Translating Potential into Profits: Foreign Multinationals in Emerging Markets since the 19th Century
Nov 02, 2012 - Nov 03, 2012
Workshop at the GHI | Conveners: Matthias Kipping (Schulich School of Business, Toronto) and Christina Lubinski (GHI)
Multinational enterprises have long identified markets as "emerging" and have tried to take advantage of their growth potential. Emerging markets are important sites for conducting business often due to low costs and growing consumer spending, but also present a number of obstacles to foreign investors that must be overcome to achieve profits. As emerging economies are hardly a contemporary phenomenon, this conference aimed at providing historical perspectives on the activities of multinational companies in these markets. The conference participants included scholars from various disciplines, among them history, economics, and sociology; and the papers dealt with a broad range of countries, companies, and national contexts utilizing a variety of methodologies to examine how multinational companies have operated in emerging markets, how they have addressed different market conditions, and finally what impact they have had on host and home countries.
After introductory remarks by the conveners, Christina Lubinski and Matthias Kipping, the first session set out to deal with conceptual frameworks and periodization schemes. In his talk, "Multinational Strategies and Developing Countries in Historical Perspective," Geoffrey Jones stressed that corporate strategies in developing economies were shaped by trade-offs between opportunity and risk. This was determined by three broad environmental factors: first, the political economy and the legal framework; second, the market and the resources of the host economy; and third, the competition from local firms. Based on these three factors, Jones delineated three different eras: the "First Global Economy" (1850-1929), the era of "De-globalization" (1929-1978), and finally the "Second Global Economy" since the late 1970s. In the second paper, "The Changing Nature of Multinationals' Operations in the Emerging World and Their Impacts on Host and Home Countries: The "Leading Sector" Stages Model à la Schumpeter," Terutomo Ozawa focused on technological, financial, and institutional innovations that led to rapid changes in the world economy. He argued that these processes initially evolved under British and later American hegemony and that, over time, markets became less industry- and more consumption-oriented. In the discussion of Jones' and Ozawa' periodization schemes participants raised the issue of Euro- or Western-centrism as well as the question whether the period after 1929 can be characterized as "De-globalization", since multinationals continued their activities despite the Great Depression, World War II, and the Cold War. The question of how to define an emerging market was also discussed. The contemporary concept of "emerging markets" is certainly not a new phenomenon. It generally refers to a market that is underdeveloped but expected to grow quickly. These markets share a potential for growth but also many problems, such as weak institutions and infrastructures. The following were identified as fruitful topics for further research: political dependency and political risk, consumption patterns of the host economy, and the localization of multinational corporations.
The second session was dedicated to organizational choices and foreign direct investments. Sierk Horn's paper (co-authored with Peter Buckley and Adam Cross), "Japanese Production Networks in India: Spatial Distribution, Agglomeration, and Industry Effects," dealt with the often neglected Japanese multinationals in emerging markets, namely India, and analyzed different factors on which they based their investment decisions. Japanese companies adapted quickly to changing market conditions in India and investment followed agglomeration logic, prior investments attracting further investments. Therefore the paper stressed the importance of business networks in promoting foreign investment, which was a recurring topic at the conference. The question of corruption led to a debate on how to integrate this topic into historical research and which sources to use. Andrea Lluch's paper, "Foreign Multinationals in Emerging Markets: the Argentinian Case (c. 1913-1960)," (with Norma Lanciotti) addressed corporate strategies pursued by foreign multinationals in Argentina and related them to domestic political change. Based on a database of foreign multinational companies in Argentina, Lluch showed how Argentina provided inducements to foreign investors, leading to high foreign direct investment even during nationalist governments after 1945. Finally, Bram Bouwens' joint paper with Keetie Sluyterman, "From Colonial Empires to Developing Countries and on to Emerging Economies: The International Expansion of the Dutch Brewery Heineken, 1930-2010," contributed to the discussion of what constitutes an emerging economy by showing that Heineken saw these markets first as "colonial", than as "developing," and finally as "emerging" without significantly changing its strategy. As a consumer-goods producer Heineken had to deal with the establishment of local brands, taste, and differences in beer consumption. These points were further developed in the discussion. Moreover, ethical questions were raised regarding the introduction of foreign products as harmful as opium, alcohol, and cigarettes.
