Doing Business in Emerging Markets
Going global is one thing, targeting emerging economies quite another. In this collection from our archives, HBS faculty discuss strategy development, government relations, exploiting local opportunities, and risk management when dealing in emerging economies.
Sharpening Your Skills dives into the HBS Working Knowledge archives to bring together articles on ways to improve your business skills.
Questions to be answered:
- How do I identify opportunities in emerging markets?
- How important are relations with the host country?
- What's key to risk management in emerging economies?
- What are the best ways to leverage local resources?
How do I identify opportunities in emerging markets?
How can multinationals, entrepreneurs, and investors identify and respond to new challenges and opportunities around the world? In this Q&A, HBS professors and strategy experts Tarun Khanna and Krishna G. Palepu offer a practical framework for succeeding in emerging markets. Key concepts include:
- The ambition level of large, fast-growing emerging markets around the world rivals that of companies in the United States in the late 19th and early 20th centuries.
- Khanna and Palepu outline how to identify and respond to institutional voids in product, labor, and capital markets.
- Investors and entrepreneurs can respond to niches in institutional infrastructure in the private sector, such as the need for information analyzers and advisors, aggregators and distributors, transaction facilitators, and more.
- A useful starting point for managers is to construct an institutional map to identify institutional voids—which may themselves present business opportunities.
- Western multinational companies as well as local entrepreneurs are innovating products to attract the emerging middle class. Such innovations could potentially benefit consumers living in mature markets.
How important are relations with the host country?
Google's threat to pull out of China is either a blow for Internet freedom or cover for a failed business strategy, depending on with whom you talk. Professor John A. Quelch looks behind the headlines in a new case. Key concepts include:
- China has become more emboldened and self-confident as a result of its increasing economic significance.
- Google acted precipitously without giving due consideration to the impact of its announcement on stakeholders.
- The Google issue has become a cause célèbre that exacerbates the already fragile and festering U.S.-China relationship.
What are the keys to risk management in emerging economies?
After a string of forced nationalizations of private enterprises in the 1960s and 1970s, the pendulum swung back and companies were again encouraged by host countries to build and run major infrastructure projects such as power and water. But a set of new property protections has done little to manage the risk in many of these politically unstable environments. Professor Louis T. Wells, coauthor of a new book on making foreign investment safe, discusses the current landscape. Key concepts include:
- Although property rights protections for investors in developing nations have improved since 1980, the new instruments are failing to satisfy the interests of either host countries or their business partners.
- Protections can be improved by developing a real consensus on the part of investors' home countries, host countries, and the investors themselves.
- Business managers must take a significant role in pushing for a multilateral agreement on foreign direct investment, or at least become active in promoting lesser changes that will lead to more balance and security in the current system. Otherwise businesses will lose profitable opportunities and find themselves in the middle of disputes that hurt their future prospects. And poor countries will fail to benefit from what investors can bring them.
- Absent strong protections, managers must ask themselves a series of questions before investing in developing countries, such as: Is my investment project politically sensitive? If so, will the country continue to need my participation in the project?
What are the best ways to leverage local resources?
Professor Michael Porter is a seminal thinker on developing strategies for competition on a global scale. Although this interview dates back to 1999, Porter's points about the importance for companies to establish "home bases" in the countries they operate, and take advantage of local knowledge clusters, are still valid today. Key concepts include:
- By taking advantage of local clusters of knowledge, companies can do things together without formal ownership or legal relationships.
- Emerging nations must create programs and incentives that encourage enterprises in free-trade zones to build linkages with the local economy.
- Companies must create a clear locational "home base" for each distinct product area, where strategy is set, core product and process technology are maintained, and a critical mass of sophisticated production and service activities reside.
- Seeing economic and social issues as separate agendas is not only wrong but counterproductive.