39 Strategic Issues in Emerging Economies

1.0 Introduction

The Term Emerging Market Economics (EME), the term was coined in 1981 by Antoine W. Van Agtmael of International Finance Corporation (IFC), World Bank. An EME describes the economic characteristic of a nation that is progressing toward becoming more advanced, through rapid economic growth and industrialization. These countries show expanding socio-economic growth, political stability and investment avenues for investors. Therefore, an EME has some characteristics of a developed market and has potential to become developed market in near future.

The increase of outward FDI from the developing countries is shaping the contour of international business and challenging the conventional wisdom that firms from emerging markets are less competitive.

Figure  1  shows  the  GDP  growth  among  the  developing  economies  per  capita  at  PPP.

As economic globalization has brought down trade and investment barriers and has connected far-flung countries in integrated global supply chains—and emerging markets seem to be converging with the world’s “rich industrial countries”—distinguishing these economies from developed markets may seem to matter less than before. We disagree. One fundamental premise of this book is that businesses still need to distinguish emerging markets—collectively from developed markets and individually from each other.

1.1.  National Competitive advantage of Emerging Market Economies (EME)

Figure 1: Determinants of National Competitive Advantage (Porter, 2002)

Every Emerging Market Economy has broad Country-specific advantages’ (CSAs) including Low-cost labor, high valued intangible assets (including Intellectual capital, patents etc).Which often results in the development of national competitive advantage as mentioned in figure 1, a balance between all determinants of National Competitive Advantages.

1.2. Definition of Emerging Market

Emerging markets can be defined as ‘‘low-income, rapid-growth countries using economic liberalization as their primary engine of growth’’.The increase of outward FDI from the developing countries is shaping the contour of international business and challenging the conventional wisdom that firms from emerging markets are less competitive.

1.3. Criteria for defining emerging market economy

The following Table illustrates the criteria(s) for defining emerging market economy

Category	Criteria
Poverty	Low-or middle-income country
	Low average living standards
	Not industries
Capital Markets	Low market capitalization relative in GDP
	Low Stock market turnover and few listed stocks
	Low sovereign debt ratings
Growth Potential	Economic liberalization
	Open to foreign investment
	Recent economic growth

1.4. Characteristics of Emerging Market Economies (EME)

Emerging markets Economies are the growth engine for world economy as whole. They also present a great opportunity for entrepreneurs/ investors in these countries to build the future.

Theoretically, Emerging Market Economies (EME) have lower per-capita incomes, above-average sociopolitical instability, higher unemployment, and lower levels of business or industrial activity relative to the developed countries (viz. North America, Western Europe and Japan). However, they also typically have much higher economic growth rates. Example of emerging economies is less developed nations throughout Asia, Africa, Eastern Europe and Latin America. The following are the characteristics of Emerging Market Economies (EME).

1.4.1. From income perspective, EME are economies with low to middle per capita income. Such countries constitute approximately 80% of the global population, and represent about 20% of the world’s economies.

1.4.2. From Business perspective, EMEs become the major outsourcing units for Production Service Operations and also getting leverages and benefits of liberal regulation and policies.

From Business risk perspective, EMEs are has higher risk as their stock are sensitive towards change in global interest rates. Emerging markets carries other risk including political and regulatory changes and currency fluctuations.

1.4.4. From economic growth perspective, Emerging markets are looking to sustain their growth. As a result, they tend to offer more capital gains opportunities than income opportunities. The majority of companies in emerging markets are choosing to invest extra cash back into the company rather than making substantial dividend payouts to their shareholders.

1.4.5. From Market Perspective, EMEs are assumed as important market locations as they contribute to the majority of world’s population and therefore, a better place for investment (e.g. China, India and Indonesia that contribute together for more than 40 percent of world’s population). Beside this, in recent years the proportion of global foreign direct investment (FDI) inflows to developing countries has increased from 18 percent in 1992 to 33 percent in 1996, when it exceeded $100 billion.

