This brief is part of the Insights @ Center for Emerging Markets, a publication focused on cutting-edge ideas and advice for global leaders about emerging markets.
By Jialin Du (Renmin University of China) & Eric Yanfei Zhao (University of Oxford)
In Short: The decision to expand internationally for emerging market companies is often attributed to a desire to escape the constraints of home environments, particularly weak rule of law, underdeveloped financial markets, inconsistent regulatory enforcement, and limited access to capital. However, recent research by Jialin Du and Eric Yanfei Zhao also reveals that a company's standing within its home country can be significantly enhanced by expanding abroad, particularly to developed markets, such as those in Europe and North America.
Established multinational corporations (MNCs) typically pursue international expansion to capture new markets. However, emerging market multinational enterprises (EMNEs) often operate with a dual mandate. Beyond gaining market share, they strategically seek to enhance their reputation and improve their access to resources back home. Du and Zhao's analysis of over 1,700 Chinese manufacturing firms confirms how international expansion serves as a potent signal to domestic stakeholders, influencing crucial factors like access to bank loans and supplier credit terms.
A Signal of Intrinsic Competence
Successfully establishing operations in foreign markets, particularly in developed countries, is a complex undertaking. It demands the ability to navigate diverse languages, cultures, regulations, and competitive landscapes. As such, success requires a high level of managerial competence, operational efficiency, and overall firm quality. This creates a distinct “halo effect,” casting a positive light on the company in the eyes of key domestic stakeholders. Financial institutions become more inclined to view internationally active firms as creditworthy, perceiving them as possessing stronger capabilities and greater potential for value creation. Suppliers, in turn, may offer more favorable credit terms, recognizing the company as a reliable and successful partner. This positive perception extends to customers, potential employees, and even government agencies, as stakeholders in emerging markets may place greater value on signals validated by external markets, particularly in developed countries where product and regulatory standards are high, and competition is often fierce.
Also, a company's political connections are often assumed to be an advantage, but the research reveals a counterintuitive finding: strong political ties can actually detract from a firm's reputation. They might provide short-term benefits but can also foster the perception that a company's success stems from political influence rather than genuine merit. This “negative framing effect” can lead stakeholders to undervalue the firm's intrinsic capabilities. Moreover, these political ties can transform into liabilities in international markets, especially when host and home country political ideologies diverge.
In contrast, the study confirms that patents, representing demonstrable innovation and technical skill, act as powerful positive signals. Consistent with international expansion, patents provide concrete evidence of innovation capabilities that corroborates and validates the overall perception of the firm's quality and potential. In other words, patents and international expansion work synergistically.
Practical Implications
For EMNEs, international expansion should be viewed as more than just a growth strategy, but as a critical instrument for building credibility and unlocking resources in their home markets. By strategically targeting developed economies, carefully managing political connections, investing in innovation, and actively communicating their global achievements to domestic stakeholders, emerging market firms can effectively leverage their international footprint to gain a significant competitive advantage in their home market.
Original Work
Du, J., & Zhao, E. Y. (2023). International expansion and home-country resource acquisition: A signaling perspective of emerging-market firms' internationalization. Journal of International Business Studies, 54(9), 1642-1660.
Contact
If you are interested in learning more about this work, contact Professor Jialin Du at dujialin@rmbs.ruc.edu.cn