INTERNATIONAL ECONOMICS & BUSINESS ASSIGNMENT

SAGARICA BRAHMA

2017PGP103
What are the challenges likely to be encountered by the businesses in the emerging
economies internationalizing at a fast pace?

Answer: Internationalization refers to the practice by an organization to increase its presence

in countries outside its home base and its ingress into international markets. This global trend
of internationalization has helped the economy progress into a state of globalization, due to
which, economies across the world have become thoroughly inter-connected to each other,
giving rise to an increasing degree of commerce and trade across borders. In this scenario, all
these economies have become highly dependent on each other’s well being and activities for
their individual prosperity.

Economies like China, India, Brazil, Argentina, Mexico, Chile, Peru, Turkey etc. are
considered as emerging economies, considering the significant rise that these countries are
witnessing in terms of industrialization and economic growth.

However, there are several challenges that these economies face, due to the rapid
internationalization.

 These economies are characterized by low per-capita incomes, high socio-political

instability, high levels of unemployment, but considerably higher economic growth
rates and higher return potential as compared to the mature economies of the world.
 Emerging economies are high on the risk front because their stocks can be quite
volatile. Adverse circumstances like inflationary pressures, rising rates of interest or
anything remotely signalling a global economic cool-down can bring these economies
crashing down. Investing in these economies come accompanied with risks of
political and regulatory changes, currency fluctuations and other such issues
 These emerging economies at times, suffer from a volatile political structure,
characterised by unstable governments and political unrest. This can lead to serious
consequences for the economy of the country as well as the investors.
 These markets may also be characterised by labour and raw material scarcity, high
inflationary or deflationary pressures, unregulated markets and flawed monetary
policies
 Corruption may be prevalent in some countries, which can lower down the profits and
adversely impact business
 The volatility of emerging market currencies as opposed to the US dollar can be
highly volatile. This could impact gains from investment once a currency is devalued
 Infrastructure is still a big issue in some of the emerging economies.
 Lack of recognition of smaller cities within these economies which have tremendous
growth potential poses as a challenge for attracting business, talent or FDI
 The significant plummeting of oil prices has placed constraints on these emerging
economies leading to scaled-back forecasts on their growth
 Increasing dose of debt along with a domestic credit bubble, misallocation of capital
into unprofitable projects, a flailing banking sector, budget deficits, current-account
gaps, substantial short-term foreign-currency debt and inadequate foreign exchange
reserves are textbook recipes for emerging market crisis
 The potential for destabilizing political events across the world like the North Korean
missile programme being criticized by the US, populist politicians winning elections
in Western Europe sending it into a state of flux, separatist movements in the
European Union can pose as a major threat to the world economy in general and the
emerging economies in particular
 The ongoing aftermath of Brexit and trade protectionism policies by the US are going
to affect the emerging economies to a great extent

The current financial policies of these emerging economies are not sustainable enough, as
they need to focus more on providing more opportunities for capital gain than for
increasing income.

Overstretching corporate balance-sheets, uncertainty in the structure and direction of the

government policies, supply-side constraints, inadequate infrastructure, flawed
regulations are detrimental to attracting investments. Aging populations, tense socio-
political situations do not help much either.

In order to build a stronger economy, these countries need to focus on managing demand,
strong growth in productivity by re-skilling the labour force and most importantly, by
investing more in innovation.

What challenges are likely to be encountered by the multinational corporations

originating in the developed countries on account of internationalization of
businesses in the developing world?

Answer: Characterized by an increasing growth in purchasing power, a burgeoning

middle-class populace, and a steady economic growth-emerging markets are attracting a
lot of investments by domestic and foreign multi-nationals. Greater access to mature
markets in developed economies and technology transfer look promising as far as
productivity level and living standard improvements are concerned.

However, with these advantages, come several challenges for MNCs originating in these
emerging economies:

 Export oriented firms face issues from the foreign regulatory environment, non-
tariff barriers, FOREX conversion rates, sky-rocketing transportation costs,
inspection, certifications and taxation related problems and Visa-related matters
 In case foreign firms are being acquired, the valuation usually is very high, and
the premium paid does not always translate to real cash benefits
 When relatively smaller Indian firms try to acquire firms that are much larger in
size, it gives rise to assimilation problems
 Raising cash in emerging markets is difficult owing to high interest rates and an
under-developed bond market
 Under-developed FOREX markets, volatile currencies in emerging economies
lead to frequent foreign exchange losses for firms
 Market segmentation and targeting, adapting to the relatively lower purchasing
power of the customers in emerging economies and developing effective strategies
to combat the same is a huge challenge for MNCs in emerging economies
 Firms in emerging markets have to deal with problems such as inefficient
infrastructure facilities, lack of protection of intellectual property rights, high tariff
barriers, over-complicated bureaucracies, ambiguous laws and regulatory
practices, monopolistic markets, logistics, supply chain and distribution issues,
unreliable and poor quality of raw material suppliers and corruption in the entire
industrial system
 The customer base is highly price sensitive, have localized needs based on
demographics, and possess a low purchasing power and firms have to strategize
accordingly
 There is a palpable absence of regulatory systems, specialized intermediaries and
contract-enforcing mechanisms in most emerging economies
 Transactional risks, income risks from operations & financing, accounting risks
due to fluctuations in exchange rates, political risks, bank instability, inflation and
legal risks are mammoth challenges for MNCs in emerging economies
 Corporate social responsibility is the buzzword for corporates in the modern times
and striking a perfect balance between economic gains and social contribution is
not an easy task
 Foreign exchange laws in these emerging economies are at times not supportive of
domestic firms wanting to do business abroad
 Firms raising a substantial portion of debt from abroad at times find it difficult to
pay off the debt owing to volatility in foreign exchange making the debt even
more expensive
 Emerging market MNCs are less likely to have built up expertise & capacity in
integration of foreign affiliates and acquisitions and are most likely unwilling to
hire non-national managers which does not bode well for the ability of these
MNCs to build an integrated international network of production and management
 Top management teams might not be aware of local cultures or have clarity in
understanding global markets
 Companies find it difficult to reward and incentivize in different markets and
cultures and retaining such talent, thereby becomes a challenge
 High levels of debt and falling commodity prices give way to an uncertain future
for most industries
 Because of cultural differences across economies, it is difficult to completely
integrate the workforce of acquired firms
 Emerging economies are mostly not well-equipped in the domain of research and
innovation, leading to commoditization of the products produced by firms which
in turn gives way to lower profit margins
 Quality standards in developing countries might not comply with quality standards
abroad which may impede foreign sales and require adaptation of products to
foreign market standards

Emerging market multinationals thus need to master efficient corporate governance

strategies, maintain the right mix of cultural diversity, management frameworks and
adapt effective corporate leadership styles, learn how to operate within different
regulatory frameworks and how to combat protectionist pressures-in order to sustain
growth.