Sajol Emerging Markets

8/8/2019 Sajol Emerging Markets

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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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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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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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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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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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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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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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