International Business: The New Realities
Fifth Edition, Global Edition
Chapter 8
Understanding Emerging
Markets
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Learning Objectives
8.1 Understand advanced economies, developing economies,
and emerging markets.
8.2 Know what makes emerging markets attractive for
international business.
8.3 Learn how to assess the true potential of emerging markets.
8.4 Evaluate the risks and challenges of emerging markets.
8.5 Learn the success strategies for emerging markets.
8.6 Understand corporate social responsibility, sustainability,
and the crisis of global poverty.
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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, United States, and nations
of Western Europe.
• Developing economies: Low-income countries characterized
by limited industrialization and stagnant economies. e.g.
Bangladesh, Bolivia, Zaire.
• Emerging market economies: Former developing economies
that achieved substantial industrialization, modernization, and
remarkable economic growth. E.g., Indonesia, Mexico, Poland,
Turkey, Malaysia (The Star, 28 Nov 2018: Bloomberg) and
Vietnam.
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The ‘BRIC’ Countries
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Key Differences Among the Three Major
Country Groups (1 of 2)
Dimension Advanced Developing Emerging
Economies Economies Markets
Representative Canada, France, Angola, Bolivia, Brazil, China,
Countries
Japan, U.K., Nigeria, India, Indonesia,
U.S.A. Bangladesh Turkey
Approximate 35 125 30
Number of
Countries
Population (% of 13% 32% 55%
world)
Approximate $44,400 $3,650 $13,830
Average Per-Capita
Income (U .S.
dollars; PPP basis)
Approximate Share 45% 5% 50%
of World GDP (PPP
basis)
Sources: Adapted from World Bank at [Link] and International Monetary Fund at [Link]
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Key Differences Among the Three Major
Country Groups (2 of 2)
Dimension Advanced Developing Emerging Markets
Economies Economies
Population 1,040 2,380 4,180
(millions)
Telephone Lines 1,700 680 1,100
per 1,000 People
(fixed and mobile)
Secure Internet 1,287 12 72
Servers per
1,000,000 People
Internet Users per 902 365 576
1,000 People
Motor vehicles per 602 60 230
1,000 people
Sources: Adapted from World Bank at [Link] and International Monetary Fund at [Link]
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Emerging Market Economies
• About 30 countries with rising economic aspirations that
enjoy rapidly growing standards of living.
• Evolving towards wealthy nation status.
• Importance in the world economy is increasing as
attractive destinations for exports, FDI, and sourcing.
• Most distinguishing characteristic- countries are enjoying
rapidly improving living standards and a growing middle
class with rising economic aspirations.
• Mid-2000s, the emerging markets collectively enjoyed an
average annual GDP growth rate of nearly 7 percent, a
remarkable feat.
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Trade Conditions in the Major Country
Groups The trade conditions
are getting better
Trade Advanced Developing Emerging Markets
Condition Economies Economies
Industry Highly developed Poor Rapidly improving
Competition Substantial Limited Substantial
Trade Barriers Minimal Moderate to Moderate
high
Trade Volume High Low High
Inward FDI High Low Moderate to High
Sources: Based on International Monetary Fund at [Link] ; World Bank, 2018, at
[Link] ; and Central Intelligence Agency, World Factbook, 2018,
[Link]
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National Characteristics of Major Country
Groups The conditions are
getting better
Characteristic Advanced Economies Developing Emerging Markets
Economies
Median Age of 39 years 24 years 32 years
Citizens
Major Sector Focus Services, branded Agriculture, Manufacturing, some
products commodities services
Economic and Free or mostly free Mostly repressed Moderately free or
Political Freedom mostly not free
Economic/Political Market Command or Mixed Mixed
System
Regulatory Minimal regulations Highly regulated, Achieved much economic
Environment burdensome liberalization
Country Risk Low moderate to high Variable
Intellectual Strong Weak Moderate and
Property Improving
Infrastructure Well-developed Inadequate Moderate, improving
Sources: Based on International Monetary Fund at [Link]
and Central Intelligence Agency, World Factbook, [Link]
2018,
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Estimated Total Contribution to World G D P, 2000 Through
2020, in Billions of U S Dollars and as a % of World G D P
Source: Based on International Monetary Fund, World Economic Outlook Database, 2018.
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Emerging Market Global Challengers
Country Example Multinational Representative Industries
Firms
Brazil Brasil Foods, Embraer, Natura Food Processor, Aerospace,
Cosmetics Cosmetics
China Alibaba Groups, Huawei E-commerce, Information and
Technologies, Lenovo Group communications technology,
Computer Technology
India Bharti Airtel, Infosys, Tata Motors Telecommunication Services,
Technology Consulting,
Automotive
Mexico America Movil, Cemex, Grupo Telecommunication, Building
Bimbo Materials, Baking, Snacks
Russia Gazprom, Lukoil, Severstal Natural Gas, Oil, Steel and
mining
Turkey Koc Holding, Sabanci Holding, Industrial, Industrial and
Yildiz holding financial, confectionary
Source: Based on Boston Consulting Group 2014, September 10, “Meet the 2014 BCG Global Challengers.”
