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journal of International Business Studies (2007) 38, 481-498© 2007 Academy of International Business All rights reserved 0047-2506 $30.00

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INTRODUCTION

International expansion of emerging marketenterprises: A springboard perspective

Yadong Luo 1 andRosalie L Tung 2

7Department of Management, School of

Business Administration, University of Miami,Coral Gables, USA; 2Faculty of BusinessAdministration, Simon Fraser University,Burnaby, Canada

Correspondence:Yadong Luo, Department of Management,School of Business Administration,University of Miami, 414 Jenkins Building,Coral Gables, FL 33124-9145, USA.Tel: + 1 305 284 4003;Fax: + 1 305 284 3655;E-mail: [email protected]

Received: 11 January 2007Accepted: 11 January 2007Online publication date: 19 April 2007

AbstractIn this article, we present a springboard perspective to describe the internationa-lization of emerging market multinational corporations (EM MNEs). EM MNEs useinternational expansion as a springboard to acquire strategic resources and reducetheir institutional and market constraints at home. In so doing, they overcome

their latecomer disadvantage in the global stage via a series of aggressive, risk-taking measures by aggressively acquiring or buying critical assets from matureMNEs to compensate for their competitive weaknesses. We discuss unique traits

that characterize the international expansion of EM MNEs, and the uniquemotivations that steer them toward internationalization. We further delineatepeculiar strategies and activities undertaken by these firms in pursuit ofinternational expansion, as well as internal and external forces that might compelor facilitate their propulsion into the global scene. We finally explain the risks andremedies associated with this international 'springboarding' strategy and highlightmajor issues meriting further investigation.Journal of International Business Studies (2007) 38, 481 -498.doi: 10. I 057/palgrave.jibs.8400275

Keywords: emerging market multinationals; springboard; international expansion

IntroductionThe past two decades have witnessed rapid growth and remarkable

transformation in emerging economies. According to the World

Investment Report 2005 (UNCTAD, 2005: 34), of the top six most

attractive global business locations five are emerging economies

(China, India, Russia, Brazil, and Mexico). Unlike the early path

of internationalization for multinational enterprises (MNEs) from

advanced markets (e.g., US, Europe and Japan) and newly

industrialized economies (e.g., Korea, Singapore, Hong Kong and

Taiwan), emerging economy enterprises have benefited tremen-

dously from inward internationalization at home by cooperating(via original equipment manufacturing (OEM) and joint venture in

particular) with global players who have transferred technological

and organizational skills, allowing emerging market enterprises

to undertake outward internationalization later in some uncon-

ventional ways. Although developed country MNEs remain the

major source of outward foreign direct investment (FDI) today,

outflows from developing and emerging economy MNEs have

significantly risen, from a negligible amount in the early 1980s to

$83 billion in 2004, or 11% in world stock, with active engagement

in a large number of cross-border mergers and acquisitions

(UNCTAD, 2005: 8).

*

4482

In this article, we present an overarching frame-work that analyzes the uniqueness of emergingmarket multinational corporations (EM MNEs),including their rationale and motives, activitiesand strategies, propelling and facilitating forces, aswell as risks and challenges in the course ofinternational expansion. At the core of this frame-work is our argument that EM MNEs use outwardinvestments as a springboard to acquire strategicassets needed to compete more effectively againstglobal rivals and to avoid the institutional andmarket constraints they face at home. Their 'spring-board' behaviors are often characterized by over-coming their latecomer disadvantage in the globalstage via a series of aggressive, risk-taking measuresby proactively acquiring or buying critical assetsfrom mature MNEs to compensate for their compe-titive weaknesses. They are often not path depend-ent nor evolutionary in selecting entry modes andproject location. Instead, their investments abroadcould be attributed to several pressures, such as late-mover position, strong presence of global rivals intheir backyard, quick changes in technological andproduct development, and domestic institutionalconstraints. At the same time, their 'springboard'approach is encouraged by their respective homegovernments, the willingness of global players inadvanced countries to sell or share strategicresources, and the increasing integration of theworld economy and global production. Whilebenefiting from many opportunities, 'springboard'activities can inherently involve more risks andchallenges by requiring EM MNEs to overcome theircritical bottlenecks, such as poor governance andaccountability, lack of global experience, managerialcompetence and professional expertise, and weaktechnological and innovation capabilities.

By developing a springboard perspective for EMMNEs, we do not imply that existing MNE theoriesare incapable of explaining behaviors of EM MNEs.For instance, Dunning's (1981, 1988, 2001) eclecticparadigm is still relevant to the extent that EMMNEs expand internationally, especially in otherdeveloping countries, in search of location-specificadvantages by leveraging their unique capabilities.Similarly, although EM MNEs do not necessarilyfollow the incremental approach in internationali-zation, they still attend carefully to the importanceof organizational learning and global experience,the central thesis of the evolutionary process theory(Johanson and Vahlne, 1977). In addition, latedevelopment (Dore, 1990) or latecomer advantage(Buckley and Casson, 1981) arguments offer some

explanations (e.g., the leapfrog effect) that areshared by the springboard perspective, thoughthese two perspectives, as discussed later, differ.Our objective here is to enrich the existing theoriesby examining the approaches adopted by EMMNEs, since they appear to face unique parameters,rationales and strengths, while seeking to play anincreasingly important role on the global stage.This paper seeks to build upon the wealth ofknowledge developed in the mid-1980s thataddressed outward expansion by 'third world'multinationals (e.g., Lecraw, 1977, 1983; Wells,1983; Lall, 1984). Although EM MNEs are at presentmuch less path dependent (e.g., ethnic network isno longer the key) and much more risk-taking (e.g.,through aggressive acquisitions and mergers) than'third world' multinationals in the 1980s, the twogroups still share some basic strengths (e.g., costadvantage) and weaknesses (e.g., limited knowl-edge of overseas markets). Despite these similari-ties, as illustrated below, there are significantpeculiar traits characterizing present-day EM MNEsthat merit the development of a new frameworkspecific to these firms.

EM MNEs: concepts and typology

Defining EM MNEsWe define EM MNEs as international companiesthat originated from emerging markets and areengaged in outward FDI, where they exerciseeffective control and undertake value-adding activ-ities in one or more foreign countries. Using thisdefinition, we exclude emerging market-based largeimport and export companies, because they do notengage in outward FDI, and enterprises that areinvolved in minority joint venture relationshipsoverseas, because they do not effectively controlthese subunits. We also exclude enterprises thatinvest mainly or exclusively in tax-haven countriessuch as the Cayman and Virgin Islands for theprimary purpose of taxation evasion or reverse/'round-tripping' investments (i.e., using their ownmoney under a 'foreign' subsidiary name to investback at home to obtain preferential treatment bythe home government), because they do notengage in value-adding activities overseas. Lastly,our definition of EM MNEs excludes state-ownedenterprises whose roles are to completely pursuepolitical objectives designated by their respectivehome governments (i.e., they do not compete ininternational markets for optimizing corporatereturns). For instance, we exclude those firms that

Journal of International Business Studies

xpans on o emr nn n gma r l el L eme,rpress Yadong LUO and Rosalie L Tlung

VYrInnn I Lin andl Rncali I Trrnn*483

seek merely to acquire natural resources fromanother country to meet governmentally plannedtasks (e.g., Indian Oil Corporation's acquisition ofoil and gas resources in West Africa) or undertakeforeign aid investment programs to strengthen thepolitical and diplomatic ties between home andhost country governments (e.g., China's state-owned construction companies, which builtbridges, stadiums, railroads, and hospitals in Africa)because these do not really compete in globalmarkets nor perform tasks to benefit corporategains.

