OUTPERFORMERS: HIGH-GROWTH EMERGING ECONOMIES AND THE COMPANIES THAT PROPEL THEM SEPTEMBER 2018 AboutSince itsMGI founding in 1990, the McKinsey Global Institute (MGI) has sought to develop a deeper understanding of the evolving global economy. As the business and economics research arm of McKinsey & Company, MGI aims to provide leaders in the commercial, public, and social sectors with the facts and insights on which to base management and policy decisions. MGI research combines the disciplines of economics and management, employing the analytical tools of economics with the insights of business leaders. Our “micro-to-macro” methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy. MGI’s in-depth reports have covered more than 20 countries and 30 industries. 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Copyright © McKinsey & Company 2018 OUTPERFORMERS: HIGH-GROWTH EMERGING ECONOMIES AND THE COMPANIES THAT PROPEL THEM SEPTEMBER 2018 Jonathan Woetzel | Shanghai Anu Madgavkar | Mumbai Jeongmin Seong | Shanghai James Manyika | San Francisco Kevin Sneader | Hong Kong Oliver Tonby | Singapore Andrés Cadena | Bogota Rajat Gupta | Mumbai Acha Leke | Johannesburg Hayoung Kim | Washington, DC Shishir Gupta | Delhi PREFACE Emerging economies are the engine of growth for the global economy, yet not all are alike. Some have achieved rapid growth over prolonged periods—fast enough and long enough to close a part or most of the gap with advanced economies—while others have not. To understand these divergences, and to identify lessons for all aspirants in the evolving global landscape, MGI has undertaken wide-ranging research into the enablers of sustained high economic growth among emerging economies. We focus on two intertwined aspects that strike us as essential but underrepresented in the literature on development economics: government actions that encourage higher productivity, income, and demand, and the role played by large, ambitious, and globally competitive companies. We aim to provide policy makers, corporate leaders, and global investors with a new understanding of the growth opportunities ahead and the characteristics of successful emerging market champions. This study is an analysis of the long-term economic growth patterns of emerging economies. It does not explore broader characteristics of economies, such as political processes, types of government, or the functioning of civil society. This research was led by Jonathan Woetzel, a McKinsey senior partner and a director of MGI based in Shanghai; Anu Madgavkar, an MGI partner in Mumbai; Jeongmin Seong, an MGI senior fellow in Shanghai; and James Manyika, the chairman of MGI, in San Francisco. Several McKinsey senior partners across the globe provided insight and guidance. They are Andrés Cadena in Bogotá; Rajat Gupta in Mumbai; Acha Leke in Johannesburg; Kevin Sneader, McKinsey’s managing partner and former head of the firm’s offices in the Asia–Pacific region; and Oliver Tonby in Singapore. We are also grateful to Jacques Bughin, a McKinsey senior partner and MGI director in Brussels; Tarek Elmasry, a McKinsey senior partner in Dubai; Sree Ramaswamy, an MGI partner in Washington; and Mekala Krishnan, an MGI senior fellow in Boston. Shishir Gupta, Paul Jacobson, Hayoung Kim, and Aditi Ramdorai led the research team in different periods. The team comprised Abdulla Abdulaal, Sruthi Chekuri, Nazrul Johari, Yuvika Motwani, Alberto Ramos, Rafael Rivera, Thea Tan, and Eleni Watts. Many McKinsey colleagues gave technical advice and analytical support as we developed this report. At MGI, we are grateful to Nicolas Grosman, Susan Lund, Jan Mischke, Jaana Remes, and Vivien Singer. From McKinsey offices around the world, we would like to thank Jorg Schubert and Yassir Zouaoui in Dubai, Elena Kuznetsova in Moscow, John Dowdy in London, Karel Eloot in Shanghai, Noshir Kaka and Vivek Pandit in Mumbai, Tim Koller in New York, and Tilman Tacke in Munich. Other McKinsey colleagues who gave support include Jonathan Ablett, Rishi Arora, Eduardo Doryan, Tari Ellis, Heather Hanselman, Nikhil Khaitan, Krzysztof Kwiatkowski, Debanwita Roy, Daniella Seiler, Gurneet Singh Dandona, Shivika Syal, and Soyoko Umeno. We are deeply indebted to our academic advisers, who challenged our thinking and provided valuable feedback and guidance through the research. We thank Miriam Altman, a member of South Africa’s National Planning Commission; Jonathan Anderson, a principal at Emerging Advisors Group, a China-based macroeconomic research firm; Justin Y. Lin, dean at the Institute of New Structural Economics at Peking University; Rakesh Mohan, a senior fellow at the Jackson Institute for Global Affairs at Yale University; Dani Rodrik, Ford Foundation Professor of International Political Economy at Harvard’s John F. Kennedy School of Government; and Andrew Sheng, a distinguished fellow of the Asia Global Institute at the University of Hong Kong and chief adviser to the China Banking Regulatory Commission. We also thank the many business leaders, experts, investors, and entrepreneurs who shared their insights confidentially in our survey. This report was edited and produced by senior editor Mark A. Stein, editorial director Peter Gumbel, editorial production manager Julie Philpot, senior graphic designers Marisa Carder and Patrick White, and graphic design specialist Margo Shimasaki. MGI’s external communications team—Nienke Beuwer in Amsterdam, Cathy Gui in Shanghai, and Rebeca Robboy in San Francisco—managed dissemination and publicity, while digital editor Lauren Meling provided support for online publication and social media. We thank Deadra Henderson, MGI’s manager of personnel and administration, and MGI knowledge operations specialists Timothy Beacom, Karen P. Jones, and Nura Funda for their support. Photographs are by George Steinmetz. We are grateful for all the input we have received, but the final report is ours, and all errors are our own. This report contributes to MGI’s mission to help business and policy leaders understand the forces transforming the global economy, identify strategic locations, and prepare for the next wave of growth. As with all MGI research, this work is independent and has not been commissioned or sponsored in any way by any business, government, or other institution. We welcome your comments on the research at [email protected]. Jacques Bughin Director, McKinsey Global Institute Senior partner, McKinsey & Company Brussels James Manyika Chairman and Director, McKinsey Global Institute Senior partner, McKinsey & Company San Francisco Jonathan Woetzel Director, McKinsey Global Institute Senior partner, McKinsey & Company Shanghai September 2018 w Young entrepreneur at a technology innovation center in Nairobi, Kenya. © Waldo Swiegers/Bloomberg/Getty Images CONTENTS HIGHLIGHTS In brief Page vi 33 Summary of findings Page 1 Rising incomes 1. Eighteen developing economies that outperformed their peers Page 33 63 2. Policies that enabled exceptional growth Page 43 South-south trade 3. Emerging-market firms as aspiring global leaders Page 63 89 4. New opportunities for emerging economies in changing times Page 89 The next wave? 5. Looking to the next outperformers Page 119 Technical appendix Page 137 Bibliography Page 149 IN BRIEF OUTPERFORMERS: HIGH-GROWTH EMERGING ECONOMIES AND THE COMPANIES THAT PROPEL THEM Emerging economies are the engine of global growth, Competition and contested leadership in the private but the performance of individual economies varies sector are key features of these dynamic economies, considerably. In this research, we identify outperforming with the best-performing companies subject to fierce countries that have experienced strong and sustained competition at home. Less than half (45 percent)