International Business: The New Realities

Fourth Edition

Chapter 8
Understanding Emerging
Markets

Slides in this presentation

contains hyperlinks. JAWS
users should be able to get
the list of links by using
INSERT+F7

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
The ‘BRIC’ Countries

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Advanced Economies, Developing
Economies, and Emerging Markets (1 of 2)

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Advanced Economies, Developing
Economies, and Emerging Markets (2 of 2)

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Key Differences Among the Three Major
Country Groups (1 of 2)
Dimension Advanced Developing Emerging
Economies Economies Markets
Representative Canada, Angola, Bolivia, Brazil, China, India, Indonesia,
Countries France, Japan, Nigeria, Bangladesh Turkey
United Kingdom,
United States
Approximate Number of 35 120 40
Countries
Population (% of world) 14% 25% 61%
Approximate Average $44,155 $3,618 $11,050
Per-Capita Income (U
.S. dollars; PPP basis)
Approximate Share of 65% 4% 31%
World GDP (PPP basis)

Sources: Adapted from World Bank at httpflwvwv.worldbank.org and International Monetary Fund at
http://w-wwimf.org.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Key Differences Among the Three Major
Country Groups (2 of 2)
Population (millions) 979 1,706 4,155
Telephone Lines per 803 442 694
1,000 People (fixed and
mobile)
Personal Computers per 517 39 191
1,000 People
Internet Users per 1,000 751 165 422
People
Motor vehicles per 1,000 537 65 236
people

Sources: Adapted from World Bank at httpflwvwv.worldbank.org and International Monetary Fund at http://w-wwimf.org.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
The World at Night

Source: C. Mayhew and R. Simmon (N ASA/GSFC), NOAA/NGDC, DMSP Digital Archive

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Emerging Market Economies
• About 40 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.
• Examples: Hong Kong, Israel, Saudi Arabia, Singapore,
South Korea, and Taiwan have developed beyond the
emerging market stage.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Trade Conditions in the Major Country
Groups
Trade Condition Advanced Developing Economies Emerging Markets
Economies
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

Sources: Based on International Monetary Fund at http://www.imf.org; World Bank, 2015, at http://www.worldbank.org;
and Central Intelligence Agency, World Factbook, 2015, https://www.cia.gov/library/publications/the-world-factbook/.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
National Characteristics of Major Country
Groups
Characteristic Advanced Developing Emerging
Economies Economies Markets
Median Age of Citizens 39 years 24 years 32 years
Major Sector Focus Services, Agriculture, Manufacturing,
branded products commodities some services
Economic and Political Free or mostly free Mostly repressed Moderately free or
Freedom mostly not free
Economic/Political Market Command or Mixed Mixed
System
Regulatory Environment Minimal regulations Highly regulated, Achieved much
burdensome economic
liberalization
Country Risk Low moderate to high Variable
Intellectual Property Strong Weak Moderate and
Improving
Infrastructure Well-developed Inadequate Moderate but
Improving

Sources: Based on International Monetary Fund at http://www.imf.org. and Central Intelligence Agency, World
Factbook, 2015, https://www.cia.gov/library/publications/the-world-factbook/.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Estimated Total Contribution to World GDP, 2000 through
2020, in Billions of US Dollars and as a % of World GDP

Source: Based on International Monetary Fund, World Economic Outlook Database, 2015.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Emerging Market Global Challengers
Country Example Multinational Firms Representative Industries
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 financial,
Yildiz holding confectionary, biscuits, snacks

Source: Based on Boston Consulting Group 2014, September 10, “Meet the 2014 BCG Global Challengers.”

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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.
• Among commodities, China buys one-third of the world’s coal,
cotton, fish, rice, and cigarettes. It buys one-quarter of the world’s
steel and one-half its pork.
• But endures serious problems of air, water, and land pollution; has 8
of the world’s top 10 polluted cities.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
What Makes Emerging Markets
Attractive? (1 of 3)
• 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.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
What Makes Emerging Markets
Attractive? (2 of 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
activities performed in Bangalore, India.
– Investments from abroad benefit emerging markets as
they lead to new jobs and production capacity, transfer
of technology and linkages to the global marketplace.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
What Makes Emerging Markets
Attractive? (3 of 3)
• 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.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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, and consumer
expenditures for discretionary items.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Purchasing Power Parity (PPP)
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.
• PPP adjusted per capita GDP 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.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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
Argentina $12,873 $22,582
Brazil 11,604 16,096
China 7,589 12,880
Hungary 13,881 24,942
India 1,627 5,855
South Korea 28,101 35,277
Mexico 10,715 17,881
Russia 12,926 24,805
Turkey 10,482 19,610
Vietnam 2,053 5,635
United States 54,597 54,597

Source: Based on data from International Monetary Fund, World Economic Outlook Database, April 2015
(www.imf.org).

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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
Mexico 20,960
Russia 14,487
Thailand 7,113
Turkey 21,966

Sources: Based on Euromonitor International January 2015 (www.euromonitor.com) and International Monetary Fund,
World Economic Outlook Database April 2015 (www.imf.org).

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Challenges of Doing Business in Emerging
Markets (1 of 3)
• 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.
Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Challenges of Doing Business in Emerging
Markets (2 of 3)
• Resistance from family conglomerates – Economies
are often dominated by privately-owned local companies
that are highly diversified, and control supplies and
employment. Common in South Korea (chaebols), India
(business houses), Latin America (grupos), and Turkey
(holding companies).

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Challenges of Doing Business in Emerging
Markets (3 of 3)

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Strategies for Emerging Markets (1 of 2)
• Target Governments, which 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.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Strategies for Emerging Markets (2 of 2)
• 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).

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
You Can Do It: Andrew & 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,
in the United Arab Emirates.
• They have traveled extensively in Europe, Latin America, and
the Middle East.
• Andrew also worked as a marketing intern at the US
Department of Commerce, in Shanghai, China.
• Jamie was a market research intern at US Department of
Commerce, in Buenos Aires, Argentina.
Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
You Can Do It: Andrew & 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.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
You Can Do It: Andrew & 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

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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); marketing consumer products (which leads
to distribution channels, reduces prices, and creates jobs).

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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.
Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
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.

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved
Copyright

Copyright © 2017, 2014, 2012 Pearson Education, Inc. All Rights Reserved