Learning by Emerging Market Firms

Dr Elizabeth Yi Wang
Associate Professor of International Business

A rhetoric that fuels recent geopolitical and trade tensions is that indigenous firms in emerging markets have benefited disproportionally from learning foreign technologies brought by multinational enterprises. But how much do emerging market firms really owe their success to seizing foreign technologies?

There has been a long tradition in the international business discipline to understand firms: how firms operate in multiple locations, how they interact with economic actors and environments in those locations and what consequences such interactions produce.

A stream of these studies examined the benefits of foreign direct investment (FDI) by multinationals and suggest that indigenous firms may enjoy “spillovers” – gaining values that foreign firms would not have wanted to give away.  The promise of “spillovers”, especially technologies and knowledge transfer, has since motivated many developing country governments to compete to attract inward FDI.

However, there is a paradox: multinationals would not want to give away advantages that make local rivals stronger while emerging market firms have become more competitive at home in face of continued FDI inflows. Motivated by this paradox, the research I’ve undertaken with my colleague examines emerging market business groups and reveals their effective approaches to spillovers and learning from FDI.

Multi-location enterprises: The battleground

All enterprises are determined by location-specific advantages and their abilities to control and coordinate activities across locations. Multinationals are prime examples, but not the only examples. Emerging market firms are rarely single-location entities. They are often networked, and some form business groups.

Multi-location business groups are hence more competitive and capable than stand-alone firms as they operate with affiliates distributed across locations and each affiliate has different sets of responsibilities that are coordinated to benefit the whole group. The battleground for native learning and catch-up is essentially in the interactions between multi-location foreign multinationals and multi-location indigenous business groups.

"All enterprises are determined by location-specific advantages and their abilities to control and coordinate activities across locations."

How do indigenous groups spatially disperse and configure themselves in responding to inward FDI?

We see that multinationals do not give away much after all. Learning at a distance is very hard but achievable with a stronger ability to overcome spatial discontinuity – a term that refers to the interruption caused by spatial boundaries such as administrative divisions, topographic conditions, and institutional distinction.

We first studied FDI spillovers occurring within a location where the group has affiliate(s), known as intra-regional effect. Secondly, we examined if the spillovers are experienced by the group when it does not have any affiliates in a location, that is inter-regional effect.

Intra-regional spillovers arise when an MNE benefits from FDI in a location where it has affiliates, while inter-regional spillovers arise when a firm benefits from FDI in locations where it does not have any affiliates. Multinationals are known to have firm-specific advantages, notably intangible assets such as technology and knowledge, and specialise in replicating these across locations to optimise competitiveness. Their strong appropriability regime –  the scope in which knowledge and innovations can be protected from imitators  – means little is easily given away.

Tacit knowledge transfer is one possible channel to obtain valuable benefits from multinationals, but tacit knowledge does not “travel far”. Thus, we predict that the most likely spillovers (if at all) would be intra-regional not inter-regional. Using a large sample of Chinese business groups with varying degrees of spatial dispersion, our results confirm this. In fact, inter-regional spillovers are found to be small in magnitude and negative, suggesting a competitive threat from multinationals in locations where groups fail to expand into.

However, those groups with greater geographic dispersion than their indigenous peers’ are found to do better, benefitting from FDI spillovers without “being there”. In other words, building resilient and more integrated internal spatial networks, hence a stronger ability to overcome spatial discontinuity, is a key approach to learning in emerging markets.

Most effective learning in emerging markets: Marketing and sales

Our research tests which types of affiliate activities have enabled the indigenous groups to benefit from intra-regional FDI spillovers. As we have seen, a group may have an affiliate responsible for marketing and sales while another for manufacturing or research and development, and such activities are distributed across locations. We found that groups benefitted most through marketing and sales but not research and development, and in fact negatively from manufacturing.

Hence, we reject the rhetoric by showing that, for a large emerging market, China, where emerging middle-class shifts the motive of FDI away from low-cost manufacturing, sales and marketing knowledge diffusion is most prevalent and effective for indigenous firms. Learning by emerging market firms takes place more often in consumption rather than production contexts. Rather than seizing foreign technologies for manufacturing and exporting, learning through meeting local consumer demands is the key to indigenous success in emerging markets.