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Transcript
Chapter 9
Understanding Emerging
Markets
International Business
Strategy, Management & the New Realities
by
Cavusgil, Knight and Riesenberger
International Business: Strategy, Management, and the New Realities
1
Learning Objectives
1. The distinction between advanced economies,
developing economies, and emerging markets
2. What makes emerging markets attractive for
international business
3. Estimating the true potential of emerging
markets
4. Risks and challenges of doing business in
emerging markets
5. Strategies for doing business in emerging
markets
6. Catering to economic development needs of
emerging markets and developing economies
International Business: Strategy, Management, and the New Realities
2
Classifying Countries based on
Economic Development
Advanced economies are post-industrial countries characterized
by high per capita income, highly competitive industries, and
well-developed commercial infrastructure.
• Examples- world’s richest countries and include Australia,
Canada, Japan, New Zealand, the United States, and Western
European countries.
Developing economies are low-income countries characterized by
limited industrialization and stagnant economies.
• Examples- low-income countries, with limited industrialization
and stagnant economies- e.g. Bangladesh, Nicaragua and Zaire.
Emerging market economies are a subset of former developing
economies that have achieved substantial industrialization,
modernization, improved living standards and remarkable
economic growth.
• Examples- some 27 countries in East and South Asia, Latin
America, Middle East and Eastern Europe- including Brazil,
Russia, India, China (so called BRIC countries).
International Business: Strategy, Management, and the New Realities
3
Advanced Economies
• Mature state of industrial development; transitioned from
manufacturing economies into service-based economies.
• Home to 14% of the world’s population, and account for half
of world GDP, over half of world trade in products, and threequarters of world trade in services.
• Political systems- democratic, multiparty systems of
government.
• Economic systems- typically based on capitalism, with
relatively little government intervention in business.
• Serious purchasing power; few restrictions on international
trade and investment.
• They host the world's largest MNEs.
• Example- Ireland, which has one of the world’s best
performing economies, with much FDI from foreign
manufacturers in high-tech industries such as Gateway.
International Business: Strategy, Management, and the New Realities
7
Developing Economies
• Low discretionary incomes, limited proportion of
personal income spent on purchases other than
food, clothing, and housing.
• In developing economies, 17% live on less than
$1 per day; 40% live on less than $2 per day.
• The combination of low income and high birth
rates tends to perpetuate poverty.
• Misnomer-sometimes called underdeveloped
countries or third-world countries- these terms
are imprecise because, despite poor economic
conditions, the countries tend to be highly
developed in historical and cultural terms.
International Business: Strategy, Management, and the New Realities
8
Developing Economies
• Hindered by high infant mortality, malnutrition, short life
expectancy, illiteracy, and poor education systems;
correlates with economic development, the vicious cycle of
poverty.
• Productivity is stagnant; living standards deteriorate.
• Debt- Governments in developing economies are often
severely indebted- countries in Africa, Latin America, and
South Asia have debt levels close to their annual GDP.
• Bureaucracy- much of Africa’s poverty is the result of
government policies that discourage entrepreneurship,
trade, and investment. Example- starting a new business:
• In sub-Saharan countries in Africa involves an average of
11 different approvals, and takes 62 days to complete.
• In advanced economies, takes an average of 6 approvals,
and 17 days to complete.
International Business: Strategy, Management, and the New Realities
9
Emerging Market Economies
• Most distinguishing characteristic- countries are enjoying
rapidly improving living standards and a growing middle class
with rising economic aspirations.
• Importance in the world economy is increasing as attractive
destinations for exports, FDI, and sourcing.
• Emerging market countries are evolving towards wealthy
nation status.
• Examples: Hong Kong, Israel, Saudi Arabia, Singapore,
South Korea, and Taiwan have developed beyond the
emerging market stage.
• 2004- emerging markets- the Czech Republic, Hungary, and
Poland, received a boost when they became members of the
European Union. By joining the EU, these countries had to
adopt stable monetary and trade policies. They leverage their
low-cost labor to attract investment from Western Europe,
thereby boosting their economies.
