Should the directive come to fruition, my role would be in danger, as the organisation believes that this service could be 'bought-in' to the organisation for considerably cheaper than it costs for me. Now I know that for a role such as mine, that client contact, both face to face, and via phone is a necessity. I know full well that the client would not be happy with a service manager running the service from a different county. But the overall organisational strategy may make our beliefs irrelevant.
What is an Emerging Market Economy?
In the globalised world of today, companies are often looking for new opportunities to develop and expand their products and services. One of the best methods of achieving this is to form a business alliance with, or in countries which have an emerging market economy. So what in reality are ‘Emerging Market Economies'?
The term was first used in 1981, by Antoine W. van Agtmael of the International Finance Corporation of the World Bank(1). Countries of varying sizes have economies that are classed as emerging. These countries are considered to be such due to the fact they have undergone either political or economical reforms, state intervention, privatisation, or the restructuring of its banking and finance.
The World Bank defines an emerging, or developing market economy, as one which has an ‘economy with low-middle per capita income’ (Luo, 2002). The strength of a country’s economy is measured by its income in the form of Gross Domestic Product (GDP), and the current GDP value, is less than $9656 per annum.
Fig 1: Source - World Bank
Figure 1 above, shows the comparison of a number of countries GDP rates, sampled in 2002. The GDP is the total value of goods and services produced by a nation per annum.
This graph, shows that Saudi Arabia, Mexico, Argentina, Russia, South Africa, Iran, Albania, China, Philippines, and Mali, all have a GDP of below $9656, and are therefore in the ‘low-middle’ economy bracket.
By the end of 2000, the classification of economies by income and region (see appendix one), showed that there were 162 countries in the low-middle income bracket at that time. Within this group, were a number of countries that are referred to as having an emerging market economy. The income classification, also defined by the World Bank is reviewed on an annual basis.
There are currently 232 countries categorised, and appendix two shows a sample of the ranking of certain countries – this is similar to the graph on the previous page. However, I have opted to show the top 5, bottom 5, and selected regions of note for comparison.
Interestingly, the United States is not the highest ranked country – a distinction that actually falls to Luxembourg. East Timor, is at the bottom of the scale, and has a GDP of only $400 per annum.
Geographically, (see figure 2) EME’s cover a vast and ever expanding area, from Central and Eastern Europe, to Central and East Asia, Latin America, Africa, and the Middle East.
Fig 2: Source - US Department of Commerce
According to Luo (2002), ten emerging markets are known as the ‘Big Ten’. These are:
- Argentina, Brazil, China, India, Indonesia, Mexico, Poland, South Africa, South Korea and Turkey.
The Economist magazine, however, view 25 emerging economies:
- The Big Ten + Chile, Colombia, the Czech Republic, Greece, Israel, Hong Kong, Hungary, Malaysia, Philippines, Portugal, Russia, Singapore, Taiwan, Thailand, Venezuela.
What surprises many people, is the size and perceived power of some of the countries classed as having an emerging market economy. For example, although China is deemed as one of the world’s economic powerhouses, it is talked of alongside much smaller economies with a great deal less resources, such as Tunisia.
Both China and Tunisia belong to this category because both have embarked on economic development and reform programs, and have begun to open up their markets and ‘emerge’ onto the global scene.
As can be seen in the lists above, many countries listed are now seen as 'target' countries for outsourcing services to. China, India, Indonesia, poland, Czech Repuiblic etc. These are the areas global corporations look at when considering moving their business outside of the UK. These countries, due to relative low wealth, can provide resources and services at a far lower rate than developing countries can.
In the following section of this report, I will concentrate on the importance of EME’s in the global markets of today, while in section four, I will be covering certain aspects that an organisation must consider if they are to attempt entry into an EME. Finally, I will summarise my findings in the conclusions section.
The Importance of Emerging Markets
Forecasts on emerging markets predict that in the next 20 years, there will be a swift rise in the output levels of developing nations, such as China, India, Mexico and Brazil (Cavisgil et al, 2002). In the global marketplace, emerging markets present many promising opportunities to corporations.
In developed markets, such as the United States and the United Kingdom, growth prospects are considerably smaller. This is due to either sluggish/slow growth as well as market saturation, and because of this companies are turning to emerging markets for business expansion.
Companies are also being challenged by foreign competition from emerging markets, which benefit from significantly lower operating costs. Competitive pressures such as these force many manufacturers to search elsewhere for new revenue sources and ways to cut costs, such as sourcing from emerging markets.
The response to these pressures by organisations in the developed world is extremely important and in relation to strategic planning and development, it can often determine the fate of a company for years to come (Brook, 1995).
