Question

Emerging markets attract inward foreign direct investment (FDI) due to their low cost advantages and significant market potential. Recently, we are also seeing an increasing volume of outward FDI from emerging markets.

Why are these emerging market firms investing overseas despite their home market attractiveness and their lack of international experience?

Please discuss the firm’s motives and viable strategies of emerging market firms conducting FDI overseas.

Answer 1

For firms in emerging markets, investing in more developed economies presents a great opportunity for a few reasons:

• Higher purchasing power in developed nations: People in developed nations have a higher purchasing power and hence are more willing and able to spend money. This attracts many emerging market firms to these nations.
• Diversification: Businesses start operations in many different geographies in order to diversify risk. Emerging markets face a lot of issues such as corruption, red tape etc. and firms, in order to diversify this emerging market risk, start operations abroad.
• Recent tariff wars: In case of a few industries, especially manufacturing, it is cheaper to produce in emerging markets because of cheap labor. So, many emerging market firms choose to manufacture in their own countries and sell those products abroad, giving them a cost advantage. But the attractiveness of this factor has gone down in recent times with trade wars and higher tariffs being imposed by a few nations. This has prompted a few companies to set up shop in these nations because firstly, they don't want to lose an attractive market and secondly, it has become expensive to manufacture elsewhere and export.

Viable strategies for an emerging market firm would be to:

• Acquisitions and partnerships: Starting business operations in new territories is not an easy task. Between two nations, there are various differences of culture, buying behavior, regulations, competitive environment etc. So, knowing the environment becomes extremely important for a business starting operations abroad. And a good way to tackle that is to partner with firms that have an experience of working in that environment.
• Start by exporting: A good strategy could be to first test the waters before going all in. Emerging market firms usually start by first exporting goods to developed nations and after gaining experience and testing market they go out and set up shop in that country.
• Proper research and Planning: As mentioned earlier, there are huge differences when it comes to running a business in two different nations. So, the first thing for any firm, thinking of setting up operations in a foreign nation is to research extensively. What is the political environment like? what are regulations regarding my industry? competition? demographics? all these have to well researched and planned for before entering the market.