International Business: The New Realities by Cavusgil, Knight and Riesenberger Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Learning Objectives 1. Emerging markets, developing economies, and advanced economies 2. What makes emerging markets attractive for international business 3. Assessing the true potential of emerging markets 4. Risks and challenges of emerging markets 5. Strategies for emerging markets 6. Corporate social responsibility in emerging markets and developing economies 7. The special case of Africa 10-2 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

The New Global Challengers Some 100 companies from emerging markets are poised to become important 21st-century multinationals. Examples include:  Brazil: Embraer, Sadia & Perdiago, Natura  Mexico: America Movil, Grupo Modelo  India: Ranbaxy, Infosys, Tata Tea, WIPRO  China: Galanz, Haier, Chunlan Group Corp., Lenovo, Pearl River Piano  Turkey: Koc Holding, Vestel & Sisecam 10-3 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

The New Global Challengers (cont.) The New Global Challengers benefit from emerging markets: Rapidly growing markets, some of which are large Low-cost labor Training grounds for competing with global incumbents Complex operating environments, which produce some very capable firms 10-4 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Key Concepts Advanced economies: Post-industrial countries with high per capita income, competitive industries, and developed commercial infrastructure; typically the richest countries, including Australia, Canada, Japan, the United States, and nations of Western Europe Developing economies: Low-income countries characterized by limited industrialization and stagnant economies; e.g., Bangladesh, Bolivia, and Zaire Emerging market economies: Former developing economies that achieved substantial industrialization, modernization, and remarkable economic growth; e.g., Indonesia, Mexico, Poland, and Turkey 10-5 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

10-6 What are the “BRIC” countries? Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Advanced Economies, Developing Economies, and Emerging Markets 10-7 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

The “BRIC” Countries 10-8 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Advanced Economies, Developing Economies, and Emerging Markets 10-9 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Emerging Market Economies About 27 countries with rising economic aspirations that enjoy rapidly growing standards of living Evolving towards wealthy nation status Importance in the world economy is increasing as attractive destinations for exports, FDI, and sourcing Examples: Hong Kong, Israel, Saudi Arabia, Singapore, South Korea, and Taiwan have developed beyond the emerging market stage Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Key Differences Among the Three Major Country Groups Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Emerging Markets as a Percent of World Total Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

GDP Growth Rates in Advanced Economies and Emerging Markets Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

China: Growing Role in International Business Huge population; rapidly growing economy; big importer Began pursuing market reforms in the late 1970s Achieved explosive economic growth, quadrupling its GDP during the succeeding thirty years Already the world’s second-largest economy However, has poor business infrastructure Buys one-third of the world’s coal, cotton, fish, rice, and cigarettes; buys one-quarter of the world’s steel and one-half its pork Confronts serious problems of air, water, and land pollution; has eight of the world’s top ten polluted cities Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

What Makes Emerging Markets Attractive? 1. Emerging markets as target markets Many have huge middle classes, with significant income for buying electronics, cars, health care services, and countless other products. Many exhibit high economic growth rates. 2. Emerging markets as manufacturing bases Many are home to low-wage, high-quality labor for manufacturing and assembly operations. Many have large reserves of raw materials and natural resources, e.g., South Africa, Brazil, Russia Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

What Makes Emerging Markets Attractive? (cont.) 3. Emerging markets as sourcing destinations MNEs have established numerous call centers in Eastern Europe, India, the Philippines, and elsewhere. Dell and IBM outsource certain technological functions to knowledge workers in India. Intel and Microsoft have much of their programming activity performed in Bangalore, India. Investments from abroad benefit emerging markets: They lead to new jobs and production capacity, transfer of technology, and linkages to the global marketplace Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Estimating the Potential of Emerging Markets Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Estimations are challenging because of the peculiar economic and social environments in these countries: Limited availability and reliability of data. Market research can be very costly and less precise when compared to the advanced economies. Market potential indicators include: GDP growth rate, income distribution, commercial infrastructure, unemployment rate, and discretionary spending.

