Business in Emerging Markets

This article will focus on the practices of businesses in emerging markets. Multinational corporations (MNC) are looking for growth opportunities, and they are finding them in emerging markets. Although the news appears to be promising for emerging markets, there are some concerns that need to be addressed. Six practices were identified to aid these businesses with developing new models on how to make the process successful and profitable. Given the growth of the emerging markets, many investors will be attracted to the opportunities. The role of the venture capitalist in emerging markets will be explored.

Keywords Board of Directors; BRICS Economies; Corporate Governance; Emerging Markets; Global Capital Markets; Intellectual Property Management; Joint Venture; Multinational Corporation (MNC); Venture Capital; Wholly Owned Subsidiary

International Business > Business in Emerging Markets

Overview

Multinational corporations (MNC) are looking for growth opportunities, and they are finding them in emerging markets. According to a study of multinational corporations, nearly 80 percent expect to gain a significant share in emerging markets, though less than 15 percent feel they have developed the proper marketing campaign to compete with local businesses and corporations (Market Wired, 2013). Antoine van Agtmael, a senior executive at World Bank Group, was the first person to use the term "emerging markets" (Jana, 2007). Many of the new ventures can be found in developing countries such as Brazil, Russia, India, China, and South Africa, which are known as the BRICS economies. The GDP of BRICS nations grew 4.1 percent from 2011 to 2013, as compared to 1.4 percent growth in developed countries during the same time period (G20, 2013). The significance of emerging markets has reached a point where corporations have recognized their influence on the corporations' bottom line. For example, Coca-Cola expects BRICS countries to make large contributions to its soft drink growth, planning to increase its investments in China by $4 billion in 2014 (BRICS Media, 2013). In the first quarter of 2012, Coca-Cola grew by 20 percent in India, 9 percent in China, and 4 percent in Brazil (BBC, 2012). Ford Motors predicts that the emerging markets will be major contributors to its goal to grow its worldwide automotive sales growth by 50 percent by 2015 (Meier, 2011). Some organizations have faced a slump in sales, but some businesses have tapped into the emerging markets as a source of revenue.

Concerns about Emerging Markets

Although the news appears to be promising for emerging markets, there are some concerns that need to be addressed. According to Olsen, Pinto and Virji (2005), there are some potential pitfalls:

  • Organizations must deal with the same growth challenges that they face in other markets. Some of these challenges deal with understanding what the customer wants, developing unique and cost effective offers, creating an effective marketing strategy and overcoming internal organizational barriers.
  • Organizations must be prepared for the instability and irregularity inherent within developing markets. Although venture capitalists are willing to fund these ventures, many seasoned venture capital managers are not willing to deal with fund management for these types of accounts.
  • Corporate headquarter offices tend to take too much time when making decisions and communicating information, which hinders subsidiaries from reacting to problems in a timely manner. Organizations must eliminate the bureaucratic red tape and provide opportunities to respond quickly when solving problems. Another option would be to empower the subsidiaries to make decisions up to a certain level.

Application

Practices to Aid in New Model Development

Olsen, Pinto and Virgi (2005) strongly believed that it was critical to develop a set of practices that would assist local and corporate leaders with achieving long-term success. Six practices were identified to aid these businesses with developing new models on how to make the process successful and profitable. The six practices were:

Establish & Review Long-Term Direction

Given the level of uncertainty in emerging markets, it is almost impossible to predict what the future will hold, and many managers find it difficult to develop a long-term strategy about what direction the project should go. In lieu of a traditional approach to strategic management, the researchers have determined that managers can develop some sort of direction by outlining:

  • Opportunities for a future market as well a SWOT analysis
  • A broad, tangible plan that addresses financial, competitive and operational needs
  • A two to four year short-term plan that will allow the organization to obtain its short-term goals.

Once these objectives have been met, the organization can focus on developing strategies over a period of time. These plans should allow the organization to adjust its strategy to new conditions. As the business continues to grow and be responsible about addressing issues as they arise, it will be in a better position to develop long-term strategies. Long term strategies (a) serve as a foundation for decision making, (b) extol local and corporate leader expectations (c) provide direction as to when a change in the local market necessitates a change in strategy.

Fit the Emerging Market Business within the Organizational Structure

Many multinational corporations hinder the decision making process of their subsidiaries that function in the emerging markets. This type of problem may occur in three ways, such as: (a) grouping emerging market subsidiaries with subsidiaries in the larger developed markets, (b) units cannot learn from one another when the organizations allow the structure or a process to minimize opportunities of sharing information, and (c) the organizational structure is outdated for the current trends and there is a constant need to make adjustments in the organizational design.

