How emerging market firms learn from multinational enterprises

A rhetoric that fuels recent geopolitical and trade tensions is that indigenous firms in emerging markets have benefited disproportionally from learning foreign technologies brought by multinational enterprises. But how much do emerging market firms really owe their success to capitalising on foreign technologies?

There has been a long tradition in the international business discipline to understand firms: how firms operate in multiple locations, how they interact with economic actors and environments in those locations and what consequences such interactions produce.

A stream of these studies examined the benefits of foreign direct investment (FDI) by multinational enterprises (MNEs) and suggests that indigenous firms may enjoy “spillovers” – gaining values that foreign firms would not have wanted to give away. The promise of “spillovers”, especially technologies and knowledge transfer, has since motivated many developing country governments to compete to attract inward FDI.

However, there is a paradox: MNEs do not want to give away advantages that make local rivals stronger, while emerging market firms have become more competitive at home in the face of continued FDI inflows. Motivated by this paradox, my research examines emerging market business groups and reveals their effective approaches to spillovers and learning from FDI.

Multi-location enterprises – the battleground

All enterprises are determined by location-specific advantages and their abilities to control and coordinate activities across locations. MNEs are prime examples, but not the only examples. Emerging market firms are rarely single-location entities. They are often networked, and some form business groups. Multi-location business groups are hence more competitive and capable than stand-alone firms as they operate with affiliates distributed across locations and each affiliate has different sets of responsibilities that are coordinated to benefit the whole group.

The battleground for native learning and catch-up is essentially in the interactions between multi-location foreign MNEs and multi-location indigenous business groups.

Learning at a distance is hard but achievable

Along with my co-author, Professor Mario Kafouros (University of Manchester), we studied FDI spillovers occurring within a location where the group has affiliate(s) (intra-regional effect), and then studied if the group experiences spillovers when it does not have any affiliate in a location (inter-regional effect).

MNEs are known to have firm-specific advantages, notably intangible assets such as technology and knowledge, and specialize in replicating these across locations to optimize competitiveness. Their strong appropriability regime (retaining the added value it creates for its own benefit) means little is easily given away. Tacit knowledge transfer is one possible channel to obtain valuable benefits from MNEs, but tacit knowledge does not “travel far”. Thus, we predict that the most likely spillovers (if at all) would be intra-regional not inter-regional.

Using a large sample of Chinese business groups with varying degrees of spatial dispersion, our results confirm this. In fact, inter-regional spillovers are found to be small in magnitude and negative, suggesting a competitive threat from MNEs in locations where groups fail to expand into. However, those groups with greater geographic dispersion than their indigenous peers are found to do better, i.e., benefit from FDI spillovers without “being there”.  Building resilient and more integrated internal spatial networks, and therefore having a stronger ability to overcome spatial discontinuity, is a key approach of learning in emerging markets.

Most effective learning in emerging markets: marketing and sales

Our research tests which types of affiliate activities have enabled the indigenous groups to benefit from intra-regional FDI spillovers. A group may have an affiliate responsible for marketing and sales while another is responsible for manufacturing or research and development, and such activities are distributed across locations. We found that groups benefitted from FDI spillovers most through marketing and sales affiliates but not research and development affiliates, and in fact negatively from manufacturing.

Hence, we reject the rhetoric by showing that, for a large emerging market, such as China, where an emerging middle-class shifts the motive of FDI away from low-cost manufacturing, sales and marketing knowledge diffusion is most prevalent and effective for indigenous firms. Learning by emerging market firms takes place more often in consumption rather than production contexts. Rather than using foreign technologies for manufacturing and exporting, learning through meeting local consumer demands is the key to indigenous success in emerging markets.

Knowledge transfer to policymakers and businesses

Evidence from this research can inform policymaking and business strategies in a number of ways. Specifically, policymakers in emerging markets should consider a more targeted approach to foster regional development through local learning. The evidence that multi-location emerging market firms possess unique capabilities and are able to benefit from intra-regional FDI spillovers gives assurance that learning is indeed taking place.

The evidence that their learning is limited to marketing and sales suggests that policies should be directed to foster the coevolution between foreign and domestic firms within a region, by which China’s rapid market growth is to be turned into innovation opportunities, especially adapted local innovation, enhancing the technological interactions between foreign and domestic firms and the return to innovation for all firms.

At the same time, policymakers in advanced economies should consider a much more sophisticated approach to engage with emerging market firms, in order to upgrade the development of advanced market firms, e.g., through export or direct investment. The evidence that Chinese indigenous firms, in face of foreign competition within a home region, have developed unique capabilities to overcome the disruption of space using a “networked” approach should be utilized.

It suggests that, in increasingly globalized marketplaces, emerging market firms can be important partners who create gateways to specific local segments of some of the world’s largest and fastest-growing markets.

Market intelligence gained through interactions (e.g., alliances) with multi-location emerging market firms can lead to unique market advantages. Thus, advanced economy policymakers who are able to support own firms better to tap into such opportunities will reap the benefits, and help own firms to gain competitive advantages over foreign firms operating in emerging markets.

For international businesses, strategies of engaging with emerging markets, in general, should have a carefully crafted network element. Businesses should be critical about the protectionist’s mindset amplified by recent geopolitical debates.

As shown above, emerging market firms can be valuable alliance partners in entering and winning in a competitive emerging market environment. Combining home country with host country networks, and resources and advantages embodied in these networks, is key for business strategy setting. A home-host bundling of network advantages can be critical for developing innovation that is most suited for local adaptation and also for high growth (and highly profitable) markets such as China.

Read the journal article: Location still matters! How does geographic configuration influence the performance-enhancing advantages of FDI spillovers? Journal of International Management. https://doi.org/10.1016/j.intman.2020.100777