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International Business: Strategy, Management, and the New Realities 1
International Business
Strategy, Management & the New Realities
by
Cavusgil, Knight and Riesenberger
Chapter 9Understanding Emerging
Markets
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International Business: Strategy, Management, and the New Realities 2
Classifying Countries based on
Economic Development
Advanced economies: post-industrial countries characterized byhigh per-capita income, highly competitive industries, and well-developed commercial infrastructure. E.g., Australia, Canada,Japan, United States, and Western European countries.
Developing economies: low-income countries characterized bylimited industrialization and stagnant economies. E.g., most lowincome countries in Africa, Latin America, and Asia, such asBangladesh, Nicaragua and Zaire.
Emerging market economies: a subset of former developing
economies that have achieved substantial industrialization,modernization, improved living standards, and remarkable economicgrowth. They are some 27 countries in East and South Asia, LatinAmerica, Middle East and Eastern Europe. Examples: Brazil,Russia, India, China.
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Advanced Economies
Mature state of industrial development; transitioned frommanufacturing economies into service-based economies
Home to 14% of the worlds population, and account forhalf of world GDP, over half of world trade in products,
and three-quarters of world trade in services Very substantial purchasing power
Political system typically democratic and multiparty
Economic system typically based on capitalism
Relatively little government intervention in business
Few restrictions on international trade and investment
Home to the world's largest MNEs
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Developing Economies
Low discretionary incomes; limited proportion ofpersonal income spent on purchases other thanfood, clothing, and housing.
As a proportion of world population, 17% live on less
than $1 per day; 40% live on less than $2 per day Combination of low income and high birth rates
tends to perpetuate poverty.
Sometimes called underdeveloped countries or
third-world countries, but these terms are imprecise
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Emerging Market Economies (Emerging Markets)
Most distinguishing characteristic: countries are enjoyingrapidly improving living standards and a growing middleclass with rising economic aspirations. Evolving towardswealthy nation status.
Importance in the world economy is increasing as attractivedestinations for exports, FDI, and sourcing.
Account for over 40% of world GDP, over 30% of exports,and receive over 20% ofFDI.
In mid-2000s, collectively had average annual GDP growthrate of nearly 7%, much faster than advanced economies
Benefit from low-cost labor, knowledge workers, low-costcapital, government support, and powerful conglomerates
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International Business: Strategy, Management, and the New Realities 13
The New Global Challengers
Some 100 companies from Emerging Markets
poised to become important 21st-century MNEs.
Examples:
Brazil: Embraer, Sadia & Perdiago, NaturaMexico: America Movil, Groupo Modelo
India: Ranbaxy, Infosys, Tata Tea, WIPROChina: Galanz, Haier, Chunlan Group Corp.,Lenovo, Pearl River Piano
Turkey: Koc Holding, Vestel & Sisecam
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Transition Economies
Special category of Emerging Market Economies
Mainly former Soviet Union countries. E.g., Czech Republic,Hungary, Poland, Romania, Russia
Long characterized by excessive regulation and entrenched
government bureaucracy Undertook large-scaleprivatization of state-owned
enterprises
Have made great strides in political and economicrestructuring
Introducing legal frameworks to protect business andconsumer interests and ensure intellectual property rights
Initially, western companies had a hard time recruitingmanagers who understand modern management practices
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International Business: Strategy, Management, and the New Realities 16
What Makes Emerging Markets Attractive?
1. Emerging markets as target markets
Growing middle class
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, andsophisticated technology
Textile machinery industry in India is huge
Oil and gas exploration are big in Russia
Agriculture is a major sector in China.
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What Makes Emerging Markets Attractive? (contd)
2. Emerging markets as manufacturing bases
Home to low-wage, high-quality labor for manufacturingand assembly operations.
Large reserves of raw materials and natural resources.
E.g., South Africa and diamonds; Brazil and bauxite
Thailand is an important manufacturing location forJapanese MNEs such as Sony, Sharp, and Mitsubishi.
