When two worlds meet: How high-growth market companies are changing international business is a UK Trade & Investment (UKTI) report commissioned from the Economist Intelligence Unit. It examines the growing international footprint of companies based in fast-growing emerging markets and the ways in which firms from Western Europe and North America are responding to a phenomenon that is redefining the global economy. The report also assesses the risks and opportunities that lie ahead for Western economies and their companies.

With their increasing numbers and growing ambition, multinational corporations (MNCs) based in high-growth markets – emerging economies growing at above average rates – are at the forefront of forces helping the global economy to recover from the financial crisis of 2008 and the subsequent recession.

The rise of this new kind of MNC represents either an unprecedented challenge or an opportunity for companies based in the developed but low-growth economies of Western Europe and North America. Firms rooted in emerging and mature markets may be quite different entities today but their futures are likely to be increasingly intertwined, either as partners or as competitors. 

The “new” MNCs already account for an increasing share of outflows of foreign direct investment (FDI). In 2010 these flows reached a record high of US$377 billion, up 21 per cent on 2009, and amounted to a 29 per cent share of the global total for FDI compared with 15 per cent in 2007. At the same time, almost one-half of developed countries’ investments of US$970 billion in 2010 went to developing countries, compared with 30 per cent in 2007, according to the 2011 World Investment Report from the United Nations Conference on Trade and Development (UNCTAD). 

Confidence among European and North American firms may be fragile after the global economic downturn but they are sitting on nearly US$5 trillion of cash that is ready for investment, according to UNCTAD. Research for this report suggests that Western firms are pursuing a variety of strategies to deal with their new challengers on the global stage. Some are sharpening their competitive edge while others are exploring partnership options. The report points to increased investment flows not only from developed to developing economies, and vice versa, but also from one developing economy to another.

The main findings of the report include the following:

European and North American companies see the rise of high-growth market companies on the global stage more as an opportunity than a threat. Seven out of 10 respondents in the survey for this report see expansion by companies based in high-growth markets as beneficial for their own firms. 43 per cent cite improved access to emerging markets as the main benefit of doing business with high-growth market MNCs; 35 per cent of Western executives expect this new force in world trade to stimulate demand for their own products and services, while others view partnership opportunities as a way to reduce operating costs. A significant minority of respondents also see foreign investment by high-growth companies boosting economic growth, employment and consumer choice in developed markets. A much smaller proportion cite greater volatility, higher unemployment and loss of control over strategic assets as the biggest risks posed to developed markets by the expansion of high-growth market MNCs.

The growing international footprint of high-growth market companies is making the competitive landscape more challenging for
European and North American firms. A majority of survey respondents admit competition is becoming increasingly intense, more so in emerging markets than in their home or developed markets. Nearly one-half of executives agree it will become harder for Western firms to compete on price, pointing to lower labour costs as the main competitive advantage of high-growth market MNCs. A similar number of respondents also believe that developed market firms are underestimating the competitive challenge from high-growth market companies. As Santiago Fernandez Valbuena, the CEO of Telefonica Latin America and until recently the Spanish telecommunications provider’s chief strategy officer, points out: “The newcomers represent a threat in the competitive sense; they’re very competent, they ask all the right questions and their prices are unbeatable.”

Western firms see their edge in technology and innovation as their greatest competitive advantage. Companies in Western Europe and North America are responding to the new competition by investing in innovation across all aspects of their operations: from their business model and supply chain to their marketing and product portfolio. While more European survey respondents than North American ones think the way forward lies in innovation, a greater number of manufacturers than service-providers favour innovation as a path to growth. “The fundamental way to respond is to stay ahead of the curve,” says Ferdinando Beccalli-Falco, president and CEO for GE in Europe and North Asia. A majority of survey respondents also think Western firms can add the greatest value in any partnership with their advanced technology and their expertise in business strategy.

Mergers and acquisitions are likely to replace partnerships and joint ventures as the favoured form of FDI by high-growth market companies. North American and European executives anticipate a flurry of cross-border merger activity after an initial period of collaboration or partnership with their emerging challengers. Currently at least two out of five Western firms are likely to be doing business with or partnering with companies based in high-growth markets. Over the next 12 months, while the global economic outlook remains uncertain, survey respondents see high-growth market MNCs opting for lower-risk options such as join ventures, equity swaps or franchising and outsourcing agreements as the preferred route for international expansion. However, Western executives expect high-growth market companies to pursue growth primarily through M&A thereafter.

Risk aversion in Western economies is likely to help high-growth market FDI flow more and more into the developing world. One-half of European and North American executives see protectionist barriers going up in their home markets, not least as a result of their governments coming under increasing pressure to shore up their weak economies and shield local businesses. A majority of survey respondents also admit their companies have little appetite to significantly increase their risk exposure by doing business with their high-growth market rivals, involving as it does overcoming differences in culture and corporate governance standards. That, along with the relatively better growth opportunities and untapped resources in developing economies, is likely to make high-growth market MNCs favour emerging markets as an investment destination.