PART 2
THE ENVIRONMENT OF INTERNATIONAL BUSINESS
CHAPTER 8
UNDERSTANDING EMERGING MARKETS
Instructor’s Manual by Marta Szabo White, Ph.D.
I. LECTURE STARTER/LAUNCHER
■ Did you know that the world’s number three and four top-selling beer brands are
produced by new global challengers based in Brazil (Skol, made by InBev) and China
(Snow, made by China Resources Snow Breweries)?
■ Together, these firms make over 50 million barrels of beer annually.
■ Questions– Who was awarded the 2006 Nobel Peace Prize, and why? What is the
underlying concept?
■ Answers– Economics professor Muhammad Yunus, for the founding of the Grameen
Bank in Bangladesh in 1974, which provides small loans, frequently less than $100, to
entrepreneurs who launch successful businesses in poor countries. The relevant
concept is microfinance, which provides small-scale financial services, such as
“microcredit” and “microloans” to encourage business development in impoverished
countries.
■ Now ask your students: “What is an emerging market?” What are the characteristics
of an emerging market? What distinguishes an emerging market from an advanced
economy (a rich country) and a developing economy? How many people live in
developing economies? (Answer: over 2 billion; They typically live on less than $5 per
day).
■ The Big Mac Index is always an interesting topic for students!
■ Big Mac Index – another way to illustrate the PPP concept is to examine the Big Mac
Index available at globalEDGE™ (globaledge.msu.edu) and developed by the
Economist (www.economist.com).
■ Exhibit 8.9 presents the Big Mac Index for the most recent year.
■ The Big Mac Index first gathers information on the price of hamburgers at McDonald’s
restaurants worldwide. It then compares the prices based on actual exchange rates to
those based on the PPP price of Big Macs to see whether a nation’s currency is
under-valued (most developing economies or emerging markets) or over-valued (most
European countries).
■ The Big Mac Index also implies that the Chinese yuan is significantly undervalued. It
suggests that the yuan (RMB) is 42.2% below its fair-value benchmark with the dollar. It
will be interesting to track what happens to the yuan now that it is no longer pegged to
the U.S. dollar, and will be a flexible currency.
■ In June 2010, China announced a reform of the yuan (RMB) exchange rate regime
and increased the yuan exchange rate flexibility mechanism rather than pegging it to the
U.S. dollar. The Chinese Central Bank said the move was in light of better economic
conditions in China and abroad. Critics had said that an undervalued yuan gave China
an unfair trade advantage, but Beijing said it had to protect itself from the global
recession. It will be interesting to track what happens to the yuan now that it is no longer
pegged to the U.S. dollar, and will be a flexible currency.
[1] YOUTUBE
Nicholas P. Sullivan – You Can Hear Me Now
Try discussing the topic “Microfinance to Facilitate Entrepreneurship”, for example, the
film Cell Phones Battle Poverty on YouTube. Big-business, technology, and a little
Bangladeshi village all came together to form a multi-million dollar company that
improves the lives of the poor.
http://www.youtube.com/watch?v=7vpqO8Fnq9E
or
http://www.tvplayvideos.com/1,7vpqO8Fnq9E/cine/Nicholas-P.-Sullivan-You-Can-Hear-
Me-Now
4.14 Minutes
[2] TED TALK
Charles Robertson: Africa’s next boom
Filmed June 2013
The past decade has seen slow and steady economic growth across the continent of
Africa. But economist Charles Robertson has a bold thesis: Africa’s about to boom. He
talks through a few of the indicators — from rising education levels to expanded global
investment (and not just from China) — that lead him to predict rapid growth for a billion
people, sooner than you may think.
https://www.ted.com/talks/charles_robertson_africa_s_next_boom?language=en
13.29 Minutes
[3] YOUTUBE
The future of emerging markets
The Economist
Published on Jul 20, 2012
Are there speed bumps ahead for emerging markets? Economic growth in the BRICS
has slowed and whilst there are cyclical reasons for this, there are more worrisome
structural ones too, say our correspondents
https://www.youtube.com/watch?v=f2eheKFqkCc
6.17 Minutes
[4] YOUTUBE
Emerging markets outlook for 2015
Financial Times
Published on Dec 21, 2014
China slowdown, collapsing currencies and the double-edged sword of cheaper oil:
Jonathan Wheatley and James Kynge of the FT’s emerging markets team discuss the
outlook for 2015 in EM countries.
