In recent years there has been unprecedented growth of emerging economies, particularly Brazil, Russia, India and China (the BRICs).
Currently they top the rankings of global investment attractiveness.
A somewhat less pronounced but no less significant phenomenon is the increasing internationalisation of companies from these economies, and particularly, their penetration into European markets. Despite recent surging interest, the topic of ‘emerging multinationals’ remains greatly under-researched.
While the phenomenon of companies from less advanced and developing countries embarking on business abroad is not entirely novel, it is only now that the magnitude of this process has changed enormously. Multinational companies from emerging economies invest not only in the neighbouring countries of the same level of development, they more assertively target advanced economies. More so, they compete vehemently between themselves. The case of the battle between India’s Mittal and Russia’s Severstal for the ‘diamond’ of the European steel industry, Arcelor, is illustrative in this respect.
While the stocks of outward direct investment from emerging economies cannot be compared to those of developed economies (the entire outward FDI stock of the BRIC
economies is slightly more than $500bn), FDI flows from emerging economies are on the rise. Even in the current global economic malaise, there are not yet indications of decreasing business activity of emerging multinationals.
Subsidiaries of emerging multinationals engage in a variety of functions, ranging from sales and logistics to R&D. It is within the advanced Western economies in particular that they seek to conduct their R&D activities, benefiting from co-operation with local research institutions and domestic companies. The EU is becoming a favourite destination for direct investments by emerging multinationals. The power of the Single European Market of 27 member states acts as a magnet for emerging multinationals that can access a large consumer base, advanced technology
and know-how, and modern managerial techniques. To reap the benefits, emerging companies have to establish physical presence through FDI rather than engaging in occasional export activities.
This internationalisation has been met with suspicion and mistrust.
Whether the motives of these companies are purely commercial – such as access to technology – or whether part of home governmentorchestrated strategy, one thing is
clear: these new global players are here to stay and can be ignored neither by policymakers in Europe nor by European businesses who find themselves competing with newcomers on their home soil.
Destination Europe
While the EU is a single economic bloc, each member state is idiosyncratic in its level of economic development (and industrial and economic structure). Moreover, there is a clear distinction between the founding member states of western Europe and the new EU member states of central and eastern Europe that joined in 2004 and 2007. These national differences determine their strategies.
The barriers to market entry in Europe for emerging multinationals are high (different business cultures, environmental regulations, managerial techniques, labour union agreements, etc). It is therefore unsurprising that the acquisition of a domestic company is a viable solution for emerging multinationals entering the European market. Even then, a newly acquired company has to sustain a competitive advantage, together with certain quality standards, especially for European consumers who place a high premium on product quality. These challenges force emerging multinationals to craft a successful strategy, both capitalising on their low-cost base and satisfying European consumer demands.
In general, emerging multinationals regard western Europe as a repository of technology and knowledge, so the dominant business strategy is acquisition of existing companies.
Emerging multinationals, particularly from China, prefer to acquire engineering companies in financial hardship. There are several cases where Chinese investors have acquired German companies on the verge of bankruptcy, such as Schiess AG. Some parts of Schiess’ production process has already been transferred to China, and after acquisition, the core business – production of heavy-duty machines – is to stay in Europe. For the Chinese investor, acquisition enables it to gain access to Schiess’ unique expertise.
Central and eastern Europe represents a slightly different case. It is a destination for efficiency-seeking FDI, with the purposing of establishing a manufacturing base and exporting to affluent Western consumers dutyfree within the boundaries of the
Single European Market. European regulations require that more than half of the value of parts and labour used in production come from within Europe. The rest may come from the home country so that the emerging economy multinationals may capitalise on their low-cost base.
Manufacturing costs even in the new EU member states are much higher than in a home base, yet the fact that goods produced within EU borders may be sold duty-free across
the single market justifies manufacturing inside the EU over import of
