Emerging Market Strategies: Operating Model

By M. Isi Eromosele

The global formation of International Joint Ventures (IJVs) has consistently increased steadily in recent years, especially among emerging markets in Asia, Eastern Europe and Latin America. These particular emerging markets account for about 70 percent of all IJV agreements consummated by multi-national companies. As companies deepen their business activities in low cost emerging markets centers and seek to integrate them into their global value chains, the chances are that their existing global operating models may not mesh well with and be effective in emerging markets. A major strategic realignment is usually necessary to make this integration work.

The type of business activities, market opportunities, country regulations, tax advantages and experience in emerging markets are the key determinants of the operating model for emerging markets. One third of global companies currently use wholly owned subsidiaries in emerging markets as joint venture partners. As complete product lines are being built and new products developed with their joint venture partners, global companies need to maintain a considerable level of control over strategic business activities.

In the same context, companies expanding sales activities in emerging markets need access to deeper knowledge of local customers, support networks, distribution and advertising. Companies need to implement joint venture partnerships with experienced players in the local market.

Market opportunities also drive the choice of operating models in emerging markets. Multi-national companies who struggle to stay competitive and innovative can find local emerging market companies with a new line of products that has the potential to add significant cash flow. In such cases, the choice of operating model depends on size of investment, risk appetite, competition and expected return on investment. Companies should choose between joint ventures and acquisitions after thorough due diligence, depending on how these factors play out.

Country regulations and experience in specific countries can also drive decisions about operating models. The type of operating models varies significantly by country. In new and smaller emerging markets like Czech Republic and Mexico, companies would be better off with wholly owned subsidiaries compared to China and India. Many countries have strict regulations on operating models for foreign direct investments to support protectionism and growth of domestic industries. However, as many countries commit themselves to open market policies, these regulations are loosening.

As companies become economically stronger, they tend to ease such regulations on operating models. However, to stay competitive over the long term, wholly owned subsidiaries might not be the best option for building an understanding of local markets. Companies with more experience in emerging markets tend to choose wholly owned subsidiaries to expand their presence.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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