Written by Khanna, Palepu, and Sinha (2005), the article ‘Strategies that Fit Emerging Markets’ is an informative piece that acknowledges the biggest challenge, namely globalization, which major businesses face today. Top-level management of large multinational corporations reveals how globalization has made it almost impossible to apply traditional strategies that were initially deployed in any corporation’s host country to an emerging market. Majority of companies in developed countries underestimate the functions carried out by the readily available infrastructure when implementing their business models, especially in their home or host markets. This poor development or absence of infrastructure such as mechanisms for enforcing contracts, regulatory systems, and specialized intermediaries in developing countries is referred to as an institutional void. As Khanna, Palepu, and Sinha (2005) suggest, even when a multinational intends to set up operations in a foreign country, the infrastructural non-development will hamper its proper day-to-day running (Sousa & Tan 2015). For instance, in developing countries, very few end-to-end providers of logistical services are available.
The presence of logistics providers enables manufacturers to lower the transport cost for raw materials and finished products. Hence, even during recruitment, the multinationals have to vet the candidates by themselves. Therefore, these institutional voids have forced corporations to perform dismally in foreign lands. However, Khanna, Palepu, and Sinha (2005) show how developing countries have markets with the fastest growth in the world for majority of products. Thus, international businesses should develop strategies to adopt in developing countries to remain competitive for a long period. According to Khanna, Palepu, and Sinha (2005), CEO’s are supposed to formulate specific strategies that are workable and efficient in developing countries since the market infrastructure quality varies in each of such rising nations. Hence, for a company to be successful in a budding economy, it needs to develop new business strategies that are unique when compared to those they uphold in their host countries. In addition, they should find efficient ways of using such tactics. Moreover, majority of companies assume that joining an emerging economy only requires them to analyze the country’s GDP growth rate and other composite indices. However, not withstanding its position in such indices, this assumption may be wrong since each country has unique market dynamics.
Multinational Companies’ Legal Structure when entering a New Emerging Market
A legal structure, which is also known as a business ownership structure, refers to the form of production a proprietor wants to indulge in. The legal structures include corporations, limited liability companies (LLCs), non-profit partnerships, and sole proprietorships. According to Khanna, Palepu, and Sinha (2005), the choice to be made by an entrepreneur depends on factors such as taxation, potential for future investments, and legal liability. However, the ideal choice should result from what fits the organization. These legal structures are unique to each country that a multinational would prefer to operate in. Hence, the structures should be well analyzed to reflect on the goals of the multinational. For instance, economies need to be open on their policy concerning international business’ Foreign Direct Investments (FDIs). Hence, if some economies do not allow FDIs, the multinational will decide to ignore the market, license local partners (franchising), or enter into a joint venture with a local establishment. These dynamics affect the legal structure to be incorporated by the multinational in the foreign country. However, not all seemingly open economies are truly transparent.
Some of them are deceptive. For instance, even though the Chinese people allow FDIs, their government upholds a strict non-permit stance towards travelling abroad. Currently, it does not allow many business ideas to be executed outside its borders. If an international business ignores these market dynamics, it will not have similar legal structures for business operations as compared to a multinational in India where traveling abroad is not regulated. Furthermore, the financial and capital markets in developing countries lack sophistication because they have not developed fully. Therefore, there is a market gap for intermediaries in the financial sector such as investment analysts or even venture capital firms (Khanna, Palepu, & Sinha 2005). Hence, if a multinational’s projected assets are borrowed finance from a venture capital firm, the business will have to work with a seemingly lower budget. With such a budget, such businesses may have to register as LLCs. However, due to their financial constraints, they may have to adopt a different legal structure. Another underlying character trait of the emerging markets is their poor corporate governance and transnational companies. Such poor corporate governance necessitates the multinational to focus on a different business structure other than a partnership. The labor market also influences the choice of a legal structure in an emerging market. In fact, few recruiting agencies and search firms characterize an emerging market. Such firms and agencies influence the operations of managerial staff members. In turn, the managerial structure of a business influences its legal structure.
Additional Legal Analysis
One of the best analytical tools of a global strategy is the integration-responsiveness (IR) framework. According to Malnight (2001), the IR framework has been regarded as the dominant and mainstream approach to international firm structure and strategy analysis in the literature of international business. Its focus is on a firm’s response to cost or the pressures of local businesses in the countries and industries where they (firms) operate. If the locals do not assert unbearable pressure, the best strategy to promote a favorable legal structure in a foreign land is to create a competency and knowledge base, which relates to the local market requirements. Such requirements identification of institutional voids and the potential opportunities that can be achieved by building, improving, and maintaining custom or auxiliary services with a long-term scope (Lessard 2003). This lasting scope of development in a foreign country enhances the longevity of business, which, in turn, determines the multinational’s legal structure. For instance, a sole proprietorship may not develop such service utilities since its longevity is dependent on the proprietor’s period of operations.
