What Are The Challenges For The Multi-National Corporations On Account of Intensification of The Divide Between Pro-Globalists and Anti-Globalists?

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1.

What are the challenges for the multi-national corporations on account of intensification of the divide
between pro-globalists and anti-globalists?
Over the past 40 years, the world has gone through an unprecedented era of globalization. People, capital,
goods, and ideas have moved around the world with freedom not seen since the late 19th century. MNCs
have been instrumental in this process. The beginnings of this transformation focused on optimizing costs,
as MNCs shifted production to countries with cheaper labor and spread advanced production techniques
and management practices around the world. As a result, both MNC and global productivity have
improved dramatically.
International collaboration and global trade deals have also greatly benefited Asian economies in the last
decade, with this region becoming an important launch pad for some of the world’s largest MNCs.
Shareholders of MNCs have benefited from this tailwind too, as bigger markets, lower production costs,
and judicious use of head office domiciles to reduce tax bills have all improved the bottom line. One
analysis shows that between 1990 and 2015, the market capitalization of the top 50 MNCs grew more
than three times faster than the average publicly traded company.
However, this advantageous position is now under threat. Political discourse, in part driven by more
profound shifts in public sentiment and rising domestic inequality, is questioning globalization and the
political and economic policies that promoted it. In recent years, this dynamic has played out through a
growing number of political leadership changes around the world, towards groups that harbor more
populist and nationalistic tendencies.
The Global Financial Crisis of 2008 proved to be the flashpoint that propelled many to re-examine the
benefits and trade-offs brought about by a globally integrated economic system. In many countries, the
economic consensus has shifted back towards a preference for a stronger role for the state in the
oversight of markets and of corporate behavior. As national policies are veering away from an emphasis
on international free trade, there has been a clear rise in the introduction of protectionist measures by
the world’s leading economies. With momentum behind “deglobalization” increasing, some market
environment assumptions of recent decades may be reversed.
Although the current shift is unambiguously towards greater protectionism, the degree to which it will
persist is not clear. A few of the liberal democracies in the West that championed free trade are starting
to push back against the free movement of capital, goods and labor, with a pivotal shift in their politico-
economic agendas. On the other hand, despite similar emerging populist sentiment in parts of Asia, efforts
are still being made towards greater regional banding (intra-Asian or intra ASEAN), triggered in part by
the recent withdrawal of the United States from the TPP (Trans-Pacific Partnership).
Moreover, with economic powerhouses China, Japan and India closer home, developing economies in
Asia have alternative sources of foreign direct investment (FDI) at attractive terms (the most notable being
China’s $900 Billion Belt and Road Initiative) and are less hesitant to steer away from Western FDI and
MNCs. For example, while US FDI into ASEAN fell by 50 percent in 2016, Chinese FDI into the region
increased by 44 percent the same year. One cannot discount the possibility of a return to some new
version of globalization with more favorable terms for MNCs, or a reversal in the trend towards increased
populism. Our assumptions in this article are: (a) Protectionism will rise at least in the short term, and
MNCs must take heed and plan for the consequences; and (b) We cannot exclude a potential rapid
acceleration into populism which should be considered a crisis scenario for most global operators.
The effect on MNCs:
MNCs have increasingly become targets of attention and criticism by this new wave of nationalism.
Specific events linked to tax avoidance, executive compensation, local market infractions (such as
environmental standards, health safety, and labor laws), accounting scandals, and government bailouts
have been cited by the populists as examples of MNCs’ abuse of the system. However, not all bearings
have been idiosyncratic. Trade barriers directly impacting MNCs businesses and products are being raised
at a record rate – in 2017 alone, 376 discriminatory trade interventions were implemented as compared
to 111 liberalizing measures.
Further, as developing economies mature, governments are getting smarter in supporting the local
economy and businesses, and pressurizing MNCs to commit more towards the local economy and broader
society. MNCs thus face a new operating environment and set of constraints – business models that
delivered superior performance by tapping into multiple growth opportunities while keeping costs and
financial resources lean and geographically mobile may no longer be efficient. Unattended to, MNCs will
face depressed business growth and profitability. This is already being seen: The FTSE has found that the
profits of the top 700 MNCs have dropped by about 25 percent in the past five years, as has the rate of
return on FDI.
MNCs’ strategic planning and risk analyses thus need to explore many different contingent scenarios,
including adverse geopolitical events. MNCs need to better understand the specific drivers and
transmission mechanisms by which political shifts trickle down to impact business models and
profitability. The impact of each of these drivers on MNCs will differ by country of incorporation, industry
of operation, and geographic footprint. Next, we highlight the transmission mechanisms and likely impact
of each of the drivers.

