CHAPTER 9
UNDERSTANDING EMERGING MARKETS
III. DETAILED CHAPTER OUTLINE
THE DISTINCTION BETWEEN ADVANCED ECONOMIES, DEVELOPING
ECONOMIES, AND EMERGING MARKETS
■ Exhibit 9.1 highlights the advanced economies, developing economies, and
the emerging markets. The economies are differentiated by degree of economic
development and per capita income.
■ Advanced economies are post-industrial countries characterized by high per
capita income, highly competitive industries, and well-developed commercial
infrastructure.
■ Examples- advanced economies are the world’s richest countries and include
Australia, Canada, Japan, New Zealand, the United States, and Western
European countries.
■ Developing economies are low-income countries characterized by limited
industrialization and stagnant economies.
■ Examples- developing economies consist of low-income countries, with limited
industrialization and stagnant economies- e.g. Bangladesh, Nicaragua and Zaire.
■ Emerging market economies are a subset of former developing economies
that have achieved substantial industrialization, modernization, improved living
standards and remarkable economic growth since the 1980s.
■ Examples- some 27 countries are considered emerging markets- in East and
South Asia, Latin America, Middle East and Eastern Europe- largest emerging
markets are China, India, Brazil, and Russia.
■ Exhibit 9.2 provides an overview of the key differences among the three
groups of countries.
Advanced Economies
■ Mature state of industrial development, thus transitioned from manufacturing
economies into service-based economies.
■ Home to 14 percent of the world’s population, and account for half of world
GDP, over half of world trade in products, and three-quarters of world trade in
services.
■ Political systems- democratic, multiparty systems of government
■ Economic systems- typically based on capitalism, with relatively little
government intervention in business
■ Serious purchasing power, with few restrictions on international trade and
investment
■ They host the world's largest MNEs
■ Example- Ireland, which has one of the world’s best performing economies,
with much FDI from foreign manufacturers in high-tech industries, such as
Gateway and Polaroid.
Developing Economies
■ Low discretionary incomes, limited proportion of personal income spent on
purchases other than food, clothing, and housing.
■ In developing economies, 17% live on less than $1 per day; 40% live on less
than $2 per day.
■ The combination of low income and high birth rates tends to perpetuate
poverty.
■ Misnomer-sometimes called underdeveloped countries or third-world countriesthese terms are imprecise because, despite poor economic conditions, the
countries tend to be highly developed in historical and cultural terms.
■ Hindered by high infant mortality, malnutrition, short life expectancy, illiteracy,
and poor education systems, which correlates with economic development, the
vicious cycle of poverty, persists.
■ Some 95% of the world’s AIDS victims are found in developing economies.
■ Productivity is stagnant; living standards deteriorate.
■ Debt- Governments in developing economies are often severely indebtedcountries in Africa, Latin America, and South Asia have debt levels close to their
annual GDP.
■ Bureaucracy- much of Africa’s poverty is the result of government policies that
discourage entrepreneurship, trade, and investment.
◘ Example- starting a new business:
● In sub-Saharan countries in Africa involves an average of 11
different approvals, and takes 62 days to complete.
● In the advanced economies, takes an average of 6 approvals,
and 17 days to complete.
■ When countries are cut off from the global economy, the result is increased
poverty and unemployment– conditions that can give rise to revolution, terrorism,
and war.
■ Exhibit 9.3 illustrates some substantial differences in critical trade conditions
across the three country groups.
Emerging Market Countries
■ Most distinguishing characteristic- countries are enjoying rapidly improving
living standards and a growing middle class with rising economic aspirations.
■ 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, Saudi Arabia, Singapore, South Korea, and
Taiwan have developed beyond the emerging market stage.
● 2004- emerging markets- the Czech Republic, Hungary, and
Poland, 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.
