INTRODUCTION

Once the manager has selected the country that provides the best opportunities and identified the sources of advantage to be transferred and the mechanisms that ensure the transfer happens, the next step is to select the mode of entry that best enables the firm to access the complementary resources that it is not transferring across countries to be able to have a fully functioning operation in the host country. We look at how to do this in this chapter. Complementary resources are resources that support the resources that are a source of advantage but that are not sources of advantage in themselves. For example, a firm's source of advantage may be its technology, and the marketing function may be merely a complement, enabling the firm to sell the technology to its customers. However, if the company lacks complementary resources, it is disadvantaged, because this deficiency will detract from the advantage created by other resources as the company does not have a fully functioning operation abroad. In our previous example, if the firm has a poor marketing function, it may serve its customers poorly and detract from the advantage provided by the technology as customers look for other products that, although not as technologically sophisticated, are better adapted to their needs.

One additional challenge with complementary resources is that because they are not perceived as a source of advantage, their analysis is often neglected. The usual assumption regarding complementary resources is that they can be obtained from external vendors when the need arises. However, in some cases, complementary resources are not readily available, and the lack of them can call the overall success of the foreign expansion into question. This appeared to be the case behind the acquisition of the French firm Thomson by the Chinese electronics firm TCL Corporation (TCL).

OPENING CASE: TCL ACQUISITION OF THOMSON

In November 2003, TCL International Holdings combined with the French firm Thomson and became the world's largest producer of television (TV) sets, making 18 million a year, 6 million more units than Sony. Thomson owned 33 percent and TCL 67 percent of the combined firm, which became known as TCL-Thomson Electronics (TTE). Unfortunately, this provided the Chinese firm with the wrong complementary resources in a rapidly changing industry.

We have been fascinated by emerging market multinationals, and interested in understanding them better, for a long time. In our travels in emerging markets, we observed that emerging market firms were dramatically increasing in size and scope and in some cases expanding beyond their countries at a rapid rate. At the same time, existing recommendations about how to successfully invest in foreign markets did not seem applicable; established theories and models of international expansion were developed by analyzing firms headquartered in advanced economies and did not seem to fit the operating conditions of emerging markets. We thought we needed to go deeper into understanding how such conditions affected the internationalization of emerging market multinationals because we had experienced and observed such differences. All three of us had spent decades analyzing firms in emerging markets.

Sam had direct experience in Asia and Eastern Europe, Alvaro had focused his interests on Latin America, and Bill straddled two continents, having first gained experience in Asia before adding a Latin American focus. We had published extensively on the internationalization of firms, especially emerging market multinationals, but most of these publications were academic. We thought it was time for a managerial book that would sum up our experiences and thoughts and reach a wider audience.

This book started its life as a research project for the Skolkovo-Ernst & Young Institute for Emerging Market Studies (IEMS). In 2012, Sam was the managing director of the Institute and Alvaro and Bill were nonresident senior research fellows. At the 2012 annual meeting, we had animated discussions about the rise of emerging markets and their multinationals and marveled at how some were not only catching up with established competitors from advanced economies but, in some cases, also becoming global leaders. At the time, Sam had just completed his book Rough Diamonds: The Four Traits of Successful Breakout Firms in BRIC Countries (Jossey-Bass, 2013), in which he described the rise of these new global competitors and provided some fascinating stories from his conversations with managers. Later, Alvaro co-edited the book Understanding Multinationals from Emerging Markets (Cambridge University Press, 2014), in which he analyzed theoretical explanations for the emergence and expansion of emerging country multinationals, while Bill co-edited Internationalization, Innovation and Sustainability of MNCs in Latin America (2013) on the internationalization of Latin American firms, which provided additional insights.

INTRODUCTION

In some instances, a company can create a disadvantage from the resources it transfers abroad. This can happen if the resources are not appropriate for operating in the host country or because the host country's government or consumers dislike them. This problem is particularly challenging for EMNCs, as individuals not only in advanced economies but also in other emerging countries can have a negative attitude toward emerging country firms and tend to associate them with less sophisticated products.

OPENING CASE: CHINA NATIONAL OFFSHORE OIL CORPORATION'S FAILED BID FOR UNOCAL

The Chinese oil firm China National Offshore Oil Corporation (CNOOC) found out the hard way that its state ownership and Chinese origin were a competitive disadvantage in the eyes of the US Congress when it tried to acquire the US oil firm Unocal in 2005. CNOOC was a Chinese state-owned firm in charge of managing offshore oil and gas projects. It created CNOOC Ltd. as a Hong Kong–quoted subsidiary to undertake exploration and production (E&P) operations in collaboration with foreign firms. CNOOC controlled 70 percent of CNOOC Ltd., with the remaining shares were traded in New York and Hong Kong.