With the existence of different techniques to analyze the international structures and strategies that a multinational has put in place, it is not easy to acknowledge the difficult decisions made when one considers isolated theoretical approaches and existing frameworks because some elements such as geographical market, product market, and organizational structure are non-inclusive in these frameworks. The IR framework gives four strategies, namely, international, transnational, global, and multi-domestic policies. The vertical axis focuses on the pressure of global integration, which occurs due to global customers’ presence, the requirement for cheaper costs, global competition, and access to raw materials. Firms that sell standardized mass-produced goods, which are produced cost effectively because of the uniform or homogenous demands by consumers, respond to global pressures of integration. Therefore, such companies may be in a suitable position to choose the best legal structures because of a proper IR framework, which encourages multinational expansion. On the other hand, the horizontal axis denotes the local response pressures that result from diverse customer needs across different countries, differences across dissimilar distribution channels within economies, and market structure diversities (Kim, Hoskisson, & Lee 2015). The multinationals have no attachment between their operations. They deal with unique and customized commodities, which are produced in the host country in response to pressures of local responsiveness. Such a model requires businesses to adapt to new international markets while at the same time doing a long-term research and investment. The model also adopts a good and favorable legal basis, which safeguards business investments in a foreign economy.
In my personal perspective, I opine that foreign multinationals should continue investing in developing countries because they benefit in various ways. For instance, when multinational companies such as McDonald’s create a new Russian market, they require an auxiliary service industry for the provision of basic services, which they cannot manage to function without. McDonald’s identified bakers and farmers to work with. According to Khanna, Palepu, and Sinha (2005), McDonald’s also brought specialists in agriculture to enhance the farmers’ productivity. Even without any further supply to McDonald’s, the support system enjoyed benefits that ranged from new technologically advanced farming techniques, which enhanced agricultural productivity. It also benefited from sophisticated financial credit offered to farmers and bakers. The credit enabled them to widen their level of production through mechanization and better seed quality.
Moreover, when the company introduced a production unit, majority of the Russians in Moscow found either formal or informal employment, which positively influenced the GDP of Russia by controlling 80% of the fast-food market to a value of $250 million. Therefore, with the right business environment in a host country, the existence of international businesses will influence the economy positively. In addition, such global corporations create a trend of disrupting the status quo in a business setting to the extent of necessitating a complete overhaul in local companies’ business model and mode of operation. A good example was the launch of Star TV in 1991, a Hong-Kong-based television channel and Asia’s first satellite TV station. This launch led to the loss of monopoly power by the Indian government and a booming television manufacturing industry together. Besides, the launch of satellite-based television channels led to a change in business model from terrestrial to satellite.
Laws Regarding the Entry of Multinationals in the UAE
The United Arab Emirates (UAE) is a federal government formed by seven emirates. The UAE government has developed an investor-friendly economic environment that continuously spurs financial growth. In this federal state, a multinational requires an industrial license for any manufacturing or industrial activity. International businesses are required to either form joint ventures (JV), limited liability companies (LLC), or public-private joint-stock companies. For JV, the participation on equity should be at least 51%. Here, licensing is not mandatory. On the other hand, a LLC is suitable for multinationals with a long-term interest in the local market. It can be formed by a minimum of two to a maximum of fifty. Its minimum capital requirement is EUR 2 million (AED 10 million) for a public LLC. However, for a private company, least investment prerequisite is EUR 0.40 million (AED 2 million). The responsibility for management may be vested to any individual, irrespective of whether he or she is a third party, foreign, or local. Finally, local equity participation should be a minimum of 51%. International businesses in the UAE include Citibank, Aramex International, Johnson and Johnson (Middle East) Inc., and American Life Insurance Company among others.
Khanna, T, Palepu, K & Sinha, J 2005, Strategies that Fit Emerging Markets, Web.
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Malnight, T 2001, Emerging Structural Patterns within Multinational Corporations towards Process-based Structures, Web.
Sousa, C & Tan, Q 2015, ‘Exit from a Foreign Market: Do Poor Performance, Strategic Fit, Cultural Distance, and International Experience Matter?’, Journal of International Marketing, vol. 23, no. 4, pp. 84-104.