■ Developing economies becoming emerging markets:
◘ Examples:
● European countries of Estonia, Latvia, Lithuania, Slovakia
● Latin American countries of Costa Rica, Panama, and Uruguay
● Kazakhstan, Nigeria, Vietnam, and the United Arab Emirates
■ Economic prosperity varies within emerging markets- there are usually two sets
of economies – those in urban areas (more developed economic infrastructure)
and those in rural areas (less discretionary income)
■ Transition economies= Privatization of former state enterprises- since 1989
after transition from centrally planned economies into liberalized marketsthe Czech Republic, Hungary, and Poland. Also China and Russia
■ Transition economy changes:
◘ Important first steps in attracting foreign direct investment- transition
economies engaged in large-scale privatization of state-owned enterprises.
◘ Excessive regulation and entrenched government bureaucracy, now are
introducing legal frameworks to protect business and consumer interests and
ensure intellectual private property rights.
◘ Russia- some painful changes:
● Within a few years of the collapse of the Soviet Union, the
Russian economy shrunk by nearly half the size it had been at the beginning of
its transformation in 1989.
● Russia endured high inflation with annual price increases
reaching 100%, hindering foreign investment and economic development.
● Shaking off the Soviet legacy required the country to restructure
not just firms and institutions, but also adopt new values about private ownership,
profits, intellectual property, and other fundamental aspects of a free-market
economy.
● Initially, western companies doing business in Russia found it
difficult to recruit managers understand modern management practices.
■ Transition economies liberalized their markets- many foreign companies
initiated trade and investment relationships with them.
■ Privatization provided many opportunities for foreign firms to enter these
markets by purchasing former state enterprises. In Eastern Europe, Western
companies are leveraging inexpensive labor and other advantages in the region
to manufacture products bound for export markets.
■ 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.
■ Exhibit 9.4 contrasts national characteristics of emerging markets with
advanced and developing economies.
■ Exhibit 9.5 shows that emerging markets account for over 40 percent of world
GDP. They represent over 30 percent of exports and receive over 20 percent of
FDI.
■Mid-2000s, the emerging markets collectively enjoyed an average annual GDP
growth rate of nearly 7%, a remarkable feat.
■ Exhibit 9.6 illustrates emerging market economies have been growing much
faster than those of the advanced economies.
■ Emerging market advantages:
◘ Low-cost labor, knowledge workers, government support, low-cost
capital, and powerful, highly networked conglomerates
■ New Global Challengers- top firms from rapidly developing emerging markets
that are fast becoming key global contenders.
◘ Example● Orascom Telecom, an Egyptian mobile telecommunications
provider that has leveraged managerial skills, superior technology, and
rapid growth to become one of the leading telecoms in Africa and the
Middle East
● Management has excelled at local branding and tailoring
telephone products and services to local pocketbooks
■ Largest emerging market:
◘ China- 1.3 billion people (one-fifth of the world total)
◘ Economy continues to grow at an impressive rate of nearly 10%
◘ New global MNEs-Shanghai Automotive (China’s top automaker),
Sinopec (a large oil company), and Shanghai Baosteel (a steel
manufacturer)
GLOBAL TREND
China: Growing Role in International Business
■ Economic reforms- within a communist regime, China began pursuing market
reforms in the late 1970s.
■ Explosive growth:
◘ GDP quadrupled during the next 30 years.
◘ 1993 – exports were $78 billion
◘ 2006- exports surged to $974 billion
◘ Income per person is still modest at around $6,800
◘ 2007 became the second-largest economy in the world (after the U.S. in
Purchasing Power Parity terms)
■ China's challenges:
◘ Job sustainability- China struggled to sustain job growth for tens of
millions of workers laid off from state-owned enterprises, migrants, and new
entrants to the workforce.
◘ Drifters- Roughly one hundred million rural workers drift between
villages and the huge cities, many subsisting through part-time, low-paying jobs.
◘ Poor infrastructure in communications and transportation, regional
differences in language and autonomous local governments
■ WTO in 2001- FDI poured in, China’s role as a global manufacturing site
expanded, triggering massive exports to Europe, the U.S., etc.