International Business: Strategy, Management, and the New Realities
11
Emerging Market Dynamics
• Emerging markets account for over 40 percent of
world GDP. They represent over 30 percent of
exports and receive over 20 percent of FDI.
• Mid-2000s, the emerging markets collectively
enjoyed an average annual GDP growth rate of
nearly 7%, a remarkable feat – much faster than
advanced economies
• Benefit from: low-cost labor, knowledge workers,
government support, low-cost capital, and
powerful, highly networked conglomerates
International Business: Strategy, Management, and the New Realities
14
The New Global Challengers
(Boston Consulting Group Study)
Some 100 companies from Emerging Markets
(called Rapidly Developing Economies in the
BCG study) are poised to become important
21st-century multinationals.
Examples:
• Brazil: Embraer, Sadia & Perdiago, Natura
Mexico: America Movil, Groupo Modelo
India: Ranbaxy, Infosys, Tata Tea, WIPRO
China: Galanz, Haier, Chunlan Group Corp.,
Lenovo, Pearl River Piano
Turkey: Koc Holding, Vestel & Sisecam
International Business: Strategy, Management, and the New Realities
15
The New Global Challengers
• RDEs have rapidly growing markets,
some of which are very large
• RDEs have low-cost resources
• Difficult operating environments at
home produce some highly capable
companies
• RDEs are training grounds for
competing with global incumbents
International Business: Strategy, Management, and the New Realities
16
Six Strategic Globalization Patterns of the
New Global Challengers from EMs
1.
2.
3.
4.
5.
6.
Taking RDE brands global (China’s Hisense, taking
consumer electronics to Africa)
Turning RDE engineering into global innovation (India’s
Wipro)
Assuming global category leadership (Hong Kong’s Johnson
Electric)
Monetizing RDE natural resources (Brazilian food
processors Sadia and Perdiago)
Rolling out new business models to multiple markets
(Mexico’s cement conglomerate Cemex’s global acquisition
strategy)
Acquiring natural resources (Shanghai Baosteel group
expanding globally to secure stable iron-ore supplies)
International Business: Strategy, Management, and the New Realities
17
Developing Economies Evolving into
Emerging Markets
• European countries of Estonia, Latvia, Lithuania,
Slovakia.
• Latin American countries of Costa Rica, Panama, and
Uruguay.
• Kazakhstan, Nigeria, Vietnam, and the United Arab
Emirates.
• Economic prosperity varies within emerging marketsthere are usually two sets of economies – those in urban
areas (more developed economic infrastructure) and
those in rural areas (less discretionary income).
• Transition economies = Privatization of former state
enterprises- since 1989 after transition from centrally
planned economies into liberalized markets: Czech
Republic, Hungary, and Poland; also China and Russia.
International Business: Strategy, Management, and the New Realities
18
Transition Economies
• Transition economies engaged in large-scale privatization
of state-owned enterprises.
• Excessive regulation and entrenched government
bureaucracy, now are introducing legal frameworks to
protect business and consumer interests and ensure
intellectual private property rights.
• Russia endured high inflation with annual price increases
reaching 100%, hindering foreign investment and economic
development.
• Shaking off the Soviet legacy required the country to
restructure not just firms and institutions, but also adopt
new values about private ownership, profits, intellectual
property, etc.
• Initially, western companies doing business in Russia found
it difficult to recruit managers who understand modern
management practices.
International Business: Strategy, Management, and the New Realities
19
Intense Market Liberalization in Transition Economies
• Transition economies liberalized their markets- many
foreign companies initiated trade and investment
relationships with them.
• Privatization provided many opportunities for foreign
firms to enter these markets by purchasing former state
enterprises. In Eastern Europe, Western companies are
leveraging inexpensive labor and other advantages in
the region to manufacture products bound for export
markets.
• Hungary, Poland, the Czech Republic, and other former
East Bloc countries have made great strides in political
and economic restructuring. These countries are well on
their way to more advanced stages of economic
development.
International Business: Strategy, Management, and the New Realities
20
Opportunities for Foreign Firms in China
• Ample opportunities for firms marketing technologies and
environmental protection equipment
• Foreign firms can profit from China’s low-cost labor and
growing affluence, numerous foreign companies set up sales
offices and manufacturing facilities, but success is slow.
