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 Alvaro Cuervo-Cazurra (Northeastern University) & Pavida Pananond (Thammasat University)
In short: Most studies on global value chains focus on advanced economy multinationals that develop products in-house and retain high-value added activities, while outsourcing low-value tasks, like component manufacturing and assembly, to emerging market suppliers. However, this dynamic is shifting as increasing numbers of emerging market suppliers are becoming multinationals and exerting control over more value chain activities. Initially positioned as suppliers for western brands, these companies have leveraged their roles in global value chains to learn, acquire advanced capabilities, and strategically expand through acquisitions. Over time, they evolve to compete directly with established players, controlling their industry value chains and becoming global leaders. This shift requires a deeper understanding of how emerging market multinationals differ from their advanced economy counterparts in their strategic use of global value chains.
Global value chains are the interconnected activities that encompass the entire lifecycle of a product or service, from initial research and development to production and marketing and sales. They play a critical role in facilitating international trade and investment. New research by Alvaro Cuervo-Cazurra, from Northeastern University, and Pavida Pananond, from Thammasat University uncovered three ways in which emerging market multinationals approach the management of global value chains differently from their advanced economy counterparts. These differences reflect the influence of their home country conditions.
First, emerging market multinationals often have different objectives for their internationalization. One leading goal is to upgrade their capabilities and enhance their competitiveness by participating in the value chain of global lead firms from advanced economies. Becoming suppliers enables these emerging market companies to learn and accumulate capabilities they may otherwise have been unable to develop in their domestic operations. In contrast, advanced economy multinationals, often already endowed with advanced capabilities thanks to their home countries' supportive innovation systems, leverage global value chains to optimize efficiency and reduce costs by distributing simpler, more standardized activities to lower-cost locations. These different objectives drive emerging market multinationals to take international expansion through global value chains more as a resource accumulation process, while their established advanced economy counterparts manage the same process as an efficiency optimization one.
Second, emerging market companies treat global value chain segments differently. They typically start by focusing on cost-effective production and gradually expand their involvement by moving into more complex and higher value-added activities. They also enter advanced markets and obtain sophisticated technologies and brands that bolster their position in the value chain. Developed country companies, in contrast, tend to fragment their value chains, outsourcing increasingly specialized tasks to suppliers in emerging economies to reduce costs and maintain control over core competencies. In other words, international expansion enables emerging market companies to expand their value chain coverage, whereas their advanced country counterparts reduce their range of value chain activities through overseas expansion.
Finally, the governance mechanisms employed by emerging market and advanced economy companies vary. Emerging market multinationals often prefer to internalize activities, in many cases using mergers and acquisitions, to integrate new capabilities and exert greater control over their global value chains. This reflects the challenges they face operating in environments with less supportive institutions and higher uncertainty levels, common in many emerging economies. Advanced economy multinationals, leveraging their established resources and experience in mature markets, tend to rely more on external partners, and employ outsourcing and other forms of externalization to manage their global value chains.
Managerial Implications
The rise of emerging market multinationals presents both opportunities and challenges for companies worldwide. Business leaders should seek to better understand the distinct characteristics of these emerging market firms and adapt their strategies accordingly.
For emerging market companies, global value chain participation offers a powerful springboard for growth. By actively engaging in global value chains, these companies can accelerate learning, acquire advanced technologies, and build world-class capabilities. As they begin to internationalize, strategic acquisitions in advanced economies provide access to valuable capabilities, established brands, and sophisticated markets.
Leaders of advanced economy companies need to better understand how emerging market suppliers are becoming formidable competitors with sophisticated capabilities and global ambitions. They should proactively reassess the changing competitive landscape and readjust their strategy to face new threats and opportunities arising from the transformation of global value chains. They can build collaborative partnerships with emerging market companies to leverage their strengths in production and specialized knowledge, potentially unlocking new avenues for innovation and growth.
Original Work
Cuervo-Cazurra, A., & Pananond, P. (2023). The rise of emerging market lead firms in global value chains. Journal of Business Research, 154, 113327.
Contact
If you are interested in learning more about this work, contact Professor Alvaro Cuervo-Cazurra at a.cuervocazurra@northeastern.edu.