniaMittal Steel Skopje
1999
Ispat WalzdrachtHochfeld Germany
ListedNew York AmsterdamStock Exchange
BH Steel, BosniaMittal Steel Zenica
Ispat StahlwerkRurhort, Germany
Polskie Huty Stali, PolandIspat Polska Stal
1997
Sidbec-Dosco, CanadaIspat Sidbec
2004
BusinessAssistance Agreementwith Iscor, South
Africa
1994
Sibalsa, MexicoIspat Mexicana
2002
1992
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Merger with 1 Steel Producer 320,000
employees in 60 countries
Equiv. AUD 102.7 bn
Source Arcelor Mittal Brochure 2006
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Acers cellular structure
Acer consists of 40-50 business cells Each
business autonomous Seeks own customers,
growth Each business internationalizes eg AIPG,
API
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Acers global organizationCircle dragon no head
 
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Li Fung
Based in Hong Kong 44 offices in 30
countries 7,500 suppliers 2,500 active at any
one time Latecomer advantage low-cost value chain
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Infosys An Indian Dragon MNE

• In 1970s Indian govt restrictions impede foreign
  competition
• Bodyshopping pioneered by Tata CS
• 1981 Murthy 6 others form Infosys
• 1991 Indian govt reforms relax
• Pursuit of Off-shore Development Centres
• 1993 Infosys institutionalizes quality (ISO
  cert)
• 1998 Infosys awarded (Capability Maturity Model)
  cert
• Infosys offers customers managed software
  solutions

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WEG A Brazilian Dragon MNE

• Uma Multinacional Brasileira
• Em seus parques fabris no Brasil, a WEG controla
  todas as etapas de sua produção, desde a fundição
  e a estamparia de metal, até a esmaltação e a
  embalagem. Em Santa Catarina, onde a empresa
  nasceu, se concentra a maior parte da produção,
  mas a partir de 2000, com a aquisição de fábricas
  no exterior, a WEG assume definitivamente o posto
  de multinacional brasileira.
•  

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WEG A Brazilian Dragon MNE

•  

Jaraguá do Sul - PF 1 Santa Catarina - Brasil
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BCG 100 New Global Challengers

• How 100 top companies from Rapidly Developing
  Economies are changing the world
• 41 of the companies listed come from China
• Including Chalco, BYD, Changhong Electric, Chery,
  CIMC, China Minmetals, China Mobile, China
  Shipbuilding, CNOOC, China Petroleum (Sinopec),
  COSCO, Dongfeng, Founder, Galanz, Haier, Huawei,
  Lenovo, Nine Dragons Paper, Petrochina, Shanghai
  Automotive, Baosteel, Shanghai Zhenhua Port
  Machinery, Sinochem, Sinomach

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BCG 100 New Global Challengers (2)

• By comparison, there are 13 companies from
  Brazil
• Braskem, CVRD, Coterrinas, Embraer, Gerdau Steel,
  JBS-Friboi, Marco Polo, Natura, Perdiagao,
  Petrobras, Sadia, Victorantim Group, WEG
• India has 20.
• But little theory as to how these companies
  internationalize

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BCG 100 New Global Challengers (3)

• BCG identify six strategies of globalization
• Taking brands global, e.g. Bajaj Auto, Natura
• Engineering global innovation, e.g. Embraer
• Assuming sectoral leadership, e.g. BYD
• Adding value to natural resources, e.g. Hindalco
• New business models, e.g. CMIC and
• Acquiring natural resources, e.g. China
  Minmetals, CNOOC

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What is the evidence for the rise of Dragon MNEs?

• Look for evidence in terms of OFDI data
  South-South investments
• And look for evidence as to internationalization
  strategies of emerging multinationals (EMNEs),
  e.g.how fast are they globalizing?
• What are the strategies they are deploying and
  how do they differ from earlier MNEs experiences?

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OFDI flows from Developing Countries
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MA flows from Developing Countries
Cross-border MA purchases by Emerging MNCs,
2003-2007 (billions of US dollars)
Source UNCTAD.
Preliminary
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Asian TNCs Main Driversbut many home countries
interested
Number of emerging economies with OFDI stock
above 5 billion

• Top-100 TNCs from developing countries (2006)
• 76 from Asia
• 14 from Africa and Middle East
• 10 from Latin America
• Outward FDI stock from developing and transition
  economies
• 1970 67 from LAC
• 2006 65 from Asia
• 2020 ???

Source UNCTAD.
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International capital flows
Source OECD, June 2009
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International capital flows
Source OECD, June 2009
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Chinese OFDI in 2006 Industry Composition
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Accounting for the rise of the Dragon MNEs

• General features
• Accelerated internationalization
• Incremental, but fast coverage
• Global scope and outlook
• Geocentric rather than ethnocentric
• or polycentric (Perlmutter)
• Strategic innovation
• eg new patterns of linkage and leverage
• Organizational innovation
• eg new global cellular clusters
• All exploit inter-linked character of world
• economy

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EMNCs internationalization is catching up
Average TNI of the 100 largest TNCs in the world
and the 50 largest TNCs from developing
countries, 1993-2003.
Source UNCTAD/Erasmus University database.
TNI transnationality index
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Linkage, Leverage and Learning