This article focuses on MNEs from major emer-ging markets that have undergone significantstructural transformation in the recent past, suchas China, India, Brazil, Russia, and Mexico. Emer-ging markets represent countries whose nationaleconomies have grown rapidly, where industrieshave undergone and are continuing to undergodramatic structural changes, and whose marketshold promise despite volatile and weak legalsystems. To the extent that several other emergingmarkets, such as Poland, Ukraine, Thailand, SouthAfrica, Chile, Argentina, Turkey, and Malaysia,among others, also share these features, our discus-sion also applies to them in large part. We cautionthat these major emerging markets are not indivi-dually homogeneous, but to the extent thatenterprises in these countries face some similarconstraints, share similar motives, and have com-mon experiences in international business, we seekto develop a model that is generally applicable toMNEs from these economies. Although businessesfrom smaller developing or emerging markets havenot yet reached a sizable scale of internationaliza-tion, the discussions and arguments presented inthis paper may also apply to firms in thesecountries in the future. MNEs from newly indus-trialized economies or NIEs, though they are stillcategorized as developing countries by the UnitedNations, are not the focus of discussion in thisarticle. However, previous and current strategiesused by NIE multinationals can be importantlessons that EM MNEs should analyze and learn.Previous research (e.g., Kumar and Kim, 1984; Hanand Brewer, 1987; Levy, 1988; Tallman and Shen-kar, 1990; Li, 1994; Yeung, 1994, 1997, 1998) hasdocumented the patterns, motives, and strategies ofNIE multinationals, and new efforts that examinewhat lessons from these multinationals are trans-ferable to EM MNEs are merited.

EM MNEs are far from homogeneous. Comparedwith their counterparts in the advanced and newly

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Non-state-owned State-owned

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Figure 1 Typology of EM MNEs.

industrialized countries, a higher percentage of EM

MNEs are state-owned for historical, political, and

economic reasons, although such ownership pat-terns vary across emerging economies (Andreff,

2002; Kalotay, 2004). Based on ownership and the

level of international diversification (i.e., the

breadth of geographical coverage of internationalmarkets through outward investment), EM MNEscan be categorized into four groups (see Figure 1):

"* niche entrepreneurs;"* world-stage aspirants;

"* transnational agents; and

"* commissioned specialists.

Niche entrepreneurs are non-state-owned MNEs

whose geographical and product coverage in inter-

national markets is narrowly focused. Examples of

this type include China's ZTE (a handset producerand exporter that recently built production facil-

ities in Dallas to focus on North America), India's

Patni Computer Systems Ltd (a Mumbai-based IT

service provider that is active in the US), Russia's

Kamaz (a machinery and truck company that has

operations in the Commonwealth of Independent

States), Mexico's Mabe (an appliance producer that

is active in Central and Latin America), and

Turkey's Arcelik (a home appliances manufacturer

that is investing in the UK). Unlike state-ownedcompanies, these niche entrepreneurs typically

do not receive government funding nor possess

rich industrial experience. They focus on a narrow

line of products and markets to leverage their

strengths.Second, world-stage aspirants are non-state-owned

MNEs that are relatively diversified in their product

offerings and geographical coverage in the interna-

tional marketplace. Examples in this category

journal of International Business Studies

International exDansion of emeraina market enternrike•

include Russia's Lukoil (a privately owned giantthat operates in both upstream and downstreamactivities worldwide), China's Haier (the world'sfourth largest white-goods manufacturer, operatingin Europe, North America, Asia, and Oceania),India's Tata Group (that country's largest privatecompany, operating in more than 40 countriesacross six continents), Brazil's Embraer (the world'sfourth largest aircraft manufacturer, privatized in1994, which owns subsidiaries in the US, France,Australia, China, and Singapore), Mexico's Cemex(the world's top building-solution company, withoperations in more than 50 countries), Thailand'sCharoen Pokphand (a multinational conglomeratewith subsidiaries in more than 20 countries), andSouth Africa's Nando (a food franchiser offeringdozens of products in more than 30 countries).Although they have not yet reached the scale andscope of internationalization of big MNEs fromadvanced markets, these world-stage aspirants havebecome a formidable force in shaping the landscapeof global competition where cost advantages arecritical. These pertain to products that are mass-manufactured and technologically mature.

Third, transnational agents are state-owned MNEsthat have invested extensively abroad for theirbusiness expansion, while still being subject tohome government instructions or influences.Examples include China's International Trust &Investment Corp. (CITIC) and Ocean Shipping Co.(COSCO), Russia's Gazprom and UES, Brazil'sPetrobra and Companhia Vale do Rio Doce, India'sHindustan Petroleum Co. Ltd. (HPCL) and Oil &Natural Gas Corp. (ONGC), and Mexico's Pemexand Bancomext. These agents generally operate invital sectors that are of strategic importance to theirrespective countries. As such, their governments areusually their largest shareholders. They have goneglobal to seize opportunities presented by a betterinvestment climate to foster overall businessgrowth while supporting economic developmentat home.

Lastly, commissioned specialists are state-ownedMNEs whose outward investments focus on only afew foreign markets in which they leverage theircompetitive strengths while at times fulfillinggovernmentally mandated initiatives. Examples ofthese include China's Minmetals and Sinopec,Russia's Rosneft and Alrosa, India's Bharat HeavyElectrical Ltd. and National Thermal Power, Brazil'sElectrobras and Banco do Brasil, Malaysia's Petro-nas, and South Africa's Anglogold Limited. Thesespecialists emphasize certain geographic domains,

and operate along a focused line of business orproducts to play their dual roles: to reap the fruitsof international expansion as a legitimate businessand, at the same time, to complete state-assignedmandates within their area of expertise.

This typology, which incorporates the nature ofownership, a dimension typically absent in pre-vious typologies of MNEs, can help to addressvarying strengths, weaknesses, different behaviors,and rationales of idiosyncratic types of EM MNE.For instance, transnational agents and commis-sioned specialists receive greater institutional sup-port and government underwriting, but face higherbureaucratic hindrances and political interventionthan do world-stage aspirants and niche entrepre-neurs. Consequently, risk-taking behavior, invest-ment strategies, subsidiary governance, and parent-subsidiary relations may vary significantly betweenstate-owned and non-state-owned groups. Becausestate-owned groups usually have fewer discretion-ary powers in certain international expansiondecisions (e.g., choice of foreign location or foreignpartner) than non-state-owned groups, decisionsmade by transnational agents or commissionedspecialists might be only sub-optimal, with discre-pancies and misalignments between optimalstrategic options and actual choices under govern-mental influence. Similarly, owing to variations ininternational diversification, world-stage aspirantsand transnational agents might enjoy more oppor-tunities and higher returns but face greater risksthan niche entrepreneurs and commissioned spe-cialists. This may lead players in the former groupto engage in greater global integration (vertical orhorizontal), conduct broadened value chain activ-ities abroad (e.g., building foreign R&D centers),and involve stronger interactions among subunitsin different countries than do companies in thelatter group.

International springboard: behaviors andmotivesWe suggest that EM MNEs systematically andrecursively use international expansion as a spring-board to acquire critical resources needed tocompete more effectively against their global rivalsat home and abroad and to reduce their vulner-ability to institutional and market constraints athome. These efforts are systematic in the sense that'springboarding' steps are deliberately designed asa grand plan to facilitate firm growth and as along-range strategy to establish their competitivepositions more solidly in the global marketplace.


*Inentoa4Xaso feeriamre ne ie n48

International expansion of emerging market enterprises*YVrlnnn I onr and Rosalie L[Tuna

They are also recursive because such 'springboard'activities are recurrent (e.g., one foreign acquisitionmay improve an EM MNE's disadvantage in brandawareness and international reputation, while a

subsequent acquisition of a foreign logistics or

distribution company may rectify its deficiency

in accessing foreign customers) and revolving(i.e., outward activities are strongly integrated with

activities back home). This recursive nature distin-

guishes springboard from leapfrog behaviors. Leap-

frog is normally used by late entrants to catch

up earlier movers' competitive position while

avoiding the risks of technological obsolescence

and proprietary technology diffusion to rivals as

well as the extra burden of educating a changing

market (Dore, 1990; Anderson and Engers, 1994).