Expanding into emerging markets can create significant benefits for organisations. It can enable a company to obtain lower total costs of production through incentives, such as government subsidies. Couple this with the potential for lower labour, raw material and overhead costs and you can see why EME’s are an attractive proposition.
Emerging markets now play a key role in shaping the global economy. The general outlook of many organisations is changing due to the success seen in emerging markets of challenging for a significant market share of global business.
Due to the economic growth encountered in emerging markets, and increasing corporate success for the global environment, emerging markets have become a key focus for personal and institutional investors, not just for international corporations (Choi et al., 1999a).
The obvious opportunities lie in markets with the fastest-growing economies, such as China, India, Southeast Asia, Russia and Eastern Europe. These countries often have resources valuable to the global marketplace, and their equal participation in this arena is a desirable asset to the future world economy.
A key development in recent years is that of the call centre. Call centre’s were heavily utilised in the 1990’s throughout the UK, but the emergence of certain developing countries such as India, led to many organisations setting up ‘off-shore’ call centre’s. HSBC were one of the first financial institutes to make the foray into India, and numerous institutes have followed.
India is one of the world's top 12 industrial nations and one of the fastest growing economies. The country is rich in natural resources, with agriculture employing two-thirds of its labour force, mainly in rice, tea, cotton, spices, cashew nuts, coffee and jute.
Manufacturing has also increased in importance over the last decade, and the key industries are steel, machinery, electronics and textiles. The government has focused on construction as the key to economic growth, and has invested in a number of industrial hubs to spur productivity.
In a recent announcement (see appendix three), BMW Group strengthened its international market strategy by formally entering the Indian market. The wide range of activities planned for the country includes the building of an assembly plant for BMW vehicles in southern India and establishing a sales subsidiary in Delhi. Ford and Hyundai also have plants in India, and this shows the market is opening up to key global players.
For a corporation to make an informed judgement regarding investing in such markets, it is imperative that they understand both the common and distinctive features of such countries and their markets. This is explained in further detail in the following section.
To give an indication of the importance of emerging markets, exports from the United States to EME’s exceed exports to the EU and Japan combined. The current emerging markets GDP is currently 25% of that of the developed world. However, this is expected to grow to 50% by 2010.
Developing countries are changing the way that the world trades, and have certainly sped up the globalisation of the world we know today. Emerging markets currently constitute approximately 4/5ths of the world’s population, and represent around 20% of the world’s economic activity(1).
However, predictions state that by the year 2020, globalisation is more likely to have a ‘non-westernised’ face, and by this time emerging countries could hold approximately 60% of the market share in economic activity(2).
For emerging countries, such investment is key to their growth, as it leads to rises in employment, refinement of labour and managerial skills, and the sharing and transfer of technology. In the long-run, the EME's overall production levels should rise, increasing its GDP and eventually lessening the gap between the emerged and emerging worlds.
Getting It Right – Key Considerations
As detailed earlier in this report, emerging markets present significant sources of cost reduction and make a compelling case for forming partnerships with suppliers in such countries. However, organisations are often caught out due to not being equipped well enough to manage the challenges and fundamental business risks that emerging markets can bring.
Entry into an emerging market is generally viewed as a ‘journey of discovery into the unknown’ and an attempt to discover new ways to do things, better than they have been done before (Hayek, 1980). This statement alone captures the feeling of most organisations when dealing with international markets for the first time.
A common problem faced by companies, is that many fall short when trying to apply standard practices within the emerging economy. Whilst these practices may work fine in developed markets, there are numerous factors which may deem them unusable in the developing country.
It is essential for an organisation to understand that when entering new, international markets, the research process should be far more rigorous than normal. Key to the process is to determine an entry strategy. These strategies are concerned about the where, when, and how companies should enter and invest in a foreign market.
According to Root (1994), effective entry strategies are also very important, because they can help determine an organisations future investment, operations, resource commitments, and their evolutionary path.
When preparing a venture into an emerging market, there are a number of key areas that need thorough review and consideration:
- Know the business culture
Undertaking business in a foreign country opens up the potential for misunderstandings due to lack of effective communication, or by not being aware of certain unstated rules.
Problems can also occur if you are uncertain of the people you are negotiating with, so it's advisable to find out as much as possible about your potential markets and its customs and cultures.
- Identify and analyse the following characteristics:
- Political stability
- Regulatory environment
- Local operating costs
- Skill of labour force
- Intellectual property protection
- Economic incentives offered
- Understand the tax implications of entering each specific market.
Different markets have different tax structures. In addition to this, different countries have unique import-export restrictions and other regulations that may impact the marketing or manufacture of a product.
