'Clear logic' for going out

Consulting | ED Zhang

Globalization means new challenges to firms from emerging economies

Investing in developing economies will become more and more important for growing Chinese companies - it is already evident with large companies buying mining rights around the world and some companies attempting to make some big plays in the West - but largely the game is new for China and its companies.

Watch out, warned Janmejaya Sinha, Asia-Pacific Chairman of Boston Consulting Group, one of the largest business consulting services in the world. Overseas investment is a business that cannot be taken lightly or simply.

Building a lasting business presence in other developing economies may prove more difficult than many investors may have initially thought. And "it is important to have a clear business logic to do so and a team able to execute it for you, if you are to succeed".

In their process of overseas expansion, companies from emerging economies encounter more challenges than those faced by large established multinationals with a long history of global growth. While it took many years for Western companies to learn how to grow internationally, time is not that generous to those entering the game today, Sinha pointed out. The world is different and moves very fast, and players need to redesign the aircraft while they are flying in it.

China has been a leading investor in Africa. And for the last few years, its direct investment in Europe has also been rising rapidly.

According to government figures, by the end of 2010, 13,000 Chinese companies had set up overseas divisions, having committed more than $300 billion in total investment.

A substantial chunk of China's overseas direct investment has been in mining, and oil and natural gas exploitation. In 2010 alone, China's overseas direct investment surged 21.7 percent year-on-year to $68.81 billion, surpassing Japan, with $56.26 billion, for the first time.

Sinha noted that when multinational corporations first appeared, they were basically a Western, or an Anglo-American phenomenon, and a key reason for their internationalization was a quest for new markets to enter and dominate. But today, Chinese companies and companies from other developing economies are beginning to invest overseas while there remain considerable opportunities at home. They are going overseas to chase resources, cheap labor or some other temporary benefit.

Sinha pointed out that to build sustainable winning positions, overseas companies should be aware that operating in an external environment will be demanding. Challenges will come on three levels:

First, compared with Western corporations, which took many years to develop, successful companies in Asia, will not have that time. In China many private sector companies are usually chaired by first-generation entrepreneurs. This is one of their unique characteristics and provides many strengths in terms of ambition, nimbleness and quick decision-making. Sinha noted that even after listing, the founding families still retain a large stake and control.

But family control is easier to operate in a familiar social setting. For first-generation company leaders, it is an effective way to operate in their hometown and their own country. It may be difficult to work in a distant environment, to provide an interface with the public or government overseas, Sinha said.

Once companies have expanded abroad, it would be naive for them to think they can go away easily after they make some sales or that they can keep operating without building relations with local society. And once first-generation entrepreneurs leave the scene, their successors really have to do a lot of rethinking about the corporate strategy.

Second, to build businesses in these countries it is important to hire and groom local managers. This is hard to do and requires the ability to delegate decision-making to managers from the local market that they quickly learn to trust. This is not easy, Sinha said.

It would be a great leap forward for family-controlled companies to learn how to work in partnership and team with people who are by nature quite foreign to them. And to do so would require a different skill set.

"If they can't do this, they will lose out in competition because some other companies will be using local talent in a big way," Sinha said.

And using local talent is only the beginning of a process of change inside the expanding companies themselves. In due course, not only the staff in their overseas operations, but also their home bases, and even their top management teams and boards of directors, would have to become more internationally mixed.

Building a company capable of operating in mixed economic and political conditions, and organizing teamwork among individuals who otherwise do not fit well with one another, is by no means a trivial issue, the India-born senior management consultant warned.

Third, as companies drift further from their past model of family control and become globalized in not just their business coverage but also in their internal structure, they would have to face the ultimate questions about their long-term survival - their purpose of business, duty to society, and so forth.

"There cannot be simple answers" to these questions, he said.

Globally competitive companies will have to meet a set of standards to ensure their survival and development. In a time of fast change and the fast rise and fall of companies, growing without adjusting to changing realities would easily get a company into trouble.

The more volatile the market situation is, the more companies will have to try to remain transparent, innovative and agile, socially responsible, and be faithful to these standards of good business, Sinha said.