Free Essay: The Impact of Foreign Exchange Effects on the Internationalization of Enterprises From Emerging Markets

Introduction

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Background

Globalization has offered a platform for enterprises to venture beyond national and regional boundaries. With a globalized economy, firms can expand their operations to new markets, especially in emerging markets. However, according to Hong, Wang, and Kafouros (2015, 46), enterprises from emerging markets are not necessarily ready to compete in the highly competitive global market. Instead, well-established multinational companies from developed nationals are in a better position to dominate the global market (Estrin, Meyer, Nielsen, and Nielsen, 2016, 294). Although studies have been conducted on specific emerging markets, it remains unclear whether multinational enterprises from emerging markets face similar challenges when they internationalize their operations. For instance, firms from some emerging markets have succeeded in expanding their operations across the world and dominating the world. In contrast, firms from other emerging markets find it difficult to compete for regional markets (He, Korhonen, Guo, and Liu, 2016, 443). Hence, there is a need to examine the specific factors that define successful internationalization of enterprises from emerging markets. One of the factors worth investigating is the foreign exchange rates (Ghosh, Ostry, and Chamon, 2016, 173). According to Ghosh, Ostry, and Chamon (2016, 173), the monetary exchange rate plays a major role in determining whether a multinational firm can operate profitably or not in a new market. This study addresses the issue of internationalization by examining the challenges facing enterprises from emerging markets as they venture into the international market. Specifically, the study focuses on the impact of the foreign exchange effects on the internalization of enterprises from emerging markets. The paper also examines the opportunities and advantages that multinational firms from emerging markets have when it comes to internationalization.

Research Questions

What is the impact of foreign exchange rate on the operations of enterprises from emerging markets?

How do the foreign exchange rates affect the ability of firms from emerging markets to penetrate a new international market?

How do the foreign exchange rates affect the ability of firms from emerging markets to operate and compete in another emerging market?

How do the foreign exchange rates affect the ability of firms from emerging markets to operate and compete in a mature market?

Literature Review

Opportunities of in Emerging Markets

The emerging markets are characterized by fast economic growths that present vast opportunities to multinational corporations. Businesses contemplating to internationalize are keen on exploiting economic opportunities in the emerging markets. Such firms conduct feasibility studies to identify the potentialities of the market and the opportunities present to inform the investment decisions (Eichengreen and Gupta, 2015, 14). A multinational enterprise can benefit immensely from the emerging markets if it embraces internationalization. The globalization process has seen many multinational firms investing in the emerging markets thus allowing room for diversifying its operations to realize economic growth (Cuervo-Cazurra, 2016, 1964). Emerging markets experience enormous competition from those in the developed countries, an aspect that a multinational corporation should consider when contemplating to invest in one (Miyajima, Mohanty, and Chan, 2015, 135-136). However, investing in such markets present vast economic opportunities and diversification despite the risks associated with such regions.

Multinational firms investing in the emerging markets designs and establishes a brand while at the same time eliminating competition. Investing in the new markets is beneficial owing to vast economic opportunities that have not been exploited (Vahlne and Jonsson, 2017, 57). A pioneer in a new market should take advantage of the few players in a given industry to create and strengthen its brands to scare away potential entrants (Korinek, 2017, 64). Such markets are virgin to certain goods and services that offer opportunities to the international investors. An international firm contemplating to expand its operations to the multinational and global levels should consider exploiting such opportunities to meet the unmet needs of the consumers. Conferring to Miyajima, Mohanty and Chan (2015, 129), a pioneer corporation in an emerging market establishes and enjoys a significant market share that enables it to remain relevant in an industry. More so, it makes it difficult for a new entrant to enter such markets owing to the uncertainties and the risks associated that the pioneer enterprises have already overcome.