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China: Growing Role in International
Business
• Huge population; rapidly growing economy; big importer.
• Began pursuing market reforms in the late 1970s.
• Achieved explosive economic growth, quadrupling its
GDP during the succeeding 30 years.
• China is already the world’s second-largest economy, but
has poor business infrastructure.
• China buys one-third of the world’s coal, cotton, fish, and
rice; one-quarter of the world’s steel; and one-half its
pork.
• But China endures serious problems of air, water, and land
pollution; has 8 of the world’s top 10 polluted cities.
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What Makes Emerging Markets
Attractive? (1 of 2)
• 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.
• 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, Brazil, Russia.
– Astra International in Indonesia is producing Honda
brand vehicles
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What Makes Emerging Markets
Attractive? (2 of 2)
• Emerging Markets as Sourcing Destinations
– The procurement of products or services from independent
suppliers or company-owned subsidiaries located abroad for
consumption in the home country or a third country
– Many companies subcontract their noncore business activities
to specialized suppliers, a trend known as outsourcing, the
procurement of selected value-chain activities.
– MNEs have established numerous call centers in eastern
Europe, India, the Philippines, and elsewhere.
– Intel and Microsoft have much of their programming activities
performed in Bangalore, India.
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Key Criteria for Assessing the Attractiveness of
Emerging Markets and Developing Economies
• Market Size: The country’s population, especially those living
in urban areas.
• Market Growth Rate: The country’s real GDP growth rate.
• Market Consumption Capacity: Income of the middle class.
• Commercial Infrastructure: Density of telephone lines, number
of personal computers, density of paved roads, population per
retail outlet, and other such characteristics.
• Economic Freedom: The degree to which government
intervenes in business activities.
• Country Risk: Degree of political and macroeconomic risk.
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Challenges of Doing Business in Emerging
Markets
• Political instability - 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; not accountable legal and
political systems. e.g., 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 Business in Emerging
Markets
• Poor physical infrastructure - Lower quality roads,
drainage systems, sewers, and electrical utilities are often
a factor in emerging markets. For example, India’s ports,
roads, railways, and airports are insufficient to handle the
massive volumes of cargo that enter and leave the
country every day.
• Partner availability and qualifications - MNEs that
seek alliances with well-qualified local companies may
find such partners in short supply in emerging markets.
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Challenges of Doing Business in Emerging
Markets
• Resistance from family
conglomerates -
Economies may be
dominated by privately-
owned local firms that are
highly diversified, and
control supplies and
employment. Common in
South Korea (chaebols),
India (business houses),
Latin America (grupos),
and Turkey (holding
companies).
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Strategies for Doing Business in 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 Family Conglomerates - FCs can provide
various advantages, including financing, bank services,
local suppliers, and distribution channels. FCs can help
reduce risks, time, and capital requirements; develop
relationships with governments and other key players;
and overcome infrastructure hurdles.i.e Honda and Astra
International in Indonesia
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Strategies for Doing Business in Emerging
Markets (2 of 3)
• Target 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.
• Skillfully Challenge
Emerging Market
Competitors - New global
challengers and other
emerging market firms
possess various advantages
that require skillful strategies
and due diligence to
overcome.
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Strategies for Doing Business in Emerging
Markets (3 of 3)
• Low-cost labor, skilled workforce, government support,
and family conglomerates give emerging market firms
various advantages. Advanced economy firms must:
– Conduct research to understand target markets and
the indigenous challengers.
– Acquire new capabilities that build competitive
advantage (e.g., develop new products, new ways of
doing business, local alliances).
– Leverage the same advantages in emerging markets
enjoyed by local firms (e.g., low-cost labor, skilled
workforce, cheap capital, key partnerships).
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THE END
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Self-study
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Key Concepts of Emerging Markets
• Outsourcing: The procurement of selected value-chain
activities, including production of intermediate goods or
finished products, from independent suppliers.
• Global sourcing: The procurement of products or
services from independent suppliers or company-owned
subsidiaries located abroad for consumption in the home
country or a third country.
• Purchasing power parity (PPP): An adjustment for
prices that reflects the number of goods that consumers
can buy in their home country, using their own currency
and consistent with their own standard of living.
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The New Global Challengers (1 of 2)
• Some 100 companies from emerging markets are poised
to become important 21st-century multinationals.
Examples
• Brazil: Embraer, Sadia & Perdigao, Natura
• Mexico: America Movil, Grupo Modelo
• India: Ranbaxy, Infosys, Tata Tea, WIPRO
• China: Galanz, Haier, Chunlan Group Corp., Lenovo,
Pearl River Piano
• Turkey: Koc Holding, Vestel & Sisecam
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The New Global Challengers (2 of 2)
• The New Global Challengers benefit from
• Emerging Markets:
– Rapidly growing markets, some of which are large.
– Low-cost labor.
