Emerging Markets Opportunities - An Analysis

By M. Isi Eromosele

Companies are increasingly looking to emerging markets like China, India, Brazil and Nigeria as a vital source of growth. However, these companies often lack an effective strategy for identifying which countries to do business in.

In formulating their globalization strategies for emerging countries, there are five business contexts that companies should consider. When choosing these strategies, companies need to analyze how the product, labor and capital markets work and don't work in their target countries.

This will help them understand the differences between home markets and those in emerging countries. Additionally, each country's social and political environment shapes those markets.

The five contexts below form the basis for a strategic foundation that anchors a multiple choice of key markets. Multinational corporations usually look at either the macro factors (the degree of openness and the sociopolitical atmosphere) or some of the market factors, but few pay attention to both. This needs to change.

Political and Social Systems

Every country's political system affects its product, labor and capital markets and how they operate. In socialist societies like China, for instance, workers cannot form independent trade unions in the labor market, which affects wage levels. A country's social environment is also important. In South Africa, for example, the government's support for the transfer of assets to the historically disenfranchised native African community has affected the development of the capital market.

Identifying Power Centers

Executives would do well to identify a country's power centers, such as its bureaucracy, media, and civil society and ascertain which types of checks and balances are in place. Managers must also determine how decentralized the political system is, if the government is subject to oversight and whether bureaucrats and politicians are independent from one another.

The thorny relationships between ethnic, regional, and linguistic groups in emerging markets affect foreign investors. In Malaysia, for instance, foreign companies should enter into joint ventures only after checking if their potential partners belong to the majority Malay community or the economically dominant Chinese community, so as not to conflict with the government's long-standing policy of transferring some assets from Chinese to Malays.

Openness

The more open a country's economy, the more likely it is that global intermediaries will be allowed to operate there. Multinationals, therefore, will find it easier to function in markets that are more open because they can use the services of both the global and local intermediaries. However, openness can be a double-edged sword: A government that allows local companies to access the global capital market neutralizes one of foreign companies' key advantages.

However, the concept of "open" can be deceptive. For example, China is considered an open economy because the government welcomes foreign investment but India is regarded as a relatively closed economy because of the lukewarm reception the Indian government gives multinationals.

Consequently, while it may be true that multinational companies can invest in China more easily than they can in India, managers in India are more inclined to be market oriented and globally aware than managers are in China.

Market Contexts

The two macro contexts above, namely political and social systems and openness, shape the market contexts in emerging economies. Openness affects the development of markets. If a country's capital markets are open to foreign investors, financial intermediaries will become more sophisticated.

Product Markets

Developing countries have opened up their markets and grown rapidly during the past decade, but companies still struggle to get reliable information about consumers, especially those with low incomes. Developing a consumer finance business is tough, for example, because the data sources and credit histories that firms draw on in the West don't exist in emerging markets.

Market research and advertising are not yet fully developed in emerging countries, and it's difficult to find the deep databases on consumption patterns that allow companies to segment consumers in more-developed markets.

Labor Markets. 

In spite of emerging markets' large populations, multinationals have trouble recruiting managers and other skilled workers because the quality of talent is hard to ascertain. There are relatively few search firms and recruiting agencies in low-income countries.

The high-quality firms that do exist focus on top-level searches, so companies must scramble to identify middle-level managers, engineers, or floor supervisors. Engineering colleges, business schools, and training institutions have proliferated, but apart from an elite few, there's no way for companies to tell which schools produce skilled managers.

Capital Markets 

The capital and financial markets in emerging market countries are remarkable for their lack of sophistication. Apart from a few stock exchanges and government-appointed regulators, there aren't many reliable intermediaries like credit-rating agencies, investment analysts, merchant bankers, or venture capital firms.

Multinationals can't count on raising debt or equity capital locally to finance their operations. Like investors, creditors don't have access to accurate information on companies. Businesses can't easily assess the creditworthiness of other firms or collect receivables after they have extended credit to customers.

Corporate governance is also notoriously poor in many emerging markets. Transnational companies, therefore, can't trust their partners to adhere to local laws and joint venture agreements. In fact, since crony capitalism thrives in developing countries, multinationals can't assume that the profit motive alone is what's driving local firms.

Despite the challenges stated above, the emerging market countries holds tremendous and growing business opportunities for multinational companies.

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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