New Horizons: Multinational Company Investment in Developing Economies

By Martin Baily, Richard Cooper, Dani Rodrik
New Horizons: Multinational Company Investment in Developing Economies

Food retail is a sector that is critical to all the economies studied. Our study reveals that the initial market conditions are of critical influence on both the performance of the foreign players in these markets and the impact foreign direct investment has in the sector.

Food retail case study

Foreign direct investments have helped increase productivity and introduce best practices to the food retail sector of developing economies, but so far no single multinational company (MNC) has achieved global total dominance in the marketplace.

In Brazil and Mexico, similar in market size and average income, investment benefits have varied. Consumers in both countries have benefited from the increased competition and knowledge transfer brought by foreign players. However, diffusion of sector innovations in Brazil are hampered by a faulty tax system, while in Mexico, supplier practices introduced by MNCs have led to operational improvements in the local food processing industry as well.

Brazil's trouble with taxes

In Brazil, 90 percent of the modern format players food retailers have some foreign ownership. Yet the biggest barrier to continuing MNC growth are informal retailers that keep their margins high by routinely underreporting revenues and salaries in order to skirt taxes. When formal MNCs attempt to gain share by acquiring these informal players, the profit evaporate under the heavy tax burden.

Wal-Mart's Mexico success

Mexico, with no value added tax on food, presents a far different picture. Though the entry of MNCs is still relatively new, the recent success of Wal-Mart, with its proprietary distribution sites and aggressive supplier price targets, has helped alter the retail food landscape and set new competitive standards in Mexico. The efficiencies have had impact across the supply chain and have been passed on as lower prices to consumers, rather than to the government in the form of taxes.

Conclusions

In late 1990s, global retailers expanded rapidly to developing economies in search of growth. No single food retailer or approach has emerged as a consistent winner, because success critically depends on being able to tailor global capabilities to local conditions and competitive dynamics.

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