FM : Anis Gunawan, MM 4.Understanding Emerging Markets

International Business: Strategy, Management, and the New Realities 1.Foundation concepts of International business 2. The environment of International Business 3.Strategy and opportunity assessment 4. Entering and operating in International Markets. 5. Functional Area excellence 4. Understanding Emerging Markets 3. Regional economic Integration 1.Foundation concepts 2.Theories of International Trade and Investment

International Business: Strategy, Management, and the New Realities 3 Classifying Countries based on Economic Development Advanced economies are post-industrial countries characterized by high per capita income, highly competitive industries, and well-developed commercial infrastructure. Examples- world’s richest countries and include Australia, Canada, Japan, New Zealand, the United States, and Western European countries. Developing economies are low-income countries characterized by limited industrialization and stagnant economies. Examples- low-income countries, with limited industrialization and stagnant economies- e.g. Bangladesh, Nicaragua and Zaire. Emerging market economies are a subset of former developing economies that have achieved substantial industrialization, modernization, improved living standards and remarkable economic growth. Examples- some 27 countries in East and South Asia, Latin America, Middle East and Eastern Europe- including Brazil, Russia, India, China (so called BRIC countries). BRIC

International Business: Strategy, Management, and the New Realities 4 Advanced Economies 1.Mature state of industrial development; transitioned from manufacturing economies into service-based economies. 2.Home to 14% of the world’s population, and account for half of world GDP, over half of world trade in products, and three-quarters of world trade in services. 3. Political systems - democratic, multiparty systems of government. 4. Economic systems - typically based on capitalism, with relatively little government intervention in business. 5.Serious purchasing power; few restrictions on international trade and investment. 6.They host the world's largest MNEs. 7. Example - Ireland, which has one of the world’s best performing economies, with much FDI from foreign manufacturers in high-tech industries such as Gateway. Ireland

International Business: Strategy, Management, and the New Realities 5 Developing Economies 1.Low discretionary incomes, limited proportion of personal income spent on purchases other than food, clothing, and housing. 2.In developing economies, 17% live on less than $1 per day; 40% live on less than $2 per day. 3.The combination of low income and high birth rates tends to perpetuate poverty. 4.Misnomer-sometimes called underdeveloped countries or third-world countries- these terms are imprecise because, despite poor economic conditions, the countries tend to be highly developed in historical and cultural terms.

International Business: Strategy, Management, and the New Realities 7 Emerging Market Economies 1.Most distinguishing characteristic- countries are enjoying rapidly improving living standards and a growing middle class with rising economic aspirations. 2.Importance in the world economy is increasing as attractive destinations for exports, FDI, and sourcing. 3.Emerging market countries are evolving towards wealthy nation status. 4.Examples: Hong Kong, Israel, Saudi Arabia, Singapore, South Korea, and Taiwan have developed beyond the emerging market stage emerging markets- the Czech Republic, Hungary, and Poland, received a boost when they became members of the European Union. By joining the EU, these countries had to adopt stable monetary and trade policies. They leverage their low-cost labor to attract investment from Western Europe, thereby boosting their economies. South Korea

International Business: Strategy, Management, and the New Realities 8 The New Global Challengers ( Boston Consulting Group Study) Some 100 companies from Emerging Markets (called Rapidly Developing Economies in the BCG study) are poised to become important 21 st -century multinationals. Examples: Brazil: Embraer, Sadia & Perdiago, Natura Mexico: America Movil, Groupo Modelo India: Ranbaxy, Infosys, Tata Tea, WIPRO China: Galanz, Haier, Chunlan Group Corp., Lenovo, Pearl River Piano Turkey: Koc Holding, Vestel & Sisecam Tata

International Business: Strategy, Management, and the New Realities 9 The New Global Challengers 1.RDEs have rapidly growing markets, some of which are very large 2.RDEs have low-cost resources 3.Difficult operating environments at home produce some highly capable companies 4.RDEs are training grounds for competing with global incumbents

International Business: Strategy, Management, and the New Realities 10 Six Strategic Globalization Patterns of the New Global Challengers from EMs 1.Taking RDE brands global (China’s Hisense, taking consumer electronics to Africa) 2.Turning RDE engineering into global innovation (India’s Wipro) 3.Assuming global category leadership (Hong Kong’s Johnson Electric) 4.Monetizing RDE natural resources (Brazilian food processors Sadia and Perdiago) 5.Rolling out new business models to multiple markets (Mexico’s cement conglomerate Cemex’s global acquisition strategy) 6.Acquiring natural resources (Shanghai Baosteel group expanding globally to secure stable iron-ore supplies)

International Business: Strategy, Management, and the New Realities 11 Developing Economies Evolving into Emerging Markets 1.European countries of Estonia, Latvia, Lithuania, Slovakia. 2.Latin American countries of Costa Rica, Panama, and Uruguay. 3.Kazakhstan, Nigeria, Vietnam, and the United Arab Emirates. 4.Economic prosperity varies within emerging markets- there are usually two sets of economies – those in urban areas (more developed economic infrastructure) and those in rural areas (less discretionary income). 5. Transition economies = Privatization of former state enterprises - since 1989 after transition from centrally planned economies into liberalized markets: Czech Republic, Hungary, and Poland; also China and Russia.

