The Emerging Giants

The Emerging Giants - An article summary per Khanna and Palepu

Written for Thunderbird School of Global Management - Spring 2012

Summary

Khanna and Palepu nicely outline the reasons why emerging market corporations have significant advantages in their home markets as well as on the world stage. They also explain why well-established multinational corporations (Western, Japanese, and Korean) often have difficulty conducting business in emerging markets.

Although established MNCs have access to terrific talent and capital markets, high technology, and well-known brands back home, the authors utilize a simple, yet impactful model of the emerging market’s Product and Factor Market to explain why these MNCs find it difficult to succeed against local companies who know how to take advantage of the local market.  For instance, when MNCs enter emerging markets, they are often only able to tap into a small portion of the Product and Factor Market because they fail to adapt.  

They are only able to work inside of the “global tier” markets where they can only sell to the few customers who are willing to pay international prices for international quality products with international attributes.  Also, regarding the factors of production in the “global tier”, MNCs can only access talent who demand international salaries.  Local companies tailor products to meet local needs in the “glocal and local tiers” which are much larger markets than the global tier, and they are able to find adequate talent at these levels with fewer dollars spent.

These advantages in the product market – knowing the customers – and the resource market create vast opportunities for locals and difficulties for newcomers.  The authors also present this theory regarding filling the institutional voids that often occur in emerging markets.  MNCs are hard-pressed to capitalize on these opportunities because they also require significant local talent and knowledge.  In addition, governments often protect these institutions for local management in the end anyways. 

Integrate

Freakonomics authors Tim Levitt and Stephen Dubner touch on the concept of “home-field advantage” related to American Football and found that 57% of the time, the home team does win.  Of course this is due to a number of factors, but this is a very simplistic and similar concept to Emerging Giants.  Another similar theory is that of National Advantage which reveals that specific countries or regions come to dominate an industry or market due to the inherent capabilities and attributes of the people and resources of that region.

Emerging Giants does identify competition in two places – first “at home” and also, “on the road”.  It is obvious to readers when emerging giants are playing on their home fields the inherent advantages that they have when visiting multinationals come to compete against them – access to talent, lack of regulatory bodies and solid supply chains.  Khanna and Palepu even explain that MNCs often fail to properly handle the sheer differences in the opponent’s home field because executives are “ill-equipped to deal with such voids”.

Then, National Advantage fits nicely as well when emerging market companies do expand abroad because they have learned how to best leverage their home market to create competitive advantage solid enough to compete in global markets.  Companies like Haier and Infosys have discovered how to best leverage their home country talent and resources to find business models that are almost unbeatable even “on the road”.