In last one decade few developing countries named as Emerging Market Economies (viz. Brazil, Russia, India and China etc.) has tremendously acquired position of driving forces as producers of goods and services, capital investments and marketplaces. The growth trend will persist for years to come due to the advantage of global capabilities which attract almost 25 percent of all global foreign direct investment (FDI) in EME. The economies show high growth potential that by 2050, the sum of the GDP of BRIC might surpass the sum of G6 countries’ GDP. The strategic Choices for investors/ entrepreneurs between developed markets and emerging market economies. Table 1explains the opportunities and strategic choices available in both cases.

Table 1: Strategic choice available to investors/entrepreneurs between Developed markets vis-à-vis Emerging Market Economy

1.5.  Potential of Emerging Market Economies over Developed Countries

Positioning emerging market firms required “right set “of strategies, which we define as the comprehensive set of plans and actions directed at leveraging and shaping sociopolitical and cultural institutions to obtain or retain competitive advantage. Relational strategies involve networking efforts to cultivate and manage dependency relationships with the government and key stakeholder groups. Infrastructure-building strategies address missing or inadequate regulatory, technological, and physical infrastructures that support business activities. Socio-cultural bridging strategies tackle socio-cultural and demographic issues that can hinder economic development and trade—for example, political and social unrest, illiteracy, poverty, and ethnic or religious conflicts. Emerging markets share same trends of economic development as developed nation does.

Table 1: Potential of BRIC over EU/US

1.6. Strategies to enter into Emerging Markets

Based on various advantages, there may be variety of strategies that can be adopted by firms to enter into emerging market economies. Few strategies are listed out in the Figure 1

Various parameters may be examined in order to evaluate the Strategic fitness of the Emerging market Economy (EME). Various important dimension covered during the evaluation are Capital Market, Labor Market, Product Market, Government Regulation and Contract enforcement. Table I explains various parameter in context to developed countries vis-à-vis emerging economy

2. Strategy perspectives of Emerging Market Economy

The central questions addressed by various theories majorly concern on question “why firms in emerging market economy are differ and how they achieve and sustain competitive advantage”. In order to understand how strategies work in the emerging market economies it are important to understand the underlined theories.

2.1. Institutional Theory Perspective

Institutional Theory examines the influence and impact of organizations that shape social and organizational behaviour. Various institutional forces affect organization’s processes and decision making and affect the institutional structure of the firm.

2.1.1 The organizations in the Emerging market economies are not merely acting as an autonomous agent seeking to maximize profit but also create a robust network of social stakeholders.

2.1.2. Social Perceptions of the firms enhance the legitimacy and institutionalization of the business and help firm to create brand value in the target market.

2.2. Transaction Cost Economics Perspective

2.2.1. Multivisional structure and vertical integration and strategic alliances.

2.2.2 Governance inseparability and unanticipated changes in bargaining power as constraints on firm choice, bringing varying risk preferences and trust into transaction cost economics and applying transaction cost economics to entrepreneurs.

2.2.3. Hybrid structures dominate both markets and hierarchies as the most efficient solution in emerging economies. It is difficult for emerging market firms to grow internally or through mergers and acquisitions owing to lack of property rights and unstable political structures. Networking as a hybrid strategy.

By pooling and coordinating resources, firms can achieve economies of scale and scope, and organizational learning can occur Network contracts and personal relations can be therefore be used to reduce uncertainty.

2.3. Resource based Perspective

2.3.1. Firm resources and capabilities can be differentiated on the basis of value, rareness, inimitability and substitutability.

2.3.2 In Emerging Market economies, local competitors may have developed capabilities for relationship-based management in their environment that substitute for the lack of institutional infrastructure.

3 Reasons why Emerging Market Economy has potential for investment

3.1 Firms Appreciate and reconcile cultural differences and started adjusting with Emerging Market economies.

3.2 Examine and react when and how to tolerate contradictions and when to reject them.

3.3 Consult with diverse management teams to understand the implications of headquarters-based decisions on other markets.

3.4 Understanding and establishing link between core values of the parent company, employee behaviour, management incentives that can be useful tool to strengthen the link.

3.5 Ensure diversified management team for better global presence and company’s geographical footprints.