ONE An Overview Of Emerging Markets

ONEAn Overview ofEmerging MarketsIntroductionEconomic and political developments are rapidly transforming our worldand prompting us to consider more global perspectives. Social and cultural changes are helping us renegotiate our identities as well as ourvalues, shaping our vision of the future. Communication and informationtechnologies continue to shrink geographical distances and put more ofthe world’s knowledge at our fingertips. Undoubtedly, the challengesahead of us will be formidable, but the opportunities in a globalizingworld are simply too great to ignore. Our potential to succeed in thisexciting environment will depend on our ability to recognize and act onthese opportunities.Over the next two decades, most of the world’s growth is expected tooccur in today’s emerging markets (EM). Many countries which wereassociated with high levels of volatility and risk have now liberalized andreformed. Once thought of as backward and ‘low tech’, these countriesare now rapidly transforming their economies. By adopting new technologies and production techniques, countries such as China, Brazil andIndia have become important locations for production. As purchasingpower continues to increase with development in these countries theyare becoming important consumer markets as well. Parallel to the rapidgrowth, they are also increasingly becoming competitors. While developed countries are faced with limited growth options and high costs ofproduction, emerging markets are growing rapidly and at a faster pace.Thus, in the 21st century, the focus of international business has shiftedtowards analysing emerging markets, and identifying opportunitieswithin these markets. Table 1.1 summarizes the changes in the emergingmarket environment in the past decade.01-CAVUSGIL ET AL-Ch-01.indd 124/10/2012 3:03:22 PM

2DOING BUSINESS IN EMERGING MARKETSTable 1.1 Trends in emerging marketsDeveloping countries (prior to 2000)Emerging markets (2000 and beyond)High risk for foreign businessEconomically and technologicallybackwardConsumers had poor purchasing powerRisks are increasingly manageableTechnologically competitiveFew opportunities for businessUnpredictable growth patternsIncreasing purchasing power amongconsumersOffer many opportunities, as largeuntapped markets and low-cost, highquality sourcesHigher income growth than developednationsFor Western managers struggling to sustain growth, cut costs and launchnew products and industries, emerging markets can be an ideal answer.With literacy and education levels rising, skilled labour in these countriesis relatively inexpensive. Over the next several years, millions of newconsumers in these emerging markets will desire and be able to affordWestern goods. Western firms can even enhance their capabilities in newmarkets. The old notion that developing countries are inherently risky forforeign businesses is no longer true. Conditions are continuing to stabilize, and our ability to predict and manage these risks has improved.Many factors have led to an increased focus on emerging markets ininternational business. The key factors are as follows:1 Market potential is no longer too small for marketing efforts.Maximum population growth and infrastructure development ratesare predicted for emerging economies. The size of the market ishuge as over 80% of the world population resides in emerging markets and cannot be ignored.2 Many emerging economies are investing in infrastructure development, especially in transportation, power and communication. Thishas helped bring down the costs of selling in emerging markets.3 Though some emerging markets have highly differentiated structures, the demand forecast has become easier, with professionalconsulting and advertising organizations established in most of thesemarkets.4 Many emerging economies have developed or accessed technologiesthat have made them competitive on a global basis. More and moremanagers in emerging economies are training themselves with modern management tools and skills, and this has made productionplanning much simpler.01-CAVUSGIL ET AL-Ch-01.indd 224/10/2012 3:03:22 PM

AN OVERVIEW OF EMERGING MARKETS 35 With governments in emerging economies providing full support forforeign investment, reaching business agreements is no longer acumbersome process. Though intercultural differences remain insome countries, more and more managers have realized the value ofcreating global ‘win–win’ relationships and alliances. Many Westernmanagers have started learning foreign languages and have a betterunderstanding of foreign cultures. Also, many local managers havebeen educated in the West and have gained vast experience in dealingwith Western firms and cultures.6 The information revolution has made more and more informationavailable about emerging economies, and business strategy formulation has become a lot easier.What are Emerging Markets?Terms such as ‘developing markets’, ‘emerging markets’ and ‘rapidlyindustrializing nations’ are often used interchangeably, which often leads toconfusion in understanding what emerging markets are. The term‘emerging market’ was first used by Antoine van Agtmael, an economist inthe World Bank, at the end of 1980s, to refer to rapidly growing economieswith rapid industrialization (Van Agtmael, 2007). The lists of emergingmarkets change rapidly as the markets included are often selectedaccording to growth indicators and projections on an annual basis.The lists also vary between institutions, as they all use a varied range ofindicators and different growth projections when creating their emergingmarket lists. Table 1.2 displays some examples of emerging market listsgenerated by different institutions.Box 1.1Who are Emerging Markets?The FTSE index breaks down stock market indices according to their development level; accordingly, the advanced emerging countries are Brazil, theCzech Republic, Hungary, Mexico, Malaysia, Poland, South Africa, Turkey andTaiwan. The secondary emerging countries are Chile, China, Columbia,Egypt, India, Indonesia, Malaysia, Morocco, Pakistan, Peru, the Philippines,Russia, Thailand and the UAE (FTSE, 2012).MSCI, a global provider of investment decision support tools, classifies theemerging markets of Brazil, Chile, Colombia, Mexico and Peru as part of the(Continued)01-CAVUSGIL ET AL-Ch-01.indd 324/10/2012 3:03:22 PM

4DOING BUSINESS IN EMERGING MARKETS(Continued)Americas; the Czech Republic, Egypt, Hungary, Morocco, Poland, Russia,South Africa and Turkey as within the Europe, Middle East and Africa region;and China, India, Indonesia, Korea, Malaysia, Taiwan and Thailand within theAsia region. This classification is based on the size of the companies, andmarket accessibility. With this framework, information such as market capitalization, openness to foreign ownership, efficiency of operational frameworkand the stability of the institutional framework is considered (MSCI, 2012).Grant Thornton has created an index called the ‘Emerging MarketsOpportunity Index’, using indicators such as GDP, size, population, international trade and future growth projections (Grant Thornton, 2010), whileGoldman Sachs considers BRICs and other emerging markets, referring tothe ‘Next Eleven’ as those economies which will grow rapidly in the21st century, and their list consists of Bangladesh, Egypt, Indonesia, Iran,Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam.This list is based on macroeconomic and political stability and openness totrade, as well as education levels (Wilson and Stupnytska, 2007).Table 1.2 Who are emerging hinaColombiaCzech Romania01-CAVUSGIL ET AL-Ch-01.indd ldman Sachs Grant Thorntonxxxxxxxxxxxxxxxxxxxxx

Thus, in the 21st century, the focus of international business has shifted towards analysing emerging markets, and identifying opportunities within these markets. Table 1.1 summarizes the changes in the emerging market environment in the past decade. 01-CAVUSGIL ET AL-Ch-01.indd 1 24/10/2012 3:03:22 PM