1. International Business: The New Realities by
Chapter 10 looks at emerging, developing, and advanced economies.
International Business: The New Realities by
Cavusgil, Knight and Riesenberger
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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
There are six major learning objectives in this chapter and a separate discussion about the continent of Africa. These objectives deal with the fast-growing, developing, or emerging economies that present significant opportunities and challenges for international firms.
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3. 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
New global challengers are top firms from emerging markets that are fast becoming key contenders in world markets. Statistics reveal how they are displacing traditional MNEs from the advanced economies and becoming key competitors in world markets. One is Orascom Telecom, an Egyptian mobile telecommunications provider that has leveraged managerial skills, superior technology, and rapid growth to become an industry leader in Africa and the Middle East. Starting in 1997, management strung together a telecom empire of more than 80 million subscribers, stretching from North Africa to Bangladesh.
Each year, Forbes magazine catalogs the top 2,000 global firms. Between 2004 and 2008, a total of 117 MNEs entered the list from such emerging markets as China, India, Brazil, and Russia. Meanwhile, in the same period, 233 firms from the United States, Japan, and Britain fell off the Forbes list. In 1990, only nineteen companies from low-income countries were among the Fortune Global 500 list of the world’s largest MNEs. By 2010, China alone had 54 companies in the Global 500. These statistics reveal how new global challengers are displacing traditional MNEs from the advanced economies and becoming key competitors in world markets.
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4. 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
Global Challengers benefit from local low-cost labor and from fast-growing markets. For example, the world’s number three and four top-selling beer brands are produced by firms based in Brazil (Skol, made by InBev) and China (Snow, made by China Resources Snow Breweries). South Korea’s Samsung is the world’s largest electronics company and the leading producer of semiconductors and flatscreen TVs.
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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
Advanced economies have largely evolved from manufacturing economies into service- based economies. Home to 14% of the world’s population, they account for about half of the world’s GDP, over half of world trade in products, and three-quarters of world trade in services. They have democratic, multiparty systems of government, with economic systems usually based on capitalism. They host the world’s largest MNEs.
About seventeen percent of the citizens in developing economies live on less than $1 per day; around 40 percent live on less than $2 per day. Developing economies are hindered by high infant mortality, malnutrition, short life expectancy, illiteracy, and poor education systems. For example, the proportion of children who finish primary school in most African countries is less than 50 percent. Lack of adequate health care is a big concern. Some 95% of the world’s AIDS victims are found in developing economies.
Governments in developing economies are often severely indebted. In fact, some countries in Africa, Latin America, and South Asia have debt levels that approach or exceed their annual gross domestic product.
Emerging markets are found in Asia, Eastern Europe, Southern Africa, Latin America, and the Middle East. Perhaps their most distinguishing characteristic is rapidly improving living standards and a growing middle class with rising economic aspirations. They occupy a middle ground between advanced economic and developing economies.
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6. What are the “BRIC” countries?
This acronym stands for Brazil, Russia, India, and China. These are four of the most significant emerging countries.
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7. Advanced Economies, Developing Economies, and Emerging Markets
This map of the globe shows that most advanced counties are in North America and Europe, while developing countries are concentrated in Africa and Eastern Europe.
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The “BRIC” Countries
Brazil, Russia, India, and China are sometimes referred to together as “BRIC” countries because of their comparable stage in economic growth.
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9. Advanced Economies, Developing Economies, and Emerging Markets
This map shows how geographically large the emerging markets are in Asia, namely Russia, India, and China.
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10. 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
Certain emerging markets that have evolved from centrally planned economies to liberalized markets—specifically China, Russia, and several countries in Eastern Europe—are called transition economies. These countries were once socialist states but have been largely transformed into capitalism-based systems. Long burdened by excessive regulation and entrenched government bureaucracy, they are gradually introducing legal frameworks to protect business and consumer interests and ensure intellectual property rights.
In the mid-2000s, the emerging markets collectively enjoyed an average annual GDP growth rate of around 7 percent, a remarkable feat. While the economies of most emerging markets were disrupted by the global recession and financial crisis, their average growth rates have remained strongly positive. The growing middle class in emerging markets implies rising demand for various consumer products, such as electronics and automobiles, and services such as health care. Roughly a quarter of Mexico’s 105 million people enjoy affluence equivalent to that of the middle class in the United States.
