Emerging Market MNEs and Cross-border Non-equity Modes: A Policy Agenda

INVESTMENT CLIMATE ADVISORY SERVICES

WORLD BANK GROUP

Lilac NachumProfessor, Globalization and Multinational Companies

My Intellectual World

as of 2015

My NEMs-Related Activities Developed and teaching the ‘Global Strategic Partnerships’ course, Indian School of Business (ISB) MBA program, 2013 -

Organization of foreign affiliates as a distinctive choice between markets, hierarchy and networks. In Ramamurti/Hashai (Eds), The Future of Foreign Direct Investment and the Multinational Enterprise. Emerald, 2011.

Foreignness, multinationality and inter-organizational relationships. Strategic Organization, 2010.

The movement of service jobs overseas: A theoretical perspective. A report prepared for UNCTAD as input for World Investment Report 2004.

Outsourcing by Multinational Corporations as a choice between internalization and the market: Implications for theory and policy makers. A report prepared for UNCTAD, 2003.

Offshoring Survey, A report prepared for the Paaras Consulting Group, 2003.

Offshoring: Not just for first movers. Journal of Financial Transformation, 2003 (with S. Gupta)

Speaker, National Conference of State Legislators, Policy responses to outsourcing: Prescriptive and normative approaches. Washington D.C., Capitol Hill 2003.

Non-equity Modes (NEMs): a One-Way Flow Top Cities/countries for service outsourcing

Established EmergingBangalore/India Krakow/PolandMumbai/India Beijing/ChinaDelhi/India Buenos Aires/ArgentinaManila/Philippines Cairo/EgyptChennai/India Sao Paolo/BrazilHyderabad/India Ho Chi Minh/VietnamDublin/Ireland Dalian/ChinaPune/India Shenzhen/ChinaCebu/Philippines Curitiba/BrazilShanghai/China Colombo/Sri-LankaUNCTAD World Investment Report 2011, based on www.globalservicemedia.com

The US Factoryless Economy

Sales, bil.US$ Employment, 000

2002 3,003 3,492

2007 6,750 11,973

Factoryless good producers – outsource all manufacturing; implement all capital, labor and material inputs required for the manufacturing. The Economic Classification Policy Committee definition

Bernard and Fort, Factoryless good producers in the US. NBER 2013

Consequences for Emerging Market TNCs (Firms)

Value appropriation from NEMs relationships Capability development via NEMs agreements NEMs as a vehicle for global expansion.

NEMs Shared Value: Developed/Emerging Country TNCs?

Share of NEMs Value Gained by Emerging Market TNCs (Firms)

Apple/California25,000

Foxconn for Apple/China250,000

Employment

Foxconn for Apple/China

753Apple/California318

Wages, Mil. US$

Apple Cisco Foxconn ASUSTek

28.7

20

4 3

Profit Margins, %

Capability Development via NEMs:Brand name, Technology

Taiwan Invisible OEM GiantsMarket share

(%)Market value

($bil)

Chip foundry 70 8.9

Notebook PCs 72 22.0

LCD monitors 68 14.0

PDAs 79 1.8

Servers 33 1.8

Digital cameras 34 2.0The Economist, IT in Taiwan and China: Hybrid vigour. 5/29/10 US

German

y

France

Canad

aIta

ly

Sweden

Israe

lH-K

Singa

pore

Brazil

55%

19%

7%

% patents US Patent Office, 1977-2008

U.S. Patent Office, www.uspto.gov

Nor do NEMs serve to as a Vehicle for Global Expansion

Attraction as local partners – does not travel

Local partners goal at time of agreement – vehicle to global expansion:

Creating Competitive Advantage via NEMs• Airtel outsourcing model:

o IT operations, Customer care – IBMo Running the network – Ericsson, Nokia, Siemens

• Cost saving:o No fixed costs; no excess capacity cost; no maintenance costs

• Call rates, cents/minute, 2009:o Airtel: 0.2; US operators: ~20 cents

• Revenues/user (per month):o Airtel: $6; Verizon: $51

• Operating margins: o Airtel: 40% = > US companieso The 'minutes factory' model - low cost/high volumes

• Sunil Mittal: ‘Flying on the Wings of Others’.

‘Flying on the Wings of Others’ – only in India?

