Managing Globalization:
Strategies for Emerging Markets
Dr. Jonathan P. Doh
Rammrath Chair in International Business
Wharton Executive Education
Securities Industry Institute
Outline of our session
Globalization:
Key Trends and
Strategic
Implications
Global
Strategy:
An Integrated
Perspective
Risk and Reward
In Emerging
and Developing
Countries
Relationship
Management
in Emerging
Markets
2
Is the world flat?

11/09/89 : when the walls came down and
the windows went up

08/09/95 : when Netscape went public

Workflow Software : let’s do lunch – have
your application talk to my application

Open sourcing : self-organizing collaborative
communities

Outsourcing : Y2K

Offshoring : running with gazelles, eating
with lions

Supply-chaining : eating sushi in Arkansas

In-sourcing : what the guys in funny brown
shirts are really doing

Informing : Google, Yahoo!, MSN Web
Search

The Steroids : digital, mobile, personal, and
virtual (…wireless the icing on the cake)
3
A “spiky” world – population
4
A “spiky” world – economic activity
5
A “spiky” world – innovation
6
Changing balance of economic power
At present, U.S. has largest GDP by far
* estimates
7
Source: Economist Intelligence Unit (2009)
Changing balance of economic power
China surpasses U.S. in 2020
8
Source: Economist Intelligence Unit (2009)
Changing balance of economic power
Picture is even clearer by 2030
9
Source: Economist Intelligence Unit (2009)
Changing balance of economic power
10
Source: Economist Intelligence Unit
Top 20 Financial Institutions 1999
By market cap US $B
Source: Financial Times, The decade for global banks, by Steven Bernard, Jeremy Lemer, Helen Warrell, Cleve Jones, Peter
Thal Larsen and Simon Briscoe, Published: March 22 2009 http://www.ft.com/cms/s/0/ea450788-1573-11de-b9a90000779fd2ac.html?nclick_check=1
11
Top 20 Financial Institutions 2009
By market cap US $B
12
Source: Financial Times, The decade for global banks, by Steven Bernard, Jeremy Lemer, Helen Warrell, Cleve Jones, Peter Thal
Larsen and Simon Briscoe, Published: March 22 2009 http://www.ft.com/cms/s/0/ea450788-1573-11de-b9a90000779fd2ac.html?nclick_check=1
Changing Global Demographics
Developing countries on the rise
1950
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13
China
Soviet Union
India
United States
Japan
Indonesia
Germany
Brazil
United Kingdom
Italy
France
Bangladesh
2007
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
China
India
United States
Indonesia
Brazil
Pakistan
Bangladesh
Nigeria
Russia
Japan
Mexico
Philippines
2050
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
India
China
United States
Indonesia
Ethiopia
Pakistan
Nigeria
Brazil
Bangladesh
Congo
Philippines
Mexico
Source: US Census Bureau (IDB) 2009
Outline of our morning
Globalization:
Key Trends and
Strategic
Implications
Risk and Reward
In Emerging
and Developing
Countries
Relationship
Management
in Emerging
Markets
14
Global
Strategy:
An Integrated
Perspective
Emerging market essentials
1.
What is an emerging market?
2.
What are these markets emerging from?
3.
What are these markets emerging to?
4.
What signals help identify a country as emerging?
5.
What signals suggest a country is submerging?
15
Emerging market: one definition

Definition

Rationale
16
Gross National Income (GNI)/capita (US$):

Between $1,001 (lower) and $9,999 (upper)

Excludes countries:

>$10,000 GNI/capita – deemed developed market

<$1,000 GNI/capita – deemed GAVI/developing market
World Bank definition of GNI:

Used 3-year average of exchange rates to
‘smooth’ out annual fluctuations due to
policies and interventions

Classified countries in low-, middle- and
high-income categories
Source: World Bank
Developing vs. Emerging Markets
Developing Countries
Emerging Markets
(prior to 2000)
(since 2000)
• High risk for foreign
investors
• Economically
underdeveloped
• Technologically inferior
• Low purchasing power
• Host government
restrictions
• Few significant
opportunities for foreign
business
17
• Risks increasingly
manageable
• Faster income growth than
developed countries
• Technologically
competitive
• Increasing purchasing
power
• Host government
liberalization
• Greater opportunities for
foreign business: BOP, OS
My perspective on emerging markets

Developing countries “on the move”

Consistent pattern of policy reform

Privatization (e.g. sale of SOEs)

Market liberalization (e.g. trade, regulatory)

Monetary policy (e.g. independent Central Bank)

Fiscal policy (e.g. efficient tax system)
Resultant record of sustainable growth


Faster than average annual growth

Growth in private (often foreign) capital)