In December 2004, CNOOC Ltd.'s CEO considered acquiring the US independent petroleum firm Unocal Corporation. Unocal had been created in 1890 and over the decades had gained expertise in offshore E&P operations and a good success record in finding hydrocarbons. Unocal expertise and its large operations in Indonesia, Thailand, Bangladesh, and Myanmar seemed a good complement for CNOCC expansion plans.

CNOOC Ltd.'s CEO discussed the possibility of acquiring Unocal with its CEO, but by the time he discussed this action with the CNOCC Ltd.'s board and made a formal offer, the operation turned into a competitive takeover. On April 4, 2005, the US petroleum giant Chevron made a bid for the purchase of Unocal, offering US$62 per share in 25 percent cash and 75 percent stock. On June 22, 2005, CNOOC Ltd. countered this with its offer of US$67 per share in cash. On June 22, 2005, Chevron increased its offer to US$63.01 in 40 percent cash and 60 percent stock.

INTRODUCTION

Most countries have the potential to offer benefits to a budding multinational. There are always opportunities to expand abroad and serve new customers who may have similar needs and desires as a firm's customers at home. Such expansions can be very beneficial as the firm can obtain higher returns on previous investments in technology and knowledge. There are also opportunities to expand abroad to obtain inputs in better conditions than those available at home, because they are either available at a lower cost or more sophisticated in other countries. These superior inputs can help the firm improve its operations at home.

The challenge for managers of emerging market multinational corporations (EMNCs) is not really identifying such foreign opportunities. Country indicators and tools are widely available, and many consulting firms offer services that can help managers assess conditions and identify opportunities for foreign expansion. The global mobility of managers also enables them to spot new business opportunities. The greater challenge is to identify which particular country is the most appropriate for the company, that is, whether the company can build advantages over competitors and serve customers there or obtain inputs that will improve its home operations.

Identifying an appropriate country for foreign investment requires, first and foremost, a deep analysis of the firm and its reasons for expanding outside the home country. Understanding the logic for moving across borders can help narrow down the list of potential countries and, more important, determine whether foreign expansion is a potentially value-creating strategy. Moving abroad just because everyone in the industry is doing so is not a good enough reason for doing the same; in this case, the manager is merely following others rather than deciding what is best for the firm. In some cases, deciding not to expand across borders may be the better strategy, never mind what everyone else is doing.

In this chapter, we focus on analyzing the reasons for expanding abroad, distinguishing between expanding to sell more and expanding to buy better. Expanding to sell more requires transferring and using in another country competitive advantages created by the firm in its home country. Expanding to buy better requires accessing and transferring comparative advantages of a foreign country to the home country and using them there.

INTRODUCTION

In this chapter, we examine the final process issue of our operational difficulties framework related to EMNC expansion. After managers of EMNCs overcome the hurdles associated with establishing operations in foreign countries and integrating these operations into the overall corporation, they must attempt to build upon the initial investments by identifying new business opportunities in the local country and the competitive advantages they can use to pursue them. They may also attempt to build upon MNC networks to identify new business opportunities outside the country that can be served from the local operation and identify advantages that can be used to set up new business operations outside the country in coordination with other subsidiaries. By pursuing these activities, EMNCs may be able to consolidate and supplement their initial investments within a country to develop synergies and a stronger overall presence.

As we have seen in previous chapters, there are differences in institutionalized expectations about organizational practices between developing country home markets and developed country host markets, and EMNCs have relatively little experience operating in these markets to guide them in incorporating local practices into their subsidiary operations. While these issues may be present in any MNC, for EMNCs with operations in developed countries, the possibilities for differences in such role expectations and the need to develop abilities to reconcile them are exponentially higher. In this chapter, we review operational difficulties associated with EMNC expansion, focusing particularly on issues related to learning and innovation and expanding EMNC competencies. We begin our exploration with the case of Tata Motors and its efforts to expand geographically as well as into higher-level automobile categories.

OPENING CASE: TATA MOTORS

Tata Motors is an Indian car company with manufacturing subsidiaries in Argentina, South Africa, Thailand, and the United Kingdom and research and development (R&D) operations in South Korea, Spain, and the United Kingdom. The company had revenues of US$38.6 billion and 66,000 employees in 2014. While Tata had initial success in investing overseas, these investments did not significantly improve the company's reputation, and Tata was primarily seen as a manufacturer of low-cost automobiles, the most notable being the Tata Nano launched in 2009. Partly as a way to combat this, Tata Motors acquired the British brands Jaguar and Land Rover from the US automaker Ford Motor Company in 2008.