■ China buys roughly 20% of the world's aluminum, copper, washing machines,
soybeans, poultry, and ice cream. It consumes roughly one-third of the world's
coal, cotton, fish, rice, and cigarettes. The country buys one-quarter of the
world’s steel and one-half its pork. It is home to 20 percent of the world's cell
phone users.
■ Conclusions:
◘ Rapid industrialization means that the country needs to import aircraft,
machinery, production equipment, telecommunications technology, and various
raw materials.
◘ Higher commodity prices- demand from China
◘ Environmental degradation- eight of the 10 most polluted cities in the
world are in China; they releases 13% of global carbon dioxide emissions,
second only to the U.S. (23%). There are also serious problems of water
pollution, deforestation, desertification, and soil problems.
■ Opportunities- for western firms marketing technologies and environmental
protection equipment
■ Foreign firms-to profit from China’s low-cost labor and growing affluence,
thousands of foreign companies set up sales offices and manufacturing facilities ,
but success has come slowly, or not at all.
■ Wal-Mart sourced over $30 billion of merchandise from China in 2007- saved
immensely.
■ The biggest problem is that China is still relatively poor.
■ Realistic target consumer segment is 250 million middle-class residents.
■ Success stories (requires deep understanding of the market and long-term
commitment): Coca-Cola, General Motors, McDonald's, Motorola, Airbus, and
Volkswagen.
WHAT MAKES EMERGING MARKETS ATTRACTIVE FOR INTERNATIONAL
BUSINESS
■ Emerging markets are attractive: target markets, manufacturing bases, and
sourcing destinations.
Emerging Markets as Target Markets
■ Growing middle class - emerging markets have become important –represent
substantial demand for electronics and automobiles and health care services.
■ The largest emerging markets have doubled their share of world imports in the
last few years.
■ Emerging markets are excellent targets for manufactured products, technology,
and sophisticated technology:
◘ Textile machinery industry in India is huge
◘ Oil and gas exploration plays a vital role in Russia
◘ Agriculture is a major sector in China.
■ Emerging markets- niche markets:
◘ Lockheed Aircraft, whose Hercules turboprop is a popular airliner in
poorer countries, has developed transport planes that carry bulk commodities at
relatively low costs.
◘ Novartis and Pfizer are pharmaceutical firms that reap big profits from
selling vaccines and medicines that can be stored without refrigeration when
shipped to distant markets.
◘ Airbus Industries is a leading commercial aircraft manufacturer based in
Europe. It has developed a double-decker plane for both passengers and cargo,
targeted to increasing traffic between advanced and emerging markets.
■ Demand is growing fastest in emerging markets- Black & Decker and Robert
Bosch, the fastest-growing markets are in Asia, Latin America, Africa, and the
Middle East
■ Governments and state enterprises are targets for sale of infrastructure-related
products/services- machinery, power transmission equipment, transportation
equipment, high-technology products, etc.
Emerging Markets as Manufacturing Bases
■ Emerging markets have long served as platforms for manufacturing by global
MNEs.
■ Advantages:
◘ Home to low-wage, high-quality labor for manufacturing and assembly
operations.
◘ Large reserves of raw materials and natural resources.
● South Africa is a key source for industrial diamonds.
● Brazil long has been a center for mining bauxite, the main
ingredient in aluminum.
● Thailand has become an important manufacturing location for
Japanese MNEs such as Sony, Sharp, and Mitsubishi.
● Malaysia and Taiwan- Motorola, Intel, and Philips manufacture
semiconductors there
● Mexico and China- platforms for consumer electronics and auto
assembly
■ Industry advantages:
◘ South Korea in electronics, semiconductors, and automobiles
◘ Taiwan and Malaysia in personal computers
◘ South Africa in mining
◘ South Korea’s Samsung is already the world’s leading producer of
semiconductors and flat screen TVs.