Leapfrog generally does not entail the recursive or

revolving dimension of international operations,and is only a part of a complex and revolving

process of international expansion. In addition,unlike leapfrog, which aims mainly to pursuelatecomer advantages (Luo, 1998), springboardseeks more extensive strategic gains beyond

latecomer advantages (detailed below). Springboardlinks a firm's international expansion with its home

base. For instance, EM MNEs (such as China's TCL,Lenovo, Chunlan, ZTE, and Haier) have reorga-

nized their home supply or production bases tomeet their increased global sales for high-endproducts, or have re-branded their homemadeproducts after using foreign acquirees' technologies

and trademarks. Viewed in this manner, the global

success of such EM MNEs is still highly dependenton their performance at home (e.g., sales, market

share, reputation) and their home base to serve

as the manufacturing center (components, semi-products and products) for their worldwide

operations. In other words, they will encountermany difficulties, and perhaps face extinction, if

their home performance weakens or their homebase fades away. Furthermore, it is foolish for theseEM MNEs to ignore their home markets while

multinationals from advanced and newly indus-

trialized countries are strongly attracted to the

opportunities, and hence huge profit potential,

posed by emerging economies. Because these globalrivals face liabilities of foreignness whereas EM

MNEs enjoy home court advantage, it is counter-productive for EM MNEs not to capitalize on their

home markets and home bases. Hence we argue

that international expansion is a springboard, not

an end, to most EM MNEs' success in globalcompetition. Because outward expansion also

48•5

generates many opportunities that are eitherunavailable or cannot be substituted for at home,the long-term viability and success of EM MNEs lie

in their ability to simultaneously leverage core

competences at home and explore new opportu-nities abroad in an integrated fashion. This argu-

ment is consistent with dynamic capability theory(Kogut and Zander, 1992; Teece et al., 1997).

'Springboarding' is manifested in several beha-viors or activities. First, EM MNEs use international

expansion as a springboard to compensate for their

competitive disadvantages. When investing in devel-

oped countries, they seek sophisticated technologyor advanced manufacturing know-how by acquir-

ing foreign companies or their subunits that possesssuch proprietary technology. They differ sharplyfrom advanced market MNEs, which generallyleverage and exploit their ownership-specific com-

petitive advantages in foreign countries (Dunning,1981; Lecraw, 1983). While NIC MNEs had also

sought such knowledge acquisition in their earlyinternationalization, they were more evolutionaryin this process (e.g., using minority joint venturesrather than acquisitions). In general, EM MNEs are

eager to acquire technology and brands throughinternationalization to fill their resource void.

Foreign firms' willingness to sell or share their

technology, know-how or brands due to financialexigency or restructuring needs makes it possiblefor EM MNEs to fulfill this need (Child andRodrigues, 2005).

Second, EM MNEs use international expansion as a

springboard to overcome their latecomer disadvantage.Through some path-independent and proactive

steps, such as mergers and acquisitions and stra-tegic asset-seeking from advanced markets, 'spring-board' moves allow EM MNEs to alleviate some

latecomer or newcomer deficiencies in areas such

as consumer base, brand recognition, and techno-logical leadership. Unlike NIC MNEs, which have

generally been evolutionary and path dependentin internationalization over the past decades(Han and Brewer, 1987; Li, 1994; Yeung, 1994)with their outward FDI driven primarily by 'push'

factors such as appreciating currencies, growing

current-account surpluses, rising labor shortages,escalating operating costs, and small yet saturated

domestic markets (Wells, 1983; Kumar andKim, 1984; Deng, 2004), EM MNEs' outwardinvestments are triggered mainly by 'pull' factors,

such as the desire to secure critical resources,acquire advanced technology, obtain managerialexpertise, and gain access to consumers in key


International expansion of emerging market enterprises Yadong Luo and Rosalie L Tung486

foreign markets so that they can overcome theirlatecomer handicap.

Third, EM MNEs use international expansion as aspringboard to counter-attack global rivals' majorfoothold in their home country market. To mostEM MNEs, their home country markets are stilltheir primary territory of operation. However, thesemarkets have been increasingly penetrated andeven dominated by advanced market and NICMNEs. To become truly global or transnational,some large EM MNEs recognize that they mustdirectly serve and win consumers in key foreignmarkets such as Europe, the US, and Japan. Thustransnational agents and world-stage aspirants takethe plunge by entering their global competitors'home or backyard in search of market share andcompetitive foothold. Some risk-taking activitiessuch as acquisitions and greenfield investments areundertaken, in part at least, for this purpose.

Fourth, EM MNEs use outward investment as aspringboard to bypass stringent trade barriers (e.g.,quota restrictions, anti-dumping penalties, andspecial tariff penalties). Although this motive isnot unique to them, many EM MNEs, especiallythose producing technologically standardized pro-ducts, are more dependent on global exportmarkets and more likely to use export intermedi-aries and distributors to reach foreign consumersthan their competitors. This allows EM MNEs toleverage their massive production capabilities whileavoiding their deficiency in reaching and interact-ing with overseas customers or end users. To avoidexport barriers, EM MNEs can either invest directlyin a target host country (e.g., China's Haier built itsmanufacturing facilities and assembly operations inthe US to avoid American quota restrictions andpotential anti-dumping suits and to protect theexporting of parts to the US) or first invest in a thirdcountry (typically another developing country,preferably treated by a target country's govern-ment) and from there springboard to a targetedadvanced market. For example, dozens of Chinesecompanies have invested in Central and SouthAmerica, the Caribbean and Mexico as a strategicplatform to manufacture garments, footwear,bicycles and household appliances for export tothe US without facing quota or other restrictions.

Fifth, EM MNEs use international expansion as aspringboard to alleviate domestic institutional con-straints. Institutional voids (e.g., lack of legalprotection for property rights, poor enforcementof commercial laws, non-transparent judicial andlitigation systems, underdeveloped factor markets,

and inefficient market intermediaries) and politicalhazards (e.g., political instability, unpredictableregulatory changes, government interference,bureaucratic red tape, corruption in public serviceand government sectors, and extremely discretion-ary explanation or enforcement of ambiguous lawsand rules) at home erode the competitiveness of thefirms, thus propelling them to go global. Regardlessof the skills and networks possessed by the firms inhandling such domestic constraints, it is alwayscostly (both financially and time-wise) for acorporate entity to deal with these institutionalvoids and political hazards. By selecting andoperating in an institutionally more efficient,transparent and encouraging environment withoutsuch constraints and hazards, EM MNEs couldavoid the aforementioned deterrents and thus beable to concentrate on building, exploiting andupgrading their competitive advantages in interna-tional markets.

Sixth, EM MNEs use international expansion as aspringboard to secure preferential treatment offered byemerging market governments. They do so mainlythrough reverse investments. Reverse investmentoccurs when an EM MNE first invests abroad andcreates a subsidiary in a foreign country, and thenuses this subunit as the 'foreign' entity to investback home to receive financial privileges (e.g., taxbreak and cheaper land fees) and non-financialprivileges (access to scarce resources and regulatorysupport) offered by emerging market governments.Although seeking reverse investment benefits maynot be the overriding objective behind these firms'international expansion, outward investment is aconvenient means to taking advantage of thesepreferential treatments. Because attracting foreigninvestments will continue to be an importantpolicy for emerging market governments, thesefinancial and non-financial privileges are likely toremain. When these privileges are present, EMMNEs may be motivated to use foreign expansionas a springboard to receive domestic preferentialtreatment. Another possible incentive is the desireto diversify assets as a safeguard against domesticinstability. For instance, there was a fast parallelincrease of both inflows and outflows in Russia,partially due to this type of round tripping byRussian MNEs. Government financing exists whenan EM MNE uses home-government-provided capi-tal to fund its foreign project(s). Many govern-ments, such as China, India, Mexico, Thailand, andPoland, offer financial incentives to encouragetheir businesses to go global (Cai, 1999; Andreff,


*Yadono Luo and Rosalie L Tuna

2002). If an EM MNE can combine governmentfinancing and reverse investments sequentially(i.e., use government loans to invest abroad andthen take some portion of the loan to reinvest athome), this type of 'opportunity' seeking is evenmore apparent.