• Wal-Mart sourced over $30 billion of merchandise from China
in 2007- saves immensely.
• A sizeable consumer segment: 250 million ‘middle-class’
residents.
• Success requires deep understanding of the market and longterm commitment: Coca-Cola, General Motors, McDonald's,
Motorola, Airbus, and Volkswagen.
• Challenges: Disparate rates of development between the
coastal areas vs. West; poverty; environmental degradation.
International Business: Strategy, Management, and the New Realities
21
What Makes Emerging Markets Attractive?
Emerging markets are attractive as target markets,
manufacturing bases, and sourcing destinations.
1. Emerging Markets as Target Markets
• Growing middle class - emerging markets have become
important –represent substantial demand for electronics
and automobiles and health care services.
• The largest emerging markets have doubled their share
of world imports in the last few years.
• Emerging markets are excellent targets for manufactured
products, technology, and sophisticated technology:
• Textile machinery industry in India is huge
• Oil and gas exploration plays a vital role in Russia
• Agriculture is a major sector in China.
International Business: Strategy, Management, and the New Realities
22
Emerging Markets can Serve as Niche Markets
• Lockheed Aircraft, whose Hercules turboprop is a
popular airliner in poorer countries, has developed
transport planes that carry bulk commodities at relatively
low costs.
• Novartis and Pfizer are pharmaceutical firms that reap
big profits from selling vaccines and medicines that can
be stored without refrigeration when shipped to distant
markets.
• Demand is growing fastest in emerging markets- Black &
Decker and Robert Bosch, the fastest-growing markets
are in Asia, Latin America, Africa, and the Middle East
• Governments and state enterprises are targets for sale
of infrastructure-related products/services- machinery,
power transmission equipment, transportation
equipment, high-technology products, etc.
International Business: Strategy, Management, and the New Realities
23
Emerging Markets As Manufacturing Bases
2. 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.
• South Africa is a key source for industrial diamonds.
• Brazil long has been a center for mining bauxite, the
main ingredient in aluminum.
• Thailand has become an important manufacturing
location for Japanese MNEs such as Sony, Sharp, and
Mitsubishi.
• Malaysia and Taiwan- Motorola, Intel, and Philips
manufacture semiconductors there.
• Mexico and China- platforms for consumer electronics
and auto assembly.
International Business: Strategy, Management, and the New Realities
24
Emerging Markets As Sourcing Destinations
• Outsourcing - procurement of selected valueadding activities, including production of
intermediate goods or finished products, from
independent, external suppliers. Helps foreign
firms become more efficient, concentrate on
their core competences, and obtain competitive
advantage.
• Offshoring - when sourcing involves foreign
suppliers or production bases.
• Global sourcing - refers to the procurement of
products and services from foreign locations.
Procurement can be from either independent
suppliers or company-owned subsidiaries.
International Business: Strategy, Management, and the New Realities
25
Emerging Markets As Sourcing Destinations
3. Emerging markets as sourcing destinations
• MNEs have established call centers in Eastern
Europe, India, and the Philippines.
• 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.
International Business: Strategy, Management, and the New Realities
26
Estimating the Potential of Emerging Markets
• Estimating the true potential of emerging market
demand is challenging. The economic and social
environments in these countries are highly peculiar.
• Limited availability of data sources or reliability of
information.
• Market research may be more costly and less
precise than in advanced economies
• Market potential indicators include: GDP growth
rate, income distribution, commercial infrastructure,
the rate of urbanization, consumer expenditures for
discretionary items and unemployment rate.
International Business: Strategy, Management, and the New Realities
27
Market Potential Indicators
• Three practical approaches firms employ in
assessing market potential of individual
countries are:
 per-capita income
 size of middle-class, and
 A mix of market potential indicators
• Market potential may be assessed with
aggregate country data, such as gross national
income (GNI) or per-capita GDP, expressed in
terms of a reference currency, such as the U.S.
dollar.
