OPERATING IN EMERGING MARKETS A Guide to Management and Strategy in the New International Economy Luciano Ciravegna Robert Fitzgerald Sumit Kundu © 2014 by Luciano Ciravegna, Robert Fitzgerald, and Vice President, Publisher Sumit Kundu Tim Moore Publishing as FT Press Associate Publisher and Upper Saddle River, New Jersey 07458 Director of Marketing Amy Neidlinger FT Press offers excellent discounts on this book when Executive Editor ordered in quantity for bulk purchases or special sales. Jeanne Glasser For more information, please contact U.S. Corporate and Operations Specialist Government Sales, 1-800-382-3419, Jodi Kemper [email protected] . Marketing Manager For sales outside the U.S., please contact International Sales Lisa Loftus at [email protected] . Cover Designer Alan Clements Company and product names mentioned herein are the Managing Editor trademarks or registered trademarks of their respective Kristy Hart owners. Project Editor Elaine Wiley All rights reserved. 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This page intentionally left blank Contents Map: Emerging Markets, BRICS, N11, and Civets. xii Introduction Emerging Markets and the New International Economy . 1 Globalization, the Financial Crisis, and the Rise of Emerging Markets . .6 Structure of the Book . .9 References . 11 Part I Opening the Black Box of Emerging Markets 13 Chapter 1 What Are Emerging Markets? . 1 5 Emerging, Developing, Catching Up . 15 Economic Performance, GDP, and Emerging Markets. 17 Financial Markets and Macroeconomic Stability . 21 Political Instability and Economic Performance . 24 Wealth, Productivity, and Inequality. 25 Demography and Wealth. 31 Consumption and First-Time Buyers. 34 Infrastructure . 36 Market Institutions. 42 Sophistication of the Economy . 45 References . 47 Chapter 2 Markets and Institutions . 49 Introduction . 49 Understanding the Functioning of Markets: A Look to the Past . 49 Barriers to Trade and the Integration of International Markets. 57 Governments and Markets . 62 Governments and the Economy. 64 References . 66 Chapter 3 A Historical Perspective . 6 9 Introduction . 69 Global Economy I: 1850–1914 . 70 Global Economy II: 1948–1980 . 86 Concluding Remarks . 98 References . 99 Part II Operating in Emerging Markets: A Step-by-Step Guide 104 Chapter 4 The Determinants of Attractiveness and the Four Dimensions . 106 Introduction . 106 Classifying the Determinants of Attractiveness: Necessary, Highly Desirable, Desirable, and Not Necessary Features . 127 Four Macro Dimensions That Shape Emerging Markets. 132 Operationalizing the Four Dimensions Analysis . 144 References . 147 Chapter 5 Managing Risk . 149 Introduction . 149 Defining Risk . 150 Expected and Unexpected Risk . 154 Location Risk and Targeted Risk. 160 Business Features: Identifying Where, What, and How . 168 From Location to Targeted Risk . 170 Assessing and Managing Risk . 176 References . 181 Chapter 6 Targeting Emerging Market Clients I: The Rich and the Middle Classes . 1 8 4 Introduction . 184 Targeting the Rich: Globalization and Luxury . 185 Targeting the Upper-Middle Classes: Urban and Aspiring to Become Super Rich . 191 Disconnected Markets, Growth Potential: Mass Markets in Emerging Economies . 195 The New Middle Classes. 203 References . 210 Chapter 7 Targeting Emerging Market Clients II: Strategies for the Base of the Pyramid . 213 Introduction . 213 Making the Poor Visible . 213 vi Contents The BoP and Exclusion from Markets . 217 How Can Business Target the BoP Effectively? . 223 Building BoP Business Models, Not Just Products. 234 References . 235 Part III The Emergence of Emerging Market Multinationals— Implications for Managers and Scholars 239 Chapter 8 Multinationals Based in Emerging Markets: Features and Strategies . 242 Introduction . 242 What Are EMNEs? . 244 State-Owned Enterprises, Conglomerates, and Specialized Players . 254 Internationalization . 260 References . 263 Chapter 9 The Internationalization of Emerging Market MNEs: A Critical Examination of International Business Theories (Written with Ying Liu * ) . 266 Introduction . 266 The Roots of the IB Research . 271 A Review of Mainstream IB Theories and Their Applicability to the Internationalization of EMNEs . 272 Conclusion. 284 References . 285 C hapter 10 Conclusion . 294 Appendix From Third World to Emerging Markets: Definitions, Contexts, and Meanings . 305 Bibliography . 