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Published: August 26, 2005

 
 

Recent Research

On emerging-world corporate “tigers,” the profitability of innovations, and other topics of interest.


Revenge of the Domestic Tigers
Paul Bracken (paul.bracken@yale.edu), “Big Business and the Golden Straitjacket.” Click here.

Photograph by Corbis
Forget Wal-Mart conquering the world; the future may belong to companies such as Petrobras (Brazil), Lukoil (Russia), Wipro (India), Haier (China), and Cemex (Mexico). “The rise of big business in Russia, China, India, Brazil, Mexico, and other emerging market nations is one of the most important yet overlooked basic trends taking place in the world today,” writes Paul Bracken, professor of management and political science at Yale School of Management.

Foreign multinationals have had big business mostly to themselves in these countries for more than a decade. Many developing countries depended on foreign companies to supply the job training, technology, and know-how they lacked. In return, foreign multinationals often used their leverage to force concessions from national governments. Globalization and the requirements of a market economy thus tended to reduce the power of national governments, as policy options were often defined to favor the interests of large global companies. This has been called the Golden Straitjacket.

But, says Professor Bracken, all that is about to change. The government leaders of emergent nations with large domestic markets are beginning to rethink the wisdom of surrendering their home markets. And in the next few years, he says, the growing power of domestic companies in these countries will create a new kind of emerging-world “tiger,” turning up the heat on the foreign multinationals, and allowing emergent nations — their governments and their companies — to break out of the straitjacket.

For example, one reason for China’s decision to develop its own car industry was to limit the undue influence that foreign multinationals had over the growth of the Chinese economy. Foreign car companies could choose to hold back on technology transfer or to pull back their investments in China; the nation’s prospects could then suffer. But the presence of a large Chinese car company targeting the same market makes those choices risky strategies for multinational firms.

As the influence of multinationals wanes, homegrown corporations will, to a degree, pick up the slack and extend their clout over government policy, especially in the area of competition and business regulations. India is a good illustration of how that is changing. Until a strong private sector emerged in the 1990s, bureaucracy and central planning prevented Indian companies from becoming efficient. But today, large corporations (such as the outsourcing giant Wipro) increasingly shape economic policy, often by successfully lobbying for limits on regulations.

These changes mean that foreign multinationals will have to find new ways of operating in these countries. In the future, Professor Bracken says, it will be much harder for them to go it alone, to deal directly with national governments, or to stitch together a network of small and compliant partner companies. Instead, he says, Western multinationals will have to work with and through homegrown companies to get access to these giant markets.

They also must pay attention to their own home markets, because some of the new large businesses from emergent nations may attempt to conquer their backyards. After all, no one in the West had heard of Toyota in 1965, and the Korean giant Samsung was virtually unknown just a decade ago.


Opportunity Knocks
Thomas Astebro (astebro@rotman.utoronto.ca) and Kristina Dahlin (kd@rotman.utoronto.ca), “Opportunity Knocks.” Click here.

Innovation is often studied in the context of the activities of corporate R&D departments and government agencies. Individual inventors tend to be overlooked except for a very few whose inventions become wildly famous. Thomas Astebro, an associate professor of strategic management, and Kristina Dahlin, an assistant professor of strategic management, both of the Joseph L. Rotman School of Management at the University of Toronto, point out that this is a significant oversight. Independent inventors generated about 15 percent of patented inventions in the United States in 2003. U.S. government employees came up with a mere 1 percent.

 
 
 
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