International Business: Strategy, Management, and the New Realities
28
Purchasing Power Parity
Adjustment to per capita GDP
• In relying on per capita GDP for comparison of
different countries, one should use purchasing
power parity exchange rates, rather than the
market exchange rates.
• Purchasing power parity adjustment provides a
more realistic indicator of purchasing power of
consumers in emerging and developing
economies.
• PPP adjusted per capita GDP more accurately
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.
International Business: Strategy, Management, and the New Realities
29
Big Mac Index (The Economist)
• Big Mac Index - another way to illustrate the PPP
concept is to examine the Big Mac Index available
at globalEDGE™ and developed by the Economist
(www.economist.com).
• The Economist's Big Mac index is based on the
theory of purchasing-power parity (PPP), according
to which exchange rates should adjust to equalise
the price of a basket of goods and services around
the world. The Economist publication selects a
single product for the basket of goods: a McDonald’s
Big Mac.
International Business: Strategy, Management, and the New Realities
31
What the Big Mac Index Suggests
• The Big Mac Index first gathers information on the price
of hamburgers at McDonald’s restaurants worldwide. It
then compares the prices based on actual exchange
rates to those based on the PPP price of Big Macs to
see whether a nation’s currency is under-valued (most
developing economies or emerging markets) or overvalued (most European countries).
• The index is supposed to serve as a guide to the
direction in which currencies should, in theory, head in
the long run.
• In its most current version, the big Mac index suggests
that the Japanese yen is 28% undervalued against the
dollar, and the euro is 19% overvalued.
International Business: Strategy, Management, and the New Realities
32
Big Mac Index
Source: The Economist, July 2007
Big Mac prices
Implied PPP of the
In local currency
In U.S. dollars
Actual dollar
exchange rate July
2007
Under (-)/over (+)
valuation against the
dollar, %
The EURO €-
3.06
4.17
1.12
1.36
+22
British Pound £
1.99
4.01
1.71
2.01
+18
Japanese Yen ¥
280
2.29
82.1
122
-33
Chinese yuan 元
11
1.45
3.23
7.60
-58
Norwegian kroner kr
40.0
6.88
11.7
5.81
+102
Swiss francs CHF
6.30
5.20
1.85
1.21
+53
South African rand R
15.5
2.22
4.55
6.97
-35
Russian ruble руб
52.0
2.03
15.2
25.6
-41
Limitations to the Use of Per Capita GDP
1.
2.
3.
4.
Managers must adjust the numbers for the existence of an
informal economy —economic transactions that are not
officially recorded and therefore left out of government
calculations of a nation's GDP, e.g. barter exchanges.
The great majority of the population is on the low end of the
income scale in emerging markets (and developing
economies), ‘mean’ or ‘average’ does not accurately
represent a non-normal distribution; often, the median or
the modal income would yield a better understanding.
Household income is several times larger than per-capita
income because of multiple wage earners in these
countries.
Governments in these countries may under-report national
income so they can qualify for low-interest loans and grants
from international aid agencies and development banks.
International Business: Strategy, Management, and the New Realities
34
Middle Class as an Indicator of Market Potential
• The middle class represents the proportion of
people in between the wealthy and the poor, has
economic independence and consume many
discretionary items, including electronics,
furniture, automobiles, recreation, and education.
• In emerging markets, the size and growth rate of
the middle class serve as signals of a dynamic
market economy
• Demographic trends indicate that, in the coming
two decades, the proportion of middle-class
households in emerging markets will become
much bigger, with enormous spending power.
International Business: Strategy, Management, and the New Realities
35
Progress of Emerging Markets in
Building Their Middle Classes
• While India and Indonesia feature large middleclass populations in absolute terms, per-capita
GDP in these countries is rather modest,
especially when compared to South Korea,
China, Russia, and Mexico - although income is
relatively high at 49 and 48%, respectively.
• Brazil- middle class citizens control only about
35% of national income.
• In relative terms, South Korea has made the
most progress towards building a sizable middle
class; its middle-class accounts for about 55% of
national income.