https://www.youtube.com/watch?v=e4BOmVOLvhA
5.53 Minutes
[5] YOUTUBE
Emerging Markets Reloaded
Credit Suisse
Published on Jan 7, 2014
For what was once the greatest growth story on the planet, some of the major emerging
markets are now experiencing an economic slowdown. But members of the Credit
Suisse Research Institute believe growth in some markets will “reload” again in 2014
thanks to reform processes or the recovery in global growth.
https://www.youtube.com/watch?v=r2e0JEpDrs8
4.46 Minutes
[6] YOUTUBE
Emerging Markets: There and back again | Short View
Financial Times
Published on Jul 22, 2015
Emerging markets have given back all their gains made during the Chinese rebound of
2009-10. James Mackintosh, investment editor, considers whether EM is now down and
out or offering glimmers of hope.
https://www.youtube.com/watch?v=R0gBa_fVIZc
5.13 Minutes
[7] YOUTUBE
Emerging Markets: Where to Put Your Money
Bloomberg Business
Published on Apr 8, 2015
Bloomberg’s Gavin Serkin reports on emerging markets and his outlook for Nigeria. He
speaks on “Bloomberg Surveillance.”
https://www.youtube.com/watch?v=KrQeCIiXWaM
3.50 Minutes
[8] YOUTUBE
How Companies in Emerging Markets Break Out
Harvard Business Review
Uploaded on Jun 9, 2010
Krishna Palepu, Harvard Business School dean, explains how multinationals and local
companies can win in emerging markets.
https://www.youtube.com/watch?v=9REV9mIL7E8
10.39 Minutes
II. LEARNING OBJECTIVES AND THE OPENING VIGNETTE
LEARNING OBJECTIVES
After studying this chapter, students should be able to:
8.1 Understand advanced economies, developing economies, and emerging markets.
8.2 Know what makes emerging markets attractive for international business.
8.3 Learn how to assess the true potential of emerging markets.
8.4 Evaluate the risks and challenges of emerging markets.
8.5 Learn the success strategies for emerging markets.
8.6 Understand corporate social responsibility, sustainability, and the crisis of global
poverty.
Key Themes
■ In this chapter, there are six themes:
[1] Advanced Economies, Developing Economies, and Emerging Markets
[2] What Makes Emerging Markets Attractive for International Business
[3] Assessing the True Potential of Emerging Markets
[4] Risks and Challenges of Emerging Markets
[5] Success Strategies for Emerging Markets
[6] Corporate Social Responsibility, Sustainability, and the Crisis of Global
Poverty
■ The focus of this chapter is emerging market economies, which represent an
important milieu for growth-oriented companies.
■ In the broader context, advanced economies, developing economies, and
emerging markets are highlighted in Exhibit 8-1.
■ Each country poses distinctive opportunities and risks.
◘ Opportunities– ideal bases for manufacturing activities (low-cost labor),
popular destinations for global sourcing—procurement of products and services from
foreign locations, large reserves of raw materials/natural resources and potential
attractive partners in family conglomerates.
◘ Risks- political instability, inadequate legal and institutional frameworks, lack of
transparency, inadequate intellectual property protection, family conglomerates
dominate emerging markets and represent formidable rivals.
■ By analyzing a country in terms of its stage of economic development, strategic
managers gain insights into three important country characteristics:
◘ Purchasing power of its citizens
◘ Business sector sophistication
◘ Commercial infrastructure – communications, transportation, and energy
generation
■ Transition economies- centrally planned economies into liberalized market
restructuring and privatization play an important role in fostering trade and investment
with foreign companies and instigating more advanced stages of economic
development.
■ A central point emphasized throughout this chapter is what makes emerging markets
attractive for international business. The answer is global sourcing.
■ Estimating emerging market potential is an important component of due diligence.
This may be accomplished with three approaches:
◘ Per-capita income-Income should be adjusted for purchasing power parity
◘ The size and growth rate of the middle class
◘ Market potential indicators
■ Strategies must be adapted for doing business in emerging markets- tailor to the
market characteristics of lower income levels, unique requirements, and
products/services that larger MNEs are less interested in. These countries are ripe for
global sourcing and as export/direct investment destinations.
■ Corporate Social Responsibility- community-oriented social programs that foster
economic and social development- facilitates economic development needs of
emerging markets and developing economies through microfinance- financial
institutions that serve emerging-markets with small-scale loans to promote
entrepreneurial initiatives in poor countries.
