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1 Chapter 10 International Business: The New Realities, 3rd Edition by
Cavusgil, Knight, and Riesenberger Copyright © 2014 Pearson Education Inc.

2 The New Global Challengers
Some 100 companies from emerging markets are poised to become important 21st-century multinationals. Examples: Brazil: Embraer, Sadia & Perdiago, Natura Mexico: America Movil, Grupo Modelo India: Ranbaxy, Infosys, Tata Tea, WIPRO China: Galanz, Haier, Chunlan Group Corp., Lenovo, Pearl River Piano Turkey: Koc Holding, Vestel & Sisecam New global challengers are top firms from emerging markets that are fast becoming key contenders in world markets. One is Orascom Telecom (www.orascomtelecom.com), an Egyptian mobile telecommunications provider that has leveraged managerial skills, superior technology, and rapid growth to become an industry leader in Africa and the Middle East. Starting in 1997, management strung together a telecom empire of more than 80 million subscribers, stretching from North Africa to Bangladesh. Operating expenses in Egypt are much lower than in Europe because engineers and salespeople work for less. Management has excelled at local branding and tailoring telephone products and services to local pocketbooks. Each year, Forbes magazine catalogs the leading 2,000 global firms. Analysis reveals that between 2005 and 2011, a total of 158 MNEs entered the list from just four emerging market countries: China, India, Brazil, and Russia. During the same period, 295 firms from the United States, Japan, and the United Kingdom fell off the Forbes list. In 1990, only nineteen companies from low-income countries were among the Fortune Global 500 listing of the world’s largest MNEs. By 2011, China alone had 61 companies in the Global 500. These statistics reveal how many new global challengers are displacing traditional MNEs from the advanced economies and becoming key competitors in world markets. Managers need to devise innovative strategies to skillfully compete with them. China is the largest emerging market with a population of 1.3 billion people, one-fifth of the world’s total. Its economy continues to grow at an impressive rate, and its role in international business is expanding rapidly. The country has already produced numerous new global challengers, such as Shanghai Automotive (China’s top automaker), Sinopec (a large oil company), and Shanghai Baosteel (a steel manufacturer). Since 1993, the share of world merchandise exports from Japan, the United States, and most European countries has declined. In the same period, the proportion of goods produced and shipped from China has risen sharply; it now accounts for more than 10 percent of total world merchandise exports. The figure is impressive given that most of the world’s 200 or so countries engage in product exporting. Copyright © 2014 Pearson Education Inc.

3 New Global Challengers (cont’d)
The New Global Challengers benefit from emerging markets: Rapidly growing markets, some of which are large Low-cost labor Training grounds for competing with global incumbents Complex operating environments, which produce some very capable firms Did you know that the world’s number three and four top-selling beer brands are produced by new global challengers based in Brazil (Skol, made by InBev) and China (Snow, made by China Resources Snow Breweries)? Together, these firms produce more than 50 million barrels of beer annually. South Korea’s Samsung is the world’s largest electronics company and the leading producer of semiconductors and flat screen TVs. It has displaced Sony (Japan) and Motorola (USA) in these industries. Copyright © 2014 Pearson Education Inc.

4 Copyright © 2014 Pearson Education Inc.
Key Concepts Advanced economies: Post-industrial countries with high per capita income, competitive industries, and developed commercial infrastructure. Typically the richest countries, including Australia, Canada, Japan, U.S., and nations of Western Europe. Developing economies: Low-income countries characterized by limited industrialization and stagnant economies. E.g. Bangladesh, Bolivia, Zaire. Emerging market economies: Former developing economies that achieved substantial industrialization, modernization, and remarkable economic growth. E.g., Indonesia, Mexico, Poland, Turkey. Having reached a mature state of industrial development, advanced economies have largely evolved from manufacturing economies into service-based economies. Home to 14% of the world’s population, they have long dominated international business. They account for about half of the world’s GDP, over half of world trade in products, and three-quarters of world trade in services. They have democratic, multiparty systems of government and economic systems usually based on capitalism. They have tremendous purchasing power with few restrictions on international trade and investment. They host the world’s largest MNEs. Consumers in developing economies have low discretionary incomes; the proportion of personal income they spend on purchases other than food, clothing, and housing is very limited. About 17 % of citizens in developing economies live on less than $1 per day; around 40 percent live on less than $2 per day. The combination of low income and generally high birth rates tends to perpetuate poverty in these countries. Developing economies are hindered by high infant mortality, malnutrition, short life expectancy, illiteracy, and poor education systems. For example, the proportion of children who finish primary school in most African countries is less than 50 percent. Because education is strongly correlated with economic development, poverty tends to persist. Lack of adequate health care is a big concern. Some 95% of the world’s AIDS victims are found in developing economies, an additional hardship that hampers their development. Governments in developing economies are often severely indebted. In fact, some countries in Africa, Latin America, and South Asia have debt levels that approach or exceed their annual gross domestic product. This means it would cost a year’s worth of national productive output just to pay off the national debt. Much of Africa’s poverty is the result of government policies that discourage entrepreneurship, trade, and investment. For example, starting a new business in sub-Saharan countries in Africa requires an average of eleven different approvals and takes 62 days to complete. Emerging markets are found in Asia, Eastern Europe, Southern Africa, Latin America, and the Middle East. Perhaps their most distinguishing characteristic is rapidly improving living standards and a growing middle class with rising economic aspirations. They occupy a middle ground between advanced economic and developing economies. Copyright © 2014 Pearson Education Inc.