Lastly, EM MNEs use international expansion as aspringboard to exploit their competitive advantagesin other emerging or developing markets. Many EMMNEs are national champions in their respectiveindustries at home. They have developed expertisein mass production through OEM arrangementsand international experience through cross-national alliances in their home country. Despitethe overall inferiority of these companies in termsof original technology and innovation, by virtue ofwell-established open global markets in appliedtechnology, advanced machinery and equipments,the latest tools and instruments, and sophisticatedmaterials and components, EM MNEs can simplybuy much of the technology and expertise theyneed. This availability, together with their massproduction capabilities and experience, havespurred EM MNEs to manufacture technologicallystandardized products in other emerging anddeveloping markets where the demand for suchitems is huge. Their low-cost position allows theselatecomers to offer a price that is very attractive to

local consumers, thus enabling them to increasetheir market share vis-i-vis multinationals fromadvanced and newly industrialized countries thathave been there for a long time.

Accordingly, EM MNEs' motives behind thespringboard behaviors can be broadly summarizedas (1) asset-seeking or (2) opportunity-seeking.While these two motives can apply to all MNEsregardless of their origin, EM MNEs seem to have

some unique property associated with asset-seekingand opportunity-seeking. Assets sought by EMMNEs may include technology, know-how, R&Dfacilities, human capital, brands, consumer bases,distribution channels, managerial expertise, andnatural resources. These assets are necessary to meet

the needs for (1) bolstering economic and socialdevelopment at home, and (2) compensating firm-level competitive disadvantages. Because of stronggovernmental involvement, especially for transna-tional agents and commissioned specialists, thesetwo objectives are sometimes dual and intercon-nected. The acquisition of raw materials by state-owned enterprises to meet their own operationalneeds, and the growing demand for the samematerials at home, are often important reasons for

EM MNEs (particularly those from China and India)to invest overseas. By more radical approaches,such as acquiring an established firm, EM MNEsmay gain access to the acquiree's entire package ofproduct and process innovation. By so doing, theymay use the acquired advanced technology to

upgrade their domestic manufacturing as well asdevelop new products for international markets(Deng, 2004). Many NIC MNEs, though not all,tended to learn the more sophisticated process andproduct technology from licensing and joint ven-

ture relationships with large MNEs from developedcountries, and then further modify and adapt themto the target market (Yeung, 1997).

To accomplish the goal of opportunity seeking,EM MNEs aim at:

"* tapping niche opportunities in advanced marketsthat complement their strengths (e.g., India'stop four software companies, Infosys, Wipro,Satyam, and Tata Consultancy Services, allbenefited from new clients and rapid growth inNorth America);

"* gaining preferential financial and non-financialtreatment offered by home and/or host govern-ments (e.g., the Chinese government has givenLenovo some support, such as financial under-writing as well as privileged access to domestic

government and educational markets);"* increasing company size and reputation (e.g.,

several Brazilian banks, including Banco Brades-co, Banco do Brasil, and Unibanco, achievedthese objectives through investments in Europeand Latin America);

"* escaping from institutional or market constraintsat home (e.g., some South African MNEs, such asSABMiller, have to operate globally to avoid

governmental control over foreign exchangeusage and to escape from the limited domesticmarket);

"* bypassing trade barriers into advanced markets

(e.g., some Chinese textile and clothing compa-nies invested in Turkey as a springboard toincrease exports to the EU, Fiji as a gateway toAustralia and New Zealand, and Jamaica as aplatform to increase US sales);

"* seizing opportunities in other developing coun-tries to leverage their cost-effective manufactur-ing capabilities (e.g., many Chinese companiesinvested in south-east Asia to absorb their excessproduction capacity, as do Latin American com-

panies that invested in neighboring countries);and


.1 1 x anslon of emer in market enterprises Yadonn I Ho and Rosalie L Tuna487•

International �xnandon of ,.�..oI..n � �4

* taking advantage of opportunities in unrelatedbut promising areas in high-income countries(e.g., 65% of Latin American investment in theUS between 1980 and 1988 was in real estate,especially in Florida and New York).

In contrast to NIC MNEs, whose outward FDI wasoften designed as an export-production platform(Wells, 1983; Levy, 1988; Li, 1994), EM MNEs areless likely to seek cost minimization opportunities,given the fact that their home supply or manufac-turing bases allow them to continually enjoy low-cost advantages through their vertically integratedglobal production systems.

EM MNEs may vary in the foci of the aboveincentives. Regarding asset-seeking, for instance,world-stage aspirants may place greater emphasison the acquisition of technology, brands, anddistribution networks to compensate for theircapability voids and to satisfy geographicallydispersed business needs, while transnationalagents may have to meet home governmentrequirements to seek natural resources to supportnational economic development. In contrast, nicheentrepreneurs may be less motivated to seek globalbrands, research facilities, or distribution networksthrough aggressive mergers and acquisitions.Rather, they may be more interested in seekingother kinds of assets, such as management expertiseand experience or product development unique toa target market, through strategic alliances. Com-missioned specialists, on the other hand, may focusmainly on acquiring special resources in a particu-lar country or region (e.g., China Minmentals'investment in the Channar Iron Mine in Australia).Concerning opportunity-seeking, niche entrepre-neurs and commissioned specialists may focus onopportunities in much more limited foreign mar-kets than world-stage aspirants and transnationalagents. For instance, niche entrepreneurs fromRussia are motivated by a desire to gain a footholdin the enlarged EU. Similar MNEs from otherCentral and Eastern Europe (CEE) countries seekmarket opportunities by focusing their investmenton neighboring CEE countries. Moreover, whiletransnational agents and commissioned specialiststry to escape from home governmental interven-tion, world-stage aspirants and niche entrepreneursmay seek better legal protection overseas over theirproperty rights and business activities than theyface at home. Figure 2 schematically highlightsmotivations and other elements in the springboardframework we present.

International springboard: strategies andactivitiesAlthough some notable exceptions exist, EM MNEsoften undertake several strategies or activitiesassociated with international springboarding.These include:

"* cumulative benefits from inward investmentbefore undertaking outward FDI;

"* leapfrog trajectory; and"* coopetition with global players.

Cumulative benefits from inward FDI, rangingfrom import and export, OEM, ODM (originaldesign manufacturing) or OBM (original brandmanufacturing) to cooperative alliances and equityjoint ventures, can stimulate EM MNEs' outwardinternationalization efforts. EM MNEs generallyfocus on advantages that can be acquired exter-nally. They may use participation in global valuechains and OEM arrangements to overcome pro-blems of market intelligence and uncertaintyregarding the quality of knowledge. They have alsoleveraged resources acquired through links estab-lished with incumbents or foreign partners.Through inward internationalization, local compa-nies have accumulated considerable financial andoperational assets, upgraded technological andprocess management skills, and developed uniquecapabilities and learning experiences (Young et al.,1996). Although indirect, inward internationaliza-tion has deepened emerging market businesses'understanding of international markets and helpedthem develop international experience. Guthrie(2005), for instance, documented that such inwardpartnerships with developed country MNEs, moreso than with overseas Chinese MNEs, could be aneffective means of transferring modern practices tomainland Chinese companies, thus strengtheningtheir international competitiveness and outwardexpansion activities. More specifically, OEM, ODMor OBM arrangements offer local firms the advan-tages of preserving their own identity, achievingeconomies of scale, and gaining an internationalreputation for manufacturing excellence in theirown right. Cooperative alliances and joint ven-tures, on the other hand, integrate local firms moreclosely into the internal network of their foreignpartners. This can offer a highly effective mechan-ism for the transfer of tacit knowledge to localpartners, not just in terms of production anddistribution, but also in other areas where inter-nationally competitive standards have to beachieved (Simonin, 2004; Child and Rodrigues,


W =.. . r, e n p ep se t vdon LUo andRlosalie L Tung

Reasons encouragingthem to spring

"* Home governmentsupport for going global

"* Willingness of globalplayers to share or sellstrategic resources

"* Offshore availability ofstandardized technology

"* Desire to hit the coreand key internationalmarkets

"* Entrepreneurialleadership

Motivations of EM MNEs- Asset seeking* Opportunity seeking

U1

1' jL

4-

Reasons impelling themto spring

"* Their late mover positionin international markets

"* Strong foothold of globalrivals in their backyard

"* Fast change oftechnological and marketlandscape

"* Shortened life cycle ofindustries and products

"• Their deficiencies in corecompetencies and strategicassets

Figure 2 International expansion of EM MNEs: a springboard perspective.

