Why do multinationals emerge

Among the more recent outperforming countries, real wages and benefits grew by 6. This was about triple the level in other developing and advanced economies. Household consumption spending generated by rising incomes grew about three percentage points faster in the 18 outperforming countries than in other developing or advanced economies. Another essential feature of these countries has been their ability to achieve macroeconomic stability, even at a time of global volatility, by adapting policies to fit their local context and changing conditions.

For example, governments took quick action to ensure rapid recovery from volatile episodes, such as the Asian financial crisis of the late s and the global financial crisis of and Outperforming economies have also benefited from their ability to tap into global demand growth through export markets, giving them greater economies of scale.

In , outperformers accounted for less than 10 percent of global inflows and outflows of goods, services, and finance. By , they had increased their share to 20 percent or more. Competition policies also created impetus for productivity growth. Many outperformer countries recognized the importance of competitive private-sector companies and nurtured environments in which they could invest and compete, even as they created incentives for productivity improvements.

Rather than picking winning sectors or winning companies within sectors, they focused on boosting productivity within sectors.

As a result, sectors with a larger share of big companies grew faster, increased productivity by more than their peers, paid workers better, and realized greater levels of investment. Protection, however, was gradually lifted as these industries became more competitive, limiting market distortions.

In some cases, support was tied to conditions that encouraged companies to increase productivity. While growth-and-development economists over the decades have extensively documented policies that have driven growth in emerging economies, the contribution to the growth of globally competitive, nimbly managed, and highly productive companies has been less studied.

In the 18 outperforming countries, we find that these companies not only helped boost GDP but that they also are catalysts for change at home. From to , their revenue relative to GDP has almost tripled in outperformer developing economies—growing from the equivalent of 22 percent of GDP to 64 percent, close to levels in high-income economies and dwarfing levels in other developing economies. At the same time, we estimate that the contribution of value added by these outperformer companies to national GDP also grew rapidly, from 11 percent in to 27 percent in —or double the share among non-outperforming emerging economies Exhibit 3.

Large companies tend to focus on sectors that tap into global demand, which has helped drive a greater share of exports for the outperforming economies. Along with these direct effects, large companies indirectly stimulate the creation, growth, and productivity of SMEs in their supply chains—and in turn depend on these SMEs to provide intermediate input for their ecosystem. Rising to the top in the outperforming emerging economies—and then staying there—is by no means a foregone conclusion for large companies.

Our analysis finds that the competitive dynamics in many but not all of the 18 outperforming countries can be brutal, with only the strongest surviving. As a result, revenue growth is shared more widely. Contested leadership is a vital sign of the competitive environment. Less than half 45 percent of companies that reached the top quintile with respect to economic profit generation between and managed to stay in place for a decade, according to our analysis.

That was far less than incumbents in high-income economies, 62 percent of which stayed in the top quintile for the same decade.

Domestic competition, in turn, has enabled the winners to earn a disproportionate share of revenue and income and to outperform their counterparts in advanced economies across key dimensions, including total returns to shareholders. For companies in high-income countries, the developing world has thus become both an opportunity for growth and the source of tough new global competition.

The rewards for the successful companies that stay on top are substantial: the top 10 percent of large companies with respect to value creation, in the outperforming emerging countries, captured percent of the net economic profits generated by all companies. That is more than four times the proportion in high-income countries, where the top 10 percent captures only percent of all net economic profit.

But the penalties for failure are larger, too: the bottom 10 percent of companies in outperformer emerging economies accrues losses equivalent to percent of the total, compared with 31 percent of the respective profit pool for top large companies in advanced economies.

The emerging-market companies that survive this rite of passage emerge as hardened and formidable competitors on the global stage. Can ideas flow into the country unrestricted? Are people permitted to debate and accept those ideas? Can companies easily obtain reliable data on customer tastes and purchase behaviors?

Are there cultural barriers to market research? Do world-class market research firms operate in the country? Can consumers easily obtain unbiased information on the quality of the goods and services they want to buy? Are there independent consumer organizations and publications that provide such information? Can companies access raw materials and components of good quality? Is there a deep network of suppliers? Can companies enforce contracts with suppliers?

How strong are the logistics and transportation infrastructures? Have global logistics companies set up local operations? Do large retail chains exist in the country? If so, do they cover the entire country or only the major cities? Do they reach all consumers or only wealthy ones? Are there other types of distribution channels, such as direct-to-consumer channels and discount retail channels, that deliver products to customers?

Do consumers use credit cards, or does cash dominate transactions? Can consumers get credit to make purchases? Are data on customer creditworthiness available? What recourse do consumers have against false claims by companies or defective products and services? How do companies deliver after-sales service to consumers? Is it possible to set up a nationwide service network?

Are third-party service providers reliable? Are consumers willing to try new products and services? Do they trust goods from local companies? How about from foreign companies? What kind of product-related environmental and safety regulations are in place? How do the authorities enforce those regulations?

Does it have a good elementary and secondary education system as well? Do people study and do business in English or in another international language, or do they mainly speak a local language? Can employees move easily from one company to another? Does the local culture support that movement? Do recruitment agencies facilitate executive mobility? What are the major postrecruitment-training needs of the people that multinationals hire locally? Is pay for performance a standard practice? How much weight do executives give seniority, as opposed to merit, in making promotion decisions?