321 Index . 325 * Ying Liu (MBA, University of Connecticut) is a doctoral candidate in Management and International Business at Business School, Florida International University. She has an MBA degree in Operations and Information Management from University of Connecticut. Her current research interests include global strategy and international business of firms in emerging economies, inter-firm cooperation and competition, and corporate governance. Contents vii Foreword When the history of the late 20th and early 21 st centuries is written by future gen- erations, all the wars, terrorist incidents, and political upheavals will be reduced to a passing mention or a footnote. But one salient fact will be recorded—the emergence of 80 percent of the world’s population from poverty to a middle class status, from ignorance to enlightenment, and the transformation of their somnolent, regulated markets into economic dynamism. It will be remembered as the great rebalancing. As recently as the year 2000, emerging countries, despite comprising over three-quarters of the world’s popu- lation, had only a 40 percent share of world GDP. A mere 10 years later, this share had grown to 49 percent, and is on its way to 60 percent by 2025. Emerging market companies, long reduced to playing a servile role as low-margin com- modity exporters or mere assemblers of gadgets and toys, are now beginning to climb both ends of the “smiling curve” (a term popularized by Stan Shih, former CEO of Acer to suggest greater value capture in the R&D and brand portions of the value chain). Twenty-five years ago, almost no one in the West had heard of Lenovo, LG, Haier, Embraer, and Concha y Toro. Yet today, their research skills and brands out-innovate and outmaneuver the old champions like Apple, Elec- trolux, and Microsoft. Companies based in the BRICs punch above their weight class in global competition—as they indeed have to, because they are relatively new to international business, and their home base is still institutionally weak. No manager should be let loose in international competition, no student of business should be given a diploma, no CEOs should cocoon themselves in the relative serenity of their advanced home nation without an exposure to the conditions, economies, business practices, and requirements of doing business in emerging countries. A tsunami of opportunities, with heady currents, awaits there. Professor Farok J. Contractor Rutgers Business School viii Acknowledgments We wish to thank all the people who helped us through this project, in particular the entrepreneurs, managers, and workers who have been kind enough to share their experi- ences with us. We found amazing people in emerging markets, people who opened their doors to us, told us their stories, and, in short, helped us see a broader, certainly more complex and exciting picture of the realities in which they live and work. We thank all of them; this book would have been impossible without their help and generosity. We also owe a great deal to Susanna Siddiqui, who did an amazing job at integrating our work and improving its style and narrative. Thanks also to Melina, for her help in collecting and assembling data for the project. —The authors I owe special acknowledgments to several people, including my dad. The idea for this project initially developed through conversations I had with him during our walks through the countryside—and he believed in this work long before I did. I also wish to thank my wife, Sara, for supporting me throughout the project and especially in its most stressful moments; my mum and brother; Susanna; Sara Roberts; and my friends in Costa Rica, the UK, Italy, Brazil, Hong Kong, Nicaragua, Chile, Peru, the Czech Re- public, and many other places. Thank you all. — Luciano Ciravegna My thanks, for many reasons, to Christina and Izabelle. — Robert Fitzgerald I would like to thank my former mentor late Professor John Dunning and Professor Farok J. Contractor, who supported me every step of the way in my professional devel- opment. Over the years my doctoral students have been an excellent pool with which to work and have stimulating intellectual conversations on new research projects. Their continuous encouragement and friendship made a profound impact on my career, and I dedicate this book to them. —Sumit Kundu ix About the Author s Dr. Luciano Ciravegna is an Associate Professor in.