Emerging Markets as Sourcing Destinations
■ Outsourcing- the procurement of selected value-adding activities, including
production of intermediate goods or finished products, from independent,
external suppliers- helps foreign firms become more efficient, concentrate on
their core competences, and obtain competitive advantages.
■ Offshoring- when sourcing involves foreign suppliers or production bases.
■ Global sourcing- refers to the procurement of products and services from
foreign locations. Procurement can be from either independent suppliers or
company-owned subsidiaries.
■ Emerging markets have served as excellent platforms for sourcing:
◘ MNEs have established call centers in Eastern Europe, India, and the
Philippines.
◘ Dell and IBM outsource certain technological functions to knowledge
workers in India.
◘ Intel and Microsoft have much of their programming activities performed
in Bangalore, India.
■ Investments from abroad benefit emerging markets as they lead to new jobs
and production capacity, transfer of technology and linkages to the global
marketplace.
ESTIMATING THE TRUE POTENTIAL OF EMERGING MARKETS
■ Challenges- estimating the true potential of emerging market demand:
◘ Limited availability of data sources or reliability of information
◘ Market research may be more costly than in advanced economies
■ Three practical approaches for developing more reliable estimates of market
potential- per-capita income, size of middle-class, and market potential indicators
Per-capita Income as an Indicator of Market Potential
■ Market potential of individual markets may be assessed with aggregate country
data, such as gross national income (GNI) or per-capita GDP, expressed in
terms of a reference currency, such as the U.S. dollar.
■ Exhibit 9.7- per-capita GDP, using market exchange rates vs. purchasing
power parity exchange rates, is depicted for a sample of emerging markets and
the United States.
■ Purchasing power parity adjustment is a more realistic indicator of purchasing
power of consumers in emerging and developing economies- it more accurately
represents the amount of products that consumers can buy in a given country,
using their own currency and consistent with their own standard of living-and
helps explain why firms increasingly target emerging markets despite the
seemingly low income levels.
■ 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).
■ 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).
■ Four reasons why caution should be used even when per-capita income is
adjusted for purchasing power parity:
◘ First, managers must adjust the numbers for the existence of an
informal economy—economic transactions that are not officially recorded and
therefore left out of government calculations of a nation's GDP, e.g. barter
exchanges.
◘ Second, the great majority of the population is on the low end of the
income scale in emerging markets (and developing economies), ‘mean’ or
‘average’ does not accurately represent a non-normal distribution; often, the
median or the modal income would reveal a better understanding.
◘ Third, household income is several times larger than per-capita income
because of multiple wage earners in these countries.
◘ Fourth, governments in these countries may under-report national
income so they can qualify for low-interest loans and grants from international aid
agencies and development banks.
■ Other market potential indicators- including GDP growth rate, income
distribution, commercial infrastructure, the rate of urbanization, consumer
expenditures for discretionary items and unemployment rate.
Middle Class as an Indicator of Market Potential
■ The middle class represents the proportion of people in between the wealthy
and the poor, has economic independence and consume many discretionary
items, including electronics, furniture, automobiles, recreation, and education.
■ In emerging markets, the size and growth rate of the middle class serve as
signals of a dynamic market economy.
■ Exhibit 9.8 provides data for a sample of emerging markets with sizeable
middle-class populations- income percentage and per capita GDP (PPP).
■ While India and Indonesia feature large middle-class populations in absolute
terms, per-capita GDP in these countries is rather modest, especially when
compared to South Korea, China, Russia, and Mexico- although income is
relatively high at 49 and 48 percent, respectively.
■ Brazil- middle class citizens control only about 35 percent of national income.
■ Demographic trends indicate that, in the coming two decades, the proportion of
middle-class households in emerging markets will become much bigger, with
enormous spending power.
Use of a Comprehensive Index to Measure Market Potential
■ Exhibit 9.9 presents a comprehensive approach, the Emerging Market
Potential Index (EMPI).
■ The EMPI compares emerging market countries using factors that taken
together, provide firms with a realistic measure of export market potential.