Increased trade and FDI
18
Types of emerging markets
19
BRIC + N-11 economies
20
Snapshot of the N-11
Comparison of Nominal GDP (US$ at PPP)
Country
Bangladesh
2005
2008*
Growth
2020**
n/a
n/a
n/a
n/a
333.35
443.34
33.00%
1,165.16
705.16*
908.24
28.80%
2,081.75
634.56
837.07
31.91%
1,747.17
1,298.28*
1,699.28
30.89%
3,075.81
Mexico
244.64*
317.14
29.64%
628.79
Nigeria
340.30
422.53
24.16%
992.43
Pakistan
250.24*
317.97
27.06%
781.64
1,096.74
1,358.97
23.91%
2,678.01
Turkey
747.33*
915.21
22.46%
1,706.29
Vietnam
178.07*
240.78
35.22%
594.32
Egypt
Indonesia
Iran
Korea
Philippines
* estimates; ** forecasts
21
Source: Economist Intelligence Unit (2009)
China and India to lead global recovery
22
Source: The World Bank 5 October 2009
China and India to lead global recovery
23
Source: The World Bank 5 October 2009
Institutional voids
24
Source: Khanna, T., Palepu, K., & Sinha, J. (2005, June). Strategies to fit Emerging Markets. Harvard Business Review,
Institutional voids
Political / Social Systems








Political Accountability – free / fair elections
Political Accountability – independent judiciary
Government regulatory interference
Protection of private property rights
Independence of quasi-judiciary agencies
Religious, linguistic, ethnic, geographic tensions
Civil society and NGOs and Corruption
Development/independent finance regulator
25
Source: Khanna, T., Palepu, K., & Sinha, J. (2005, June). Strategies to fit Emerging Markets. Harvard Business Review,
Institutional voids
Openness









Receptivity to/restrictions on FDI
Local content/ownership requirements?
Presence/quality of foreign intermediaries
Support/constraints to new venture development
Restrictions on portfolio investment/FX
Import tariffs on intermediate/capital goods
Participation in FTAs/EIAs
Free flow of executives in/out of country
Financial liberalization (WTO/unilateral)
26
Source: Khanna, T., Palepu, K., & Sinha, J. (2005, June). Strategies to fit Emerging Markets. Harvard Business Review,
Institutional voids
Product Markets / Distribution








Development of transportation infrastructure
Development of distribution systems/networks
Existence and sophistication of market research
Availability of raw materials/dependability of suppliers
Government restrictions on FDI
Nature/quality of retail/credit system
Consumer receptivity to new products/services
Ability to develop network of branches or other financial
distribution systems
27
Source: Khanna, T., Palepu, K., & Sinha, J. (2005, June). Strategies to fit Emerging Markets. Harvard Business Review,
Institutional voids
Labor Markets








Educational Development
Employee mobility
Quality of training / management development
Pay / performance and motivation
Receptivity to foreign managers
Laws and regulations on labor reduction
Consumer receptivity to new products / services
Ability to deploy foreign nationals and hire / fire local
employees
28
Source: Khanna, T., Palepu, K., & Sinha, J. (2005, June). Strategies to fit Emerging Markets. Harvard Business Review,
Institutional voids
Capital Markets







Development of banking / insurance / securities
Ownership / transparency of institutions
Sophistication / liquidity of debt/equity markets
Reliability / quality of information on markets
Corporate governance / board independence
Regulatory effectiveness
Takeover / bankruptcy laws
29
Source: Khanna, T., Palepu, K., & Sinha, J. (2005, June). Strategies to fit Emerging Markets. Harvard Business Review,
Institutional voids
30
Source: Khanna, T., Palepu, K., & Sinha, J. (2005, June). Strategies to fit Emerging Markets. Harvard Business Review,
Outline of our morning
Globalization:
Key Trends and
Strategic
Implications
Global
Strategy:
An Integrated
Perspective
Risk and Reward
In Emerging
and Developing
Countries
Relationship
Management
in Emerging
Markets
31
Emerging market relationships



Relationship management in emerging markets is
complicated by institutional inadequacy, differences in
culture, and other socio-political issues
Global companies must navigate range of
relationships that include local/global partners,
government agencies, and other stakeholders
These relationships can make or break success of
global companies in EMs and lock in or lock out
presence for decades to come
>32
Emerging market relationships
Power
Distance

Extent to which less powerful members
of institutions and organizations accept
that power is distributed unequally


33
High power distance countries: people
blindly obey orders of superiors,
centralized organization structures
Low power distance countries: flatter and
decentralized organization structures,
smaller ratio of supervisors
Source: Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors, institutions, and organizations
across nations, 2nd ed. Thousand Oaks, CA: Sage.
Emerging market relationships
Power
Distance
Uncertainty
Avoidance

