U.S. executives' perceptions of "BEMs" as F.D.I. options.

Abstract

In this study, perceptual mapping was used to identify the collective and individual positions of ten big emerging markets or "BEMs" as they are more commonly called. The perceived position of the "ideal" market or nation also was captured by the study's findings. FDI executives who were surveyed indicated that some "BEMs" have positioned themselves strategically in terms of their availability of and access to markets and resources. The stability of a market's or nation's political and economic environments, as well as business environment, also contributes to a nation's perceived position. Some "BEMs" appear better positioned to take advantage of their strengths, whereas others face long-term FDI obstacles.

Introduction

Foreign Direct Investment (FDI) is an integral component of the globalization of the world's economy, as well as a key aspect of every nation's economic development efforts. Virtually all nations are eager to attract FDI, as evidenced by the immense financial investments that developing and developed nations have attracted and continue to attract (Jenkins, 1995; UN 1998 and 1999). Indeed, the success of a given nation in attracting foreign capital is a direct result of that nation's market or resources attractiveness, or both, and the presence and availability of investment opportunities (Aitken, et al., 1997).

In recent years, the social, economic, and political environments governing foreign direct investment in many previously closed economies have undergone something of a metamorphosis (Boycko, et al., 1994; Kamm, 1992; Sachs and Warner, 1995). These nations have changed from essentially closed economies or markets advocating protectionism, subsidies, and increased regulations to more market and growth-oriented positions espousing regulatory reform, market expansion, and private sector development. In turn, these changes have encouraged many foreign direct investors to revise their list of nations considered desirable FDI candidates. While still largely comprised of developed nations, many FDI lists now include nations known as "BEMs," big emerging markets. In this instance, a big emerging market's status is not a function of its per capita GNP, but relies on economic and demographic measures that cut across all four stages of economic development (Garten, 1997).

"BEMs" consist of nations located around the globe that have experienced rapid economic growth for the past decade (Keegan and Green, 2003). It is because of this rapid growth and the resulting market opportunities that the Columbia Journal of World Business dedicated a special issue to "BEMs" (1996). (1) (Ten countries generally are recognized as big emerging markets. These nations include China, India, Indonesia, South Korea, Brazil, Mexico, Argentina, South Africa, Poland, and Turkey (Garten, 1997).

In the past, the US has invested mightily in emerging nations, both big and otherwise. However, US investment in emerging nations has dwindled in recent years. While various reasons may explain this trend, perhaps the most apparent reason is the delicate balance that often exists between risk and reward (Ramcharran, 2000). This balance has proven tenuous in emerging nations. While conspicuous in form and magnitude at times, in other instances, the risk associated with an emerging nation often is intangible and based largely upon perception.

Given the previous comments and the limited amount of empirical information that exists concerning the relative and/or perceived market position of various big emerging nations as FDI alternatives, this research was conducted. The basic purpose of the research was to identify the market position of the ten big emerging nations as perceived by American business executives experienced in foreign direct investment decisions. Specific objectives of the study were to:

1. Empirically establish the perceived market position of the ten big emerging nations;

2. Develop perceived profiles of each individual nation;

3. Develop an aggregate profile of the ideal nation vis-a-vis the ten big emerging nations studied.

Background

The issue of foreign direct investment can be approached from the perspective of investing companies, as well as from that of recipient countries. There seems to be a consensus in the literature that multinational enterprises invest in foreign countries to either create a competitive advantage or sustain the competitive advantage that they were able to create in their domestic markets (Cho and Moon, 1998; Clark 1996; Ensign, 1993; Hill and Jones, 2000; Hitt 1996). This is possible because investing in foreign countries allows companies to both expand their sales and realize locational advantages. Expanding sales can help increase a company's market power and profits, and enhance its low cost position. Companies also can achieve competitive advantage by benefiting from such national resources as abundant and cheaper raw materials, readily available labor supply, lower transportation costs, and financial incentives (Earle and Estrin, 1996; Estrin and Meyer, 1998).

However, what is unclear is the role FDI plays in the recipient countries' economic development efforts. Research has resulted in conflicting conclusions as to whether foreign direct investments are more productive than similar investments by domestic companies (Taylor, 2000). Still, it is widely recognized that FDI is playing an increasing role in the global economy. According to a United Nations report, beginning in the early 1980s, FDI increased at an unprecedented compound annual rate of 29%, reaching a world stock of FDI of $1.7 trillion at the end of 1990 (UN, 1992). Though most of the foreign direct investment outflows go to developed economies, FDI has become a critical ingredient of the gross domestic product and gross fixed capital formation for developing economies (Dunning, 1993). As a result, FDI is increasingly becoming an important policy issue (Taylor, 2000).

As noted earlier, the 1990s witnessed a bevy of governmental initiatives that codified changes in public policies toward free enterprise and foreign direct investments in many emerging nations (Jones, 2000; Orton, 2000; Ramcharran, 2000). Several East and Central European governments (e.g., Poland and Turkey) enacted competition laws and bilateral investment treaties aimed at encouraging foreign investments (El-Said and McDonald, 2001; Hobeika, 2001; Middle East Executive Reports, 1999; Parsons, 2002; Tatoglu and Glaister, 1998). In turn, the success of these countries in their efforts to develop market-oriented economies has made them candidates for the European Union (McCrary, 2000; Orton, 2000). Clearly, nations such as these, which have initiated market-oriented economies, offer the best opportunities for multinationals seeking to invest in emerging countries. Besides these nations, India also has launched, albeit with limited success, an assault on the remnants of their old command economies (Azzam, 2001; Dhume, 2000).

The last decade of the twentieth century offered ample opportunities and challenges for foreign direct investments in emerging economies. The fall of the Berlin Wall in 1989 and the disintegration of the Soviet Union marked a turning point in the role that both multinational enterprises and national governments played in facilitating the creation of a sustainable and balanced economic environment. Now, there is virtual agreement among these, and all other nations, that foreign direct investment is beneficial (Wallace, 1990). Though much of the interest of multinational investors remains focused on developed countries, big emerging markets have been and continue to be attractive FDI alternatives (Dunning, 1988 and 1993).

Despites the progress that has been made in reforming political and economic systems, a number of challenges continue to impede the flow of foreign direct investments into emerging nations. As Dunning (1993) suggests, the most important of these challenges are the political systems, values, and ideologies that most emerging nations inherited as a result of a centralized economy. These nations still have several obstacles that need to be eradicated in order to develop market-oriented economies and attract foreign investments (Ramcharran, 2000).

For decades, FDI was perceived as a threat to national sovereignty. As a result, government policy and legislation were devised to severely restrict foreign investments, particularly from the United States. Despite recent pro FDI changes, many emerging countries continue to suffer from this legacy (Jones, 2000). Despite its ambitious efforts, India (one of the largest BEMs) is still unable to bolster investors' confidence. The Indian Ministry of Industry has issued new guidelines on joint ventures that while easing local ownership requirements, continue to force foreign investors to waste months or even years in negotiations with Indian partners (Viswanathan, 2000).

While most big emerging nations have put in place democratic or pseudo-democratic institutions, many continue to suffer institutional instability. To implement market economies, new democracies may impose hardships on a population accustomed to the welfare state. In turn, this reliance leads to a rise in the popularity of political parties that threaten new democratic and market-oriented institutions. Thus, the prospect that these nations can at any time fall back into political and economic instability can negatively affect the perceptions that foreign investors have of these nations (Middle East Executive Reports, 2001; Townsend, 2002).