2005). For example, the joint venture betweenMexican supermarket chain Grupo Gigante andFrench chain Carrefour enabled the former's man-agement to learn superior management experiencefrom Carrefour's management, which it leveragedto compete successfully with Wal-Mart in Mexicoand subsequently expand its supermarket opera-tions into the United States. Thus MNEs fromadvanced economies can provide multiple benefitsto EM MNEs - they can serve as role models,transfer technology to local partners, and offermany opportunities for local firms to learn aboutinternational technology, practices and standards,which can in turn reduce these firms' liability offoreignness when they eventually expand abroad.Moreover, when emerging market enterprises com-

pete successfully against foreign MNEs in theirhome markets, they develop capabilities, experi-ence and confidence that enable them to competeagainst the same MNEs abroad. This may helpexplain why emerging economies that have beensuccessful in attracting inward FDI (e.g., China andIndia in Asia, Brazil and Chile in Latin America)have been able to quickly increase their outwardFDI. Although further investigation is necessarybefore definite conclusions can be drawn, inwardinvestment has apparently fostered or helpedaccelerate EM MNEs' subsequent outward FDI.Although largely unarticulated in MNE theories,inward investment has helped indigenous compa-nies accumulate general, though not host country-specific, international experience. Organizational


*489

Springboard perspectiveSystematically and recursively use

international expansion as a springboard to:"* Compensate their competitive weaknesses"* Overcome their latecomer disadvantage"* Counter-attack global competitors"* Bypass stringent trade barriers into

advanced markets"* Alleviate domestic institutional and

market constraints"* Secure preferential treatments from home

governments"* Exploit competitive advantage in other

emerging and developing countries

Unique activities"* Inward internationalization"* Risk-taking entry modes

(acquisitions or greenfield)"* Path departure in location

selection"* Radical in investment size and

commitment

Unique challenges"* Poor corporate governance"* Post-spring integration and

organization difficulties"* Lack of global experience,

managerial competence andprofessional expertise

"* Weak product/processinnovation

International exoansion of emeralna market enternrE�e�

learning theory holds that this experience orknowledge cannot be easily acquired in openmarkets, and involves routinization and institutio-nalization (Levitt and March, 1988). Once thisknowledge is acquired, the firm will increase itsmarket and resource commitment to internationalmarkets (Pennings et al., 1994).

There are several leapfrog trajectories to mirrorEM MNEs' springboard behaviors in outwardinvestment. First, they tend to internationalizevery rapidly and not in an incremental fashion aspredicted by conventional internationalizationprocess theory (Johanson and Vahlne, 1977). Akey notion in this theory is that a firm's involve-ment in international markets occurs incrementallyaccording to an establishment chain: from exportto sales subsidiaries. and eventually manufacturingfacilities. This sequence of stages indicates anincreasing commitment of resources to the market.As latecomers on the global stage, EM MNEs needto accelerate their pace of internationalization so asto catch up with that of incumbents. Although theyvary in geographical diversification, many EMMNEs embark on a strategy whereby they willsimultaneously pursue customers in many foreignmarkets, not just one at a time. Large EM MNEsrapidly expand internationally through high-risk,high-control entry modes such as acquisitions andgreenfield investments. For instance, the number ofinternational acquisitions by Chinese firms hasbeen growing drastically in recent years. They werevalued at $2.85 billion in 2003 and about $7 billionin 2004 (Child and Rodrigues, 2005). Acquisitionsare used primarily to secure brands and technologyquickly and pre-empt similar moves by competi-tors. Thus acquisition adds innovation, differentia-tion, and brand advantages to the existing costadvantage. This strategy of 'buying-in' establishedinternational reputations and global brands accel-erates their market entry and the process ofinternationalization. For those EM MNEs that havealready built product reputation and need organi-zational control over foreign production, greenfieldinvestments are chosen too (e.g., Haier's produc-tion plant in South Carolina and design center inLos Angeles). In the first nine months of 2004alone, Brazilian MNEs invested in 36 greenfield FDIprojects abroad (UNCTAD, 2004b: 5). Verticallyintegrated global production systems, includinggreenfield investment projects for certain valuechain activities within the system, nourish theexploitation of these companies' already estab-lished reputation and capacity.

A second leapfrog trajectory is that many EMMNEs tend to be radical in their choice of location(country). The conventional internationalizationprocess logic suggests that firms enter new marketsinvolving successively greater psychic distance,which is defined as differences in language, culture,political systems, and so forth. Hence firms startinternationalization in those markets they canmost easily understand, where it is easy to spotopportunities, and where perceived liabilities offoreignness are low (Johanson and Vahlne, 1977;Davidson, 1980). This is consistent with Rugman's(2000) findings that regionalization, rather thanglobalization, can more accurately explain invest-ments and trade patterns worldwide - for example,60% or more US-Canada trade and investment canbe explained for by regionalization. The same istrue for the European Union and Japan. Many EMMNEs, particularly world-stage aspirants and trans-national agents, however, do not seem to shy awayfrom psychic distance. Very often, they first ventureinto advanced markets such as Europe and NorthAmerica, normally viewed as highly psychicallydistant destinations from their home countries.Perhaps psychic distance or liability of foreignnessmay have been attenuated, in part, by the processof inward FDI discussed above. Capability deficien-cies needed to run businesses in psychically distantlocations and to overcome liabilities of foreignnessare partly offset by:

"* the availability of technology, key components,product development, and brands through directpurchase;

"* the use of acquisitions to secure tacit knowledgeand distinctive resources; and

"* the reliance on host country experts to organizeand manage sophisticated activities.

Accompanying these characteristics is EM MNEs'(notably those from India, China, Mexico, andTurkey) lower dependence on ethnic ties andhigher proactiveness in geographical diversificationin comparison with the early stages of internatio-nalization by MNEs from Singapore, Taiwan, andHong Kong (Mathews, 2002; Yeung, 1994). Withthe exception of some niche entrepreneurs whoprefer locations with strong ethnic networks, manyEM MNEs may not be path dependent on ethnicties. This does not mean that ethnic networks areno longer important to them; instead it means that,to become global players, they have to 'spring-board' faster and be more aggressive in theirattempt to leapfrog from their late entrant position.


4490 International exnanslon of emerninn market enter rises Yadon Luo and Rosalie L Tun

*V ln I II n,I Pln-.lti: ITin

If their global ethnic ties do not support theiroverall springboard strategies, they will not usethese ties. Furthermore, differing from the conven-tional wisdom that suggests that geographicaldiversification is evolutionary, that is, beginningwith a market the firm is most familiar, thengradually and progressively diversifying into lessfamiliar markets, some EM MNEs do not necessarilyfollow this path and instead enter those marketswhere more opportunities abound for their pro-ducts (e.g., China's TCL's first major outwardinvestments were in Germany by acquiring Schnei-der Electronics and in France by acquiring thetelevision arm of Thomson and the handset opera-tions of Alcatel. These were then followed byinvestments in South-east Asia and Russia).

According to the internationalization processtheory, when a firm expands abroad, learning istransmitted via institutionalized organizationalpractices, such as decision-making procedures andcorporate policies, through which firms progres-sively acquire site-specific knowledge (Andersen,1993). Davidson (1980) reported that less experi-enced firms often overstate risks and understatereturns: consequently, they shy away from under-taking significant resource contributions and mak-ing stronger resource commitments to the hostmarket. While the importance and progressivenature of learning still holds true for EM MNEs,their resource commitment, especially investmentsize, is not necessarily a function of time, experi-ence or learning. Instead, their initial commitmenttends to be large (owing to the use of acquisition orgreenfield investment) and does not necessarilyinvolve many small steps (owing to the strategicneed to leapfrog from their latecomer position).Also, departing from the conventional wisdom ofcontrol, which suggests that required managerialcontrol by the firm's senior expatriates mustincrease with resource commitment (Hennart,1989) and with more risky entry mode (Hill et al.,1990), EM MNEs tend to use localized seniormanagement team, rather than parent countrynationals, that is, expatriates, to organize complexoperations in advanced markets (e.g., both Lenovoand Haier's US headquarters are led by local CEOs).This may also be compounded by the fact that theseexpatriates are not well qualified or accepted inthese developed markets.