Extent to which people feel threatened
by ambiguous situations and have
created institutions to avoid such
situations


34
High uncertainty avoidance countries:
people have high need for security,
structured organizational activities, more
written rules, less risk taking
Low uncertainty avoidance countries: more
willing to accept risks associated with
unknown, less structured organizational
activities, fewer written rules, more risk
taking by managers
Source: Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors, institutions, and organizations
across nations, 2nd ed. Thousand Oaks, CA: Sage.
Emerging market relationships
Power
Distance

Individualism: Tendency of people to
look after themselves/family

Uncertainty
Avoidance

Individualism /
Collectivism
Collectivism: Tendency of people to
belong to groups or collectives and to
look after each other

35
Countries high in individualism: support
work ethic, greater individual initiative,
merit promotions
Countries high in collectivism: less support
of work ethic, less individual initiative,
seniority promotions
Source: Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors, institutions, and organizations
across nations, 2nd ed. Thousand Oaks, CA: Sage.
Emerging market relationships
Power
Distance

Masculinity: dominant social values are
success, money, things

Uncertainty
Avoidance

Individualism /
Collectivism
Femininity: a culture in which the
dominate social values are caring for
others and the quality of life

Masculinity /
Femininity
36
Countries high in masculinity: great
importance on earnings, recognition,
advancement, challenge, and wealth.
Countries high in femininity: importance on
cooperation, group decision, employment
security.
Source: Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors, institutions, and organizations
across nations, 2nd ed. Thousand Oaks, CA: Sage.
Cultural rankings
37
Power
Distance
Uncertainty
Avoidance
Individualism
(Collectivism)
Masculinity
China
80
40
20
66
Philippines
94
44
32
64
Malaysia
104
36
26
50
India
77
40
48
56
Czech Republic
57
74
58
57
Hungary
46
82
55
88
Poland
68
93
60
64
Slovakia
57
74
58
57
Mexico
81
82
38
69
Brazil
69
76
38
49
South Africa
49
49
65
63
US
40
46
91
62
EU (avg.)
45
74
61
59
Source: Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors, institutions, and organizations
across nations, 2nd ed. Thousand Oaks, CA: Sage.
Decision-making strategy in EMs

Emerging markets fraught with risk; makes decisionmaking difficult




Often leads to “wait and see” approach
Yet, first movers almost always win out
Later movers not only face barriers against incumbents,
but fierce competition from each other
First movers do not always need to “bet the store,” but
can use options approach to seed investments
38
China strategy

State of market prior to 2001



39
Major state commercial banks (SCB) following directed lending
practices towards other state owned enterprises
Non-performing loans significant and other signs of financial
mismanagement exist – huge risks
Chinese banking sector grows with other economic indicators
China strategy

China’s domestic reform









40
Interest rate liberalization
Clearer regulatory requirements
Transition traditional to “universal” banks
Integration of regulatory agencies
Relaxing foreign bank restrictions
Addressing corruption and abuse scandals
Greater investment transparency
IPO's for state owned banks
Government supported write-offs of bad debts
China strategy

WTO commitments




41
Dec 11, 2001 - China’s accession to WTO
Objective of WTO agreement was to open china’s market to
foreign competition
Several commitments to change trade policies, at all levels of
government
Deadline for complete implementation is December 11, 2006
China strategy

Risks




Corruption/Bribery/Embezzlement
Insolvency
Lack of Transparency
Reward



42
First Mover Advantage
IPO Opportunities
Huge Market Potential
China strategy

Staggered investments and payoffs




43
2002, HSBC takes 10% stake in Ping An Insurance, China's
second largest insurer for $600 million
2004, HSBC invests $1.8 billion for a 19.9% stake in BoCOM
2005, HSBC invests an additional HK$8.1 billion ($1.04 billion)
for an additional 9.91% stake in Ping An
Profits for China grow from $32 million in 2004 to $334m in
2005 to $708m for 2006
China strategy

Key strategies






44
Longstanding history and legacy in region
First mover – credit for taking risks when others hesitated
Staggered investments
Willingness to bring in managerial know-how, technology and
knowledge
“Role with punches” in terms of changing regulatory landscape
Invest where it counts
China strategy

Update






45
Industrial and Commercial Bank of China IPO raised $19.1
billion, largest IPO in history, valuing bank at more than $108
billion
Citigroup and partners buy Guangdong Development Bank
with effective control
2007: China opens financial sector to FDI
Ping An IPO
BoCom president Zhang Jianguo moves to China
Construction Bank
HSBC opened a new sub-branch in Beijing
Outline of our morning
Globalization:
Key Trends and
Strategic
Implications
Global
Strategy:
An Integrated
Perspective
Risk and Reward
In Emerging
and Developing
Countries
Relationship
Management
in Emerging
Markets
46
Three global leaders
Takes advantage of scale, but adapts for local
preferences
The “World’s Local Bank”
Emerging giant become a global competitor
47
Four global leaders: Nokia




