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Learning Objectives 1. The distinction between advanced economies, developing economies, and emerging markets 2. What makes emerging markets attractive for international business 3. Estimating the true potential of emerging markets 4. Risks and challenges of doing business in emerging markets 5. Strategies for doing business in emerging markets 6. Catering to economic development needs of emerging markets and developing economies
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Advanced Economies
Mature state of industrial development; transitioned from manufacturing economies into service-based economies. Home to 14% of the worlds population, and account for half of world GDP, over half of world trade in products, and threequarters of world trade in services. Political systems- democratic, multiparty systems of government. Economic systems- typically based on capitalism, with relatively little government intervention in business. Serious purchasing power; few restrictions on international trade and investment. They host the world's largest MNEs. Example- Ireland, which has one of the worlds best performing economies, with much FDI from foreign manufacturers in high-tech industries such as Gateway.
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Developing Economies Low discretionary incomes, limited proportion of personal income spent on purchases other than food, clothing, and housing. In developing economies, 17% live on less than $1 per day; 40% live on less than $2 per day. The combination of low income and high birth rates tends to perpetuate poverty. 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.
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Developing Economies
Hindered by high infant mortality, malnutrition, short life expectancy, illiteracy, and poor education systems; correlates with economic development, the vicious cycle of poverty. Productivity is stagnant; living standards deteriorate. Debt- Governments in developing economies are often severely indebted- countries in Africa, Latin America, and South Asia have debt levels close to their annual GDP. Bureaucracy- much of Africas poverty is the result of government policies that discourage entrepreneurship, trade, and investment. Example- starting a new business: In sub-Saharan countries in Africa involves an average of 11 different approvals, and takes 62 days to complete. In advanced economies, takes an average of 6 approvals, and 17 days to complete.
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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 21st-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
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RDEs have rapidly growing markets, some of which are very large RDEs have low-cost resources Difficult operating environments at home produce some highly capable companies RDEs are training grounds for competing with global incumbents
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Six Strategic Globalization Patterns of the New Global Challengers from EMs 1. Taking RDE brands global (Chinas Hisense, taking consumer electronics to Africa) Turning RDE engineering into global innovation (Indias Wipro) Assuming global category leadership (Hong Kongs Johnson Electric) Monetizing RDE natural resources (Brazilian food processors Sadia and Perdiago) Rolling out new business models to multiple markets (Mexicos cement conglomerate Cemexs global acquisition strategy) Acquiring natural resources (Shanghai Baosteel group expanding globally to secure stable iron-ore supplies)
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Developing Economies Evolving into Emerging Markets European countries of Estonia, Latvia, Lithuania, Slovakia. Latin American countries of Costa Rica, Panama, and Uruguay. Kazakhstan, Nigeria, Vietnam, and the United Arab Emirates. Economic prosperity varies within emerging marketsthere are usually two sets of economies those in urban areas (more developed economic infrastructure) and those in rural areas (less discretionary income). 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.
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Transition Economies
Transition economies engaged in large-scale privatization of state-owned enterprises. Excessive regulation and entrenched government bureaucracy, now are introducing legal frameworks to protect business and consumer interests and ensure intellectual private property rights. Russia endured high inflation with annual price increases reaching 100%, hindering foreign investment and economic development. Shaking off the Soviet legacy required the country to restructure not just firms and institutions, but also adopt new values about private ownership, profits, intellectual property, etc. Initially, western companies doing business in Russia found it difficult to recruit managers who understand modern management practices.
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Intense Market Liberalization in Transition Economies Transition economies liberalized their markets- many foreign companies initiated trade and investment relationships with them. Privatization provided many opportunities for foreign firms to enter these markets by purchasing former state enterprises. In Eastern Europe, Western companies are leveraging inexpensive labor and other advantages in the region to manufacture products bound for export markets. Hungary, Poland, the Czech Republic, and other former East Bloc countries have made great strides in political and economic restructuring. These countries are well on their way to more advanced stages of economic development.
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Emerging Markets As Sourcing Destinations Outsourcing - procurement of selected valueadding activities, including production of intermediate goods or finished products, from independent, external suppliers. Helps foreign firms become more efficient, concentrate on their core competences, and obtain competitive advantage. Offshoring - when sourcing involves foreign suppliers or production bases. Global sourcing - refers to the procurement of products and services from foreign locations. Procurement can be from either independent suppliers or company-owned subsidiaries.
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Emerging Markets As Sourcing Destinations 3. Emerging markets as sourcing destinations MNEs have established call centers in Eastern Europe, India, and the Philippines. Dell and IBM outsource certain technological functions to knowledge workers in India. Intel and Microsoft have much of their programming activities performed in Bangalore, India. Investments from abroad benefit emerging markets as they lead to new jobs and production capacity, transfer of technology and linkages to the global marketplace.
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Market Potential Indicators Three practical approaches firms employ in assessing market potential of individual countries are:
per-capita income size of middle-class, and A mix of market potential indicators
Market potential may be assessed with aggregate country data, such as gross national income (GNI) or per-capita GDP, expressed in terms of a reference currency, such as the U.S. dollar.
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Purchasing Power Parity Adjustment to per capita GDP In relying on per capita GDP for comparison of different countries, one should use purchasing power parity exchange rates, rather than the market exchange rates. Purchasing power parity adjustment provides a more realistic indicator of purchasing power of consumers in emerging and developing economies. PPP adjusted per capita GDP more accurately represents the amount of products that consumers can buy in a given country, using their own currency and consistent with their own standard of living.
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1.36
+22
British Pound
1.99
4.01
1.71
2.01
+18
Japanese Yen
Chinese yuan
280
2.29
82.1
122
-33
11
1.45
3.23
7.60
-58
Norwegian kroner kr
40.0
6.88
11.7
5.81
+102
6.30
5.20
1.85
1.21
+53
15.5
2.22
4.55
6.97
-35
Russian ruble
52.0
2.03
15.2
25.6
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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. In emerging markets, the size and growth rate of the middle class serve as signals of a dynamic market economy 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.
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Progress of Emerging Markets in Building Their Middle Classes While India and Indonesia feature large middleclass 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. Brazil- middle class citizens control only about 35% of national income. 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.
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Challenges of Doing Business in EMs: Political Stability The absence of reliable government authorities adds to business costs, increases risks, and reduces managers ability to forecast business conditions. Political instability is associated with corruption and weak legal frameworks that discourage investment. Example- Russia- Bureaucratic practices favor well-connected, home-grown firms threaten the business activities of foreign firms, i.e. denying access to Russias energy resources- harming foreign investor confidence.
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Challenges of Doing Business in EMs: Partner Availability and Qualifications Foreign firms need to seek alliances with local partners in countries characterized by inadequate legal and political frameworksgaining access to local market knowledge, supplier and distributor networks, and key government contacts. Qualified business partners in emerging markets are not readily available. Often in emerging markets, one has to contend with second-best or third-best partner candidate, and provide much technical and managerial assistance to upgrade the partners capacity.
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Unilever and P&G sell Sunsilk and Pantene shampoo in India for less than $0.02 per mini-sachet. Narayana Hrudayalaya sells health insurance for less than $0.20 per person per month in India. Amul, one of Indias largest processed food companies, sells a wide range of food products to millions of poor people.
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