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India is a less developed country (LDC), with a population exceeding one million, an average per capita GDP of $583, low literacy and high infant mortality rates. There are just five phones and two internet users for every hundred people. Yet it is one of the fastest growing knowledge-based industries in the world. With a GDP growth of about 4% compared to 2% for the USA. Likewise, China is even experiencing a growth not less than 8% of GDP annually. Emerging economies, like India, China, Brazil and Russia will become more important as a consequence of high growth rates combined with large populations.
These emerging economies are raided by what Harvard’s Dani Rodrik has called “export fetishism”. Meaning, foreign Multinational Enterprises (MNE’s) are trying to tap into these fast growing markets. The Boston Consulting Group (BGC) has identified several domestic firms that are a hit in the home market, not wanting to build out abroad and most importantly, countering foreign MNE’s entering their home market. They have labelled them “local dynamos”. (“The stay-at”) These Local Dynamos are successfully fighting off foreign MNE’s trying to gain a foothold in their domestic market due to three reasons.
First of all, domestic firms can use the benefit of knowing the specific consumer tastes of their fellow-countryman. According to Rugman and Collinson this is a Firm Specific Advantage (FSA): “Strengths and benefits specific to a firm and a result of contributions made by its personnel, technology and/or equipment.” (49) For instance, a Brazilian budget airline Gol lets their aeroplanes depart at unusual hours and make inter-flight touchdowns to remote locations, because, Brazilian customers are relatively money-bound and relinquish convenience and speed for an inexpensive ticket.
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Secondly, local dynamos are fully utilizing the low-prized labour which they have in abundance, this in contrast with exporters who tend to be more capital focused. Which is explained by the Heckscher-Ohlin model, also known as the factor endownment theory, the model essentially says that countries will export products that utilize their abundant factors of production and import products that utilize the countries' scarce factors. (Brakman et al. ch. 3) In addition, According to Rugman and Collinson these factor endowments are Country Specific Advantages (CSAs): “ Strengths or benefits specific to a country that result from its competitive environment, labour force, geographic location, government policies, industrial clusters, etc.”
In emerging economies like India and China, companies are fully exploiting their inexpensive labour force; on the other hand, Western firms heavily rely on their substantial capital endowment. For example, at 85.000 points throughout the country, Focus Media, a Chinese advertising company, displays advertisements on flat panel displays. Due to broadcasting regulations, instead of interlinking all the displays to produce the same advertisement, Focus Media employs cyclists to replace the displays discs and flash cards on a regular basis. (“The stay-at”)
Thirdly, local firms based in emerging economies outside the triad region, the triad consists of North America, Western Europe and Japan, are able to gain knowledge via subcontracting and joint ventures with larger established multinational firms. In other words, through technology and capability exchange that takes place within these inter-firm relationships, foreign MNE’s are, to a certain level “breeding” their upcoming competitors. Triad MNE’s trade their knowledge, assets, resources and networks in order to get access to local knowledge, technology, assets, resources and networks as part of a market-entry or expansion strategy. For example, Chinese firms Huawei Technologies, Zhongxing Telecom and Datang Telecom are three government-supported, high-tech competitors who are quickly gaining ground against foreign telecom equipment manufacturers, including Ericsson, Lucent, Nortel and Cisco systems. Likewise, local firms as Founder, Red Flag, UFSoft , Neusoft, Kingdee and Top Group are cooperating as well as competing with Microsoft, Oracle, IBM and Sun Microsystems in the computer software branch. (Rugman and Collinson ch. 19)
In addition, Joint ventures in Research & Development (R&D) allow local firms to learn from inward Foreign Direct Investment (FDI). When local dynamos tend to move up the value chain, R&D operations become of increased importance, because, continual innovation and modification of existing products is needed to gain or retain a competitive edge. For instance, by developing technological capabilities to improve productivity, efficiency and develop new as well as better products. The Chinese government has identified foreign R&D investments to be a crucial part of China’s technology development strategy. In many cases inward investors are competing for privileged access to the Chinese market and will offer high-technology investments to receive government support for projects. For example, General Motors set up a R&D centre late 1990s when global car companies were competing for the best joint ventures with a few government-supported local enterprises. Similarly, IBM and Microsoft made significant R&D investments; Microsoft’s research lab in Beijing even produced a series of the new tablet PC technology. (Rugman and Collinson ch. 19)
To conclude, the knowledge of specific consumer tastes, full exploitation of the cheap labour at hand and being ‘bred’ through subcontracting and joint ventures result in a competitive edge for local dynamos over foreign established MNE’s. Company’s like Gol, Focus Media and Huawei are good examples of these dynamos fending off foreign MNE’s by using FSAs and CSAs. As a result, if these local dynamos do start to tap into foreign markets and believe they can be the biggest and best in their industries, will they pose a serious threat to foreign MNE’s in the markets abroad?
Brakman, Steven, Harry Garretsen, Charles van Marrewijk, Arjan van Witteloostuijn. Nations
and Firms in the global economy. Cambridge,UK: Cambridge University, 2007.
Rugman, Alan M., and Simon Collinson. International Business. 4th ed. Harlow, England:
“The stay-at-home giants.” The Economist 13 Mar. 2008