Multinational Expansion Underscores Management Challenges
In spite of the current turmoil in Mexico and Russia, and the uncertainties regarding political transition in China and Brazil, U.S. business is generally bullish on what has become known as the “Big Emergent Markets,” or BEMs for short. A recent Commerce Department initiative identifies 10 such markets as targets for joint business-government efforts: the Chinese Economic Area (which includes China, Hong Kong and Taiwan), India, Indonesia, South Korea, Mexico, Brazil, Argentina, South Africa, Poland and Turkey. Given current trends, exports to these countries are expected to exceed our combined exports to Europe and Japan by 2010.
Foreign direct investment--that is, when the investor has management control, as opposed to portfolio investments undertaken by individuals or mutual funds--into these markets is also accelerating dramatically. Net equity investments in emerging markets exceeded $61 billion in 1993, compared to $3 billion in 1988. Asia accounted for $40 billion of this total. Latin America was next, with $20 billion.
U.S. corporations have been at the forefront of these trends. Export volume to the 10 BEMs exceeded $113 billion in 1993 and is expected to have topped $150 billion last year. Direct investment by U.S. firms in emerging markets amounted to $23 billion in 1993 and may have exceeded $30 billion last year. And these are not just huge firms: more than 37,000 multinational firms are active in foreign markets, according to a United Nations study.
Such global expansion places enormous burdens on the management structure and skills of parent companies. Managing international operations requires a conceptual understanding that goes beyond that applicable domestically. In fact, one of the major competitive advantages of any multinational company is precisely its ability to optimize operations on a global scale, maximizing revenue and minimizing costs by emphasizing national differences in market prices and production costs.
This challenge to management can be traced to five principal factors:
* Institutions evolve in distinctive national patterns rooted in history and often in accidental circumstances. Government agencies, public policy processes, the structure of labor unions and bargaining and grievance resolution processes differ widely among countries which might otherwise share a common heritage and level of economic development. Witness the vast differences in public organizations and labor-management relations between the United States, Canada and Britain.
Significant national differences exist in legal systems, property rights, the enforceability of contracts and even the possibility of recourse to judicial remedies--as the film and software industries have found out in their attempts to eradicate piracy in Asia. The banking system and both the availability and regulation of media, financial services or distribution channels also vary among countries with similar economic structures.
* Culture also represents a major discontinuity in operating internationally. Differences in values and social attitudes, in behavior and responses to interpersonal stimuli and in religion and personal priorities all call for responses in marketing and management policies both quantitatively and qualitatively distinct from those that would work at “home.” While there is no denying that cultural diversity exists in many nations, and particularly within the United States, research has shown that national differences in attitudes toward authority or responsibility, for example, are significant and must be incorporated into any international business plan. Failure to account for these differences may explain Disney’s difficulties in translating its successful theme park formula to the outskirts of Paris.
* Competition and competitive behavior also differ across countries in significant ways. Not only is the identity and behavior of competitors likely to vary, but so are the structure of local industry, including the existence of cozy “competitive understandings,” their willingness to accommodate new entrants, or the degree of innovation permitted. The experience of U.S. companies in the Japanese market speaks volumes of the importance of these factors.
* The nature of the risks incurred is probably the most distinguishing characteristic of international operations. Political risks may seriously affect the value of foreign assets or, more often, the expected returns on these assets. Financial risks--particularly fluctuations in the relative value of currencies--expose the international firm to economic events drastically different from those experienced by a domestic corporation. Recent developments in Mexico are a reminder of the need for careful analysis of such factors.
* Finally, organization and control issues are much more complex for the multinational company. While the typical domestic firm wrestles with product and functional lines of authority in arriving at an optimal structure, international operations add one more dimension to the puzzle: geography. Lines of coordination and responsibility must now be drawn in a three-dimensional space which raises the number of necessary linkages in geometric fashion. Add to this the barriers that distance, time zones and languages impose on any attempts at integration.
How to master this diversity, respond to genuine demands for local differentiation in new markets, and, yet, maintain strategic control over a far-flung network of affiliates is the most demanding managerial task of any multinational firm. It is not simply a matter of “think global, act local,” but of how to design complex networks of relationships that simultaneously integrate the global and local perspectives in reaching decisions.
As U.S. corporations extend their global reach to take advantage of the opportunities presented by the BEMs, it is how well they manage these conflicting yet essential tasks that will determine the long-term winners and losers.
