International Business Strategy, Management & the New Realities by Cavusgil, Knight and Riesenberger

1. International BusinessStrategy, Management & the New Realitiesby Cavusgil, Knight and Riesenberger Chapter 9 Understanding Emerging Markets International Business: Strategy, Management, and the New Realities

2. Classifying Countries based on Economic Development Advanced economies: post-industrial countries characterized by high 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 by limited industrialization and stagnant economies. E.g., most low income countries in Africa, Latin America, and Asia, such as Bangladesh, Nicaragua and Zaire. Emerging market economies: a subset of former developing economies that have achieved substantial industrialization, modernization, improved living standards, and remarkable economic growth. They are some 27 countries in East and South Asia, Latin America, Middle East and Eastern Europe. Examples: Brazil, Russia, India, China. International Business: Strategy, Management, and the New Realities

6. Advanced Economies • Mature state of industrial development; transitioned from manufacturing economies into service-based economies • Home to 14% of the world’s population, and account for half 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 International Business: Strategy, Management, and the New Realities

7. Developing Economies • Low discretionary incomes; limited proportion of personal income spent on purchases other than food, 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 International Business: Strategy, Management, and the New Realities

8. Developing Economies (cont’d) • Hindered by high infant mortality, malnutrition, short life expectancy, illiteracy, and poor education systems; correlates with vicious cycle of poverty. • Productivity. Stagnant; living standards deteriorate, particular in countries with high population growth rates • Debt. Governments are often severely indebted. Countries in Africa, Latin America, and South Asia have debt levels close to their annual GDP. • Bureaucracy. Much of Africa’s 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. International Business: Strategy, Management, and the New Realities

10. Emerging Market Economies (‘Emerging Markets’) • Most distinguishing characteristic: countries are enjoying rapidly improving living standards and a growing middle class with rising economic aspirations. Evolving towards wealthy nation status. • Importance in the world economy is increasing as attractive destinations for exports, FDI, and sourcing. • Account for over 40% of world GDP, over 30% of exports, and receive over 20% of FDI. • In mid-2000s, collectively had average annual GDP growth rate of nearly 7%, much faster than advanced economies • Benefit from low-cost labor, knowledge workers, low-cost capital, government support, and powerful conglomerates 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, 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 International Business: Strategy, Management, and the New Realities

14. 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-scale privatization of state-owned enterprises • Have made great strides in political and economic restructuring • Introducing legal frameworks to protect business and consumer interests and ensure intellectual property rights • Initially, western companies had a hard time recruiting managers who understand modern management practices International Business: Strategy, Management, and the New Realities

15. Opportunities for Foreign Firms in China • Foreign firms can profit from China’s (i) low-cost labor and (ii) growing affluence • Many foreign companies set up manufacturing facilities and marketing subsidiaries, but success is slow. • Wal-Mart sourced over $30 billion of merchandise from China in 2007, providing huge cost savings • Large consumer segment: 250 million ‘middle-class’ residents • Success requires deep understanding of the market and long-term commitment: Coca-Cola, General Motors, McDonald's, Motorola, Airbus, and Volkswagen are leading examples. • Challenges: Disparate rates of development between coastal areas vs. west China; poverty; environmental degradation 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, and sophisticated technology • Textile machinery industry in India is huge • Oil and gas exploration are big in Russia • Agriculture is a major sector in China. International Business: Strategy, Management, and the New Realities

17. What Makes Emerging Markets Attractive? (cont’d) 2. Emerging markets as manufacturing bases • Home to low-wage, high-quality labor for manufacturing and 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 for Japanese 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 electronics and auto assembly International Business: Strategy, Management, and the New Realities

18. What Makes Emerging Markets Attractive? (cont’d) 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 done in Bangalore, India. International Business: Strategy, Management, and the New Realities

19. 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 International Business: Strategy, Management, and the New Realities

20. Purchasing Power Parity Adjustment to per capita GDP • Compared to per-capita GDP adjusted for current exchange rates, purchasing power parity adjustment provide 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. International Business: Strategy, Management, and the New Realities