Malaysia and Taiwan are semiconductor manufacturing
sites for Motorola, Intel, and Philips
Mexico and China are critical in consumer electronicsand auto assembly
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What Makes Emerging Markets Attractive? (contd)
3. Emerging markets as sourcing destinations
MNEs have established call centers in EasternEurope, India, and the Philippines.
Dell and IBM outsource certain technologicalfunctions to knowledge workers in India.
Intel and Microsoft have much of theirprogramming done in Bangalore, India.
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Market Potential Indicators
Three practical approaches firms employ in
assessing market potential of individual
countries are:
per-capita income growth rate of per-capita income
size of middle-class, and
a mix of market potential indicators
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Purchasing Power Parity
Adjustment to per capita GDP
Compared to per-capita GDP adjusted forcurrent exchange rates,purchasing powerparityadjustment provide a more realistic
indicator of purchasing power of consumersin emerging and developing economies.
PPP adjusted per-capita GDP moreaccurately represents the amount of products
that consumers can buy in a given country,using their own currencyand consistent withtheir own standard of living.
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Emerging Market Potential Index (EMPI)
The EMPIcombines factors that provide firms with a realisticmeasure of export market potential:
Market Size: the countrys population, especially urbanpopulation
Market Growth Rate: the countrys real GDP growth rate
Market Intensity: private consumption and GNI representdiscretionary expenditures of citizens Market Consumption Capacity: The percentage share of
income held by the countrys middle class Commercial Infrastructure: characteristics such as number of
mobile phone subscribers, density of telephone lines, number of
PCs, density of paved roads, and population per retail outlet Economic Freedom: the degree of government intervention Market Receptivity: the particular countrys inclination to trade
with the exporters country as estimated by the volume of imports Country Risk: the degree of political risk
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Challenges of Doing Business in Emerging Markets
Political stability
Absence of reliable government authoritiesincreases business costs and risks, and
reduces ability to forecast businessconditions.
Corruption and weak legal frameworks
E.g., Argentina, Indonesia, Russia, andVenezuela experience substantial corruption.
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Challenges of Emerging Markets (contd)
Weak intellectual property protection
Even if they exist, laws that safeguardintellectual property rights may not be
enforced, or the judicial process may bepainfully slow.
E.g., in China, Indonesia and Russia,counterfeiting is common, especially ofsoftware, DVDs, CDs. In India, weak patentlaws discourage investment by foreign firms.
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Challenges of Emerging Markets (contd)
Bureaucracy and lack of transparency
Burdensome administrative rules, as well asexcessive requirements for licenses,
approvals, and paperwork, delay businessactivities.
Lack of transparency implies that legal andpolitical systems are not open and
accountable. Lack of transparency isassociated with corruption.
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Challenges of Emerging Markets (contd)
Partner availability and qualifications
Alliances with local partners helps gainaccess to local markets, supplier and
distributor networks, and key governmentcontacts. May be critical in complex markets.
But qualified business partners are notreadily available.
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Challenges of Emerging Markets (contd)
Dominance of family conglomerates
Large, highly diversified, privately-owned firms thatcontrol much economic activity and jobs in emergingmarkets. Enjoy government support, extensive
networks, access to capital, market knowledge.
South Korea chaebols; the top 30 FCs account fornearly half the assets and industry revenues in theKorean economy. Samsung, the most famous
Korean FC, has annual revenues of $140 billion.
India business houses
Latin America grupos
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Examples of Partnering with Family Conglomerates
Ford partnered with Kia to introduce the Sable lineof cars in South Korea, leveraging Kia's strongdistribution and after-service network.
Digital Equipment Corporation (DEC) designated
Tatung the main distributor of its workstations andclient-server products in Taiwan, leveragingTatung's local experience and distribution network.
Danone (French producer of Dannon yogurt and
Evian bottled water) entered a joint venture withSabanci in Turkey, leveraging Sabancis distributors,retailers and knowledge of the market.
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Major International Contractors Target
Major Government Projects
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