31% market share in crowded Chinese market, well
ahead of the Motorola’s 10%
2005 sales in Greater China reached $4.5 billion - region
is company's biggest market, accounting for 11% of global
revenues, compared with 8% in the U.S.
In India Nokia has a 60% share, with sales in 2005 of
about $1 billion; by 2010 the company expects India to
be its No. 2 market
Designing products in China, using global platforms
48
Four global leaders: Nokia




March 2005: Opened first Indian factory, $150 million
facility near Madras that will turn out 20 million
inexpensive phones annually both for the local market
and export
Doubling the size of its plant in the Chinese city of
Dongguan
China is world's No. 1 cellular market, with 450 million
users and annual growth of 20%
While India is far smaller, with just 85 million users,
handset sales expected to double in 2006; total users 500
million by 2010
49
Four global leaders: HSBC

Headquartered in London; just moved CEO to HK



Listing on London, Hong Kong, Paris, New York and
Bermuda stock exchanges




Operates 8,500 offices in 88 countries
Over 110 million customers worldwide
Shares held by 220,000 shareholders from 119 countries
Market capitalization of US $165 billion
Assets of more than US $1.154 billion
“The World Local Bank” – Highly Successful
Marketing/Branding

50
Current Strategy is “Managing for Growth”
Four global leaders: HSBC

Investments in China


2002: Ping An - additional stake in 2005 - total 19.9%
2004: Bank of Communications – total 19.9%

2002: Purchase of Banco Internacional, S.A. (Bital)
in Mexico

2001: Acquired Demirbank, largest bank in Turkey

2007: HSBC Insurance acquires 50% less one share
of Hana Life Insurance Company
51
>51
Four global leaders: HSBC
Country
2004
(U.S. $ml)
2005
(U.S. $ml)
Change
2004-2005
Argentina
112
154
244
58
Brazil
208
281
406
44
China
-26
32
334
944
India
87
178
212
19
Indonesia
70
76
113
49
Malaysia
116
214
236
10
Mexico
9
774
923
19
Saudi Arabia
30
122
236
93
South Korea
65
89
94
6
Taiwan
45
107
68
-36
Turkey
59
142
265
87
UAE
130
192
308
60
Total
905
2,361
3,439
+ 46
18,943
20,966
+10.7
Total Profit Before Tax (All
countries)
52
2000
(U.S. $ml)
Four global leaders: HSBC
Country
2006
(U.S. $ml)
Change
(2006 over 2005)
Argentina
157
-36
Brazil
526
30
China
708
112
India
393
85
Indonesia
71
-37
Malaysia
274
16
Mexico
1009
9
Saudi Arabia
181
41
South Korea
48
-13
Taiwan
(23)
NA
Turkey
217
-18
Middle East
730
25
Other
166
-15
Total
4,533
19
22,086
5
Total Profit Before Tax (All countries)
53
Four global leaders: Tata

India's biggest group by market cap (~$60 billion)





Revenues $22 billion, 2.8 per cent of the country's GDP;
employs 250,000
28 publicly listed enterprises, Tata Steel, Tata Consultancy
Services, Tata Motors, Tata Tea
Wants sales abroad to make up 30% of total revenue
from 20% now
Account for 5% of India's annual exports
Investing in Australia, Bangladesh and South Africa to
increase overseas income
54
Four global leaders: Tata




Tata Motors is flagship: '1 Lakh Car ($2,000)
Seven sectors: Average Tata holding in each firm is 25%,
but in flagship businesses, such as Tata Motors, Tata Steel
and Tata Consulting Services (TCS), it is 65% or more
Tata floated 14% of shares of TCS for $1 billion
Since 2000, Tata has acquired Daewoo CV (truck
manufacturer) in South Korea, Tetley Group of Britain,
steel maker in Singapore, stake in a Spanish bus
component co. Hispano Carrocera
55
Four global leaders: Tata
56
Outline of our morning
Globalization:
Key Trends and
Strategic
Implications
Risk and Reward
In Emerging
and Developing
Countries
Relationship
Management
in Emerging
Markets
57
Global
Strategy:
An Integrated
Perspective
Managing Globalization:
Strategies for Emerging Markets
Dr. Jonathan P. Doh
Rammrath Chair in International Business
Wharton Executive Education
Securities Industry Institute