Can Emerging Market Multinationals Become Global Leaders?Senior Lecturer and Director of Emerging Markets Institute, Johnson School of Business, Cornell University Visiting Fellow at Emerging Markets Institute, Johnson School of Business, Cornell University
Emerging economies have gained strength in wealth and influence over the past two decades, bringing about radical changes in the global economic landscape. The rise of their multinationals, the so-called emerging market multinationals (eMNCs), is an illustration of this phenomenon.
The overseas expansion of eMNCs has indeed been remarkable: For instance, about 20 percent of global outward investment flows today are accounted for by a group of 20 top emerging economies, the E20*; which had a share of 2 percent at the turn of the century. Not only have emerging market multinationals significantly increased their investment abroad, but they have also made significant inroads in the global corporate world.
For instance, today, about 30 percent of the firms in the Fortune Global 500 list (based on revenues) are enterprises from emerging markets (less than 10 percent 10 years ago). China leads the trend: With 98 companies, it ranked second in 2015 in terms of number of Fortune 500 firms—not far from the U.S. (128), but much more than the number 3, Japan (54). However, a wide array of emerging economies is represented in the list: 14 of the E20 grouping are mentioned, although sometimes with only one entry in the list. The new players come mainly from China, Korea, India, Brazil, Russia, Mexico and Indonesia.
Chinese MNCs Emerge as Leaders
Beyond the fact that emerging market multinationals significantly increased their presence among the largest corporations in the world, perhaps as remarkable is the fact that several have made it to the very top, becoming world leaders in their own sector. Let’s take eight key industries: banking, logistics, automobile, telecom, engineering and construction, petroleum refining, mining, crude oil production and mining. In 2004, based on the Fortune Global 500 ranking, there was no emerging market multinational among the top five world leaders in these industries while, in 2015, 40 percent of such leaders came from emerging economies, largely dominated by China.
The shift has been particularly marked in banking (where all but one of the five leaders are Chinese), engineering and construction (where all top five are Chinese), and mining and crude oil production, as well as metals. In less traditional industries, such as IT consulting for instance, three Indian corporations are among the world’s largest (TCS, Infosys and Wipro). In e-commerce, or platform industries, a similar trend is developing; witness Alibaba, and Wechat (Tencent), for instance.
About 30 percent of the firms in the Fortune Global 500 list are companies from emerging markets.
Profit Lags Revenue
While they have made remarkable inroads as global corporations, emerging market multinationals still have a significant gap to close compared to the more established western multinationals regarding profits. Indeed, the average profit margins of emerging market multinationals lag behind those of their U.S. and Japanese counterparts. This difference can be quite important: About 27 percent of the Fortune Global 500 firms from emerging countries in the E20 group achieve a profit margin above 5 percent versus an average of 39 percent for the totality of Fortune Global 500. This suggests that, in their present expansion phase, emerging market multinationals have a stronger focus on revenues and market growth than on profit margins.
The overseas expansion of emerging market multinationals has disrupted the global competition landscape. These firms have been deploying themselves not only in their natural markets—mostly other emerging economies—but also more recently, and quite effectively, in developed markets, conquering industry leadership positions (as illustrated above) in the process.
The competition from these new leaders has become more acute both in developed and emerging markets. Will the trend continue? Is the balance tilting in favor of these newcomers? Some observers would argue that it is, given the increasing weight and influence of emerging markets in the world economy and the importance of consumer demand in those markets. It is an open question, even more today than before, and this is for several reasons:
- Because growth has slowed worldwide, including in many of the emerging market multinationals’ home markets. This is not really to the advantage of those firms that have surfed on this growth wave, many of them focusing on the search for revenues rather than profit.
- Because the established players—the large corporations from developed economies—should not be underestimated in their capacity to react to this new competition, building on their long experience of operating in very competitive markets, and their capacity to overcome serious challenges and learn.
- Because the past few months have brought about a significant degree of uncertainty, as protectionist measures are being seriously considered in a number of key economies. On the other hand, the past 10 years have shown that many of the newcomers are fast learners, able to expand globally and reach the top at an impressive speed.
*Argentina, Brazil, Chile, China, Colombia, Egypt, India, Indonesia, Iran, Korea, Malaysia, Mexico, Nigeria, Philippines, Poland, Russia, Saudi Arabia, South Africa, Thailand, Turkey.
This piece first appeared on the World Economic Forum’s Agenda blog.