Emerging markets offer massive opportunities to a multinational firm to diversify its operations, goods and services. As suggested by Vahlne and Jonsson (2017, 60) diversity is an essential aspect in the international business that offers multinational corporations opportunities to transform their products and services to meet the unmet needs of the customers. An organization that operates in one place is likely to suffer when the economy of such markets dwindle down (Lien and Filatotchev, 2015, 641). However, investing in multiple emerging markets offers a remedy to such firms contemplating to expand their operations and command a large market share at the international level. Conducting business in multiple countries insulates a multinational corporation from uncertainties in the market such as the dwindling economies in the affected regions (Porter and Kramer, 2019, 341). Businesses perform differently in different markets, an aspect that makes it imperative for such firms to consider investing in multiple countries with promising economies. A company can benefit from such investments in many ways. For example, it can use the profits acquired in performing markets to cover the losses incurred in poor markets (Porter and Kramer, 2019, 329). It also provides critical information that can inform the formulation of decisions in matters internationalization.

Emerging markets are characterized by increased demand for new goods and services, an opportunity that offers economic opportunities to the multinational firms. Companies are competing to remain relevant in the dynamic business environment. Investing in the new markets enables a multinational corporation contemplating internationalization to expand its operations in an attempt to gain a strong position in the global business (Oh and Contractor, 2014, 101). Moreover, emerging markets also have a growing upper-class population that guarantees a market for finished goods and services. Understanding the psychographics and demographics of such markets is essential in making informed decisions that will strengthen the financial base of a multinational firm (Korinek, 2017, 29). For example, customers in the upper-class are likely to purchase luxurious items that were previously unavailable in the market, an opportunity that can be exploited by multinational corporations to strengthen its financial and customer bases. The scarcity of a product in an emerging market plays an essential role in making it be seen as a status symbol, an aspect that contributes to a good positioning of a multinational firm at the global level (Lien and Filatotchev, 2015, 638). Without a doubt, investing in the emerging markets offers massive opportunities to a multinational organization contemplating to expand its operations to new markets with promising economies.

A multinational corporation can exploit an emerging market to become part of a growing infrastructure that constitutes its growing economy. However, to realize such milestones in growth, it is essential for international firms to expand capacity and capability to benefit fully (Eichengreen and Gupta, 2015, 7). For example, investing in the key sectors such as transport, agriculture, and energy opens opportunities to small businesses in the emerging markets. The locals tend to identify and associate developments in such regions with the firms investing in the countries, a situation that builds and enhances its reputation. According to Gallagher (2018, 54), reputation can build or break a multinational corporation owing to its interaction and perceptions by the potential customers. It is critical for such firms to consider collaborating with the host countries to facilitate the exploitation of the natural resources to create employment and help such countries realize economic development (Rothaermel, 2015, 121). This offers the companies opportunities to be part of the infrastructural developments that form the base for economic developments in the new markets.

Risks in the Emerging Markets

Despite the benefits of investing in the emerging markets such as diversification, such regions are characterized by the foreign exchange risk that can adversely affect the operations of a multinational corporation. A foreign investor is obliged to invest in an emerging market using the local currency a transaction that is negatively influenced by the domestic exchange rates (Ghauri, 2018, 21). Multinational corporations experience enormous challenges in an attempt to invest in such markets owing to the high exchange rates when it comes to buying and selling of securities and sock in foreign countries (Heizer, 2016, 87). It is of the essence for such enterprises to conduct feasibility studies to ascertain the risks associated with the foreign exchange rates to make informed decisions when it comes to investing in the new emerging markets. Studies have revealed that failure to consider the risks of foreign exchange rates can adversely affect the financials of a multinational corporation, a situation that increases operational costs (Jeston and Nelis, 2014, 70).

Poor corporate governance in the emerging markets is highly associated with expensive international financing. A solid corporate governance system contributes to positive stock returns. According to Abdullah, Ismail and Nachum (2016, 466) emerging markets are usually characterized by weak corporate governance structures that adversely affect the efforts of the multinational corporations to expand their operations to the global level. New markets do not have established corporate governance systems to empower the shareholders of multinational firms to make their vital contributions (Jiang, Peng, Yang, and Mutlu, 2015, 227). On the contrary, governments and the management in such market tend to have a greater voice than the shareholders, a situation that discourages foreign investors from investing in those countries. It is critical for the government to allow ample time for the shareholders to actively participate in the operations of a multinational corporation when contemplating internationalization (Wang, Hong, Kafouros, and Wright, 2018, 79). Moreover, restrictions on c...