Before deciding to enter EMs, fi rms should take into consideration both local opportunities as well as potential local risks (see Figure 6.1 ).
MNCs face a number of opportunities in EMs that help them to secure long-term growth. In particular, EMs become more and more attractive sales markets: Their purchasing power grows on the country, fi rm, and household levels; local customers increasingly have use for products tra- ditionally sold in developed markets, as well as appreciate and are ready to pay for technological innovations. In this context, it is important to note that EMs are not homogeneous. Depending on the industry, they consist of several—sometimes very distinctive—market segments. Often three main market segments can be distinguished: the premium, the mid- dle, and the low end (Gadiesh, Leung, and Vestring, 2007; Shankar et al., 2008; The Economist , 2010). The purchasing power of the premium seg- ment is high, and customers are eager to pay for internationally acclaimed brands. These customers seek high-end products with many state-of-the-art features. The middle market, by contrast, consists of value-seeking cus- tomers with mid-level incomes very consciously selecting products with a certain price-performance ratio. This means that products have to be equipped with only decisive features and be signifi cantly cheaper than those in the premium segment—in other words, “good enough.” In the low-end segment, customers are able to pay only for the basic product fea- tures at prices that are a fraction of those in the premium market.
As MNCs typically enter EMs with their traditional high- quality and high-functionality products—sometimes with minor (price)
FIGURE 6.1 OPPORTUNITIES AND RISKS FOR MNCs IN EMs.
Opportunities Risks
Increasingly attractive B2B and B2C sales markets
Keeping emerging MNCs at bay both locally and at home Increasingly innovative local science and technology infrastructure
To some extent lower R&D costs
Very different market conditions Often unstable political and regulatory environments Possibility of watering down premium brands
Resource scarcity
adjustments—they tend to address the local premium market segment in the fi rst instance. In this segment, MNCs usually have a strong com- petitive position. In the middle and lower market segments, by contrast, they are generally scarcely represented and face fi erce competition from local fi rms. Especially in the low market segment, it is diffi cult for MNCs to match the cost structure of local rivals. However, in many industries, the current premium market is shrinking or developing at a much slower pace. For this reason, it becomes increasingly attractive for MNCs not only to keep their positions in the premium segment but also to expand into the good-enough market (Gadiesh et al., 2007; Shankar et al., 2008;
The Economist , 2010). It is estimated that 2 billion people may join the middle class by 2030 (Goldman Sachs, 2008). In some industries, this segment is already the dominant one in terms of overall market revenues (Gadiesh et al., 2007). And it seems realistic for many MNCs to be able to match the offerings of cost-savvy local fi rms in this segment. More- over, MNCs should not let local fi rms take this segment by default. For many of them, it is the perfect training ground for increasingly innova- tive NPD helping them to expand in the premium segments of EMs, as well as transferring new products to developed markets and challenge MNCs on their home turf (see Figure 6.2 ). Consider fi rms like Lenovo,
FIGURE 6.2 INTERNATIONAL EXPANSION OF COMPANIES HEADQUARTERED IN EMs.
High-end Lowest growth Developed markets
Low growth
Globa- lize
Inno- vate
Emerging markets
Dominated by MNCs
Mid-range
Low-end
Highest growth Profit base for expansion of EMs’ national champions Dominated by
domestic players Beginning imports
from EMs
High growth Still dominated by MNCs
Adapted with kind permission from Springer Science1Business Media: Ernst, Dubiel, and Fischer (2009), p. 32 and Siemens AG. Strategische Bedeutung lokaler F&E in Emerging Markets, in Industrielle Forschung und Entwicklung in Emerging Markets: Motive, Erfolgsfaktoren, Best-Practice- Beispiele , edited by H. Ernst, A.T. Dubiel, and M. Fischer. Wiesbaden: Gabler Verlag.
Haier, or Suzlon. A decade ago, most of them were not regarded as a serious competitive threat to Western MNCs in both EMs and developed markets. Now their products are not only conquering middle and even premium segments of EMs but also successfully redefi ning competition in developed economies by creating totally new markets. A good example is Haier, which changed the market for wine refrigerators in the United States from a connoisseur-based to a mainstream product category (Zeng and Williamson, 2007).
EMs are attractive for MNCs apart from their vast sales markets. Many EMs heavily invest in science and technology and thus turn into promis- ing R&D locations. For instance, China ranks third worldwide in terms of number of researchers (OECD, 2007) and produces 5 million graduates per annum—four times more than a decade ago ( The Economist , 2010).
This local innovative potential can be tapped for NPD for local as well as worldwide markets. A number of MNCs also report lower NPD costs associ- ated with NPD activities conducted in EMs.
EMs are as risky as they are alluring because they differ sharply from familiar markets in many aspects (see again Figure 6.1 ). First, local mar- ket conditions are often very distinct. For instance, even though the pur- chasing power of many local customers is growing at a fast pace, it is still relatively low. Local customers not accustomed to Western brands may be very volatile in their purchase behavior, too. Also, the often poor local infrastructure hinders operations. Second, in several EMs, MNCs are exposed to unstable political and regulatory environments. For example, weak intellectual property protection laws make it particularly challeng- ing both to conduct NPD and to offer the latest products locally. Third, some MNCs fear that their premium brands may be diluted by expanding their product offerings to lower market segments. Last but not least, many MNCs in EMs face resource scarcity like limited supplier capabilities and high R&D employee turnover, making it diffi cult to sustain NPD qual- ity. Thus, developing successful new products for and in EMs is anything but an easy task. What ’s more, most MNCs are handicapped since they have based their NPD capabilities on understanding the needs, techni- cal requirements, and adequate pric-
ing of developed markets ’ customers (Deloitte, 2006). Additionally, they often face unfavorable cost structures as well as limited local distribution and service networks (Deloitte, 2006;
The Economist , 2010).
Before deciding to enter EMs, fi rms should consider both the local opportunities and the potential local risks