Coopetition (simultaneous competition andcooperation) between EM MNEs and global playersseems common in both home and host countries(Luo, 2004). Many EM MNEs have transformed

491

their global rivals into alliance partners. Whilethey still compete in certain products or geographicdomains, they form alliances in other specific areas.For instance, Ranbaxy of India cooperates withGlaxoSmithKline (GSK) for drug discovery andclinical development collaboration in a wide rangeof therapeutics areas, with Merck for clinicaltrials, and with Terumo (Japan) for producing andmarketing blood bags and dialysis systems. At thesame time, Ranbaxy also competes with GSK inEurope, Merck in the US, and Terumo in Japanin other products or areas in which they operatealone. Mabe of Mexico has several joint ventureagreements with GE in Mexico and Brazil to sharekey components, and yet it competes intenselywith GE in North America, especially in the middle-end white goods consumer market. Such coopeti-tion links with rivals, suppliers or distributorsfit well with the yin-yang philosophy, which isdeeply rooted in some emerging economy cultures(China and India, in particular, where Taoism orHinduism is strong). This philosophy synthesizesthe yin side (e.g., soft and collaboration) with theyang side (e.g., hard and competition) and views thetwo sides as mutually complementary. Coopetitiongoes beyond the old rules of competition andcooperation to combine the advantages of both.It develops win-win scenarios in which a businessstrives to gain more, not necessarily by takingmarket share from a contender in every area, but bycreating a bigger pie in some complementary areasto benefit both (Brandenburger and Nalebuff,1996). EM MNEs work with some global rivals,suppliers or distributors to collectively enhanceperformance by sharing complementary resourcesand committing to common task goals in someareas of common interest (e.g., improving industrystandards, basic research, common supplies, andconsumer awareness) while they compete by takingindependent action in other areas to improve theirown performance (e.g., product quality, marketshare, sales growth, and cost-effectiveness).

International springboard: external andinternal forcesSpringboard behaviors of EM MNEs are fostered orpropelled by several critical forces, including:

* home government support for going global;* willingness of global players to share or sell

strategic resources and offshore availability ofstandardized technology;


n erna ona expans - - N N r JI . .1 1 A n f emer In market enter rises Yadon Luo and Rosalie L Tun

International exnanslnn of emernina market enter.,.'ke.

"* corporate entrepreneurship and strong motiva-tion to enter key foreign markets;

"* increasing competitive pressure from globalrivals; and

"* quick changes in technological and marketlandscapes and a heightened borderless worldeconomy.

The growth of outward FDI from emergingeconomies is facilitated by the liberalization ofgovernment policies and the relaxation of regula-tions on offshore investment. For instance, sincethe late 1990s, foreign exchange control limits onoutward FDI and restrictions on foreign dividendrepatriation have been removed in most emergingeconomies. In India, for example, improvements inthe regulatory framework have played an importantrole in the increase in Indian investment abroad.Since 2000, Indian companies have been able tomake overseas investments by market purchases offoreign exchange without prior approval of theReserve Bank of India; they are allowed to befunded up to 100% by American DepositoryReceipt; investments in joint ventures or whollyowned subsidiaries abroad by way of share swapsare permitted; and overseas investments are nowopen to registered partnership firms and companiesthat provide professional services (UNCTAD, 2004a,2004c). Similarly, in 1999 the Chinese governmentlaunched its 'Go Global' policy, encouraging high-performing Chinese firms to invest abroad tofurther enhance their competitiveness. The Chi-nese government sponsors overseas expansionthrough the provision of low-interest loans to fundthe purchase of foreign companies from sources itcontrols such as state banks. Thus there are twopush and pull elements of the institutional envir-onment that prompt EM MNEs to expand globally:one involves more institutionally embedded con-straints such as limited property rights protection,weak judicial and legal systems, and unexpectedchanges to regulatory policies. Firms attempt toavoid these constraints by investing abroad. At thesame time, the institutional environment involvesless institutionally embedded but favorably evol-ving government policies that encourage localfirms to expand. Under the second condition,government officials and corporate executives viewinternational expansion as a strategic choice, aphenomenon of co-evolution (Lewin et al., 1999).

Furthermore, the willingness of advanced marketMNEs to sell or share their strategic business units(SBUs), technology, brands or other assets makes it

possible for the sharp increase in internationalacquisitions by EM MNEs. To advanced market MNEs,selling off some of their SBUs (including R&Dworkforce and facility) and/or brands helps them to:

* cash in on slow-growing businesses at the besttime;

* improve competence-portfolio fit;* allocate and exploit resources more productively;

and* improve financial position and share price.

To EM MNEs, this provides a faster alternative toconsummate their resource portfolio. Acquiredstrategic assets such as technology, brands, andaccess to the global consumer base generallycomplement mass-manufacturing cost advantages,resulting in possible synergies for EM MNEs.Cooperation via joint ventures or strategic alliancesbetween EM MNEs and advanced market and NICMNEs during inward investment foster cooperationbetween them when they themselves ventureabroad. Many advanced market MNEs are alsowilling to enter into various modes of collaborationwith EM MNEs in the forms of joint research,production and marketing. India's Ranbaxy, forinstance, is able to access the US market through itsUS-based marketing alliances with Eli Lilly andDade, largely because they have cooperated suc-cessfully in India for many years. In addition, EMMNEs' international springboard activities havebeen facilitated by the global open market for keycomponents and technologies. This availability hasreduced the burden for EM MNEs to invest heavilyin R&D to enable them to mass-manufacture withstandardized technology and thus offset theirtechnological weaknesses. Austin-based SiliconLaboratories, for example, supplies semiconductorchips for cellular phones and computer modems toseveral large EM MNEs (e.g., China's TCL andLenovo and Brazil's Embratel Participacoes). In thePC market, the latest technologies developed inSilicon Valley now arrive in China within months.This, for instance, allows Dongguan, a small city inthe Guangdong province with the world's highestconcentration of component manufacturers, toprovide Chinese PC markets with a ready supplyof world-class technology. Since well-establishedopen global markets in applied technology,advanced machinery and equipments, latest instru-ments, and sophisticated materials and compo-nents were not present in the early years' expansionof advanced market MNEs and NIC MNEs, these


*49 2

I ,.�A P-�I.� I

inrLernaional ex*

pafl3�urs U. cr..rp..�j r..a.nc. s.c yr .aS�

precedents tended to be much more path depend-ent and resource-constrained (Andersen, 1993).

Entrepreneurial leadership is also an importantdriving force behind springboard activities. Forboth state-owned and non-state-owned enterprises,the interaction between institutional legacies ofemerging economies and dynamic capabilities oftheir corporate entrepreneurs is crucial for under-standing their internationalization strategies (Childand Rodrigues, 2005). Unlike their counterparts inadvanced market or NIC MNEs, corporate execu-tives in EM MNEs have to skilfully maneuver theirstrategic choice within their domestic institutionalcontext. They need to find ways of co-optingpolitical support that has given them the freedomand endorsement to pursue international expan-sion strategies of their own choosing. EM MNEsthat are proactive in international markets are oftenled by corporate executives who have sharp visionand have adopted pragmatic measures to tap intoforeign markets that provide resource-seeking ormarket-seeking opportunities (Andreff, 2002; Tsang2002). A cursory review of the examples at someleading EM MNEs, such as China's Lenovo andHaier, and India's Tata and Wipro Technologies,reveal just that: their corporate leaders have astrong appreciation of the core of global competi-tion - serve worldwide customers, including thosein advanced markets, quicker, better and morecheaply. To achieve this goal, springboard activitieshave become essential to mitigate their latecomeror newcomer status in international markets.Related to this, organizational innovation andcorporate entrepreneurship (venturing and stra-tegic renewal are the two key elements) alsofacilitate EM MNEs' springboard activities. Aslatecomers, these firms have to find innovativeways to create space for themselves in marketsalready saturated with very capable firms. Theyhave to seek new ways to learn from their previousexperience in OEM and alliances, acquire strategicassets from these precedents, and maintain coope-titive networks with global players. Through thesecompensatory strategies, or through their capacityto leverage resources from the strengths of others,some EM MNEs are able to grow very rapidly. Thesecompensatory strategies, designed to primarilyenhance a firm's critical resources rather than toexploit existing assets, represent a significantorganizational innovation and a departure fromthe conventional theory of MNEs.