■ For emerging markets, the following dimensions serve as comprehensive
indicators of market potential (For a detailed discussion of the EMPI
methodology, see Cavusgil, 1997).
◘ Market Size: the country’s population, especially those living in urban
areas
◘ Market Growth Rate: the country’s real GDP growth rate
◘ Market Intensity: private consumption and gross national income per
capita represent discretionary expenditures of citizens
◘ Market Consumption Capacity: The percentage share of income held by
the country’s middle class
◘ Commercial Infrastructure: characteristics such as number of mobile
phone subscribers, density of telephone lines, number of PCs, density of paved
roads, and population per retail outlet
◘ Economic Freedom: the degree to which government intervenes in
business
◘ Market Receptivity: the particular emerging market’s inclination to trade
with the exporter’s country as estimated by the volume of imports
◘ Country Risk: the degree of political risk
■ Managers can use the EMPI in several ways:
◘ First, they can use the rankings as an objective basis for prioritizing
emerging markets in the course of planning international expansion.
◘ Second, on-line EMPI rankings are interactive, so users can rank
markets on the basis on any of the eight dimensions making up the overall Index
(see the EMPI at globalEDGE™, globaledge.msu.edu).
◘ Third, managers can modify the assigned weights to fit the unique
characteristics of their own industry.
◘ Fourth, managers may add additional indicators that are not currently
included in the EMPI as a way of refining the tool for greater precision, or they
may add additional countries beyond the emerging markets already represented
in the Index.
RISKS AND CHALLENGES OF DOING BUSINESS IN EMERGING MARKETS
Political instability
■ The absence of reliable government authorities adds to business costs,
increases risks, and reduces managers’ ability to forecast business conditions.
■ Political instability is associated with corruption and weak legal frameworks that
discourage investment.
■ Example- Russia- Bureaucratic practices favor well-connected, home-grown
firms threaten the business activities of foreign firms, i.e. denying access to
Russia’s energy resources- harming foreign investor confidence.
Weak intellectual property protection
■ Even if they exist, laws that safeguard intellectual property rights may not be
enforced, or the judicial process may be painfully slow.
■ Examples◘ Argentina- enforcement of copyrights on recorded music, videos, books,
and computer software is inconsistent- laws against Internet piracy are weak and
ineffective.
◘ China Indonesia, and Russia - counterfeiting is common, especially with
software, DVDs, and CDs.
◘ India- weak patent laws discourage investment by foreign firms.
Bureaucracy, red tape, and lack of transparency
■ Burdensome administrative rules, as well as excessive requirements for
licenses, approvals, and paperwork, delay business activities.
■ Example- American International Group (AIG) formed a joint venture with the
giant Indian conglomerate Tata, to enter India's underserved $8 billion insurance
market, and it still took six years before the Indian government granted AIG
permission to sell property and life insurance to Indians.
■ Excessive bureaucracy means lack of transparency, i.e. legal and political
systems are not open and accountable. Where anti-corruption laws are weak,
bribery, kickbacks and extortion are common.
■ In Transparency International’s rankings, emerging markets such as Argentina,
Indonesia, and Venezuela experience substantial corruption.
Partner availability and qualifications
■ Foreign firms need to seek alliances with local partners in countries
characterized by inadequate legal and political frameworks- gaining access to
local market knowledge, supplier and distributor networks, and key government
contacts.
■ Qualified business partners in emerging markets- not readily available.
Dominance of family conglomerates
■ Many emerging market economies are dominated by family-owned rather than
publicly-owned businesses.
■ Family conglomerate (FC) is a large, privately-owned company that is highly
diversified, and control economic activity and employment in emerging markets.
■ Examples◘ South Korea, where they are called chaebols - the top 30 FCs account
for nearly half the assets and industry revenues in the Korean economy.
Samsung, the most famous Korean FC, has annual revenues of $140 billion.
◘ India where they are called business houses
◘ Latin America where they are called grupos
◘ Turkey where they are called holding companies - the Koc Group
accounts for about 20 percent of trading on the Istanbul Stock Exchange, and
Sabanci provides over five percent of Turkey’s national tax revenue.
