OENG1088 Emerging Economies And Management Of The Foreign Subsidiaries Case Study - Research Project

Background of Research

Emerging economies (EE) is known as countries with economies that are progressing towards developed status. The expression of EE was formulated in 1981 by Antoine W (Das 2009). Economies with higher annual growth rates, measured utilizing gross domestic product (GDP). The present days, multinational companies are investing and extending widely in emerging countries where those countries have a fertile environment for business development and a big base of clients. Indeed, they have many features for investing and expanding there. 

Foreign subsidiaries are partially or wholly owned companies that are part of a larger corporation with headquarters in another country which are managed by several ways, however, the most significant way in this management is the relational dynamic among the headquarter and the emerging countries. The establishment of foreign subsidiaries in emerging economies such as China, India, and Vietnam are an extremely beneficial investment (Dunning 2009). The reasons why they invest in emerging economies are that an increasing capital, brand recognition, low production cost, and lower tax rates (McKinsey Global Institute 2003). 

1.1 China

China has emerged out to be a prominent country in the world economy since beginning of major economic reforms and introduction of its open-door policy in 1978 (Henisz & Zelner 2015). China’s vivid and rapidly growing economy gives it an edge over other transition and emerging economies. It has been experiencing rapid inflow of foreign direct investment since 1992 as the foreign invested enterprises rose to approximately 794,445 by end of 2015 as compared to zero in 1978. According to Zhang (2017), China has become a workshop of the world where different foreign firms have established their subsidiaries due to cheap raw materials, parts, manufactured products and labour. Boston Consulting Group (2013) report also demonstrated that made-in-China products dominates the consumer goods’ shop shelves in Western countries. By the end of 2015, more than 400 MNCs from Global 500 have invested in China while over 100 have established their headquarters in China. Hence, it has become clear that China has retained its tag of most attractive destination for foreign direct investment and that many of the major foreign parent companies are opening manufacturing or selling stores in China due to its institutional and legal environmental attractiveness (Ambler & Witzel 2010). 

1.2 India

Historically, the foreign investment was restricted in India until 1991 when the foreign direct investment was stimulated due to economic reforms. The liberalization policy, relaxed exchange control system and tax environment has attracted many major foreign investors to invest in India. Moreover, the international arrangements like signing of Bilateral Investment Promotion Agreements, SAFTA and Free Trade Agreements with Sri-Lanka, Thailand and Nepal have also helped the Indian investment environment to boom and attract the foreign investors to invest in the country. Other major attractions include Finance Act of 2013, Tax residency certificate and liberalization of external commercial borrowing and foreign direct investment. Moreover, the Indian Government have also liberalized the trade credit policy recently that allows the companies of all sectors to take trade credit upto 5 years for importing of capital goods. However, the foreign investors have found confidentiality and difficulties in transactions to be of major risks that are required to be mitigated and assessed before the investment is to be made.  

1.3 Vietnam

Vietnam is an open economy with current trading flow of around US$340 billion i.e. 1.6 times of its GDP. Due to such a huge trading flow, it attracts foreign direct investment that contributes almost 22% to its GDP and generate around 70% of the country’s export turnover. According to the PWC report (2017), Vietnam has improved its rank of doing business by nine points by climbing from 91st rank to 82nd since 2016. It has been continuing to drive the global economic integration and is still expected to maintain its GDP growth rate of 6.5% to 7% over next two years(PWC 2017). Due to promotion of exports, investment expansion, Government’s integrity and innovation strategies Vietnam is striving to integrate into the regional as well as global value chains (PWC 2017). Due to potential of expanding business, many new investors are finding Vietnam to be an attractive investment option for opening foreign subsidiaries. 

2.0 Current State-of-the-art     

Currently, there are some companies that have established subsidiaries in emerging economies. For example, the Disney Channel, which is a wholly owned subsidiary by the parent company named The Disney Corporation. Another example is Starbucks Japan which is also wholly owned by Starbucks Corporation of America. 

The above discussed parent companies have established subsidiaries in emerging economies because of brand recognition, financial considerations, raising a capital as well as reporting and disclosure issues (Sullivan n.d.). However, many of the parent companies have to face certain risks while operating the subsidiaries in emerging economies. The activities of the small subsidiaries can pose certain potential risks for the overall parent firm including liquidity risks, financial reporting accuracy, company’s supplier quality, unbudgeted spending and management of assets risks, just to name few. The risks can be mitigated and streamlined so that the subsidiaries can be managed efficiently and the intended results can be obtained.