■ Although Africa long stagnated in terms of trade, investment, and per capita income;
several African countries are beginning to experience economic success. Much of the
continent has begun to receive substantial investment from abroad. Africa is benefiting
from microfinance and widespread diffusion of mobile telephones. For MNEs,
agriculture, healthcare, and several other industries are promising investment targets.
Firms can succeed by applying innovative business models.
Teaching Tips
■ Historically, most trade and investment were conducted among the advanced
economies, the world’s wealthiest countries.
■ Developing economies and especially emerging markets now play important and
growing roles in international business.
■ Emerging markets are rapidly industrializing, growing economies.
■ Emerging markets since the 1980s have provided new impetus to worldwide
economic interconnectedness.
■ Most distinguishing characteristic- countries are enjoying rapidly improving living
standards and a growing middle class with rising economic aspirations.
■ Mid-2000s, the emerging markets collectively enjoyed an average annual GDP growth
rate of nearly 7%, a remarkable feat.
■ There are about 35 countries considered emerging markets- mainly in Asia, Latin
America, and Eastern Europe- largest emerging markets are Brazil, Russia, India
and China [BRIC] – registering substantial market liberalization, privatization, and
industrialization, fueling global economic transformation.
■ How many of the 35 countries can your students name?
■ Exhibit 8.3 illustrates the three groups of countries by depicting a map of the world at
night. The advanced economies represent the highest levels of industrialization, energy
consumption, pollution and are the most brightly lit on the map. Emerging market
countries also demonstrate significant economic activity. Conversely, developing
economies represent low levels of industrialization, as represented by large stretches of
Africa, central Asia, eastern Russia, and major parts of Latin America.
■ Sony conducts business in emerging markets such as Argentina, Brazil, China,
Turkey, Indonesia, Vietnam, and the Philippines.
■ Importance in the world economy is increasing as attractive destinations for exports,
FDI, and sourcing.
■ Emerging market countries are evolving towards wealthy nation status:
◘ Examples:
● Hong Kong, Israel, Singapore, South Korea, and Taiwan have
developed beyond the emerging market stage.
● Hungary, Poland, the Czech Republic, and other former East Bloc
countries have made great strides in political and economic restructuring.
These countries are well on their way to more advanced stages of economic
development.
● Recently, Bulgaria and Romania received a boost when they became
members of the European Union. By joining the EU, these countries had to adopt
stable monetary and trade policies. They leverage their low-cost labor to attract
investment from Western Europe, thereby boosting their economies.
■ Frontier Economies – Developing economies becoming emerging markets:
◘ Examples:
● European countries of Estonia, Latvia, Lithuania, Slovakia
● Latin American countries of Costa Rica, Panama, and Uruguay
● Kazakhstan, Nigeria, and the United Arab Emirates
■ Low-cost labor countries- Examples:
India, Russia, Brazil, China, and Mexico
■ Economic prosperity varies within emerging markets- there are usually two parallel
economies – those in urban areas (more developed economic infrastructure) and those
in rural areas (less discretionary income)
■ Exhibit 8.5 contrasts national characteristics of emerging markets with advanced and
developing economies.
■ Exhibit 8.6 illustrates the importance of emerging markets, e.g. emerging markets
account for over 40% of world GDP. They represent over 30% of exports and receive
over 20% of FDI.
■ Exhibit 8.7 depicts emerging market economies growing much faster than those of
the advanced economies.
■ Exhibit 8.10 provides Median Household Income for a Sample of Emerging Markets,
2015.
■ Demographic trends indicate that, in the coming two decades, the proportion of
middle-class households in emerging markets will become much larger, with enormous
spending power.
Commentary on the Opening Vignette:
THE NEW GLOBAL CHALLENGERS: MNEs FROM EMERGING MARKETS
Key message
This vignette illustrates ardent challengers from emerging markets that have
successfully ventured into global markets with global innovation to become global
contenders and leaders.
◘ Emerging market challengers:
● Mexico– Grupo Bimbo is one of the world’s leading baking companies,
present in 22 countries in Asia, Europe and America, with over 10,000 products
and 100 brands. http://www.grupobimbo.com/en/index.html
● 1945- From its humble beginnings, this privately-held company is
now a global player in the bread, bakery, and snack markets.
