Emerging Markets

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 Emerging Markets – a view
• In the 1970s, "less developed countries" (LDCs) was the common term for
markets that were less "developed“

• These markets were supposed to provide greater potential for profit but also
more risk from various factors like patent infringement

• LDC was replaced by ther term “Emerging Markets” originally coined in 1981 by
then World Bank economist Antoine Van Agtmael

• Political scientist Ian Bremmer defines an emerging market as "a country where
politics matters at least as much as economics to the markets". [11]

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• In 2009, Dr. Kvint published this definition:

"an emerging market country is a society transitioning from a

dictatorship to a free-market-oriented-economy, with
increasing economic freedom, gradual integration with the
Global Marketplace and with other members of the GEM
(Global Emerging Market), an expanding middle class,
improving standards of living, social stability and tolerance, as
well as an increase in cooperation with multilateral
institutions"

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 Learning Objectives
• To understand the special concerns that must be
considered by the international manager dealing with
emerging market economies

• To survey the vast opportunities for trade offered by

emerging market economies

• To understand why economic change is difficult and requires

much adjustment

• To become aware that privatization offers new opportunities

for international trade and investment. 4
Emerging Economies

• BRIC

• N11

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BRIC
• O'Neill coined the term "BRIC" in 2001 in "The
World Needs Better Economic BRICs", a paper
written for Goldman Sachs's "Global Economic
Paper" series, on the four emerging "BRIC"
economies Brazil, Russia, India, and China

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 N11
• The Next Eleven (known also by the numeronym N-11) are the eleven countries
–

• Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria

• Pakistan,Philippines, South Korea, Turkey, and Vietnam

identified by Jim O'Neill in a research paper as having a high potential of becoming, along with
the BRICS countries, among the world's largest economies in the 21st century.[ The bank chose
these states, all with promising outlooks for investment and future growth, on 12 December 2005

• The criteria used were macroeconomic stability, political maturity, openness of

trade and investment policies, and the quality of education

• The N-11 is a follow-up to the four emerging "BRIC" economies

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 Doing Business with Transition
Economies
• The major market economies
emerging out of formerly centrally
planned economies are:
• Russia and the now independent states of
the former Soviet Union.
• Eastern and central European nations
(Albania, Bulgaria, the Czech and Slovak
Republics, Hungary, Poland, and Romania).

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 The Trade History of Socialist
Countries
• After 1918, Socialist states had a monopoly on foreign
trade, which was concentrated in the hands of
organizations specifically authorized by the state.
• This trade structure isolated the firms and consumers from
the West and unlinked demand from supply.
• The result was misallocated resources, ineffective channels
of distribution, and inefficiency due to lack of competition.
• Managers of plants were more concerned with producing
the quantities stipulated by a rigid central plan than with
producing products and quality desired.

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 Perestroika and Glasnost
• In the mid 1980’s, the Soviet Union developed two new
political and economic programs: perestroika and
glasnost
• Perestroika was used to fundamentally reform the Soviet
Union economy by improving the overall technological and
industrial base as well as the quality of life for Soviet citizens
through increased availability of food, housing, and
consumer goods.
• Glasnost was used to complement those efforts by
encouraging the free exchange of ideas and discussion of
problems, pluralistic participation in decision-making, and
increased availability of information.

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 Changes after 1989
• With an unexpected suddenness, the Iron Curtain
disappeared, and within three years, the
Communist empire ceased to exist
• Eastern Europe and the former Soviet Union
shifted their political and economic orientations
toward a market economy.
• Trade flows were redirected.
• Austerity programs were introduced, which led to a
decrease in the standard of living.
• All of these changes ended the Cold War.

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The Realities of Economic Change
• Many transition economies face infrastructure shortages

• Capital shortages are also a major constraint

• It is difficult for corporations to respond to demand because

consumer knowledge is vague

• Allocation mentality, or waiting for instructions from above,

represent a management problem

• Employee and manager commitment improbable

• Global changes complicate managerial decision making. 12

 The Realities of Economic Change
Given the poor market orientation in the previous business
environment, organizations must adapt their behavior in these
areas:

Problem Solving

Decision Making

Customer Orientation
Team Building Development
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 Adjusting to Global Change
• Resistance to change should be expected in
countries that experience rapid economic and
political change

• The established market economies of the West

also must be prepared for change due to:
• The reorientation trade flows
• Job shifts
• Declines in employment

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International Business Challenges
• The frequent unavailability of convertible currency makes
many products out of reach for citizens of emerging market
economies
• Lack of protection of intellectual property rights dissuade
firms from investing in emerging market economies
• Attempting to source products from emerging market
economies can be problematic
• The quality of products can be inferior in emerging market
economies

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International Business Opportunities
• Some transition economies have products that
are unique in performance and can be
successfully traded internationally

• Consumer products in transition economies

are gaining favor because of competitive
pricing

• There are substantial opportunities for

technology transfer

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Reasons for State-owned Enterprises
• The reasons for the existence of state-owned enterprises
in emerging market economies are:
• Increased national security
• Increased economic security
• The investment is too large for the private sector
• Governments rescue failing private enterprises by placing
them in government ownership
• State-owned firms are more socially-oriented than private
firms which are more profit-oriented

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 State-owned Enterprises and
International Business
The three types of activities where firms are likely to
encounter state-owned enterprises:

The Sourcing or
Marketing Process

International
Market Entry
Competition

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 Drawbacks to State-owned
Enterprises
• Competition is restrained, which results in lower
quality of goods and reduced innovation.
• The international competitiveness of state-owned
enterprises declines, resulting in the need for
government subsidies.
• Many government-controlled corporations are losing
money because the focus is on job allocation rather
than business.

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 Reasons for Privatization
• Through privatization, budgets can be reduced and more
efficient services can be provided.
• Goods and services can be more competitive and
innovative.
• Experience indicates that private enterprises outperform
state-run companies.
• Privatization attracts foreign investment capital.
• Governments can use proceeds from privatization to help
fund other pressing domestic needs.

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 Privatization Opportunities
for International Firms
• Existing firms can be acquired at low cost, often with
governmental support through tax exemptions, investment
grants, special depreciation allowances, and low-interest
credits

• Since wages are low in countries where privatization takes

place, there is more opportunity to build low-cost
manufacturing and sourcing bases

• The international firm can act as a catalyst by accelerating

the pace of transferring business skills and technology and
by boosting trade prospects.
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 The Less-developed Markets
• The less developed markets in the world
include countries in:
• Africa
• Asia
• Eastern Europe
• Latin America
• the Middle East

• The emergence of these markets

presents a great opportunity for citizens
and companies alike

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 The World Economic Pyramid

Annual Per Capita Income Tiers World Population

More than $20,000 1 75 to 100 million

1.5 to 1.75
$1,500 to $20,000 2 and 3
billion

Less than $1,500 4 4 billion

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 Multinational Firm’s Role
• Multinational firms have experienced a high rate of
success when entering transition economies for
several reasons:
• They tend to enter sectors that allow high profit
potential with minimal capital investments
• They increase in size only after they gain experience
and knowledge of the local markets
• The governments in transition economies award special
privileges to multinational firms
• As multinational firms mature in these economies, the
domestic market itself becomes a market opportunity

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 World-class Competition
• Many economies now recognize that they must be world
class competitors in order to develop businesses

• Domestic firms enter into joint ventures with global firms

to tap into their knowledge base and success

• This can be difficult, given that domestic firms rarely have

significant capital to contribute.

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OK for the day.

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