■ A typical FC may hold the largest market share in each of several industries in
its home country.
■ FCs enjoy various competitive advantages in their home countries, such as
government protection and support, extensive networks in various industries,
superior market knowledge, and access to capital, e.g. Hyundai’s advantages
were overwhelming to foreign automakers.
■The origin and growth of FCs are partly attributable to governments, which
protect FCs by providing subsidies, loans, tax incentives, and market entry
barriers to competitors- sometimes, the government may even launch the FC.
■ FCs provide huge tax revenues and facilitate national economic development.
■ FC dominance in emerging markets suggests that they will be formidable
competitors or capable partners.
STRATEGIES FOR DOING BUSINESS IN EMERGING MARKETS
■ Unique approaches for different market conditions.
■ Examples◘ Toyota markets simple, low-cost car models in low-income countries.
◘ Toyota has built a large factory and aims to boost its share of the India
car market to 10 percent by 2010.
◘ General Motors is building low-cost cars targeted to emerging markets
such as China, India, and Russia.
◘ Renault, Volkswagen, and other big carmakers are following suit.
Partnering with Family Conglomerates
■ Family conglomerates are key players.
■ Most major FCs in Korea; Koc and Sabanci in Turkey; Vitro in Mexico; Astra in
Indonesia- own their own financing operations in the form of insurance
companies, banks, and securities brokers, and own distribution channels.
■ FCs can make valuable venture partners in emerging markets.
■ Advantages:
(1.) reduce risks, time, and capital requirements of new market entry
(2.) develop relationships with governments and other key, local players
(3.) target market opportunities more rapidly and effectively
(4.) overcome infrastructure-related hurdles
(5.) leverage FC’s resources and local contacts.
■ Successful examples◘ Ford partnered with Kia to introduce the Sable line of cars in South
Korea-Kia's strong distribution and after-service network.
◘ Digital Equipment Corporation (DEC) designated Tatung, a Taiwanese
FC, as the main distributor of its workstations and client-server products in
Taiwan- Tatung's local experience and distribution network.
◘ In Turkey, Sabanci entered a joint venture with Danone, the French
yogurt producer and owner of the Evian brand of bottled water. Danone brought
ample technical knowledge in packaging and bottling, and a reputation for
healthy and environmentally friendly products, but it lacked information on the
local market. As the Turkish market leader, Sabanci knows the market, retailers,
and distributors- resulting in Danone the bottled water market leader in the first
year.
Marketing to Governments in Emerging Markets
■ In emerging markets, government agencies and state-owned enterprises are
important customer groups:
◘ Governments buy enormous quantities of products (such as computers,
furniture, office supplies, and motor vehicles) and services (such as architectural,
legal, and consulting services).
◘ State enterprises in areas such as railways, airlines, banking, oil,
chemicals, and steel buy goods and services from foreign companies.
◘ Public sector influences the procurement activities of various private or
semi-private corporations.
■ Request for proposals (RFPs) or tenders- government agencies (buyer)
seeking bids from suppliers to procure bulk commodities, equipment, and
technology or to build power plants, highways, dams, and public housing.
■ Vendors submit bids to the government.
■ Governments prefer dealing with vendors that offer complete sales and service
packages- which requires substantial competencies and resources.
■ Governments are attracted by deals that create local jobs, employ local
resources, reduce import dependence, and provide other country-level
advantages.
■ Examples- Bechtel, Siemens, General Electric, Hitachi regularly participate in
bidding for global tenders from emerging market governments.
■ Three Gorges Dam on the Yangtze River in China, will be fully operational in
2009, following 16 years of construction- will cost $25 billion, will be the largest
hydroelectric dam in the world- global contractors involved- ABB, Kvaerner,
Voith, Siemens, and General Electric.