International Business: Strategy, Management, and the New Realities
37
Emerging Market Potential Index (EMPI)
The EMPI combines factors that provide firms with a realistic
measure of export market potential:
• Market Size: the country’s population, especially urban
population
• Market Growth Rate: the country’s real GDP growth rate
• Market Intensity: private consumption and GNI represent
discretionary expenditures of citizens
• Market Consumption Capacity: The percentage share of
income held by the country’s middle class
• Commercial Infrastructure: characteristics such as number of
mobile phone subscribers, density of telephone lines, number of
PCs, density of paved roads, and population per retail outlet
• Economic Freedom: the degree of government intervention
• Market Receptivity: the particular country’s inclination to trade
with the exporter’s country as estimated by the volume of imports
• Country Risk: the degree of political risk
International Business: Strategy, Management, and the New Realities
38
Managers can use EMPI in Many Ways
1. Rankings can provide an objective method for
prioritizing emerging markets in the course of
planning international expansion.
2. On-line EMPI rankings are interactive, so users can
rank markets on the basis on any of the eight
dimensions making up the overall Index (see the
EMPI at globalEDGE™).
3. Managers can modify the assigned weights to fit the
unique characteristics of their own industry.
4. Managers may add additional indicators that are not
currently included in the EMPI as a way of refining the
tool for greater precision, or they may add additional
countries beyond the emerging markets already
represented in the Index.
International Business: Strategy, Management, and the New Realities
40
Challenges of Doing Business in EMs:
Political Stability
• The absence of reliable government authorities
adds to business costs, increases risks, and
reduces managers’ ability to forecast business
conditions.
• Political instability is associated with corruption
and weak legal frameworks that discourage
investment.
• Example- Russia- Bureaucratic practices favor
well-connected, home-grown firms threaten the
business activities of foreign firms, i.e. denying
access to Russia’s energy resources- harming
foreign investor confidence.
International Business: Strategy, Management, and the New Realities
41
Challenges of Doing Business in EMs:
Weak Intellectual Property Protection
• Even if they exist, laws that safeguard intellectual
property rights may not be enforced, or the judicial
process may be painfully slow.
• Argentina- enforcement of copyrights on recorded
music, videos, books, and computer software is
inconsistent- laws against Internet piracy are weak
and ineffective.
• China Indonesia, and Russia - counterfeiting is
common, especially with software, DVDs, and
CDs.
• India- weak patent laws discourage investment by
foreign firms.
International Business: Strategy, Management, and the New Realities
42
Challenges of Doing Business in EMs:
Bureaucracy and Lack of Transparency
• Burdensome administrative rules, as well as excessive
requirements for licenses, approvals, and paperwork,
delay business activities.
• Example- American International Group (AIG) formed a
joint venture with the giant Indian conglomerate Tata, to
enter India's underserved $8 billion insurance market, and
it still took six years before the Indian government granted
AIG permission to sell property and life insurance.
• Excessive bureaucracy means lack of transparency, i.e.
legal and political systems are not open and accountable.
Where anti-corruption laws are weak, bribery, kickbacks
and extortion are common.
• In Transparency International’s rankings, emerging
markets such as Argentina, Indonesia, and Venezuela
experience substantial corruption.
International Business: Strategy, Management, and the New Realities
43
Challenges of Doing Business in EMs:
Partner Availability and Qualifications
• Foreign firms need to seek alliances with local
partners in countries characterized by
inadequate legal and political frameworksgaining access to local market knowledge,
supplier and distributor networks, and key
government contacts.
• Qualified business partners in emerging markets
are not readily available. Often in emerging
markets, one has to contend with second-best or
third-best partner candidate, and provide much
technical and managerial assistance to upgrade
the partner’s capacity.
International Business: Strategy, Management, and the New Realities
44
Challenges of Doing Business in EMs:
Dominance of Family Conglomerates
• Many emerging market economies are dominated by
family-owned rather than publicly-owned businesses.
• Family conglomerate (FC) is a large, privately-owned
company that is highly diversified, and control economic
activity and employment in emerging markets.
• South Korea, where they are called chaebols - the top 30
FCs account for nearly half the assets and industry
revenues in the Korean economy. Samsung, the most
famous Korean FC, has annual revenues of $140 billion.