International Business: Strategy, Management, and the New Realities 12 Opportunities for Foreign Firms in China 1.Ample opportunities for firms marketing technologies and environmental protection equipment 2.Foreign firms can profit from China’s low-cost labor and growing affluence, numerous foreign companies set up sales offices and manufacturing facilities, but success is slow. 3.Wal-Mart sourced over $30 billion of merchandise from China in saves immensely. 4.A sizeable consumer segment: 250 million ‘middle-class’ residents. 5.Success requires deep understanding of the market and long-term commitment: Coca-Cola, General Motors, McDonald's, Motorola, Airbus, and Volkswagen. 6.Challenges: Disparate rates of development between the coastal areas vs. West; poverty; environmental degradation. Walmart

International Business: Strategy, Management, and the New Realities 13 What Makes Emerging Markets Attractive? Emerging markets are attractive as target markets, manufacturing bases, and sourcing destinations. 1. Emerging Markets as Target Markets Growing middle class - emerging markets have become important –represent substantial demand for electronics and automobiles and health care services. The largest emerging markets have doubled their share of world imports in the last few years. Emerging markets are excellent targets for manufactured products, technology, and sophisticated technology: Textile machinery industry in India is huge Oil and gas exploration plays a vital role in Russia Agriculture is a major sector in China.

International Business: Strategy, Management, and the New Realities 14 Emerging Markets can Serve as Niche Markets 1.Lockheed Aircraft, whose Hercules turboprop is a popular airliner in poorer countries, has developed transport planes that carry bulk commodities at relatively low costs. 2.Novartis and Pfizer are pharmaceutical firms that reap big profits from selling vaccines and medicines that can be stored without refrigeration when shipped to distant markets. 3.Demand is growing fastest in emerging markets- Black & Decker and Robert Bosch, the fastest-growing markets are in Asia, Latin America, Africa, and the Middle East 4.Governments and state enterprises are targets for sale of infrastructure-related products/services- machinery, power transmission equipment, transportation equipment, high-technology products, etc.

International Business: Strategy, Management, and the New Realities 15 Emerging Markets As Manufacturing Bases 2. Emerging markets as manufacturing bases 1.Home to low-wage, high-quality labor for manufacturing and assembly operations. 2.Large reserves of raw materials and natural resources. 3.South Africa is a key source for industrial diamonds. 4.Brazil long has been a center for mining bauxite, the main ingredient in aluminum. 5.Thailand has become an important manufacturing location for Japanese MNEs such as Sony, Sharp, and Mitsubishi. 6.Malaysia and Taiwan- Motorola, Intel, and Philips manufacture semiconductors there. 7.Mexico and China- platforms for consumer electronics and auto assembly. Motorola

International Business: Strategy, Management, and the New Realities 16 Emerging Markets As Sourcing Destinations 3. Emerging markets as sourcing destinations 1.MNEs have established call centers in Eastern Europe, India, and the Philippines. 2.Dell and IBM outsource certain technological functions to knowledge workers in India. 3.Intel and Microsoft have much of their programming activities performed in Bangalore, India. 4.Investments from abroad benefit emerging markets as they lead to new jobs and production capacity, transfer of technology and linkages to the global marketplace.

International Business: Strategy, Management, and the New Realities 17 Big Mac Index (The Economist) Big Mac Index - another way to illustrate the PPP concept is to examine the Big Mac Index available at globalEDGE™ and developed by the Economist ( The Economist 's Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalise the price of a basket of goods and services around the world. The Economist publication selects a single product for the basket of goods: a McDonald’s Big Mac. Big Max

International Business: Strategy, Management, and the New Realities 18 Middle Class as an Indicator of Market Potential 1.The middle class represents the proportion of people in between the wealthy and the poor, has economic independence and consume many discretionary items, including electronics, furniture, automobiles, recreation, and education. 2.In emerging markets, the size and growth rate of the middle class serve as signals of a dynamic market economy 3.Demographic trends indicate that, in the coming two decades, the proportion of middle-class households in emerging markets will become much bigger, with enormous spending power.

International Business: Strategy, Management, and the New Realities 19 Progress of Emerging Markets in Building Their Middle Classes 1.While India and Indonesia feature large middle- class populations in absolute terms, per-capita GDP in these countries is rather modest, especially when compared to South Korea, China, Russia, and Mexico - although income is relatively high at 49 and 48%, respectively. 2.Brazil- middle class citizens control only about 35% of national income. 3.In relative terms, South Korea has made the most progress towards building a sizable middle class; its middle-class accounts for about 55% of national income. Brazil