In the third session, panelists examined how multinationals have operated in the context of changing and weak institutions. Marcelo Bucheli and Erica Silvaj presented their paper on "Multinational Corporations, Public Utilities, and Globalization: A Comparison of the Operations of US and Spanish Multinationals in the Chilean Telecommunications Sector, 1958-2005." Looking at the companies' boards of directors, the authors developed a network analysis that showed that interlocks, i.e. directors serving on multiple boards at the same time, depended on ownership. During times of state ownership, public utilities do not need many linkages with other sectors of the economy. During democratic regimes they build more networks with the rest of the economy than during military regimes. In the hand of foreign multinationals, public utility companies build links with domestic corporations, which are useful for coordination purposes, and with the domestic government, which are useful for coordination or legitimization purposes. Adaptation to local circumstances was also the topic of Pao Kao's contribution. With his co-authors Martin Johanson and William Redekop, he raised the question of "How do Market-Leading Foreign Subsidiaries in China Overcome Changes in Laws and Regulations and Sustain Their Success? Cases of Swedish Manufacturing Firms." The paper showed how the three companies Högnäs, Elekta, and LeDaval have dealt with the ever-changing regulatory institutions in China. It argued that three strategic responses arose as these firms encountered market transition and turbulence: learning, responding, and integrating. The authors analyzed these three strategic responses to shed light on how multinational corporations sustain their competitiveness in China. Finally, in his paper, "The Canadians in the Tropics: Imperial Oil in Latin America 1914-1948," Graham D. Taylor examined how Standard Oil of New Jersey used Imperial Oil of Canada to cloak its efforts to obtain oil for its North American refineries from Latin and South America. Imperial Oil operations in Peru and Colombia were poorly capitalized, as profits from the venture went to Standard Oil instead of Imperial Oil. Ultimately, Imperial Oil exited both markets and refocused its operations within Canada.
On the second day of the conference, the fourth session examined the challenge of nationalism for multinationals in emerging markets. In a paper co-authored with Pierre-Yves Donzé, Takafumi Kurosawa discussed the case of "Nestlé Coping with Japanese Nationalism: Political Risk and the Strategy of a Foreign Multinational Enterprise in Japan, 1913-1945." Nestlé not only faced nationalism in Japan, but also had difficulties establishing its main product, condensed milk, on the Asian market due to consumption habits. Kurosawa showed the long-term strategy Nestlé pursued and the sophisticated organizational strategies the firm developed to counter political risks. Christina Lubinski's paper, "The Global Business with Local Music: Western Gramophone Companies in India before World War I," illustrated that India has been perceived as an emerging market for more than a century. She showed how Western gramophone and record companies adapted rather successfully to local consumer preferences by sending out agents to record local music. They were, however, challenged by the nationalist anticolonial Swadeshi movement in India, which led to a boycott of British firms since 1905 but opened the door to other Western as well as domestic competitors in this market. The companies' experience of heavily localizing their product in foreign markets later shaped segmentation strategies in the respective home markets.
The fifth panel discussed the challenges of decolonization. Adrian E. Tschoegl presented his study on "Belgolaise: The life-cycle of a colonial bank," which told the story of a Belgian bank that was active in the Congo for almost 100 years before it ceased to operate in 2004. Although the relatively small bank ultimately failed, it weathered remarkable political and economic changes for more than a century, including Congolese independence, and reinvented itself to serve a postcolonial banking market. In the next presentation, "Doing Business in a Wave of Nationalizations: Philipp Brothers and the Bolivian Tin Experience," Espen Storli raised the question of how the Bolivian expropriation and nationalization of foreign companies beginning in the 1950s influenced global value chains. He focused on the commodity trading firm Philipp Brothers and how it coped with radical domestic political transitions in Bolivia. The experience traders acquired in this emerging market later helped the company manage political risks in other markets. Another example of how to manage political risk in times of decolonization was examined by Stephanie Decker in her paper, "British Multinationals in West Africa: Re-gaining Organizational Legitimacy after the End of Empire." Decker looked at the aspect of sense-making and public perceptions of British companies in West Africa in the second half of the twentieth century and explored questions of corporate communication and reputation. To legitimize their ongoing business activities in the former colonies, British companies pursued recurring narratives that were connected to concepts of corporate citizenship and corporate social responsibility.