2. What are the challenges for the traditional or classical MNCs on account of internationalization of
businesses in the emerging economies?

The twenty-first century has seen the economic and social rise of countries from the less developed parts
of the world. Some of these countries have become major exporters of manufactured goods while others
sell agricultural, energy or mineral commodities. In the last few years, the emerging economies have also
become major sources of foreign direct investment, that is, companies based in emerging economies have
expanded throughout the world, making acquisitions and setting up manufacturing and distribution
operations not just in emerging economies and developing countries but in developed ones as well,
becoming Multinational Corporations (MNCs). The proliferation of the new multinationals has taken
observers, policymakers, and scholars by surprise. Most of these firms were very small in size globally and
marginal competitors just a couple of decades ago; today they are challenging some of the worlds most
successful and established multinationals in a range of industries and markets.

The Growth of the New MNCs and their Challenging the Traditional MNCs:
The early students of the phenomenon of MNCs from developing, newly industrialized, emerging, or
upper-middle-income countries focused their attention on both the vertical and the horizontal
investments undertaken by these emerging firms, but the latter especially surprised them. Investments in
the vertical stream are easily explained in terms of the desire to reduce uncertainty and minimize
opportunism when assets are dedicated or specific to the supply or the downstream activity, whether the
MNC comes from a developed country or not. The horizontal investments of the new MNCs, however, are
harder to explain because they are supposed to be driven by the possession of intangible assets, and firms
from developing countries were simply assumed not to possess them, or at least not to possess the same
kinds of intangible assets as the classic MNCs from the rich countries. This paradox becomes more evident
with the second wave of foreign direct investment (FDI) from the developing world, the one starting in
the late 1980s. In contrast with the first wave FDI from developing countries that took place in the 1960s
and 70s, the new MNCs of the 1980s and 90s aimed at becoming the leading global enterprise in their
respective industries, not just marginal players.
The dimensions in the table highlight the key differences between new and conventional MNCs. Perhaps
the most startling one has to do with the accelerated pace of internationalization of the new MNCs, as
firms from emerging economies have attempted to close the gap between their market reach and the
global presence of the MNCs from developed countries. A second feature of the new MNCs is that, no
matter the home country, they have been forced to deal not only with the liability of foreignness, but at
the same time with the lack of competitive advantage that stems from being latecomers lacking the
resources and capabilities of the established MNCs. For this reason, the international expansion of the
new MNCs runs in parallel with a capability upgrading process through which newcomers seek to gain
access to external resources and capabilities in order to catch up with their more advanced competitors,
that is, to reduce their competitiveness gap with established MNCs. However, despite these emerging
MNCs lacking the huge resource endowment of traditional MNCs, the new MNCs usually have an
advantage over them, as they tend to possess stronger political capabilities. As the new MNCs are more
used to deal with discretionary and/or unstable governments in their home country, they are better
prepared than the traditional MNCs to succeed in foreign countries characterized by a weak institutional
environment. The high growth rates of developing countries and their unique institutional environment,
the political capabilities that the MNCs have gained have been especially valuable.
The first three features taken together point to another key characteristic of the new MNCs: they face a
significant dilemma when it comes to international expansion because they need to create a balance
between their objectives of global reach and the need to upgrade their capabilities. They can put to use
their domestic competitive advantages in target countries, but they must also enter more advanced
countries in order to expose themselves to cutting-edge demand and develop their capabilities. This
tension is reflected in the graph below. Firms may evolve in a way that helps them to upgrade their
capabilities or gain geographic reach, or both. Though some MNCs from emerging markets focus only on
emerging markets, the corporate expansion of the new multinationals typically entails growing in both
directions, upgradation of capability and increasing geographic reach. The diagonal shows the optimum
scenario, where the firm pursues a balanced growth path, with the typical expansion pattern of traditional
MNCs. Above the diagonal it enters the region of capability building, in which the firm sacrifices the
number of countries entered (i.e., its geographic reach) so as to decrease the gap with other MNCs,
especially in the advanced economies. Pursuing a strategy below the diagonal becomes unsustainable for
the firm as it enters the unsustainable region of prioritizing global reach without improving firm
competences thus jeopardizing the capability upgrading process. This tension between the two competing
objectives forces the new MNCs to enter developed and developing countries simultaneously once they
start their international expansion. Entry into developing countries helps these MNCs gain size and
operational experience, as well as generate profits, while the developed countries contribute primarily to
the capability upgrading process. The emerging MNCs have shown a tendency to expand into developing
countries at the beginning of their international expansion and limit their presence in developed countries
to only a few sites where they can concentrate on building capabilities, either because they have a partner
there or because they have acquired a local firm. As they catch up with established MNCs, they begin to
invest more in developed countries in search of markets, though they also make acquisitions in developed
markets in order to secure strategic assets.
A fifth feature of the new MNCs is their preference for entry modes based on external growth. Global
alliances and acquisitions are used by these firms to simultaneously overcome the liability of foreignness
in the country of the partner/target and to gain access to their competitive advantages so that they can
upgrade their resources and capabilities. When entering into global alliances, the new MNCs have used
their home market position to facilitate the entry of their partners in exchange for reciprocal access to
the partners’ home markets and/or technology. Besides the size of the domestic market, the stronger the
position of new MNCs in it, the greater the bargaining power of the new MNCs to enter into these
alliances. This fact is illustrated by the case of some new MNCs competing in the domestic appliances
industry like China’s Haier, Mexico’s Mabe or Turkey’s Arcelik, whose international expansion was helped
by alliances with tradition established MNCs that allowed them to upgrade their technological
competences. Capability upgrading processes have been possible in some cases due to the new MNCs’
privileged access to financial resources, because of government subsidies or capital market imperfections.
A final feature of the new MNCs is that they enjoy more freedom to implement organizational innovations
to adapt to the requirements of globalization because they do not face the constraints typical of
established MNCs. Traditional MNCs from the developed economies suffer from inertia and path
dependence due to their deeply ingrained values, culture and organizational structure. Mathews shows
how the new MNCs from Asia have adopted a number of innovative organizational forms that suited their
needs, including networked and decentralized structures.
When analyzing the foreign investments of the new MNCs of the 1960s and 70s, scholars focused their
attention on two important questions, namely, their motivations and their proprietary, firm-specific
advantages, if any. The following sections deal with these two issues.