Springboard behaviors in outward FDI are alsopropelled by fierce competition facing EM MNEs in

xpanslon ol emerging marmeL enLerprses laongLuo an osa e ung

their home markets, especially with powerful globalrivals from advanced markets and NICs. Putanother way, they are somehow 'pushed' out bythe latter, who have already established strongpresence, market share, competitive position andbrand recognition in emerging markets. ManyMNEs from advanced economies and NICs see theirlarge-scale operations in emerging markets as key totheir overall corporate success and global marketleadership. They have clear advantages in techno-logical capabilities (technology, know-how andinnovation) and operational capabilities (branding,finance, information technology, and value chainintegration). With greater accessibility and anincrease in sophisticated consumption and brandawareness, many foreign MNEs have built theircompetitive advantages and secured more marketshare in emerging markets. Global players areextremely large scale, with emerging market opera-tions accounting for a considerable portion ofcorporate sales or capital investment. To maintainand develop this position, they aggressively expandtheir scale and scope by investing parent capital innew projects and/or reinvesting accumulatedretained earnings in existing or other new projects.For example, Motorola has plans to increaseinvestment, revenue and procurement in Chinaby $10 billion in each category over the next fiveyears (Farrell et al., 2004). These powerful playershave evolved into strategic or dominant players byshifting strategic goals from merely establishing alocal presence and learning about emerging mar-kets to securing dominant market share andachieving sustained high returns. They have builtnew competences necessary in emerging markets,diversified lines of products suitable to multi-tierconsumers, participated in extended value chainactivities, and emphasized massive localization andadaptations (Perez et al., 1995). As a result, manylocal companies that used to dominate in certainindustries at home now find themselves in anincreasingly disadvantageous position to competewith global players for high-end and mid-endproducts in their own backyard, thus compellingthem to consider international diversification.

Lastly, quick changes in the technological andmarket landscapes and heightened integration ofthe global economy have propelled EM MNEs toenter onto the world stage. Compared with thetechnological and market conditions that facedadvanced market and NIC MNEs before the 1990s,the fundamental nature of competition facing EMMNEs has changed and is now characterized by


493

International eznandnn of �..��rnEnn �.4,t �94. . .- . . ..... | , UUIIy LUU OIlU Rosalie L Iunig

rapid technological changes, shortened product lifecycle, rapid technology diffusions, increasingimportance of knowledge, and dramatic changesin information and communication technologies.Meanwhile, the global economy has also beenchanging, with goods, services, people, and ideasmoving more freely across geographic boundaries,new opportunities emerging in multiple globalmarkets, and markets and industries becomingmore integrated and internationalized. Under thisnew calculus of global competition, speed, innova-tion, and flexibility have become the new keys tosuccess. International springboarding can thus beviewed as a strategic response to new landscapes inboth competition and globalization.

International springboard: challenges andremediesWhile international springboarding presents manyopportunities, it also involves many risks. While allmultinationals have to contend with risks, based onthe aforementioned discussions, we see that EMMNEs are confronted with some unique problemsor challenges. A detailed analysis of these chal-lenges and proposed remedies for these problems isbeyond the scope of this article. However, severalmajor handicaps deserve mention here.

First, owing to underdeveloped stock markets athome, poor accountability, and lack of transpar-ency stemming from their ties with their hostgovernment, corporate governance of EM MNEs isgenerally weak. These limitations, in turn, tarnishorganizational reputation and hinder shareholderconfidence and relationship building with globalstakeholders (including those with foreign countrylegislators and regulators). Although corporategovernance varies in different emerging economies(e.g., corporate governance in Russia and China ismuch more distant from the Anglo-Saxon govern-ance system than is the case in India, Brazil, andMexico), relationship-based governance mechan-isms are widely used in emerging economies. In thisenvironment, foreign stakeholders may perceivethe behaviors of board members and executives ofEM MNEs as less accountable, transparent, andtrustworthy. In particular, some state-owned EMMNEs, such as transnational agents and commis-sioned specialists, may be regarded as even moreworrisome in terms of corporate governance andaccountability. When global stakeholders harborstereotypes about poor governance of firms inemerging markets, even some well-governed EMMNEs could fall victim to such negative images.

Regardless of whether a foreign subsidiary has itsown board of directors, the poor corporate govern-ance at the parent headquarters level might stillobstruct the subsidiary-level managerial govern-ance so much that frontline foreign units' moraleand conduct may deteriorate and their internalcontrol and strategy implementation may bethwarted. For most EM MNEs, their global successhinges upon frontline units' initiatives, commit-ment, and performance. To help improve internaltransparency, decision effectiveness, and corporateimage, EM MNEs may place top executives (e.g.,CEOs) of key frontline units on the parent firm'sboard or supervisory committee. While they cannotmarkedly change the poor image of the distortedstock market at home, EM MNEs must improvetheir own transparency in corporate undertakings,in response to the global stakeholders that theyserve. Accountability is essentially a matter ofdisclosure (financial disclosure and non-financialdisclosure), transparency and explanation of corpo-rate policies, investment decisions, and strategicactions to those to whom the company is behol-den. While it will remain a daunting challenge forlong to improve their poor image in accountabilityand governance, EM MNEs may consider spin-off toseparate their prime frontline units from theirparent organizations and arrange these key unitslisted on advance market stock exchanges. Havingwell-known international accounting firms, ratherthan home country ones, as outside auditingagencies may also help improve EM MNEs' finan-cial accountability. Superior accountability canhelp these firms to receive a better rating orevaluation by market intermediaries who globallydisseminate this information to the market, thusimproving their trustworthiness, credibility, andreputation. Resource-based theory suggests thattrustworthiness, as perceived by market intermedi-aries, is a critical source of competitive advantage,and is especially important for firms from econo-mies with strong government intervention, wherethe line between public and private is often blurred(Barney and Hansen, 1994).

A second challenge pertains to post-springboard,post-acquisition difficulties. These can range frombuilding effective working relationships with hostcountry stakeholders, reconciling disparatenational- and corporate-level cultures, organizingglobally dispersed complex activities, to integratinghome and host country operations. While some ofthese difficulties are common to all MNEs, rapidand radical leaps into highly developed markets


*49

International expansion of emerging ma,r-,1 enverpipru ses a uo a,nv o e i2ý I I A R l LTu

often exacerbate the difficulties for those EM MNEsthat lack international experience and organiza-tional expertise in handling these issues. Althoughthey can hire local talent to manage routineoperations in the host country, many of thesepost-springboard activities bear upon the headoffice operations of EM MNE's and their peer unitsin other countries. To deal with these issues, richknowledge in global planning and execution isrequired. Many Japanese and Korean MNEs thatexpanded abroad in the 1980s and 1990s had to paydearly for mistakes in this regard. These painfullessons have led them to revise their strategy to one

of gradual international expansion and conserva-tive acquisition (Li, 1994; Chang, 1995). Accordingto the dynamic capability theory, a firm's ability to

deploy, transfer, and manage geographically dis-persed critical resources, especially in risk-takingand radical investments, is a necessary conditionfor sustained success in global competition (Teeceet al., 1997). To overcome post-springboard andpost-acquisition challenges, EM MNEs have to planahead the global resource-flow and product-flowsystems before embarking on such aggressiveexpansions abroad, including the creation of aspecial office or task force responsible for post-springboard integration and coordination, the

motivation of key country managers to makedecisions consistent with the parent firm's globalinterests, and the creation of effective global wheels(e.g., information flow and reporting systems) tostreamline intra-corporate sharing and support. Inmany ways, these suggestions are consistent withthe literature on post-mergers and acquisitions,even within a domestic context.