Concluding the conference, the sixth session dealt with technology transfers in international business. In her paper, "Selling Industrialization and Technological Progress: Foreign Multinationals in China's post-1895 Emerging Market," Elisabeth Köll discussed the role that foreign companies played in developing China's transportation infrastructure, railroads in particular. Foreign investors competed for prominence until the early 1910s when Chinese authorities began implementing standardization to centralize the railroad system. However, the presence of private foreign investors in China continued to shape the construction of industrial infrastructure and led to transfers of knowledge and the founding of engineering schools. An interesting side aspect of these competing "spheres of knowledge" was the conflict over which language should become the universal technical standard for industry. German engineers vied with British and French engineers, but English ultimately prevailed as the international engineering language. Next, Nadia Fernández de Pinedo and David Pretel presented their paper, "Trading Innovation in Nineteenth-Century Cuba: Patent Rights, Foreign Firms and Technology Transfer," in which they discussed the importance of the sugar industry in promoting vigorous patenting activity in Cuba while the country was part of the Spanish Empire. The authors noted, however, that patenting activity did not directly correlate to industrialization.
The final discussion concluded that markets have been perceived as "emerging" ever since companies have been active on a global scale. In some cases, it may be justified to see particular regions or nation states as "emerging," in others expectations may be based on the experience of a single industry. Several contributors argued that emerging markets are characterized by rapid growth or the expectation thereof and often by a higher political risk for foreign investments. Despite this risk, the potential of high profits attracted, and still attracts, multinational corporations to emerging markets. The papers presented at this conference showed how multinationals - successfully and unsuccessfully - aimed at managing political risks, interacted in networks, developed global strategies, and at times localized strategies. Many of the historical studies showed "path dependency" over time. Moreover, the experiences in emerging markets triggered learning processes that shaped future foreign investments but also influenced strategies in the home market. Although global conditions seem to have changed in the most recent era, there are numerous similarities between the historical case studies and current debates on multinationals in emerging markets. The conference thus contributed to the ongoing discussion by adding historical depth and perspective to a current topic.
Corinna Ludwig (GHI) and Paula de la Cruz-Fernandez (Florida International University)
Call for Papers
The purpose of this workshop is to provide historical perspectives on the operations of multinationals in emerging markets, which present significant opportunities but also a range of serious challenges for foreign investors. The intention is to provide some general insights about how these multinationals managed to adapt to these conditions and establish a successful and lasting presence in these markets.
Much public and scholarly attention has recently been paid to what Goldman Sachs analyst Jim O'Neill in a 2001 paper referred to as the BRICs - Brazil, Russia, India and China - and more generally to a number of emerging economies, which are now also seen to include South Korea and South Africa or even Africa as a whole. These countries are seen as providing enormous potential in terms of growing consumer demand, but also presenting a number of challenges including weakly developed institutional frameworks (notably in terms of property rights or corruption for instance), interventionist, sometimes unstable governments, and local competitors seeking access to foreign technology and capital, enabling them not only to compete in their own markets but also abroad. The question then becomes how multinationals from the more developed countries can benefit from the potential of the emerging markets - rather than simply using them as source of raw material or cheap labour, while managing or at least mitigating the corresponding risks.
This situation and the resulting question are not new. Many countries at different times were emerging economies according to the criteria above, attracting (sometimes substantial) foreign direct investments. Suffice to point to the case of Singer, which created and dominated the market for sewing machines in pre-revolutionary Russia, or Unilever, which generated substantial profits from markets like Brazil, India and South Africa during the 1960s and 1970s - a period marked in all these countries by nationalistic government policies, including import substitution and ownership restrictions.
We look for papers that move beyond the current context - too often (wrongly) presented as unique and unprecedented - and examine (i) the motivations for foreign firms to invest in emerging economies, (ii) the variety of ways in which they overcame the associated challenges, as well as (iii) the results (positive or negative) of their investments for themselves and, possibly, the host economy. Both empirical and conceptual papers are welcome.
Those interested should send an abstract of 1,000-1,500 words and a one-page CV to Susanne Fabricius by 1 June 2012, with invitations to be sent out by 1 July 2012. Full papers or longer abstracts are due by 1 October 2012.