Local Challenges Global Thinking

When entering emerging economies, multinationals should get genuinely involved and actively participate in the development of local markets rather than just adapt to them. Well, this question raised to my mind after the scandal with Starbucks in Saudi Arabia. Even if it was based on cultural differences, I was researching more information about global brands in local markets.

Many leading multinationals are finding that their biggest competitors in emerging economies are local players and not other big global names. Why is it, for example, that the Chinese andIndian ice cream markets are dominated by local brands and not the likes of Unilever and Nestlé? Even, you can observe that big companies buy some local brands like in Russia. The same goes for a large spectrum of industries. In most cases, the fact that local companies have been outperforming foreign multinationals cannot be blamed on protectionist regulations or unfair competition.

A study that Jose Santos (from INSEAD) conducted with Peter J. Williamson described in “The New Mission for Multinationals” provided plenty of evidence of locals winning in various emerging markets and led us to discover why. They found three main factors

1. Local companies are leveraging the world’s technologies and knowledge at home

2. Local firms can turn quickly to consecutive shifts, which means attempts by multinationals to adapt to the local market lag behind developments

3. “Local integration” provides a dual ‘home team’ advantage. Together, these three factors make local firms a force to be reckoned with.

Leveraging the world at home

It was often assumed that globalization would only favor large multinationals from the developed world, which could transfer physical as well as intangible assets within themselves cheaply and efficiently. Their ability to outsource activities remained investment low Globalization also affords local players in emerging economies the access to the same modular designs, product components, contract manufacturing, and cross-border M&A opportunities to bolster their competitiveness in their home markets in ways that weren’t possible in the past. China’s Xiaomi Inc., for example, sells mobile phones in China which are engineered and made with technologies, components and manufacturing services by the same American, Japanese, and Taiwanese suppliers that serve Apple and Samsung.

Local companies anywhere can also benefit from global markets for knowledge-intensive activities such as design, engineering, or consulting as well as from global markets for talent. The “global village” is, after all, a village for everybody.

Adaptation lags behind developments

The rapidly changing dynamics of emerging markets is why “local adaptation” is always a second-best strategy in emerging markets. Countries such as the BRICS have been engaged in the process of globalization with an unprecedented surge of modern development. If we focus on the growth that several of these emerging markets have exhibited, we may miss the point of the complex transformation that their societies are going through, each unlike the other. It is this ‘emergence’ that is both fascinating and hard to comprehend.

“Development” is not a linear path. It is associated with myriad changes (new institutions, new policies, new rules and practices, new technologies and skills, new offerings and preferences, new industries and product markets), mostly disruptive.

An emergent market economy is not just about the economy; it is also about the society. Brazil’s economy has been through an extraordinary phase of development and growth. At the moment GDP is shrinking, but the question is not just about the short-term consequences. The country is struggling to unlearn old habits that led to corrupt relationships between business and politicians, and changing the practices of politics and government. At the same time, it is dealing with the increased participation of citizens using social media who demand improvements to infrastructure, environmental sustainability, and more. Brazil’s continued emergence is a long and rough journey forward.

It wasn’t long ago that China had little or no internet access. Now, it has 22% of the world’s internet users. Such rapid developments are significant for the development of the country. Different preferences and habits emerge in different places and along the way, new rules enacted, common practices change and some traditions vanish.

It is not easy to understand today’s China from an office in the US or in Sweden. Even those in China cannot fully know what China will be tomorrow. Emerging China can only be anticipated by those who are actively engaged in building it. If you go there today, by the time you appreciate what is happening, it will have moved on. Multinationals are, at best, slow to adapt to such rapid social and institutional shifts.

Local integration

The “home team” in an emerging market has an additional advantage: it can anticipate changes because it is actively engaged in developing the playing field. Transforming the field and playing at the same time is taxing for the home team but they have a particularly powerful motivation: it is their home, after all.

Amazon and eBay were early entrants in China when e-commerce was just beginning there. They found an embryonic market in a vast country with no reliable and efficient infrastructure for delivery or credit card payments. How could they adapt their plays to that field? Alibaba, a local e-commerce company, decided to introduce new plays and change the playing field. It created AliPay, a special payment system with Alibaba acting as intermediary; it partnered with forty local banks and with China Post, so that AliPay accounts could be re-charged nationwide. Alibaba continued to transform the local landscape for e-commerce, as well as itself, actively influencing the development of the market in China while simultaneously evolving with it.

Local integration requires the active commitment of a company to its community. Being cloning a foreign operation is not enough. Many local companies speak and act as if their “home” is just the natural place to do business and make a profit. This is obvious. But other companies go much further, embracing a vision for their “home” and contributing to it. The world may be global, but “there is no place like home”.

The question is, can a multinational company be “locally integrated” outside its home base, or will it remain consigned to being foreign? Such an alien visitor may still win there, but only when the local market values it because it is foreign, or because it comes with unique offerings that locals value, or both.

Otherwise, in emerging markets, local companies will continue to win.