Furthermore, lack of global experience, manage-rial competence, and professional expertise has

posed critical bottlenecks for many EM MNEs.While 'objective' knowledge (e.g., product devel-opment) can be taught or acquired in international

expansion, 'experiential' knowledge, such as host-market-specific experience, is typically implicit andtacit and therefore can be secured only throughexperience, that is, learn by doing (Davidson, 1980;Barkema and Vermeulen, 1998). As stated inorganizational learning theory (Levitt and March,1988), institutionalization of learning takes place

through organizational codes, procedures, androutines into which inferences about past successesand failures are embedded. Although inwardinvestment has helped EM MNEs to acquire some

familiarity with global products and foreign com-panies, international leapfrog approaches often

I ,.-�A D�Ii� I *49"-

skip over some necessary steps of experientiallearning, such as how to deal directly and effec-

tively with foreign consumers, regulators, legisla-tors, courts, unions, employees, financialinstitutions, and the like. Thus inward investmentalone is inadequate of curtailing an EM MNE'sliability of foreignness, particularly in advancedmarkets. Since many EM MNEs do not havesufficient experience in structuring, organizing,and managing large-scale and sophisticated world-wide operations, they are more likely to encounterfriction with external business stakeholders. Theymay also face conflicts in managerial philosophies,corporate culture, incentive schemes, leadershipstyles, and formalized managerial procedures withlocal executives at foreign subunits. Furthermore,most EM MNEs lack sufficient professional knowl-edge in international accounting, taxation, brand-ing, auditing, finance, transfer pricing, cash flow

and risk management, as well as in the hostcountry's business law, judicial system, and com-

mercial arbitration. Although they can hire and relyon indigenous talent to handle such functionsoverseas, many of these activities have to beperformed interactively between foreign subunitsand the corporate head office in the emergingmarket, thus involving tremendous planning,coordination, control, and support by the home

office. To mitigate these challenges, EM MNEs maycontinue to hire local talent to fill the void inprofessional knowledge, and consider joint trainingprograms with leading accounting and law firms or

other professional service providers, as well ascustomized executive programs at major universi-ties overseas. Rotation of senior executives along

regional, divisional, and functional lines might alsobe a useful tool to facilitate knowledge acquisitionand accumulation and experience development.When acquisitions are contemplated, it is impor-tant to evaluate the foreign target firm's 'human

capital', especially managerial and professionalexpertise. While such human capital, if acquired,can significantly redress an EM MNE's organiza-tional weakness, it could at the same time posetremendous challenges to the acquiring company(Tung, 1988, 1994).

Last, but not least, weaker product innovationand process innovation compared with advancedmarket and NIC MNEs can continue to handicapEM MNEs' success in global competition. Interna-

tional acquisition can be useful in helping a firm

acquire a target company's knowledge and exper-tise; nonetheless, no company can survive in the


International ei�nando.. nf � .....L�. �4496

long run by merely relying on external acquisitionsfor knowledge development. In the final analysis, itis the acquiring firm's capability to research,develop and design as well as to combine, integrateand reconfigure externally acquired competenceswith its existing knowledge base that ultimatelydetermines the sustainability of global competitiveadvantages (Kogut and Zander, 1992). The successof some NIC MNEs, such as Samsung, illustrates theimportance of internal development. SamsungElectronics reportedly deploys 34% of its totalworkforce in R&D. At the center of its globalsuccess is its design competitiveness, and at thecenter of its design competitiveness are its designcapabilities and design bank. According to theoption theory, international expansion can beregarded as an option window that permits MNEsto gain tacit knowledge and explore emergingopportunities. Once the initial experience isachieved, the new option calls for further invest-ment and commitment. To do so, it requires strongcapabilities, and a knowledge base from the firmcan make these advancements (Kogut, 1994). Toimprove their weaker position in innovation, EMMNEs may hire the world's top design firms orexperts to teach their designers and engineers theskills and values of innovation that can be learned.They may also send designers and engineers over-seas to work in Western design studios or R&Dcenters. Innovation goes beyond the product itself,and extends to process innovation (particularly theinterplay between consumer needs and productattributes) and managerial innovation (especiallythe mindset to encourage R&D employees to shareideas and challenge their superiors).

Overview of the focused issueThis focused issue was developed with the objectiveof shedding light on the growing phenomenon ofoutward FDI from emerging markets. 'The rise oftransnational companies from developing econo-mies is part of a profound shift in the worldeconomy today' (UNCTAD, 2005). Undoubtedly, itis imperative that we, as scholars of internationalbusiness, seek to understand the motivations,dynamics, processes, and challenges associatedwith this new development.

We would like to thank all the authors who haveresponded to the 'call for submissions' for this focusedissue. The response was quite overwhelming, illustrat-ing that many international business scholars andresearchers are already studying this phenomenon.We would also like to thank all the reviewers for their

careful and thorough evaluation of all the submis-sions to guide us in the selection of papers mostsuitable for the focused issue and, more importantly,provide invaluable feedback to the authors tostrengthen the papers accepted for inclusion.

Collectively, the five papers selected for inclusionin the focused issue delve into various theories,motivations, behaviors, and activities associatedwith international expansion of EM MNEs. The firstpaper, by Buckley, Clegg, Cross, Voss, and Liu,examines the determinants of outward FDI fromChina and represents the first systematic andempirical attempt to refine existing theories ofFDI to more adequately capture the dynamicsassociated with EM MNEs. Their finding, based onan analysis of secondary data from China between1984 and 2001, shows some unique trajectory andinvestment behavior of Chinese MNEs, and henceillustrates the importance of developing a moresuitable theoretical perspective for these firms. Thesecond paper, by Yiu, Lau and Bruton, analyzes theprimary data containing 274 Chinese firms pertain-ing to home country networks and firm capabil-ities. Their framework and evidence advances ourunderstanding of international venturing activitiesby emerging market enterprises. The third paper, byElango and Pattnaik, sheds further light on thesignificant role of networks in international expan-sion through a study of 794 Indian firms. Thefourth paper, by Filatotchev, Strange, Piesse andLien, through an analysis of 122 Taiwanese com-panies with investments in China's mainland,investigates the role of corporate governance inchoice of entry mode and location. AlthoughTaiwan is already a newly industrialized economy,investment strategies by Taiwanese MNEs may offersome lessons on how EM MNEs, as they mature,will succeed in operating in neighboring economieswith which they have strong economic, historicaland cultural ties. To reflect the practical signifi-cance of the theme, this focused issue ends with anexecutive's note by Mr Chuanzhi Liu, co-founder ofLenovo, based on his keynote speech upon accep-tance of the 2006 AIB Distinguished Executive ofthe Year Award. In this note he traces the reasonsbehind Lenovo's global expansion, the challengesassociated with its acquisition of IBM's PC division,and the solutions that overcome these challenges(including those identified in this paper). TheLenovo case provides an illustrative example ofsome springboarding strategies discussed in thispaper, including the desire to 'buy into' establishedglobal brands.


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Together, the six papers in the focused issuehighlight the unique challenges and opportunitiesfor future research on EM MNEs and their outwardFDI. Challenges arise because existing theoriesand concepts previously developed to explainadvanced market MNEs can be insufficient forexplaining some unique motives, processes, andbehaviors associated with EM MNEs. Opportunitiesexist, at the same time, because a more thoroughunderstanding of the special circumstances thatsurround this new breed of MNEs can help not onlydevelop existing MNE theories further along or

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About the authorsYadong Luo is Professor of Management and theEmery Findley Distinguished Chair at the School ofBusiness Administration, University of Miami. Hisresearch interests include global corporate strategy,foreign direct investment, international joint ven-tures, multinational corporations in emergingmarkets, and management in emerging economies.He is the author of 15 books and over 120 referredjournal articles.

Rosalie L Tung is the Ming and Stella WongProfessor of International Business at Simon FraserUniversity. In 2003-2004 she served as President ofthe Academy of Management. She was formerly aWisconsin Distinguished Professor with the Univer-sity of Wisconsin System. She is a Fellow of the RoyalSociety of Canada, the Academy of Management,the Academy of International Business, the BritishAcademy of Management, and the InternationalAcademy for Intercultural Research. She has pub-lished 11 books and over 80 articles on internationalhuman resource management, international busi-ness negotiations, and comparative management.

Accepted by Arie Y Lewin, Editor-in-Chief January 2007. This paper has been with the author for two revisions.


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TITLE: International expansion of emerging market enterprises: Aspringboard perspective

SOURCE: J Int Bus Stud 38 no4 Jl 2007

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