ib chapter 10 understanding emerging markets (1)

8/11/2019 IB Chapter 10 Understanding Emerging Markets (1)

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International Business: The New Realities, Global Edition,3rdEdition

by

Cavusgil, Knight, and Riesenberger

Chapter 10

Copyright 2014 Pearson Education Inc.


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Learning Objectives

1. Emerging markets, developing economies,advanced economies

2. What makes emerging markets attractive forinternational 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 marketsand developing economies

7. The special case of Africa



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The New Global Challengers

Some 100 companies from emerging marketsare poised to become important 21st-centurymultinationals. Examples:

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



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New Global Challengers (contd)

The New Global Challengers benefit fromemerging markets:

Rapidly growing markets, some of which arelarge

Low-cost labor

Training grounds for competing with global

incumbents Complex operating environments, which

produce some very capable firms



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Key Concepts

Advanced economies: Post-industrial countrieswith high per capita income, competitive industries,and developed commercial infrastructure. Typicallythe richest countries, including Australia, Canada,Japan, U.S., and nations of Western Europe.

Developing economies: Low-income countriescharacterized by limited industrialization andstagnant economies. E.g. Bangladesh, Bolivia, Zaire.

Emerging market economies: Former developingeconomies that achieved substantial industrialization,modernization, and remarkable economic growth.E.g., Indonesia, Mexico, Poland, Turkey.



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What are the BRIC countries?



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The BRIC Countries



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Advanced Economies, Developing Economies, and Emerging Markets



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Advanced Economies, Developing Economies, and Emerging Markets



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Key Differences

Among the Three Major Country Groups



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Emerging Market Economies

About 40 countries with rising economic aspirationsthat enjoy rapidly growing standards of living

Evolving towards wealthy nation status

Importance in the world economy is increasing asthey become attractive destinations for exports, FDI,and sourcing.

Examples: Hong Kong, Israel, Saudi Arabia,Singapore, South Korea, and Taiwan havedeveloped beyond the emerging market stage.



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Emerging Markets as a Percent of World Total



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GDP Growth Rates in

Advanced Economies and Emerging Markets



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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 itsGDP during the succeeding 30 years

China is already the worlds second-largest economy buthas poor business infrastructure.

Among commodities, China buys one-third of the worldscoal, cotton, fish, rice, and cigarettes. It buys one-quarterof the worlds steel and one-half its pork.

China endures serious problems of air, water, and landpollution and has 8 of the worlds top 10 polluted cities.



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What Makes Emerging Markets Attractive?

1. Emerging Markets as Target Markets Many have huge middle classes with significant

income for buying electronics, cars, health careservices, and countless other products.

Many exhibit high economic growth rates.

2. Emerging Markets as Manu factu r ing Bases

Home to low-wage, high-quality labor for

manufacturing and assembly operations Large reserves of raw materials and natural

resources as in South Africa, Brazil, Russia



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What Makes Emerging Markets Attractive? (contd)

3. Emerging Markets as Sourc ing Dest inat ion s 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 programmingactivities performed in Bangalore, India.

Investments from abroad benefit emerging markets asthey lead to new jobs, production capacity, transfer oftechnology. and linkages to the global marketplace.



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Estimating the Potential of Emerging Markets

Estimations are challenging because of peculiareconomic and social environments in thesecountries.

Limited availability and reliability of data

Market research can be very costly and less precise,as compared to the advanced economies.

Market potential indicators include: GDP growth rate,income distribution,

commercial infrastructure,unemployment rate, andconsumer expendituresfor discretionary items.



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Purchasing Power Parity (PPP)

Adjustment to per capita GDP

In relying on per capita GDP for comparison ofdifferent countries, one should use PPP exchangerates, rather than the market exchange rates.

PPP adjustment provides a more realistic indicator ofpurchasing power of consumers in emerging anddeveloping economies.

PPP adjusted per capita GDP represents the amountof products that consumers can buy in a givencountry, using their own currency and consistent withtheir own standard of living.