Partners’ attraction to Airtel?

Airtel attraction to partners?Access to India

marketPotential target

A Business Model Confined to India?2013, in crore Revenues Net income Capital expend.

India 14,079 967 1,042

Africa 7,026 -288 964

Asia 543 -133 132

2014, in crore Revenues Net income Capital expend.India 15,815 2,449 2,058

Africa 6,896 -754 1,602

Asia 389 -154 66

Asia = Sri-Lanka, Bangladesh

Goal at Zain acquisition - by 2013:

Revenues Net income

~30,000 ~12,000

Bharti Airtel quarterly report. www.airtel.com

1 crore = 10 million Rupees

2013-4, % change Revenues per user

India +1

Africa -5

Asia n.a.

The ‘Africa Effect?’

‘Bharti Airtel [2014] Fourth-Quarter Net Profit - Almost Halves, Missed Forecast. …[this is] in part due to high interest costs on the debt it took to buy ZAIN.’

NEMs as a Vehicle for Global Expansion: Developed/Emerging Market TNCs

Fast food◦ US companies - % franchised globally 85-100%◦ Developing country companies – Jollibee overseas expansion – mostly via

acquisitions/shared ownership (j.v.)

Hotels ◦ US companies - ditto◦ Developing country companies - hotels Indian Hotels (Taj Palaces), Obroi,

Shangri La◦ Taj global expansion - mostly acquisitions.

Different Choices: Developed/Emerging country Firms

Where Should we go From Here?

Some Suggestive Thoughts Why NEMs by emerging market TNCs limited?

◦ Lesser specialization; excellence in generic skills [Apple/Samsung; Dell/Lenovo]◦ history of institutional void◦ Resistant to change, to economic development [Legend Holdings, est. 1984]

What will it take to encourage NEMs by emerging market TNCs?◦ Acquisition of new skills and talent◦ Change corporate culture!

◦ From efficiently implementing ideas designed elsewhere to innovation◦ Internal/external resistance

◦ Convince shareholders◦ [inevitable?] Loss of customers - do not want to do business with a competitor.

A Role for Governments?The Policy Agenda Home country branding Capital – investment with long time span IPR protection – encourage investment in innovation

More – when patterns better uderstood.

Nation [Place] Branding: Marketing Theory Meets Nation States

Change country image – deliberate government efforts◦ ‘Cool Brittania’ ◦ Taiwan ‘reputation management’ ◦ ‘Invest in remarkable Indonesia’

Challenge: brand already exists re-branding! change perceptions◦ Martin Spurling, CEO of HSBC in Turkey: ‘I had no idea how big Istanbul was until I

was appointed here. I was shocked. In terms of its location, history, culture, human potential and hospitality, Istanbul's a great candidate to be an international finance center. We have to explain it to the world a little better.’

Companies as ambassadors for nation – firms [+governments?]◦ India IT companies.

Size of Financial MarketsCountry size adjusted to volume of financial assets, 2010

Čihák et al.,Financial Development in 205 Economies, 1960 to 2010. NBER18946

Government ownership/control and access to capital

IPR Perception and Violations

Legitimate, % software market, by v...

85

17

Developed countriesEmerging markets

Business Software Alliance, Sixth Annual BSA-IDC Global Software Piracy Study, 2008; The Economist, Can you keep a secret? 3/16/13

Run Out of Time after Thoughts

Distinctive Policy Concerns of NEMs

Go under the radar of policy makers◦ US Specific NEMs Laws: Franchise laws require registration and franchisors need to make certain

disclosures to prospective franchisees (balances the bargaining power)◦ Partly addresses this concern◦ US only country to have this legislation?

Leave no trail poor record of actual activity policymakers in the dark

Where this creates most pain:

Anti-trust authorities - can generate too much market power

Restrictions foreign ownership – may harm all the reasons that bring about these restrictions

Limited ability to affect mutual [equal?] gains of investment – investors/host countries.

The Trade-offs of NEMs for TNCs (Firms)ADVANTAGES

Speed◦ Access to partner assets

Core competency focus

Overcome liabilities of foreignness

Create political capital.

DISADVANTAGES

Vulnerability – weak legal protection in case of legal disputes of any kind policy implications

IPR appropriation – most IPR violations in EM – by outsources

Developing a (legal) competitor.