Chapter 9
Emerging Markets
1
Learning Objectives
To understand the special concerns that
must be considered by the international
manager dealing with emerging market
economies.
To survey the vast opportunities for trade
offered by emerging market economies.
To understand why economic change is
difficult and requires much adjustment.
To become aware that privatization offers new
opportunities for international trade and
investment.
2
Doing Business with
Transition Economies
The major market economies
emerging out of formerly
centrally planned economies
are:
Russia and the now independent
states of the former Soviet Union.
Eastern and central European nations
(Albania, Bulgaria, the Czech and
Slovak Republics, Hungary, Poland,
and Romania).
3
The Trade History of Socialist
Countries
After 1918, Socialist states had a monopoly on
foreign trade, which was concentrated in the
hands of organizations specifically authorized
by the state.
This trade structure isolated the firms and consumers
from the West and unlinked demand from supply.
The result was misallocated resources, ineffective
channels of distribution, and inefficiency due to lack of
competition.
Managers of plants were more concerned with
producing the quantities stipulated by a rigid central
plan than with producing products and quality desired.
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Perestroika and Glasnost
In the mid 1980’s, the Soviet Union developed
two new political and economic programs:
perestroika and glasnost
Perestroika was used to fundamentally reform the
Soviet Union economy by improving the overall
technological and industrial base as well as the quality
of life for Soviet citizens through increased availability
of food, housing, and consumer goods.
Glasnost was used to complement those efforts by
encouraging the free exchange of ideas and discussion
of problems, pluralistic participation in decisionmaking, and increased availability of information.
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Changes after 1989
With an unexpected suddenness, the
Iron Curtain disappeared, and within
three years, the Communist empire
ceased to exist
Eastern Europe and the former Soviet Union
shifted their political and economic
orientations toward a market economy.
Trade flows were redirected.
Austerity programs were introduced, which led
to a decrease in the standard of living.
All of these changes ended the Cold War.
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The Realities of Economic
Change
Many transition economies face infrastructure
shortages.
Capital shortages are also a major constraint.
It is difficult for corporations to respond to
demand because consumer knowledge is
vague.
Allocation mentality, or waiting for
instructions from above, represent a
management problem.
Employee and manager commitment can be
hard to find.
The changes complicate managerial decision
making.
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The Realities of Economic
Change (cont.)
Given the poor market orientation in the previous
business environment, managers must adapt their
behavior in these areas:
Problem Solving
Decision Making
Team Building
Customer Orientation
Development
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Adjusting to Global Change
Resistance to change should be
expected in countries that experience
rapid economic and political change.
The established market economies of
the West also must be prepared for
change due to:
The reorientation trade flows
Job shifts
Declines in employment
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International Business
Challenges
The frequent unavailability of convertible
currency makes many products out of reach for
citizens of emerging market economies.
Lack of protection of intellectual property
rights dissuade firms from investing in
emerging market economies.
Attempting to source products from emerging
market economies can be problematic.
The quality of products can be inferior in
emerging market economies.
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International Business
Opportunities
Some transition economies have
products that are unique in
performance and can be successfully
traded internationally.
Consumer products in transition
economies are gaining favor
because of competitive pricing.
There are substantial opportunities
for technology transfer.
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Reasons for State-owned
Enterprises
The reasons for the existence of state-owned
enterprises in emerging market economies
are:
Increased national security
Increased economic security
The investment is too large for the private sector
Governments rescue failing private enterprises by
placing them in government ownership
State-owned firms are more socially-oriented than
private firms which are more profit-oriented
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State-owned Enterprises and
International Business
The three types of activities where firms are
likely to encounter state-owned enterprises:
The Sourcing or
Marketing Process
Market Entry
International
Competition
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Drawbacks to State-owned
Enterprises
Competition is restrained, which results in
lower quality of goods and reduced
innovation.
The international competitiveness of stateowned enterprises declines, resulting in
the need for government subsidies.
Many government-controlled corporations
are losing money because the focus is on
job allocation rather than business.
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Reasons for Privatization
Through privatization, budgets can be reduced
and more efficient services can be provided.
Goods and services can be more competitive
and innovative.
Experience indicates that private enterprises
outperform state-run companies.
Privatization attracts foreign investment
capital.
Governments can use proceeds from
privatization to help fund other pressing
domestic needs.
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Privatization Opportunities
for International Firms
Existing firms can be acquired at low cost,
often with governmental support through tax
exemptions, investment grants, special
depreciation allowances, and low-interest
credits.
Since wages are low in countries where
privatization takes place, there is more
opportunity to build low-cost manufacturing
and sourcing bases.
The international firm can act as a catalyst by
accelerating the pace of transferring business
skills and technology and by boosting trade
prospects.
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The Less-developed Markets
The less developed markets in
the world include countries in:
Africa
Asia
Eastern Europe
Latin America
the Middle East
The emergence of these markets
presents a great opportunity for
citizens and companies alike.
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The World Economic Pyramid
Annual Per Capita Income
More than $20,000
Tiers
World Population
1
75 to 100 million
$1,500 to $20,000
2 and 3
Less than $1,500
4
1.5 to 1.75
billion
4 billion
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Multinational Firm’s Role
Multinational firms have experienced a
high rate of success when entering
transition economies for several reasons:
They tend to enter sectors that allow high profit
potential with minimal capital investments.
They increase in size only after they gain
experience and knowledge of the local markets.
The governments in transition economies award
special privileges to multinational firms.
As multinational firms mature in these economies,
the domestic market itself becomes a market
opportunity.
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World-class Competition
Many economies now recognize that they must
be world class competitors in order to develop
businesses.
Domestic firms enter into joint ventures with
global firms to tap into their knowledge base
and success.
This can be difficult, given that domestic firms
rarely have significant capital to contribute.
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