The new MNCs are the result of both imitation of established MNCs from the rich countries—which they
have tried to emulate strategically and organizationally—and innovation in response to the peculiar
characteristics of emerging and developing countries. The new MNCs have emerged from countries with
weak institutional environments and they are used to operating in countries with weak property-rights
regimes, legal systems, and so on. Experience in the home country became especially valuable for the new
MNCs because many countries with weak institutions are growing fast and they had developed the
capabilities to compete in such challenging environments.
It is also important to note that the established MNCs from the rich countries have adopted some of the
patterns of behavior of the new multinationals. Increased competitive pressure from the from MNCs from
developing countries has prompted many American and European firms to become much less reliant on
their traditional strategies of product-differentiation and vertical integration. To a certain extent, the rise
of networked organizations64 and the extensive shift towards outsourcing represent competitive
responses to the challenges faced by established MNCs. Finally, a special type of new MNC is the so-called
born-global firm, which resembles the new MNC in many ways but has emerged from developed
countries.
Taking all of these developments into account, it is clear that the traditional model of MNC is fading. In
effect, globalization, technical change, and the coming of age of the emerging countries have facilitated
the rise of a new type of MNC in which foreign direct investment is driven both by the exploitation of firm-
specific competences as well as the exploration of new patterns of innovation and ways of accessing
markets.
Our analysis of the new MNCs has shown that their international expansion was possible due to some
valuable capabilities developed in the home country, including project-execution, political, and
networking skills, among other non-conventional ones. The lack of technological or marketing capabilities
does not necessarily imply the absence of other valuable capabilities that may provide the foundations
for international expansion. It is precisely for this reason that the new MNCs are here to stay.

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