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11. Key Differences Among the Three Major Country Groups
This table shows how economically different countries are around the world in several dimensions, such as income and access to the internet.
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12. Emerging Markets as a Percent of World Total
The emerging markets make up over 50% of the world’s population and over 40% of the world’s GDP on a Purchasing Power basis. These countries are also seeing dramatic increases in exports and FDI inflows. Even during the global recession, technology firms such as Cisco, Hewlett-Packard, and Intel were generating a large and growing proportion of their revenues from sales to such countries. In 2008, firms in the global pharmaceutical companies, such as Pfizer and Glaxo-SmithKline, increased their emphasis on developing and marketing drugs in emerging markets. Merck and Pfizer have launched popular drugs in India, using innovative pricing strategies that make once-expensive medications affordable for millions of low-income consumers.
Businesses in emerging markets are important targets for machinery and equipment sales. In this category, markets are huge for textile machinery in India, for agricultural equipment in China, and for oil and gas exploration technology in Russia. In a similar way, governments and state enterprises in emerging markets are major targets for sales of infrastructure-related products and services, such as machinery, power transmission equipment, and transportation equipment.
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13. GDP Growth Rates in Advanced Economies and Emerging Markets
The GDP growth of emerging economies is frequently three to four times higher than advanced countries. This fact alone presents great opportunities for international firms.
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14. 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
Since launching market reforms in 1970s, China has achieved explosive economic growth, often 10 percent or more per year. Although income per person is still around $6,500, China is the second-largest economy in the world (after the U.S.). But success in China has come slowly for most foreign firms. A big challenge is low per-capita income. About one-third of China’s population (roughly 400 million people) lives on less than $2 per day. Of a total population of 1.3 billion, the realistic target consumer segment is the 250 million residents of urban areas, largely in the developed eastern regions.
Rapid, under-regulated industrialization has produced much environmental harm. China is home to eight of the world’s ten most polluted cities. More than one million Chinese are thought to die every year from pollution-related causes.
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15. 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.
Emerging markets have become important target markets for a wide variety of products and services. Exports to such countries account for one-third of total merchandise exports from the U.S. Roughly a quarter of Mexico’s 105 million people enjoy affluence equivalent to that of the middle class in the U.S.
Emerging markets are home to low-wage, high-quality labor for manufacturing and assembly operations. Finally, some emerging markets have large reserves of raw materials and natural resources, such as South Africa for industrial diamonds, and Brazil is a center for bauxite, the main ingredient in aluminum.
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16. 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.
Global sourcing helps firms obtain competitive advantages. Emerging markets have served as excellent platforms for sourcing. Numerous MNEs have established call centers in Eastern Europe, India, and Mexico. Firms in the IT industry like Dell and IBM reap big benefits from outsourcing certain technological functions to knowledge workers in India. Intel and Microsoft have many of their programming activities performed in Bangalore, India.
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17. Estimating the Potential of Emerging Markets
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.
Global sourcing helps firms obtain competitive advantages. Emerging markets have served as excellent platforms for sourcing. Numerous MNEs have established call centers in Eastern Europe, India, and Mexico. Firms in the IT industry like Dell and IBM reap big benefits from outsourcing certain technological functions to knowledge workers in India. Intel and Microsoft have many of their programming activities performed in Bangalore, India.
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18. 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.
Economists estimate real buying power by calculating GDP statistics based on purchasing power parity (PPP). Since prices vary greatly among countries, economists adjust ordinary GDP figures for differences in purchasing power. Adjusted per capita GDP more accurately represents the amount of products consumers can buy in a given country, using their own currency and consistent with their own standard of living.
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19. Difference in Per Capita GDP in Conventional and PPP Terms
One of the most commonly used economic statistics is per capita GDP by country, which is presented in dollars after each countries’ currency is converted.
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20. Difference in Per Capita GDP in Conventional and PPP Terms
Managers should exercise caution in relying on per capita income as an indicator of market potential in an emerging or developing economy. PPT is considered more accurate since it takes many additional economic factors into the calculation. There are four reasons for this caution.