Purchasing Power Parity (PPP) Adjustment to Per Capita GDP When relying on per capita GDP for comparison of different countries, one should use PPP exchange rates rather than the market exchange rates. PPP adjustment provides a more realistic indicator of the purchasing power of consumers in emerging and developing economies. PPP adjusted per capita GDP represents the amount of products that consumers can buy in a given country, using their own currency and consistent with their own standards of living Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Difference in Per Capita GDP in Conventional and PPP Terms Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Difference in Per Capita GDP in Conventional and PPP Terms Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Magnitude of Middle-Class Population for a Sample of Emerging Markets Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Key Criteria for Assessing the Attractiveness of Emerging Markets and Developing Economies Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Market size: The country’s population, especially the population of urban areas Market growth rate: The country’s real GDP growth rate Market consumption capacity: Income of the middle class Commercial infrastructure: Density of telephone lines and paved roads, number of personal computers, population per retail outlet, and other such characteristics Economic freedom: The degree to which government intervenes in business activities Country risk: The degree of political risk

Emerging Market Potential Index Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Challenges of Doing Business in Emerging Markets Political stability: Corruption, weak legal systems, and unreliable government authorities increase business risks and costs and hinder forecasting. Weak intellectual property protection: Discourages producing or selling goods that entail valuable assets. Bureaucracy, red tape, and lack of transparency: Burdensome rules, excessive requirements for licenses, approvals, and paperwork; legal and political systems without accountability. For example, it may take years, or many bribes, to obtain permissions to do business. China, India, and Russia are particularly problematic Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Challenges of Doing Business in Emerging Markets (cont.) Poor physical infrastructure: Basic elements of infrastructure, such as high-quality roads, drainage systems, sewers, and electrical utilities, are often sorely lacking in emerging markets. Partner availability and qualifications: Given emerging market challenges, foreign firms might seek local partners to provide access to markets, supplier and distributor networks, and key government contacts. However, qualified partners are often difficult to find or require much assistance to upgrade their abilities Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Challenges of Doing Business in Emerging Markets (cont.) Dominance of family conglomerates: Economies are often dominated by privately owned local companies that are highly diversified and control supplies and employment. These are common in South Korea (chaebols), India (business houses), Latin America (grupos), and Turkey (holding companies) Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

10-27 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Strategies for Doing Business in Emerging Markets Customize offerings to unique emerging market needs. Successful firms develop a deep understanding of the distinctive characteristics of buyers, local suppliers, and distribution channels in emerging markets, and customize offerings and business models accordingly. Partner with a family conglomerate. FCs can provide various advantages, including financing, bank services, local suppliers, and distribution channels. FCs can help reduce risk, time, and capital requirements; develop relationships with governments and other key players; and overcome infrastructure hurdles Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Target governments. Governments buy enormous quantities of products, such as computers, furniture, office supplies, and motor vehicles, as well as services. State enterprises operate in areas such as railways, airlines, banking, oil, chemicals, and steel. Skillfully challenge emerging market competitors. New global challengers and other emerging market firms possess various advantages that require skillful strategies and due diligence to overcome Strategies for Emerging Markets (cont.) Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Strategies for Emerging Markets (cont.) Low-cost labor, skilled workforce, government support, and family conglomerates give emerging market firms various advantages. Advanced economy firms must: Conduct research to understand target markets and the indigenous challengers Acquire new capabilities that build competitive advantage (e.g., develop new products, new ways of doing business, and local alliances) Leverage the same advantages enjoyed by local firms in emerging markets (e.g., low-cost labor, skilled workforce, cheap capital, and key partnerships) Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Catering to Emerging Market Economic Development Needs Increasingly, firms are involved in fostering economic development in emerging markets. Assisting economic development might (or might not) be part of efforts aimed at corporate social responsibility. More commonly, doing business in emerging markets makes good business sense and generates big profits. Helpful ventures include modernization projects (e.g., power plants); infrastructure projects (highways); injections of capital (via microfinance); and marketing consumer products (which leads to distribution channels, reduces prices, and creates jobs) Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

Foreign Firms Support Local Economic Development Wal-Mart and Home Depot have created new, cost-effective distribution channels in Mexico. Unilever and P&G sell shampoo in India for less than $0.02 per mini-sachet. Cemex provides low-cost building materials to millions of poor people. Narayana Hrudayalaya sells health insurance for less than $0.20 per person per month in India. Various cell phone and telecom firms have substantially increased telecommunications infrastructure in Africa Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

10-33 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.