Define Roles & Decision Rights between Headquarters & the Local Leadership

Many organizations may encounter problems when they attempt to divide decision making rights between the corporate office and the local subsidiaries. The two extreme approaches are when the corporate office micromanages the subsidiaries and when the corporate office gives too much freedom to the subsidiaries and does not keep the senior management informed as to what is going on in the business. It is important for these organizations to create an organizational design and structure that will allow the two entities to share and divide the different levels of responsibility and decision making rights so that the emerging market can respond to the trends and conditions in the market.

Prioritize Local Decisions

Subsidiaries must develop an agenda that prioritizes the different levels of strategies that need to be performed in order to reach long term objectives. A potential process for the agenda may be to (a) place issues on the agenda list when they are identified and defined by local and corporate managers and (b) move the issues off the list once they are resolved.

Make Resource Allocation More Flexible

Many multinational corporations do not have a resource allocation system that can meet the needs of the emerging market subsidiaries. Therefore, these organizations will need to define the criteria for emerging market subsidiaries and align them with the corporate standards. In order to meet this need, some MNCs are using the stage-gated funding method and linking it to specific performance indicators.

Monitor & Manage Performance

Performance measurements must be related to the local country’s economic market and financial market conditions.

In order to fully experience the emerging market growth experience, multinational corporations will be required to balance each of the areas mentioned above.

Viewpoint

Financing for Emerging Markets

Litrack (2006) has been quoted as saying that "emerging market companies still lag behind in corporate governance. However, their success in developing businesses outside their home countries and their need to tap global capital markets is forcing them to devote more attention to their rules" (p. 158). Given the growth of the emerging markets, many investors will be attracted to the opportunities. For example, venture capitalists are attracted to this type of investment. There is a group of venture capitalists who specialize in assisting companies when they have reached the point when the company needs financing in order to expand the business, especially into emerging markets.

Venture Capital

Venture capital is usually available for a product or idea that may be risky, but has a high potential of yielding above average profits. Funds are invested in ventures that have not been discovered. The money may come from wealthy individuals, government sponsored Small Business Investment Corporations (SBICs), insurance companies, and corporations. It is more difficult to obtain financing from venture capitalists. A company must provide a formal proposal such as a business plan so that the venture capitalist may conduct a thorough evaluation of the company's records. Venture capitalists only approve a small percentage of the proposals that they receive.

Funding may be invested throughout the company's life cycle with funding being provided at both the beginning and later stages of growth. Venture capitalists may invest at different stages. Some firms may invest before the idea has been fully developed while others may provide funding during the early stages of the company's life. However, there is a group of venture capitalists who specialize in assisting companies when they have reached the point when the company needs financing in order to expand the business.

Support of the International Finance Corporation

The International Finance Corporation (IFC) has supported venture capitalist initiatives for small and medium sized organizations. The IFC has provided organizations in emerging markets with equity finance and management expertise. "Between 1978 and June 1995, the IFC invested $196 million in forty-nine venture capital funds whose total size at inception was $1.5 billion. The average size has been $30 million; however, recent funds have ranged up to $100 million" (International Finance Corporation, 1996, p. 1). The IMF continues to be one of the largest investors in emerging markets.

Factoring in Stakeholder Concern

As a result of the high stakes involved with the amount of money being invested and the risk factor, emerging market companies are being challenged to respond to the concerns and questions of their stakeholders, such as venture capitalists. There have been requests to respond to issues such as a "weak and unaccountable board of directors, inadequate internal controls, widespread corruption, and opaque ownership structures and transactions” (Litvack, 2006, p. 158). According to Litvack (2006), MNCs can address these issues by dealing with the following issues:

The Role of the Board

Many boards are selected based on their ability to champion the government or family's agenda. Therefore, boards tend not to be a separate entity of the organization. In order to resolve this issue, it may be in the organization's best interest to hold annual elections for board members.

The Audit Committee

Many emerging market corporations have complex ownership structures, which results in many intertwined transactions. These types of activities must be closely monitored in order to avoid the perception of inappropriate and unethical transactions taking place. There needs to be a check and balance process in place. Therefore, it is crucial that each board of directors entity has an audit committee to validate that the organization is operating ethically.

