copyright © 2013 pearson education, inc. publishing as prentice hall 7-1 a framework for...

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

7-1

A Framework for International Business

by Cavusgil, Knight, & Riesenberger

Chapter 7: Emerging Markets, Developing Economies, and

Advanced Economies


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In this chapter, you’ll learn about:

1. Advanced economies, developing economies, and emerging markets

2. What makes emerging markets attractive for international business

3. Assessing the true potential of emerging markets

4. Risks and challenges of emerging markets

5. Strategies for doing business in emerging markets

Learning Objectives


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Key Concepts

• Advanced economies: Post-industrial countries with high per capita income, competitive industries, and developed commercial infrastructure; typically the richest countries, including Australia, Canada, Japan, the United States, and nations of Western Europe

• Developing economies: Low-income countries characterized by limited industrialization and stagnant economies; e.g., Bangladesh, Bolivia, and Zaire

• Emerging market economies: Former developing economies that achieved substantial industrialization, modernization, and remarkable economic growth; e.g., Indonesia, Mexico, Poland, and Turkey


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Key Differences Among the Three Major Country Groups


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Advanced Economies

• Well-developed economic systems

• Have largely evolved from manufacturing to service based

• Only 14% of the world’s population, but accounts for over ½ of world GDP, ½ of world trade in products, and ¾ of world trade in services

• Characterized by democratic, multiparty systems that are capitalistic


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Developing Economies

• Consumers have low incomes

• About 17% live on less than $1/day and 40% live on < $2/day

• Often have rich historical and cultural backgrounds, but also have short life expectancy, significant malnutrition, and poor educational systems

• Common for debt levels to approach or exceed annual GDP and tough to initiate new business


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Trade Conditions Among Major Groups of Economies

Trade Condition

Advanced Economies

Developing Economies

Emerging Markets

Industry Highly developed

Poor Rapidly improving

Competition Substantial Limited Moderate but increasing

Trade Barriers Minimal Moderate to high

Rapidly liberalizing

Trade Volume

High Low High

Inward FDI High Low Moderate to high


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Emerging Market Economies

• Countries with rising economic aspirations that enjoy rapidly growing standards of living

• Evolving toward wealthy nation status; rapidly improving living standards & growing middle class

• Importance in the world economy is increasing as attractive destinations for exports, FDI, and sourcing

• Examples: Hong Kong, Israel, Saudi Arabia, Singapore, South Korea, and Taiwan have developed beyond the emerging market stage


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Emerging Market Economies (cont.)

• Prosperity varies within countries - often seen as wealthy urban & less developed, poorer rural

• Some have evolved from centrally planned economies to liberalized markets – transition economies (e.g., China, Russia).

• Privatization – the process of transferring state-owned enterprises to private concerns; common within emerging market economies


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Emerging Markets as % of World Total


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Emerging Markets as a Percent of World Total


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Features of Emerging Markets

• Enjoyed an average annual GDP growth rate of 7%

• While most were affected by global recession and financial crisis, average growth rate remains strong


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GDP Growth Rates in Advanced Economies and Emerging Markets


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The New Global Challengers

• These are top firms from emerging markets that are fast becoming key contenders in world markets

• The challengers are displacing traditional MNEs from the advanced economies & are becoming key competitors around the globe

• In Forbes top 2,000 global firms, a total of 117 MNEs entered the list between 2004 and 2008 from China, India, Brazil, Russia, & other emerging markets

• By 2010, China alone had 54 companies in Global 500


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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 care services, and countless other products

• Many exhibit high economic growth rates

2. Emerging markets as manufacturing bases

• Many are home to low-wage, high-quality labor for manufacturing and assembly operations

• Many have large reserves of raw materials and natural resources, e.g., South Africa, Brazil, Russia


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What Makes Emerging Markets Attractive? (cont.)

3. Emerging markets as sourcing destinations

• 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 programming activity performed in Bangalore, India

• Investments from abroad benefit emerging

markets: They lead to new jobs and production

capacity, transfer of technology, and linkages to

the global marketplace


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Estimating the Potential of Emerging Markets

• Estimations are challenging because of the peculiar economic and social environments in these countries:

• Limited availability and reliability of data

• Market research can be very costly and less precise when compared to the advanced economies

• Market potential indicators include: GDP growth rate, income distribution, commercial infrastructure, unemployment rate, anddiscretionary spending


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Purchasing Power Parity (PPP)Adjustment to Per Capita GDP

• When relying on per capita GDP for comparison of different countries, one should use PPP exchange rates rather than the market exchange rates

• PPP adjustment provides a more realistic indicator of the purchasing power of consumers in emerging and developing economies

• PPP adjusted per capita GDP represents the

amount of products consumers can buy in a

given country, using their own currency &

consistent with their own standards of living


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Difference in Per Capita GDPin Conventional and PPP Terms


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Middle-Class As an Indicator of Market Potential


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Challenges of Doing Businessin Emerging Markets

• Political stability: Corruption, weak legal systems, and unreliable government authorities increase business risks and costs and hinder forecasting

• Weak intellectual property protection: Discourages producing or selling goods that entail valuable assets

• Bureaucracy, red tape, and lack of transparency: Burdensome rules, excessive requirements for licenses, approvals, and paperwork; legal and political systems without accountability. For example, it may take years, or many bribes, to obtain permissions to do business. China, India, and Russia are particularly problematic


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Challenges of Doing Businessin Emerging Markets (cont.)

• Poor physical infrastructure: Basic elements of infrastructure, such as high-quality roads, drainage systems, sewers, and electrical utilities, are often sorely lacking in emerging markets

• Partner availability and qualifications: Given emerging market challenges, foreign firms might seek local partners to provide access to markets, supplier and distributor networks, and key government contacts. However, qualified partners are often difficult to find or require much assistance to upgrade their abilities


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Challenges of Doing Businessin Emerging Markets (cont.)

• Dominance of family conglomerates: Economies are often dominated by privately owned local companies that are highly diversified and control supplies and employment. These are common in South Korea (chaebols), India (business houses), Latin America (grupos), and Turkey (holding companies)


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Examples of Leading Family Conglomerates


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Strategies for Doing Businessin Emerging Markets

• Customize offerings to unique emerging market needs. Successful firms develop a deep understanding of the distinctive characteristics of buyers, local suppliers, and distribution channels in emerging markets, and customize offerings and business models accordingly

• Partner with a family conglomerate. FCs can provide various advantages, including financing, bank services, local suppliers, and distribution channels. FCs can help reduce risk, time, and capital requirements; develop relationships with governments and other key players; and overcome infrastructure hurdles


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• Target governments. Governments buy enormous quantities of products, such as computers, furniture, office supplies, and motor vehicles, as well as services. State enterprises operate in areas such as railways, airlines, banking, oil, chemicals, and steel

• Public sector buyers regularly announce tenders – formal offers to purchase certain products or services

• A tender is also known as a request for proposals (RFPs).

Strategies for Emerging Markets (cont.)


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