– Training grounds for
competing with global
incumbents.
– Complex operating
environments, which
produce some very
capable firms.
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Purchasing Power Parity (PP P)
Adjustment to Per Capita GDP
• In 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
purchasing power of consumers in emerging and
developing economies.
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Difference in Per Capita GDP, in
Conventional and PPP Terms
Country Per-Capita GDP, Converted Per-Capita GDP, Converted
Using Market Exchange Using PPP Exchange Rates
Rates
Brazil $10,515 $15,919
China 9,377 17,943
India 1,989 7,750
Mexico 10,021 20,028
Poland 15,050 30,827
Russia 10,630 28,918
South Africa 6,292 13,591
South Korea 30,919 41,173
Turkey 11,125 27,635
Vietnam 2,482 7,378
United States 61,687 61,687
Source: Based on data from International Monetary Fund, World Economic Outlook Database, 2018
( [Link] )
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The Big Mac Index
Source: Based on The Economist, “The Big Mac Index,” January 17,
2018, [Link]
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Additional Concepts
• Transition economies: A subset of emerging markets that evolved
from centrally planned economies into liberalized markets.
• Privatization: Transfer of state-owned industries to private
concerns.
• New global challengers:
Leading firms from emerging
markets that are fast
becoming key contenders in
world markets.
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The World at Night
Source: C. Mayhew and R. Simmon (N ASA/GSFC), NOAA/NGDC, DMSP Digital Archive
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Advanced Economies, Developing
Economies, and Emerging Markets (1 of 2)
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Advanced Economies, Developing
Economies, and Emerging Markets (2 of 2)
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Estimating the Potential of Emerging
Markets
• Estimations are challenging because of peculiar
economic and social environments in these countries.
• Limited availability and reliability of data.
• Market research can be very costly and less precise, as
compared to the advanced economies.
• Market potential indicators include:
– GDP growth rate
– income distribution
– commercial infrastructure
– unemployment rate
– consumer expenditures for discretionary items.
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Median Household Income for a Sample of
Emerging Markets
Country Median Income Per
Household (U.S. $)
Brazil 15,372
China 9,721
India 4,965
Indonesia 5,919
Nigeria 20,960
Russia 14,487
Thailand 7,113
Turkey 21,966
Sources: Based on United Nations, United Nations Database on Household Size and Composition 2017 (New York:
United Nations, 2017); World Bank, “GNI per Capita, Atlas Method (current US$),” 2017, [Link]
Note: Data shown are gross national income per household, Atlas method, in current U.S. dollars.
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You Can Do It: Andrew and Jamie Waskey
(1 of 3)
• Andrew and Jamie are married recent graduates who got their
master’s degrees in international business at a state university
in the United States.
• They are making their careers as business managers in Dubai,
United Arab Emirates.
• They have traveled extensively in Europe, Latin America, and
the Middle East.
• Andrew also worked as a marketing intern at the U. S .
Department of Commerce in Shanghai, China.
• Jamie was a market research intern at U S Department of
Commerce in Buenos Aires, Argentina.
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You Can Do It: Andrew and Jamie Waskey
(2 of 3)
Success Factors
• Set goals and persistently work toward them. If you want to work
abroad, pursue your goal actively.
• Know what you want to do. Develop a clear professional path.
• Leverage friends and other
contacts to connect with key
people in your field.
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You Can Do It: Andrew and Jamie Waskey
(3 of 3)
Challenges of working abroad
• Mastering cross-cultural communication
• Adapting to different living situations
• Making friends
• Striking a healthy work-life balance
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Catering to Emerging Market Economic
Development Needs
• Increasingly, firms are involved in fostering economic
development in emerging markets.
• Assisting economic development may (or may not) be part
of efforts aimed at corporate social responsibility.
• More commonly, doing business in emerging markets
makes good business sense, and generates big profits.
• Helpful ventures include modernization projects (e.g., power
plants); infrastructure projects (highways); injections of
capital (via microfinance); and marketing consumer
products (which leads to distribution channels, reduces
prices, and creates jobs).
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Foreign Firms Support Local Economic
Development
• Walmart and Home Depot have created new, cost-
effective distribution channels in Mexico.
• Unilever and P&G sell shampoo in India for less than
$0.02 per mini-sachet.
• Cemex provides low-cost building materials to millions of
poor people.
• Narayana Health sells health insurance for less than
$0.20 per person per month in India.
• Various cell phone and telecom firms have substantially
increased telecommunications infrastructure in Africa.
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Ethical Connections
• Africa bears the burden of about one-quarter of all disease
worldwide, yet has only 3% of the world’s health care workers.
Most Africans cannot obtain medical care.
• Every day, thousands die from treatable or preventable
ailments such as malaria and AIDS.
• MNEs play a growing role to address such challenges.
• Private firms such as GlaxoSmithKline and General Electric
use innovative business approaches to provide needed
medications and medical care to impoverished countries in
Africa.
• Numerous firms have established clinics that provide low-cost
health care.
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