Official data do not account for the informal economy, where economic transactions are not officially recorded and are thus left out of government calculations of a nation’s GDP. In developing economies, the informal economy is often as large as the formal economy.
Most of the population is on the low end of the income scale in emerging markets and developing economies. “Mean” or “average” does not accurately represent a non-normal distribution; often, median income provides a more accurate depiction of purchasing power.
Household income is often much larger than per capita income because of multiple wage earners within individual households in these countries. Multiple income households naturally have more spending power than individuals.
Governments in these countries may underreport national income so they can qualify for low-interest loans and grants from international aid agencies and development banks.
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21. Magnitude of Middle-Class Population for a Sample of Emerging Markets
In every country, the middle class represents the segment of people between wealthy and poor. They have economic independence and consume many discretionary items. In emerging markets, the size and growth rate of the middle class serve as signals of a dynamic market economy. For marketers of products and services, emerging markets are prime prospects.
India and Indonesia rank at the very top, given their large populations. But, per capita GDP in these countries is rather modest, especially when compared to South Korea, China, Russia, and Mexico. However, the percentage of income held by the middle class in India and Indonesia is relatively high, at 49 and 48 percent, respectively. Contrast this to Brazil, where the middle class controls only about 35 percent of national income. Demographic trends indicate that, in the coming two decades, the proportion of middle-class households in emerging markets will become much bigger, acquiring enormous spending power.
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Key Criteria for Assessing the Attractiveness of Emerging Markets and Developing Economies
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
Firms considering investing in developing economies should assess many factors before they decide where and when. Besides financial issues, such as GDP growth rates, political risk should also be considered.
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23. Emerging Market Potential Index
This index quantifies several economic statistics and ranks where the country is in that area. This results in an overall ranking for each country and simplifies decision making for companies.
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24. 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.
Political instability: Political instability is associated with corruption and weak legal frameworks that discourage inward investment and the development of a reliable business environment. In Russia, for example, bureaucratic practices favor well-connected, homegrown firms. Western oil companies have been denied access to Russia’s energy resources.
Weak intellectual property protection: Even when they exist, laws that safeguard intellectual property rights may not be enforced, or the judicial process may be painfully slow. In Argentina, enforcement of copyrights on recorded music, videos, books, and computer software is inconsistent. Counterfeiting—unauthorized copying and production of a product—is common in China, Indonesia, and Russia, especially of software.
Bureaucracy, red tape, and lack of transparency: Burdensome administrative rules and excessive requirements for licenses, approvals, and paperwork all delay business activities. In China, getting a bank loan is arduous, especially for smaller firms. There are many government forms to complete, and it can take several months to register collateral with the appropriate authorities. As a result, many firms cannot obtain bank loans in a timely manner, delaying their ability to grow and flourish. While smaller businesses contribute some 60 percent of China’s GDP, they account for only 15 percent of outstanding bank loans.
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25. 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.
Poor physical infrastructure: High-quality roads, drainage systems, sewers, and electrical utilities are typically lacking in emerging markets. In India, many still do not have access to toilets and sewage treatment systems. Poor sanitation results in thousands of Indian children dying every week. India’s ports, roads, railways, and airports are insufficient to handle the massive volumes of cargo that enter and leave the country every day. The government is working to improve infrastructure, but MNEs often must build their own systems. A subsidiary of Tata Chemicals, part of India’s giant Tata conglomerate, had to build its own road and railway infrastructure in Africa to support the firm’s operations there.
Partner availability and qualifications: Foreign firms should seek alliances with well-qualified local companies in countries characterized by inadequate legal and political frameworks. Through such partners, foreign firms can access local market knowledge, establish supplier and distributor networks, and develop key government contacts. However, partners that can provide these advantages are not always readily available in emerging markets, especially smaller ones.
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26. 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).