• India where they are called business houses
• Latin America where they are called grupos
• Turkey where they are called holding companies - the Koc
Group accounts for about 20 percent of trading on the
Istanbul Stock Exchange, and Sabanci provides over five
percent of Turkey’s national tax revenue.
International Business: Strategy, Management, and the New Realities
45
International Business: Strategy, Management, and the New Realities
46
Characteristics of Family Conglomerates
• A typical FC may hold the largest market share in each of
several industries in its home country.
• FCs enjoy various competitive advantages in their home
countries, such as government protection and support,
extensive networks in various industries, superior market
knowledge, and access to capital, e.g. Hyundai’s
advantages were overwhelming to foreign automakers.
• The origin and growth of FCs are partly attributable to
governments, which protect FCs by providing subsidies,
loans, tax incentives, and market entry barriers to
competitors.
• FCs provide huge tax revenues and facilitate national
economic development.
• FC dominance in emerging markets suggests that they will
be formidable competitors or capable partners.
International Business: Strategy, Management, and the New Realities
47
Managerial Strategies:
Partnering with Family Conglomerates
•
Most major FCs in Korea; Koc and Sabanci in Turkey;
Vitro in Mexico; Astra in Indonesia are highly diversified;
own their own financing operations, banks, and
distribution channels. FCs make valuable venture
partners in emerging markets. They can:
1. reduce risks, time, and capital requirements for new
market entry
2. develop relationships with governments and other
key, local players
3. target market opportunities more rapidly and
effectively
4. overcome infrastructure-related hurdles
5. leverage FC’s resources and local contacts.
International Business: Strategy, Management, and the New Realities
48
Examples of Partnering with
Family Conglomerates
• Ford partnered with Kia to introduce the Sable line of
cars in South Korea-Kia's strong distribution and afterservice network.
• Digital Equipment Corporation (DEC) designated Tatung,
a Taiwanese FC, as the main distributor of its
workstations and client-server products in TaiwanTatung's local experience and distribution network.
• In Turkey, Sabanci entered a joint venture with Danone,
the French yogurt producer and owner of the Evian
brand of bottled water. Danone brought ample technical
knowledge in packaging and bottling, and a reputation
for healthy and environmentally friendly products, but it
lacked information on the local market. As the Turkish
market leader, Sabanci knows the market, retailers, and
distributors- resulting in making Danone the bottled
water market leader in the first year.
International Business: Strategy, Management, and the New Realities
49
Managerial Strategies:
Marketing to Governments
• In EMs, government agencies and state-owned
enterprises are important customer groups:
• Governments buy enormous quantities of products
(such as computers, furniture, office supplies, and
motor vehicles) and services (such as
architectural, legal, and consulting services).
• State enterprises operate in areas such as
railways, airlines, banking, oil, chemicals and
steel, and buy goods and services from foreign
companies.
• Public sector influences the procurement activities
of various private or semi-private corporations.
International Business: Strategy, Management, and the New Realities
50
Aspects of Marketing to Governments
• Request for proposals (RFPs) or tenders- government agencies
(buyer) seeking bids from suppliers to procure bulk commodities,
equipment, and technology or to build power plants, highways,
dams, and public housing.
• Governments prefer dealing with vendors that offer complete sales
and service packages -- in addition to financing (e.g., low-interest
loans).
• Governments are attracted by deals that create local jobs, employ
local resources, reduce import dependence, and provide other
country-level advantages.
• Examples- Bechtel, Siemens, General Electric, Hitachi, KBR…
regularly participate in bidding for global tenders from emerging
market governments.
• Three Gorges Dam on the Yangtze River in China, will be fully
operational in 2009, following 16 years of construction- will cost $25
billion, will be the largest hydroelectric dam in the world- global
contractors involved- ABB, Kvaerner, Voith, Siemens, and GE.
International Business: Strategy, Management, and the New Realities
51
Major International Contractors
Managerial Strategies:
Skillfully Challenging EM Competitors
• Advantages such as low-cost labor, skilled workforce,
government support, and FCs, are fostering the rise of
firms that are capturing market share from incumbent
international players.