Corruption

It is believed that corruption is rampant in emerging market corporations. Therefore, there has to be an attempt to clean up this image. In order to combat corruption, corporations have (1) begun to enact stricter anti-bribery laws, (2) become tougher when enforcing national and international anti-bribery laws, and (3) started to require sound corporate governance and business ethics.

The Laws of the Market

Shareholders become concerned when the local laws and enforcement do not move quickly in order to eliminate corruption. However, laws such as the Foreign Corrupt Practices Act and the Sarbanes-Oxley Act force organizations to be in compliance and also increase the likelihood of securing funding.

Corporate Political Influence

It has been suggested that corporate influence and shareholder money has been used to shape public policy, especially in the United States. However, the F&C Asset Management has published a standard of good practice that is designed to keep emerging market companies in compliance. One of the recommendations is that donations to individual political candidates and parties should be avoided. Even when this cannot be validated, following the practices encourages organizations to disclose the information and seek shareholder approval before making a donation.

Conclusion

Wilfred Verstrate, CEO of Atradius, has been quoted as saying that "investments in emerging markets are expected to continue to grow, as a result of the attractive opportunities to benefit from affordable, often skilled, labor pools, competitive business environments, and improving political and economic operating environments in these markets" (Credit Control, 2005, p. 43). Atradius conducted a survey of multinational corporations and received feedback from the managers in 20 countries that were primarily located throughout Europe. The survey found that MNCs preferred to used the wholly owned subsidiary model in Central and Eastern Europe and the joint venture model in the Chinese and Southeast Asian markets, and MNCs in Central and Eastern Europe were concerned about corruption, whereas, MNCs in China were more concerned about intellectual property management.

Emerging markets are a trend that major corporations should continue to watch. As the attention of emerging markets has increased, Litvack (2006) identified three trends that have surfaced. The three trends are:

  • There are growing numbers of emerging market companies seeking secondary or primary listings within western capital markets.
  • Emerging market companies are selling good amounts of strategic stakes to Western companies
  • The numbers of companies based in emerging markets are growing.

The IFC asserted that funding small and medium sized organizations in emerging markets was profitable. IFC made significant contributions to many organizations, especially in Eastern Europe. IFC invested in eighteen funds in the region between 1989 and June, 1995 (International Finance Corporation, 1996). More recently, the IFC has concentrated its investments in International Development Association (IDA) countries. As IFC assisted these organizations, they have learned valuable lessons on how to manage these types of investments. Some key aspects of the learning process included acknowledging that:

  • A fund’s performance is most readily determined by the quality of fund management.

IFC identified that they needed to have seasoned venture capital fund managers to manage the accounts. However, they found that it was hard to attract this caliber of manager to oversee small funds in a difficult environment. As a result, there was a need to develop some strategies for attracting high quality venture capital managers to this area of business.

  • A fund’s structure succeeds when it provides performance incentives for managers and maintains shareholder interest.
  • The size of funds is another important factor.

IFC found that funds under $10 million performed worse than larger funds.

  • Many funds invested less capital and more slowing than expected.

Unfortunately, the IFC experienced problems in some of the countries. The venture capital concept conflicted with some of the local cultural values and practices. Members of the local community were not accustomed to sharing their plans with outsiders (i.e. foreigners).

  • Selling venture capital fund investments tends to be difficult.

IFC found that liquidating a venture capital fund took longer than expected.

Van Agtmael has written a book entitled The Emerging Markets Century: How a New Bread of World-Class Companies Is Overtaking the World. The book discusses 25 case studies from emerging markets and follows the growth and success of corporations doing business in Asia, Latin America and Russia. Van Agtmael highlights how these organizations have become regional and global leaders in their sectors and hopes the lessons will help other multinational corporations with growth strategies (Jana, 2007). It is his desire that his work serve as a wake-up call to American corporations. Companies that deal with emerging markets pose a serious threat the United States' economy. However, there are still opportunities for the American corporations to engage in the process. American corporations may sell to the emerging market companies or work as a supplier (Jana, 2007).

Terms & Concepts

Board of Directors: Group of individuals tasked with honoring the needs and wants of an organization’s shareholders.

BRICS Economies: Acronym that refers to the economies of Brazil, Russia, India, China, and South Africa combined. The term was first used in the Goldman Sachs report of 2003.

Corporate Governance: The body of regulations which control the administration of an organization; consists of the corporate charter, bylaws, formal policy and rule of law.

Emerging Markets: International economies which have been formed as a result of the spread of capitalism and the creation of a stock market. Like small growth companies, emerging markets exhibit high potential and high risk.