Many emerging market economies are dominated by large, highly diversified firms that are privately owned, referred to as Family Conglomerates (FCs). They operate in industries ranging from banking to construction to manufacturing. They control the majority of economic activity and employment in emerging markets like South Korea, where they are called chaebols; in India, where they are called business houses; in Latin America, where they are called grupos; and in Turkey, where they are called holding companies. In South Korea, the top thirty FCs account for nearly half the economy’s assets and industry revenues. Samsung is perhaps the most famous Korean FC. In Turkey, the Koc Group accounts for about 20 percent of trading on the Istanbul Stock Exchange, and Sabanci provides more than 5 percent of Turkey’s national tax revenue.
FCs enjoy various competitive advantages in their home countries, such as government protection and support, extensive networks in various industries, superior market knowledge, and access to capital. Hyundai Group was an early mover in South Korea’s auto industry and now holds the largest share of that country’s car market. When foreign automakers tried to enter the market, they found Hyundai’s advantages overwhelming.
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A sampling of family conglomerates from various countries.
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28. 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.
Successful firms develop a deep understanding of the market. The firm should customize offerings and devise innovative business models. MNEs employ creative approaches to promote their offerings. Where suppliers and distribution channels are lacking, they develop their own infrastructure to obtain requisite raw materials and components or move finished goods to local buyers. MNEs set prices appropriate for local conditions. In China, consumers favor text messaging on mobile phones to keep communication costs low. In India, General Electric subsidiary GE Healthcare developed a super lightweight electrocardiograph machine that sells for just $1,500. It is targeted to doctors and clinics in poor areas. Low pricing allows treatment of heart patients for a fraction of the cost of earlier technologies.
Family Conglomerates can make valuable venture partners. By collaborating with an FC, the foreign firm can: (a) reduce the risks, time, and capital requirements of entering the market; (b) develop helpful relationships with governments and other key local players; (c) target market opportunities more rapidly and effectively; (d) overcome infrastructure-related hurdles; and (e) leverage FC resources and local contacts. For example, Ford partnered with Kia to introduce the Sable line of cars in South Korea and benefited from Kia’s strong distribution and after-service network.
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29. Strategies for Emerging Markets (cont.)
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.
Target governments in emerging markets: Governments and state enterprises are important customers for three reasons. First, governments buy enormous quantities of products (such as computers and motor vehicles) and services (such as architectural and consulting services). Second, state enterprises in areas like railways, airlines, and banking buy goods and services from foreign companies. Third, the public sector influences the procurement activities of various private or semi-private corporations. In India, for example, the government works directly in planning housing projects. Bechtel, Siemens, General Electric, Hitachi, and other major vendors regularly participate in bidding for global tenders from emerging market governments.
Skillfully challenge emerging market competitors: The global farm equipment industry was long dominated by venerable names such as John Deere and Komatsu. Recently, however, India’s Mahindra & Mahindra has been grabbing market share with a powerful, high-quality tractor that sells for far less than competing models. Keys to success for advanced-economy firms are to:
Research the market and local competitors.
Acquire new capabilities that improve the firm’s competitive advantages.
Incumbent firms can leverage low-cost labor and skilled workers in locations such as China, Mexico, and Eastern Europe.
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30. 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)
Before entering into an emerging country, firms should spend time researching the country and plan to use many of the same techniques that other successful companies in that country are using, such as partnerships.
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31. 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).
If firms market appropriate products and employ suitable strategies, they can earn substantial profits in emerging markets and developing economies. Helping the infrastructure improve can lead to even greater profits and can be considered part of the firms’ CSR. The Swedish telecommunications firm Ericsson, for example, helped modernize the telecom infrastructure in Tanzania by installing phone lines and cellular systems that meet communication needs of households, firms, and aid agencies.
Another example is in India, where every day some 20 million people travel long distances for work or pleasure. Hotel accommodations generally fall into two categories: dirty, low-quality lodgings for the poor, or $350-per-night luxury hotels for the rich. To address the shortage of accommodations for middle-class travelers, Tata launched the Ginger chain of medium priced hotels ($20–$40 per night). To keep costs low, the hotels have minimal staff and few furnishings, but the rooms are clean and offer broadband Internet, flatscreen TV, and a work space. By devising an innovative business model, Tata captured a major, lucrative market in a poor country and simultaneously addressed an important need of lower-income travelers.
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32. 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.
Many firms have produced products and techniques that have raised the standard of living in the countries where they do business.
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