23. Emerging Market Potential Index (EMPI) The EMPI combines factors that provide firms with a realistic measure of export market potential: • Market Size: the country’s population, especially urban population • Market Growth Rate: the country’s real GDP growth rate • Market Intensity: private consumption and GNI represent discretionary expenditures of citizens • Market Consumption Capacity: The percentage share of income held by the country’s middle class • Commercial Infrastructure: characteristicssuch 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 country’s inclination to trade with the exporter’s country as estimated by the volume of imports • Country Risk: the degree of political risk International Business: Strategy, Management, and the New Realities

25. Challenges of Doing Business in Emerging Markets Political stability • Absence of reliable government authorities increases business costs and risks, and reduces ability to forecast business conditions. • Corruption and weak legal frameworks • E.g., Argentina, Indonesia, Russia, and Venezuela experience substantial corruption. International Business: Strategy, Management, and the New Realities

26. Challenges of Emerging Markets (cont’d) Weak intellectual property protection • Even if they exist, laws that safeguard intellectual property rights may not be enforced, or the judicial process may be painfully slow. • E.g., in China, Indonesia and Russia, counterfeiting is common, especially of software, DVDs, CDs. In India, weak patent laws discourage investment by foreign firms. International Business: Strategy, Management, and the New Realities

27. Challenges of Emerging Markets (cont’d) Bureaucracy and lack of transparency • Burdensome administrative rules, as well as excessive requirements for licenses, approvals, and paperwork, delay business activities. • Lack of transparency implies that legal and political systems are not open and accountable. Lack of transparency is associated with corruption. International Business: Strategy, Management, and the New Realities

28. Challenges of Emerging Markets (cont’d) Partner availability and qualifications • Alliances with local partners helps gain access to local markets, supplier and distributor networks, and key government contacts. May be critical in complex markets. • But qualified business partners are not readily available. International Business: Strategy, Management, and the New Realities

29. Challenges of Emerging Markets (cont’d) Dominance of family conglomerates • Large, highly diversified, privately-owned firms that control much economic activity and jobs in emerging markets. Enjoy government support, extensive networks, access to capital, market knowledge. • South Korea – chaebols; the top 30 FCs account for nearly half the assets and industry revenues in the Korean economy. Samsung, the most famous Korean FC, has annual revenues of $140 billion. • India – business houses • Latin America – grupos International Business: Strategy, Management, and the New Realities

30. International Business: Strategy, Management, and the New Realities

31. Examples of Partnering with Family Conglomerates • Ford partnered with Kia to introduce the Sable line of cars in South Korea, leveraging Kia's strong distribution and after-service network. • Digital Equipment Corporation (DEC) designated Tatung the main distributor of its workstations and client-server products in Taiwan, leveraging Tatung's local experience and distribution network. • Danone (French producer of Dannon yogurt and Evian bottled water) entered a joint venture with Sabanci in Turkey, leveraging Sabanci’s distributors, retailers and knowledge of the market. International Business: Strategy, Management, and the New Realities

32. Managerial Strategies: Marketing to Governments • In Emerging Markets, government agencies and state-owned enterprises are important, well-financed customers • Governments buy enormous quantities of products (such as computers, furniture, office supplies, and motor vehicles) and services (such as architectural, legal, and consulting services). • State enterprises operate in areas such as railways, airlines, banking, oil, chemicals and steel, and buy from foreign suppliers. • E.g., the Three Gorges Dam in China was built by firms such as ABB, Hitachi, Kvaerner, Siemens, and GE. International Business: Strategy, Management, and the New Realities

33. Major International Contractors Target Major Government Projects

34. Innovative Solutions to Local Economic Development • MNEs are involved in fostering economic development, via profitable microfinance, modernization projects, development of distribution channels and other infrastructure projects, targeting the Bottom of the Pyramid. • Unilever and P&G sell Sunsilk and Pantene shampoo in India for $0.02 per mini-sachet. • Narayana Hrudayalaya sells health insurance for less than $0.20 per person per month in India. • Amul, one of India’s largest processed food companies, sells various food products to millions of poor people. International Business: Strategy, Management, and the New Realities