Skillfully Challenge Emerging Market Competitors
■ Advantages such as low-cost labor, skilled workforce, government support, and
FCs are fostering the rise of firms that are capturing market share from
incumbent international players.
■ Example- India’s Mahindra & Mahindra (farm equipment industry) has been
grabbing market share from John Deere and Komatsu, with brands such as the
Mahindra 5500, a powerful, high-quality tractor that sells for far less than
competing models.
■ Advanced economy firms must:
◘ Conduct research to understand the new challengers
◘ Acquire new capabilities that build competitive advantages (R&D
investment, partnering with competitors, leveraging low-cost labor).
CATERING TO ECONOMIC DEVELOPMENT NEEDS OF EMERGING
MARKETS AND DEVELOPING ECONOMIES
■ Internationalizing firms are more involved in fostering economic development in
emerging markets- a form of corporate social responsibility because they help
developing economies grow- most cases they also make good business sense:
◘ Economic development through profitable modernization projects
◘ Entrepreneurship through small-scale loans
Fostering Economic Development with Profitable Projects
■ Historically few firms targeted poor countries- however- If firms market
appropriate products and employ suitable strategies, doing business in emerging
markets and developing economies can be profitable.
■ Examples- innovative solutions:
◘ Unilever and P&G sell Sunsilk and Pantene shampoo in India for less
than $0.02 per mini-sachet.
◘ Narayana Hrudayalaya sells health insurance for less than $0.20 per
person per month in India.
◘ Amul, one of India’s largest processed food companies, sells a wide
range of food products to millions of poor people.
◘ Ericsson, the Swedish telecom modernized the telecom infrastructure in
rural parts of Tanzania, and other parts of Africa. Between 1998 and 2004, the
number of mobile-phone users in Africa grew to 81 million – the fastest growth
worldwide.
◘ The emergence of a significant cell phone market in Africa led to the
development of related industries and the launch of local firms that produce
accessories, such as devices for recharging cell phone batteries. Thus,
Ericsson’s experiences suggest that market-based solutions not only contribute
to social and economic transformation, but can be profitable as well.
◘ Ericsson also modernized much of Russia’s antiquated phone systems;
installed Hungary’s digital telephone system (in partnership with local
government); was instrumental in expanding Vietnam’s telecommunications
network, and manufactured optical fiber cables in partnership with the Birla
Group in India- one of the largest family conglomerates.
◘ New business models – to be profitable- volume is the key.
◘ Partnering with state-owned enterprises builds competitive advantages
in emerging markets.
● Development of infrastructure in transportation, communications,
and energy systems
● Job creation and contribute to regional and sector development.
● Investment generates local tax revenues, which can be spent to
improve living standards among the poor.
● Technology transfer promotes local innovation and enterprise.
● Corporate citizenship- community-oriented social programs that
foster economic and social development
Microfinance to Facilitate Entrepreneurship
■ Microfinance refers to providing small-scale financial services, such as
“microcredit” and “microloans,” that assist businesses in poor countries-providing
small loans, frequently less than $100, small-scale entrepreneurs (primarily
women) accumulate sufficient capital to launch businesses that help pull them
out of poverty.
■ This concept led economics professor Muhammad Yunus to found the
Grameen Bank in Bangladesh in 1974- now has over 2,100 branches- with 17
microfinance organizations in China- and has helped millions of Grameen
borrowers in Bangladesh rise out of acute poverty.
■ World Bank estimates there are more than 7,000 microfinance institutions,
serving some 16 million poor people in developing economies.
■ Thanks to the success of microfinance, Yunus was awarded the 2006 Nobel
Peace Prize.
■ Similar efforts have been inspired in dozens of poor countries worldwide, often
sponsored by philanthropic organizations such as the Bill and Melinda Gates
Foundation.
■ Proponents point to how a small amount of money can have a dynamic, ripple
effect on many lives in a village.
■ Microfinance has gained credibility in the mainstream banking industry- with
other forms of small-scale financial services offered in poor countries worldwide,
including insurance and mortgage lending.