• A framework for capturing the essence of catch-up
  strategies in a global setting
• Linkage abundance of opportunities to make
  connections in era of globalization (contracting
  and sub-contracting networks)
• Haier initial links with Liebherr
• Ispat/Mittal links with Austrian source of DRI
• CIMC links with Graaf
• Leverage abundance of ways of accessing
  technologies through such linkages, e.g.
  technology licensing OEM contracting
• Learning repeated application of linkage and
  leverage
• None of these concepts can be found in economics
• All come from strategy

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LLL as alternative to OLI

• Traditional account of advantages of
  multinational firm OLI
• Ownership advantages owning technologies,
  resources not available to local competitors
• Locational advantages taking advantage of
  generalized arbitrage opportunities
• Internalization advantages not having to pay
  for everything as external resource
• But does not capture the flavour of latecomer
  strategies of catch-up
• and internationalization in order to access
  resources

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The American Model of the Multinational Firm and
the New Multinationals From Emerging Economies
Source Guillén and García-Canal, Academy of
Management 2009
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The Political Economy of Chinese FDI in Australia

• Deals
• Minmetals ? OZ Minerals
• Hunan Valin Iron Steel ? Fortescue Metals
  (17.5)
• GRAM ? PanAust (copper and gold in Laos)
• Citic Pacific ? magnetite project in Pilbara
• MCC MoU with Waratah Coal to develop AUs largest
  thermal coal mine
• Chinalco ? Rio Tinto (18)

• Motivations
• Secure resource assets near the low point of the
  commodity cycle (cheaper assets hard to obtain
  project finance)
• Reactions
• FIRB recommendations to the Treasurer
• Upper House review of investments by state-backed
  entities in long-term resources
• Lobbying by BHP
• Is Beijing hands-off? Appointment of Chinalcos
  president to State Council

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Two views on governance and FDI

• Peter Drysdale (2009)

• Ivar Kolstad and Arne Wiig (2009)

• Applying special conditions for these investments
  would reinforce the perception of the primacy of
  regulatory solutions over market solutions, and
  help sustain the dominance of the bureaucracy
  over the market in PRC and drive Chinese
  investment to other destinations where there are
  less robust institutions to host it.

• Chinese outward FDI is attracted to large
  markets, and to countries with a combination of
  large natural resources and poor institutions.
• Disaggregation shows that the former effect is
  related to OECD countries, whereas the latter
  interaction effect holds for non-OECD countries

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Global financial crisis dramatic collapse
followed by gradual recovery
Real GDP Growth (Percent change from previous
quarter, annualized)
Emerging and Developing economies
World
Advanced economies
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Developing exports in decline export volumes
ch 3mma y/y
China
India
Mexico
Jordan
Source National Agencies through
Thomson/Datastream.
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Regions in which FDI plans have been affected by
the crisis
International capital flows
Source UNCTAD, April 2009
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What lies behind Chinas success?
Behind Chinas success and the emerging Dragon
MNEslies a new framework or paradigm of economic
development and industrial upgrading. This
provides an alternative to the prevailing
Washington Consensus that has dominated
development thinking Call this the
Beijing-Tokyo-Seoul Consensus or BeST
Consensus for Development Its significance Any
country that wants to compete with China needs
to master the elements of the BeST Consensus
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The BeST Consensus

• Two principal agents
• Creating firms and building their capabilities
• Creating and relying upon the pilot
  (coordinating) State agencies
• Setting the process of capability enhancement in
  motion
• Arranging firms to access and leverage advanced
  knowledge
• Promoting export-based engagement with the
  global economy
• Targeting industries/technologies for (initially
  import-substitution
• Sequential upgrading of the leading sectors and
  activities
• Creating an economic environment in which
  capability development will proceed
• Building broad-based education, from primary to
  tertiary
• Creating a financial system that is catch-up
  friendly but cautious about external financial
  liberalization
• Establishing stable macroeconomic settings
• Gradual phasing out of non-market interventions

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The Washington Consensus
1. Fiscal discipline keeping budget deficits
under control 2. Public expenditure priorities
redirecting expenditure away from white
elephants towards neglected 3. Tax reform
broadening the tax base and cutting marginal tax
rates 4. Financial liberalization abolition of
preferential interest rates 5. Exchange rates
ensuring competitive exchange rates 6. Trade
liberalization phasing out trade restrictions
in tariffs and then lowering tariffs 7. FDI
abolition of barriers to inward FDI 8.
Privatization of state enterprises 9.
Deregulation especially of regulations that
impede entry of new firms 10. Provision of
secure property rights.
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Summary of the argument
Emergence of Chinese firms on global stage is
happening faster than anticipated and
generalized as Dragon MNEs from BICs Will not
be slowed by global financial crisis if
anything, accelerated Chinese firms are making
full use of their latecomer advantages,
capturing cost advantages through
organizational innovations Chinese state playing
a major role in promoting their global
expansion China fashioning a national political
economy based on lessons learned by East Asian
Tigers Korea, Taiwan, Singapore A framework of
support and discipline being applied in way that
is quite different from the terms of the
Washington Consensus Can be called an emerging
Beijing-Seoul-Tokyo Consensus Provides the best
framework for advance for other countries
(emerging, peripheral) and for their OFDI Dragon
MNEs are the most interesting cases in global
economy today