BUSS1000 mod 10 emerging markets

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Oct 30, 2023

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BUSS1000 mod 10 emerging markets Brief module notes WHAT IS AN EMERGING MARKET? “An emerging market is defined as an economy with low-to-middle per capita income that is in transition to a more developed economy, characterised by stable and sustained economic growth and high standards of living.” - Blanco, 2008 Identifying an emerging market “Absolute level of economic development, indicated by the average GDP per capita, the relative pace of economic development indicated by the GDP growth rate & the system of market governance and, in particular, the extent and stability of a free-market system; if the country is in the process of economic liberalisation from a command economy, it is sometimes defined as a transitional economy."- Arnold & Quelch, 1998 WHO ARE THE EMERGING MARKETS? - Conventional segmentation Goldman Sachs, one of the biggest investment consulting firms globally, first referred to 'BRIC ', as Brazil, Russia, India and China. At that time these economies were growing the most and showed the most potential. This acronym was later extended to BRIIC, to refer to Brazil, Russia, India, Indonesia, China & South Africa. - E7 countries The term “E7” was invented in 2006 by two economists: John Hawksworth and Gordon Cookson (PWC, 2006). The E7 (emerging 7 countries) are Brazil, Russia, India, Indonesia, China, Mexico and Turkey.

WHAT MAKES EMERGING MARKETS ATTRACTIVE - manufacturing/ outsourcing/ global sourcing INFRASTRUCTURE - Needed to support population increase Increased consumption E.g residential floor space, water, goods CHALLENGES OF DOING BUSINESS IN EMERGING MARKETS Risk: e.g political instability, corruption, cultural differences, poor labour laws, weak intellectual property protection LOF AND CAGE FRAMEWORKS - Liability of forgiveness (LOF) Firms are faced with additional social and economic costs when they operate in foreign markets (Zaheer, 1995). Additional costs of doing business with them include: ● Communication costs ● Resource costs ● Host government discrimination ● Cultural unfamiliarity ● Legal and institutional unfamiliarity - CAGE framework The CAGE framework is the distance between 2 countries as manifested along four dimensions, also the cultural, administrative, geographic and economic dimensions (Ghemawat, 2001). The main argument is that the strategy to enter a market cannot be decided on a country-by-country basis or on one size fits all approach. Rather, both similarities AND differences need to be considered.

1. Cultural Distance Differences in values, languages, religion, social norms and trust. 2. Administrative Distance Lack of common trading currency or political association, government policies, political hostility or closed market. 3. Geographical Distance Remoteness, different time zones, weak or under-developed communication and/or transportation links, lack of a common border or sea/river access, and size of country. 4. Economic Distance Differences in economic development level and consumer income; differences in costs and quality of natural resources, human resources, financial resources, infrastructure, intermediate inputs and information or knowledge. Going beyond LOF and CAGE frameworks Every firm either buys input(s) or sells output(s). The input markets are: ● Labour ● Capital ● Product The output markets are: ● Product (raw materials/finish goods) ● Services. We need to build country specific understanding of multiple factors and build the ability to navigate through ‘institutional void’. ENTERING AN EMERGING MARKET Key factors: 1. Political and social system (political structure, civil society) - Do you know the political and social system well enough? 2. Openness (modes of entry) - Is the market open to having foreign investors? 3. Product markets - are the product markets well-established? Is there a lot of competitiveness? Are people ready for your products? 4. Labour markets - What are the labour markets? Do you need inexpensive labour or skilled labour with a particular language and education? 5. Capital markets - What type of banks do they have operating? Would they loan money or support a foreign venture? Are you going to trade in their currency or use your home currency or maybe a mutual currency such as the US dollar? LEVERAGING EMERGING MARKETS IN YOUR HOME MARKET Conventional approach

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The core argument for a conventional approach is the economy of scale but there are challenges. Developed market products do not always meet the criteria of the emerging markets due to gaps in: ● Income ● Infrastructure (energy, transportation, telecom etc...) ● Sustainability. Reverse innovation Another approach to doing business in emerging markets is reverse innovation. This is about generating successful innovation in emerging markets then, export the knowledge and innovations back to the developed markets. This approach can help to rethink the products and identify new markets for growth. Challenges with reverse innovation Challenges include:

● Resistance to shifting power and control ● Reshape the organisational model ● The expectation of an in-country team. Approaches Project level actions - Establish radical goals - Practise clean-slate organisational design - Leverage global resources - Choose team leaders without conflicting interests. Top level actions - Rebranding the company’s future - Shifting people and power to emerging markets - Increase R&D spending in emerging markets Case study: Unilever V2. https://canvas.sydney.edu.au/courses/47998/pages/10-dot-12-your-tutorial-2? module_item_id=1944377 Additional Research You should also have a look at Unilever's website - what does their Code of Business Principles say about corruption and other ethical behaviours? Note down the research to help you with your preparation for the client. Consider some of the resources mentioned in this Week's module e.g. Corruption Perception Index, and World Bank Global Competitiveness Index/Report. How does South Africa, Brazil and the USA differ? Consider as well culture... have a look at Hofstede's cultural dimensions Links to an external site. , how do the three locations differ and how does that compare to Unilever's base country (UK)? Discussion questions Unilever is considering reducing their workforce as a result of moving to remote working in their factories. The three countries to be significantly impacted will be South Africa,

Brazil and the United States. Not only are they considering downsizing their workforce, but they are also considering which location to establish their virtual headquarters. - Liability of forgiveness (LOF) Firms are faced with additional social and economic costs when they operate in foreign markets (Zaheer, 1995). Additional costs of doing business with them include: ● Communication costs ● Resource costs ● Host government discrimination ● Cultural unfamiliarity ● Legal and institutional unfamiliarity - CAGE framework The CAGE framework is the distance between 2 countries as manifested along four dimensions, also the cultural, administrative, geographic and economic dimensions (Ghemawat, 2001). The main argument is that the strategy to enter a market cannot be decided on a country-by-country basis or on one size fits all approach. Rather, both similarities AND differences need to be considered. 5. Cultural Distance Differences in values, languages, religion, social norms and trust. 6. Administrative Distance Lack of common trading currency or political association, government policies, political hostility or closed market. 7. Geographical Distance Remoteness, different time zones, weak or under-developed communication and/or transportation links, lack of a common border or sea/river access, and size of country. 8. Economic Distance Differences in economic development level and consumer income; differences in costs and quality of natural resources, human resources, financial resources, infrastructure,

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intermediate inputs and information or knowledge. 1. Out of the three locations, which one would be the most attractive for the virtual headquarters and why? Base this on conducting a detailed analysis using LOF or CAGE for each of the different locations. USA: skilled workforce South Africa: Communication costs/ resource costs: electricity issues Host govt discrimination: inequality issues Cultural unfamiliarity: very diverse culturally no core language spoken by above 23% legal/ institution: very corrupt Brazil: Communication costs/ resource costs: Host govt discrimination: inequality issues Cultural unfamiliarity: legal/ institution: very corrupt USA- close to UK Communication costs/ resource costs: access to high speed internet, high resource costs Host govt discrimination: in some cases Cultural unfamiliarity: advantage of being an english speaking country legal/ institution: considerable regulation 2. What will be the challenges Unilever will have to prepare for with establishing their virtual headquarters in the location you recommend? Ensure you consider the dealings with factories in other countries. Regulation, Language barriers