Global Capital Markets: Markets where capital, such as stocks and bonds, is traded on a global level.

Intellectual Property Management: The management of property that derives from the work of the mind or intellect, specifically, an idea, invention, trade secret, process, program, data, formula, patent, copyright, or trademark or application, right, or registration.

Joint Venture: A partnership or conglomerate, formed often to share risk or expertise.

Multinational Corporation (MNC): A corporation that has its facilities and other assets in at least one country other than its home country.

Wholly Owned Subsidiary: Subsidiary that has 100% of its stock owned by its parent company.

Venture Capital: Money that is invested in innovative organizations or products; also called risk capital, the risk of loss and potential for profit is often high.

Bibliography

BBC. (2012, 17 Apr). Coca-Cola sales boosted by emerging markets. Retrieved November 20, 2013 from http://www.bbc.co.uk/news/business-17742632

Boston Consulting Group. (2013, Sept 12). Multinational companies target high growth in emerging markets despite challenges. Market Wired. Retrieved November 20, 2013 from http://www.marketwired.com/press-release/multinational-companies-target-high-growth-in-emerging-markets-despite-challenges-1830340.htm

BRICS Post. (2013, May 9). Coca Cola want to make China their largest market. Retrieved November 20, 2013 from http://thebricspost.com/coca-cola-want-to-make-china-their-largest-market/#.Uo0qUycUT%5Fs

G20. (2013, Sept 5). BRICS countries are an important driving force of economic growth. Retrieved November 20, 2013 from http://www.g20.org/news/20130905/782451004.html

International Finance Corporation. (1996, September). Venture capital funds in emerging markets — Lessons from IFC's investments. Viewpoint. Retrieved June 20, 2007, from http://wbln0018.worldbank.org/html/FinancialSectorWeb.nsf/(attachmentweb)/note90/$FILE/note90.pdf.

Jana, R. (2007, January 10). Lessons from emerging-market leaders. Business Week Online, 22. Retrieved June 20, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=23685998&site=ehost-live

Litvack, K. (2006). Emerging markets clean up their act. Euromoney, 37, 158-160. Retrieved June 20, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=20004075&site=ehost-live

Meier, F. (2011, June 7). Ford sales goal: Up 50% in just 4 years on Asia, Africa growth. USA Today. Retrieved November 20, 2013 from http://content.usatoday.com/communities/driveon/post/2011/06/ford-sales-goal-up-50-to-8m-in-4-years-on-asia-africa-growth/1#.Uo0uEicUT%5Fs

Olsen, T., Pinto, M., & Virji, S. (2005). Navigating growth in emerging markets: Six rules for improving decision making between corporate and local leadership. Journal of Business Strategy, 26, 37-44. Retrieved June 20, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19329862&site=ehost-live

Survey reveals major risks involved in trading with emergent markets. (2005). Credit Control, 26, 43. Retrieved June 20, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19317551&site=ehost-live

Suggested Reading

Anshuman, R. (2007). Cross-border investments in emerging markets: A valuation perspective — Discussion. IIMB Management Review, 19, 65-81. Retrieved June 20, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=24522888&site=ehost-live

Das, D. (2003). Evolving financial market structure in the emerging market economies. Journal of Asset Management, 4, 131-145. Retrieved June 20, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=10289335&site=ehost-live

Goswami, N. (2007). Links creates counsel role. (Cover story). Lawyer, 21, 1. Retrieved June 20, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=25219478&site=ehost-live

Lazell, M., & Blackler, Z. (2007). Foster: Next, the universe. Building Design,(1755), 3. Retrieved June 20, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=23898228&site=ehost-live

Pereiro, L. (2006). The practice of investment valuation in emerging markets: Evidence from Argentina. Journal of Multinational Financial Management, 16 , 160-183. Retrieved June 20, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=20012148&site=ehost-live

Shah, A. M. (2012). Business strategies in the emerging markets. Journal of Asia-Pacific Business, 13, 4–15. Retrieved November 20, 2013 from EBSCO online database, Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=71707811&site=ehost-live

Essay by Marie Gould

Marie Gould is an Associate Professor and the Faculty Chair of the Business Administration Department at Peirce College in Philadelphia, Pennsylvania. She teaches in the areas of management, entrepreneurship, and international business. Ms. Gould has spent her career in both academia and the corporate world, and she enjoys helping people learn new things — whether it's by teaching, developing or mentoring.