Would a company be able to enforce employment contracts with senior executives? Could it protect itself against executives who leave the firm and then compete against it? Could it stop employees from stealing trade secrets and intellectual property? Does the local culture accept foreign managers?

Do the laws allow a firm to transfer locally hired people to another country? Do managers want to stay or leave the nation? How are the rights of workers protected? Are financial institutions managed well? Is their decision making transparent? Do noneconomic considerations, such as family ties, influence their investment decisions? Can companies raise large amounts of equity capital in the stock market?

Is there a market for corporate debt? Does a venture capital industry exist? If so, does it allow individuals with good ideas to raise funds? How reliable are sources of information on company performance?

Do the accounting standards and disclosure regulations permit investors and creditors to monitor company management? Do independent financial analysts, rating agencies, and the media offer unbiased information on companies? How effective are corporate governance norms and standards at protecting shareholder interests? Do the laws permit companies to engage in hostile takeovers? Can shareholders organize themselves to remove entrenched managers through proxy fights? Is there an orderly bankruptcy process that balances the interests of owners, creditors, and other stakeholders?

In socialist societies like China, for instance, workers cannot form independent trade unions in the labor market, which affects wage levels. Such transfers usually price assets in an arbitrary fashion, which makes it hard for multinationals to figure out the value of South African companies and affects their assessments of potential partners.

The thorny relationships between ethnic, regional, and linguistic groups in emerging markets also affects foreign investors. This policy arose because of a perception that the race riots of were caused by the tension between the Chinese haves and the Malay have-nots. Although the rhetoric has changed somewhat in the past few years, the pro-Malay policy remains in place. Managers must also determine how decentralized the political system is, if the government is subject to oversight, and whether bureaucrats and politicians are independent from one another.

Companies should gauge the level of actual trust among the populace as opposed to enforced trust. For example, executives believe that China is an open economy because the government welcomes foreign investment but that India is a relatively closed economy because of the lukewarm reception the Indian government gives multinationals. Consequently, while it may be true that multinational companies can invest in China more easily than they can in India, managers in India are more inclined to be market oriented and globally aware than managers are in China.

Multinationals, therefore, will find it easier to function in markets that are more open because they can use the services of both the global and local intermediaries. The two macro contexts we have just described—political and social systems and openness—shape the market contexts. Similarly, openness affects the development of markets.

That has happened in India, for example, where capital markets are more open than they are in China. Likewise, in the product market, if multinationals can invest in the retail industry, logistics providers will develop rapidly.

Some EM-MNCs have advantageous access to resources and markets, and also have "adversity advantages," that is, the ability to survive poor infrastructure, corrupt bureaucracies, regulatory uncertainties and weak educational institutions—all of which hamper multinationals from advanced economies that operate within emerging economies. Evaluating the consequences for developed countries is difficult because data are very limited, which makes empirical research challenging.

The immediate effect of entry in advanced economies is the introduction of greater competition in input and product markets. Because many EM-MNCs are active in mature products industries, they could encourage less dynamic sectors to become more innovative within host economies and could introduce a reallocation of resources, such as capital and labor, from less efficient to more efficient firms.

Consider, for example, the "white goods" industry. Haier, which is partly owned by the Chinese government, opened a factory in South Carolina in , shook up the dormitory refrigerator industry with new types of refrigerators and then expanded into other niches. If EM-MNCs expand their production into advanced economies by opening new plants or expanding old ones, they may contribute positively to the host country's employment situation.

The Haier web site says that more than 95 percent of Haier America's employees in the U. Finally, the regulatory frameworks that allow FDI into advanced economies may need revisions in order to balance the protection of national interests, such as national security, defense and access to key resources, without alienating foreign companies.

Aykut, Dilek; and Goldstein, Andrea. Goldstein, Andrea. New York: Palgrave Macmillan, Goldstein, Andrea; and Pusterla, Fazia. Similarly, while all companies need data for investment and operational decision-making, official statistics in emerging markets are not always reliable , and are often skewed by political agendas. For example, in Pakistan, a census scheduled for was delayed by nine years, and beset by problems when it was finally conducted.

More broadly, all developing countries undergoing rapid population growth struggle to provide regular and reliable census data.

Ethiopia recently delayed a census originally scheduled for for a second time, citing ethnic conflict ahead of the upcoming elections, scheduled for May In Nigeria, where the last census was conducted in , past counts have consistently led to accusations of fraud. In the absence of data, relationships are key; reliable contacts with intimate knowledge of the local markets are critical for successful business operations.

Rapid economic growth is neither linear nor smooth and multinationals must navigate uncertain policy environments. There is remarkable overlap between the countries with the highest economic growth rates and those with the highest levels of political risk.

In countries with underdeveloped policy processes, regular cabinet shuffles, endemic corruption, commodity dependency, and the potential for mass protests against discredited governments, uncertainty comes with the territory. Although these four challenges each place different demands on firms, they all point to the need for flexibility and strategic redundancy.

Smart companies will invest in local subsidiaries instead of trying to maintain strong central control, and they will embrace mobile technology to connect with consumers and build bridges to the informal sector. Examples of success are found in new companies focused on large emerging markets sales. To counter the under-regulated, largely informal nature of the used-auto market, FCG has established a network of inspection centers usually a gas station or other preexisting business where vehicles undergo an app-supervised inspection before being listed on a live bidding site.