M it d f Middl Cl


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Magnitude of Middle-Class

Population for a Sample of Emerging Markets


K C i i f A i h A i


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Key Criteria for Assessing the Attractiveness

of Emerging Markets and Developing Economies

Market Size: the countrys population, especially thoseliving in urban areas

Market Growth Rate: the countrys real GDP growth rate

Market Consumption Capacity: income of the middle class Commercial Infrastructure: density of telephone lines,

number of personal computers, density of paved roads,population per retail outlet, and other such characteristics

Economic Freedom: the degree to which governmentintervenes in business activities

Country Risk: degree of political risk



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Emerging Market Potential Index



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Challenges of Doing Business in Emerging Markets

Pol i t ical instabi l i ty corruption, weak legal systems,and unreliable government authorities increasebusiness risks and costs and hinder forecasting

Weak intellectual property p rotect ion discourages

producing or selling goods that entail valuable assets

Bureauc racy, red tape, and lack of transparency --burdensome rules, excessive requirements for

licenses, approvals, and paperwork; not accountablelegal and political systems. E.g., it may take years, ormany bribes, to obtain permissions to do business.China, India, and Russia are particularly problematic.



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Challenges in Emerging Markets (contd)

Poor physical infrastructureBasic infrastructuresuch ashigh-quality roads, drainage systems,sewers, and electrical utilitiesare often sorelylacking in emerging markets.

Partner avai labi l i ty and quali f icat ions givenemerging market challenges, foreign firms mayseek local partners, who provide access to markets,supplier and distributor networks, and keygovernment contacts. But qualified partners areoften hard to find or require much assistance toupgrade their abilities.



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Challenges in Emerging Markets (contd)

Dominance o f fam i ly conglomerates economies are often dominated by privately-owned,local companies that are highly diversified andcontrol supplies and employment. They are

common in South Korea (chaebols), India (businesshouses), Latin America (grupos), and Turkey(holding companies).



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Strategies for Doing Business in Emerging Markets

Custom ize Offer ing s to Un ique Emerging Market

Needs. Successful firms develop a deep understandingof the distinctive characteristics of buyers, local suppliers,and distribution channels in emerging markets, andcustomize offerings and business models accordingly.

Partner with a fam ily cong lomerateFCs can providevarious advantages, including financing, bank services,local suppliers, and distribution channels. FCs can help

reduce risks, time, and capital requirements; developrelationships with governments and other key players;and overcome infrastructure hurdles.



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Target governments, which buy enormousquantities of products, such as computers, furniture,office supplies, and motor vehicles, as well asservices. State enterprises operate in areas such as

railways, airlines, banking, oil, chemicals, and steel.

Ski l l ful ly Chal lenge Emerg ing Market

Compet i tors. New global challengers and other

emerging market firms possess various advantagesthat require skillful strategies and due diligence toovercome.

Strategies for Emerging Markets (contd)



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Strategies for Emerging Markets (contd)

Low-cost labor, skilled workforce, government support,and family conglomerates give emerging market firmsvarious advantages. Advanced economy firms must:

Conduct research to understand target markets andthe indigenous challengers;

Acquire new capabilities that build competitiveadvantage (e.g., develop new products, new ways ofdoing business, local alliances);

Leverage the same advantages in emerging marketsenjoyed by local firms (e.g., low-cost labor, skilledworkforce, cheap capital, key partnerships).


Catering to Emerging Market


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Catering to Emerging Market

Economic Development Needs

Increasingly, firms are involved in fostering economicdevelopment in emerging markets.

Assisting economic development may (or may not) bepart of efforts aimed at corporate social responsibility.

More commonly, doing business in emerging marketsmakes good business sense and generates big profits.

Helpful ventures include modernization projects (powerplants); infrastructure projects (highways); injections ofcapital (via microfinance); marketing consumerproducts (which leads to distribution channels, reducesprices, and creates jobs).


Foreign Firms Support


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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 millionsof 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 substantiallyincreased telecommunications infrastructure in Africa.



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Ethical Connections

Africa bears the burden of about one-quarter of alldisease worldwide, yet has only 3% of the worlds health

care workers. Most Africans cannot obtain medical care.

Every day, thousands die from treatable or preventableailments such as malaria and AIDS.

MNEs play a growing role to address such challenges.

Private firms such as GlaxoSmithKline and GeneralElectric use innovative business approaches to provide

needed medications and medical care to impoverishedcountries in Africa.

Numerous firms have established clinics that provide low-cost health care.


ib chapter 10 understanding emerging markets (1)

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