● Grupo Bimbo owns such brands as Sara Lee, Brownberry,
Arnold, Plus Vita, among others.
● Mexico– Cemex is one the world’s largest cement producers
● Russia– Lukoil has big ambitions in the global energy sector
● Turkey– Yildiz Holding- a diversified conglomerate which owns Godiva
Chocolatier and United Biscuits
● Turkey– Arcelik, the giant home appliance producer
● Brazil– Brasil Foods (BRF) – exemplifies the challengers’ international
entrepreneurial savvy.
● 2014- The firm had net sales of $29 billion.
● One-half of its sales derive from international markets.
● BRF operates farms, and markets processed foods and
ready-to-eat meals.
● BRF has built world-class distribution and supply-chain
management systems, and exports about half its annual production.
● Brazil– Embraer successfully taps the large pool of experienced but
low-cost engineers to become an innovative force in aerospace technology- zooming
past Canada’s Bombardier to become the world’s largest producer of regional jet
aircraft.
● China– Hisense
● Operates in multimedia, household appliance, technology
services, telecommunications, information technology.
● Real estate industries sells its products more than 130 countries.
● Hisense also makes stylish consumer electronics at low prices.
● China– Hong Kong- Johnson Electric- the world leader in small electric
motors for automotive and consumer applications
● Russia– Rusal is extracting the country’s rich reserves of bauxite to
produce aluminum for international markets.
■ The majority of the world’s natural resources are located in developing economies,
and a growing number of challengers use these to their advantage.
● China– CNOOC (China National Offshore Oil Corporation) has been
buying into oil and gas reserves in Asia and Africa.
■ Shifting markets- The success of MNEs from emerging markets suggests that the
character of international trade and investment is shifting.
■ What we are witnessing is just the tip of the iceberg.
■ Serious challenge- Thousands of emerging market firms have global dreams and are
pursuing those dreams to become NEW GLOBAL CHALLENGERS.
Uniqueness of the situation described
■ Emerging markets present a unique historical condition, one that will never be
duplicated.
■ Emerging markets include the “BRIC” countries of Brazil, Russia, India and China, in
addition to some two dozen rapidly growing economies such as Mexico and Turkey
that, in contrast to advanced economies, are experiencing rapid economic growth,
industrialization, and modernization.
■ Emerging market characteristics:
◘ Young population and a growing middle-class.
◘ Low-cost manufacturing bases, low-cost labor, home-country natural resources
(majority of the world’s natural resources are located in developing economies),
engineering and managerial talent that are often superior to those of advanced
economies.
◘ Commercial infrastructure- inadequate, evolving legal systems and a high-risk
business environment.
◘ Typically global challengers are family-owned or family-run businesses (family
conglomerates).
◘ Access to low-interest loans from home-country, government-owned banks.
■ Business models:
● Acquisitions– gaining access to key markets by acquiring important
local businesses
●Strategic Alliances– building relationships with major retailers, such as
Home Depot and Walmart
Global challengers represent an important trend in international business.
■ Emerging Markets- Foster highly capable firms that pose competitive challenges to
traditional MNEs from the advanced economies- Europe, Japan, and North America.
■ By 2025– Tata will be in the consideration set of consumers in addition to Mercedes or
Lexus for luxury automobiles.
■ Lukoil will be one of the major fuel sources like ExxonMobil or BP is today.
Classroom discussion
■ This vignette was inspired in part by a study from The Boston Consulting Group,
which identified the top 100 global challengers: “Meet the 2014 BCG Global
Challengers,” Boston Consulting Group, September 10, 2014; “Hisense a global leader
in smart TV market,” China Daily Europe, June 20, 2014; “Multipolarity: The New Global
Economy,” The World Bank, 2011.
■ Assign a short project to your students that involves researching this publication,
writing a short summary of this initiative and sharing their findings with the class.
Assignments such as this should cultivate students’ research and communication skills
(written and oral); a key trait listed by potential employers as absent in most graduates.
■ To direct students’ perspectives in the direction of emerging markets and how these
present unique opportunities and challenges to MNEs and SMEs, ask students whether
they have visited countries that are considered emerging markets. Then ask them to
think about differences that they observed in terms of infrastructure- transportation,
communications (e.g. Internet), services (health, food, utilities). Leverage their
examples to discuss the points in this vignette as outlined above. Once students invest
into the discussion by sharing their personal examples, they are more likely to be
interested in the learning points as well as remember them.