For example, in China, the manner in which a relationship with a sourcing agent is established can substantially affect the overall impact of taxes on cost efficiency.
- Accurately and efficiently assess the capability of all target partners.
In addition to production capability and quality, the following factors must be assessed:
- Management capability
- Compliance
- Market strength
- Systems/IT infrastructure
- Ownership and governance
- Set up a successful internal system for monitoring
Effective communication and knowing the business culture will not ensure success unless you can effectively monitor your business. In emerging markets, widely dispersed operations with decentralised management, local staff and poor internal reporting systems can harm your efforts.
It is essential to demonstrate an ability to monitor the business as it operates in an emerging market. Otherwise your business could be prone to corruption, fraud or theft.
This involves hiring the right people, encouraging quality control and training managers who can both lead and examine the business at various stages.
Additional Risks
Risks are greater in emerging economies where the development and implementation of accounting practices are in their infancy. Regulatory regimes — when they do exist — are often in early stages of development. Companies can be subject to inconsistent applications of regulations, including taxes and employment-related issues.
In addition, conducting business in foreign countries often means being confronted with certain business practices that require sensitivity and tolerance. You may have to adopt certain means of doing business, or pay attention to a different "language of business."
You can easily remedy these situations by hiring an interpreter — if there's potential language risk in contracts or in conversation — or by seeking advice from a consultant familiar with that business culture.
A good example of an organisation that has had success in this area, is HSBC. The bank prides themselves on their knowledge that each country has different cultures, needs, and methods of carrying out business. They have run a very successful advertising campaign explaining the cultural differences throughout the globe.
The points and risks identified in the section are just a number of critical ones that must be researched thoroughly before entering a market. To be honest, these still apply even when entering a developed country, but their importance is greater when applied to emerging markets.
Conclusions
Although emerging economies may be able to look forward to brighter opportunities and offer new areas of investment for foreign and developed economies, local officials of EME’s need to consider the effects of an open economy on its citizens. Furthermore, organisations need to determine the risks when considering investing into an EME, as discussed in the previous section.
The process of emergence may be difficult, slow and often stagnant at times. And even though emerging markets have survived global and local challenges in the past, they had to overcome some large obstacles to do so.
The introduction and impact of, say, fast food and music videos to some local markets has been a by-product of foreign investment. Over the generations, this can change the very fabric of a society and if a population is not fully trusting of change, it may fight back hard to stop it.
However, the emerging markets present the greater growth opportunities for organisations today. And as long as the correct research and development are carried out in the target economy, and organisations work in tandem with the very country it wishes to invest in, then the benefits of it becoming a success within the emerging market far outweigh the risks of attempting entry.
References and Bibliography
Brook, C. (1995) The drive to global regions?, Oxford University Press: quoted in Kiely, R. and Marfleet, P. (1998) Globalisation and the Third World, Routledge Publishing, First Edition
Cavisgil, S. T., Ghauri, P.N., Agarwall, M.R. (2002) Doing Business in Emerging Markets: Entry and Negotiation Strategies, p71, Sage Publications Ltd
Choi. C.J, Lee, S.H., and Kim, J.B. (1999a) Countertrade and transaction governance in emerging economies pp 1-15: quoted in Millar, C.C.J.M., Grant, R.M., and Choi, C.J. (2000) International Business: Emerging Issues and Emerging Markets, Macmillan Press Ltd, Volume Six
Emerging Global Systems lecture. Held Wednesday 2nd November 2005
Economist Magazine (1998) Emerging Market Indicators, p94: quoted in Luo, Yadong (2002) ‘Multinational enterprises in emerging markets’, First edition, Copenhagen Business School Press
Hayek, F.A. (1980), Individualism and Economic Order, University of Chicago Press, quoted in Prasad, S.B. and Ghauri, P.N. (2004) Global Firms and Emerging Markets in an Age of Anxiety, Praeger Publishing
Luo, Yadong (2002) ‘Multinational enterprises in emerging markets’, First edition, Copenhagen Business School Press: pg 4-5
Root, F. R. (1994), Entry Strategies for International Markets, Lexington Books: quoted in Luo, Yadong (2002) ‘Multinational enterprises in emerging markets’, First edition, Copenhagen Business School Press
Web References
(1) What Is An Emerging Market Economy? -
last accessed 09/11/2005
(2) Mapping the Global future - last accessed 12/11/2005
(3) Classification of Economies by Income and Region, 2000 - last accessed 02/11/2005
(4) Rank Order - GDP - per capita - last accessed 02/11/2005
(5) BMW Press Release, 02/11/2005: -
Last accessed 21/11/2005