• Example- India’s Mahindra & Mahindra (farm equipment
industry) has been grabbing market share from John
Deere and Komatsu, with brands such as the Mahindra
5500, a powerful, high-quality tractor that sells for far
less than competing models.
Advanced economy firms must:
• Conduct research to understand the indigenous
challengers
• Acquire new capabilities that build competitive
advantages (R&D investment, partnering with
competitors, leveraging low-cost labor).
International Business: Strategy, Management, and the New Realities
53
Catering to Economic Development
Needs of EMs
• Internationalizing firms are more involved in fostering
economic development in Ems -- a form of corporate
social responsibility because they help developing
economies grow- most cases they also make good
business sense.
• Economic development through profitable modernization
projects
• Entrepreneurship through small-scale loans
• Fostering economic development with profitable projects
• Historically few firms targeted poor countries- however- If
firms market appropriate products and employ suitable
strategies, doing business in EMS and developing
economies can be profitable.
International Business: Strategy, Management, and the New Realities
54
Innovative Solutions to
Local Economic Development
• Unilever and P&G sell Sunsilk and
Pantene shampoo in India for less than
$0.02 per mini-sachet.
• Narayana Hrudayalaya sells health
insurance for less than $0.20 per person
per month in India.
• Amul, one of India’s largest processed
food companies, sells a wide range of food
products to millions of poor people.
International Business: Strategy, Management, and the New Realities
55
Ericsson’s Experience with Local Economic
Development
• Ericsson, the Swedish telecom modernized the telecom
infrastructure in rural parts of Tanzania, and other parts of Africa.
Between 1998 and 2004, the number of mobile-phone users in
Africa grew to 81 million – the fastest growth worldwide.
• The emergence of a significant cell phone market in Africa led to
the development of related industries and the launch of local
firms that produce accessories, such as devices for recharging
cell phone batteries. Ericsson’s experiences suggest that
market-based solutions not only contribute to social and
economic transformation, but can be profitable as well.
• Ericsson also modernized much of Russia’s antiquated phone
systems; installed Hungary’s digital telephone system (in
partnership with local government); was instrumental in
expanding Vietnam’s telecommunications network, and
manufactured optical fiber cables in partnership with the Birla
Group in India- one of the largest family conglomerates.
International Business: Strategy, Management, and the New Realities
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Partnering with State-Owned Enterprises
• Partnering with state-owned enterprises builds
competitive advantages in EMs.
• Development of infrastructure in transportation,
communications, and energy systems
• Job creation and contribute to regional and sector
development.
• Investment generates local tax revenues, which can
be spent to improve living standards among the poor.
• Technology transfer promotes local innovation and
enterprise.
• Corporate citizenship- community-oriented social
programs that foster economic and social
development.
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Microfinance to Facilitate Entrepreneurship
• Microfinance refers to providing small-scale financial
services, such as “microcredit” and “microloans,” that
assist entrepreneurs in poor countries-providing small
loans, frequently less than $100, small-scale
entrepreneurs (primarily women) accumulate sufficient
capital to launch businesses that help pull them out of
poverty.
• This concept led economics professor Muhammad
Yunus to found the Grameen Bank in Bangladesh in
1974- now has over 2,100 branches- with 17
microfinance organizations in China- and has helped
millions of Grameen borrowers in Bangladesh rise out of
acute poverty.
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Experience with Microfinance Projects
• World Bank estimates there are more than 7,000
microfinance institutions, serving some 16 million poor
people in developing economies.
• Thanks to the success of microfinance, Yunus was
awarded the 2006 Nobel Peace Prize.
• Similar efforts have been inspired in dozens of poor
countries worldwide, often sponsored by philanthropic
organizations such as the Bill and Melinda Gates
Foundation.
• Proponents point to how a small amount of money can
have a dynamic, ripple effect on many lives in a village.
• Microfinance has gained credibility in the mainstream
banking industry- with other forms of small-scale financial
services offered in poor countries worldwide, including
insurance and mortgage lending.
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