How much importance Emerging Markets wield in the global economic landscape today is beyond debate. The financial crisis of 2008-09 and the havoc it wreaked on the world turned out to be a test of endurance and credibility for the Emerging Markets. With the decades-old revered financial institutions failing and the US economy floundering, emerging economies in Asia and other parts of the world were bound to feel the ripple effects. However, when the dust settled, emerging economies, in an almost counterintuitive fashion, had defied the odds and rebounded the highest even as the developed economies snailed to normalcy. MSCI BRIC Index fund (consisting of stocks from Brazil, Russia, India and China) managed to gain 80% vis-à-vis a somber 30% of MSCI World index (consisting of 1500 stocks from the developed markets). In the nutshell, what we witnessed in the stock markets was a reflection of the underlying growth stories that Emerging markets had been cultivating over the years. No wonder, corporations from all over the world are making a beeline to countries like India, China, Mexico, Brazil, etc., to claim their stakes in the respective growth stories.
‘Winning in Emerging Markets’ is a comprehensive guide-book meant to equip individuals and corporations alike with a must-have framework as and when they contemplate on venturing into emerging markets. Written by two Harvard professors of Indian origin, Tarun Khanna and Krishna Palepu, ‘Winning in Emerging Markets’ comprises 3 segments: a) Thread-bare analyses of factors that make Emerging markets a difficult place to do business in, b) Challenges faced by MNCs while venturing into developing markets and c) Challenges faced by Emerging market companies at home and in overseas markets.
Tarun Khanna and Krishna Palepu argue that focused strategies emphasizing “core competencies,” may not be appropriate for businesses in emerging markets because of the absence of product, capital and labor market institutions (“institutional voids”) that companies in developed markets take for granted. The author duo explains that the absence of these market intermediaries including market research firms, auditing firms, software development accreditation agencies, financial data-gathering firms, etc. in emerging markets is a telling differentiator and also the factor that sets emerging economies back vis-à-vis their Western counterparts. These intermediaries are often significant to the conduct of frictionless business operations in any economy. Basically, they help bring buyers and sellers closer by adding a tinge of credibility and information. The very absence or deficient supply of these informal institutions creates voids in the market, according to the authors, thus making it difficult for the MNCs to correctly gauge the success potential of emerging markets.
In a comparison of stark contrast, the authors note that an entrepreneur stuck up in an institutional rigmarole in India or China would normally take 10-12 agonizing days before his business sees the daylight (filing registration and affiliated procedures) whereas in a developed market like Australia or Canada, his dream venture can get off the ground in 2 days time. Taking the argument forward, authors underline the fact that many advanced markets-based firms are often ill-prepared for their foray in emerging markets. Paucity of intermediaries in emerging markets could be a bewildering experience for developed market-based firms which are so accustomed to the streamlined constructs. In the nutshell, unless these MNCs have a way to negotiate or plug the pervasive institutional voids, longevity and profit-making in emerging markets could be a distant proposition.
For anyone interested in investing in emerging markets, there is an adequate and an exhaustive list of thorny questions that can really help the MNCs not just spot the loopholes but also gear themselves up to aptly respond to the institutional lacunae of emerging economies. Authors assert that failure to find an appropriate response to these voids often leaves MNCs serving only one segment of the market – the Global segment (Global segment has been defined by authors as the one where the rules of developed markets apply. Low Price Elasticity for High quality products and services) – much at the expense of the lucrative emerging middle class segment. Lack of commitment to successfully resolve these issues often leaves these MNCs catering to only the minuscule fringe of the vast market only, much to their chagrin.
“Understanding Institutional voids – and learning how to work with them in specific markets – is the key to success in emerging markets.” – Tarun Khanna & Krishna Palepu
Authors further note that it’s a fallacy to bracket all emerging markets into one homogeneous club. For example, both China and India are vying for the attention of the developed world and both offer distinct advantages. However, where China has a much better infrastructure to boast about, India has a far superior capital market to showcase. Further, to make their point-of-view teachable, authors throw in interesting case-studies of GM, L’Oreal, Tetrapak and Microsoft about their quests to strike gold in emerging markets where each company was faced with a distinct set of trials and tribulations. Case-studies of these MNCs make it amply clear that gaining success in developing markets is not easy, not by a long shot. When faced with no-go situations initially, these organizations took path-breaking decisions, for example, when it was snubbed by the Chinese Government in its early days, Microsoft instead of coming to grips with whatever little was available decided to become China’s partner-in-progress. By investing heavily into the Chinese educational infrastructure, Microsoft ingratiated itself with the Chinese Government. Later, it turned out to be a pivotal cog in the development of Chinese software industry. In short, Microsoft hit the victory road in China by plugging institutional voids such as by building an educational infrastructure, by controlling piracy and by providing impetus to the burgeoning domestic software industry.
Several firms from the emerging markets are now starting to expand into the developing markets. Quite aptly, the authors call such companies ‘Emerging Giants’. Much to one’s surprise, the authors conclude that the challenges faced by these Emerging giants in their own backyard are not any different from the ones faced by the transnational corporations in the developing economies. Yes, emerging giants do enjoy the competitive advantage of local knowledge, but MNCs with steep learning curves can soon catch up and make it a level playing field.
All in all, ‘Winning in Emerging Markets’ makes a great effort to bridge the information gap between perceptions and realities of emerging markets. The frameworks and tool-kits provided in each chapter can motivate the powers-that-be in MNCs to ask some tough questions of themselves before they prepare to launch into emerging markets. On the negative side, the book somehow doesn’t lay as much emphasis as it should on what can arguably turn out to be the massive roadblocks in emerging markets like regulatory knots and special interest groups. Nonetheless, with all its positives and a few negatives, I found ‘Winning in Emerging Markets’ an informative and a knowledgeable read.