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Chapter 9
Emerging Markets
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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.
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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 can be hard to
find.
The changes complicate managerial decision making.
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The Realities of Economic
Change (cont.)
Given the poor market orientation in the previous business
environment, managers must adapt their behavior in
these areas:
Problem Solving
Decision Making
Team Building
Customer Orientation
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 from industrialized
nations towards emerging economies
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. in
reemerging 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
Market Entry: prohibit
foreign market entry
International
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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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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