"Why do firms based in emerging countries internationalize?" This is the question that Global Challenges Senior Fellow John Luiz sought to answer in a recent paper with Helena Barnard. "Emerging market firms internationalize for many of the same reasons as firms from developed countries," Luiz said during a presentation on May 25. "But they also have other reasons."
Much like other multinationals, emerging multinational enterprises (EMNEs) seek to invest outside their country to seek natural resources, new markets, greater efficiency, and assets such as brands or technology. In addition, EMNEs also internationalize to seek advantages – such as intellectual property rights or greater social stability – in other institutional contexts. "EMNEs appreciate the costs and benefits of different environments and gauge one location against another," explained Luiz. "This results in a portfolio of locations that allow the EMNE to benefit from the home location while mitigating risk by seeking complementary institutional environments abroad."
Institutional arbitrage, this idea of balancing risk through different institutional contexts, differentiates EMNEs from other types of multinationals. "There's a notion of difference here," Luiz pointed out. "EMNEs seek out host countries with institutional contexts that can provide what their home countries' institutional contexts lack." Depending on home and host country settings, arbitrage can take place from higher to lower income countries, from lower to higher income to search for new capabilities, increased legitimacy or institutional stability, or between countries at the same level of economic development but different institutional gains.
In this paper, Luiz and Barnard look at the case of South Africa from 1956 to 2012. This period includes a changing institutional context within South Africa from apartheid to post-apartheid as well as across the African continent with many countries gaining independence and moving to self-governance. "What we've seen is that EMNEs construct networks of locations driven by both home and host country conditions in order to main an optimum level of institutional risk across their portfolio," concluded Luiz.
The Global Challenges Fellowship assembles scholars from rising non-Western powers to explore questions in the humanities or social sciences relevant to the most pressing public policy challenges of the 21st century. The Global Challenges Fellowship is generously supported by Volkswagen Stiftung.