5 What are the “BRIC” countries?
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6 Copyright © 2014 Pearson Education Inc.
The ‘BRIC’ Countries Copyright © 2014 Pearson Education Inc.

7 Advanced Economies, Developing Economies, and Emerging Markets
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8 Advanced Economies, Developing Economies, and Emerging Markets
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9 Key Differences Among the Three Major Country Groups
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10 Emerging Market Economies
About 40 countries with rising economic aspirations that enjoy rapidly growing standards of living Evolving towards wealthy nation status Importance in the world economy is increasing as they become attractive destinations for exports, FDI, and sourcing. Examples: Hong Kong, Israel, Saudi Arabia, Singapore, South Korea, and Taiwan have developed beyond the emerging market stage. Certain emerging markets that have evolved from centrally planned economies to liberalized markets—specifically China, Russia, and several countries in Eastern Europe— are called transition economies. These countries were once socialist states but have been largely transformed into capitalism-based systems, partly via a process of privatization— the transfer of state-owned industries to private concerns. Privatization and the promotion of new, privately owned businesses have allowed the transition economies to attract substantial direct investment from abroad. Long burdened by excessive regulation and entrenched government bureaucracy, they are gradually introducing legal frameworks to protect business and consumer interests and ensure intellectual property rights. In the mid-2000s, the emerging markets collectively enjoyed an average annual GDP growth rate of around 7 percent, a remarkable feat. While the economies of most emerging markets were disrupted by the global recession and financial crisis, their average growth rates have remained strongly positive. Emerging markets have become important target markets for a wide variety of products and services. The largest ones have doubled their share of world imports in the last few years. Exports to such countries account for one-third of total merchandise exports from the United States. The growing middle class in emerging markets implies rising demand for various consumer products, such as electronics and automobiles, and services such as health care. Roughly a quarter of Mexico’s 105 million people enjoy affluence equivalent to that of the middle class in the United States. Copyright © 2014 Pearson Education Inc.

11 Emerging Markets as a Percent of World Total
The fastest-growing markets for power tool companies like Black & Decker and Robert Bosch are in Asia, Latin America, Africa, and the Middle East.10 Even during the global recession, technology firms such as Cisco, Hewlett-Packard, and Intel were generating a large and growing proportion of their revenues from sales to such countries. In 2008, firms in the global pharmaceutical companies such as Pfizer and Glaxo-SmithKline increased their emphasis on developing and marketing drugs in emerging markets. Industry insiders forecast that medication sales in the biggest emerging markets will hit $300 billion by 2017, equal to today’s sales in the top five European markets and the United States combined. Already Merck and Pfizer have launched popular drugs in India using innovative pricing strategies that make once-expensive medications affordable for millions of low-income consumers. Businesses in emerging markets are important targets for machinery and equipment sales. In this category, markets are huge for textile machinery in India, for agricultural equipment in China, and for oil and gas exploration technology in Russia. In a similar way, governments and state enterprises in emerging markets are major targets for sales of infrastructure-related products and services such as machinery, power transmission equipment, transportation equipment, high-technology products, and other products that countries in the middle stage of development typically need. Copyright © 2014 Pearson Education Inc.

12 GDP Growth Rates in Advanced Economies and Emerging Markets
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13 China: Growing Role in International Business
Huge population; rapidly growing economy; big importer Began pursuing market reforms in the late 1970s Achieved explosive economic growth, quadrupling its GDP during the succeeding 30 years China is already the world’s second-largest economy but has poor business infrastructure. Among commodities, China buys one-third of the world’s coal, cotton, fish, rice, and cigarettes. It buys one-quarter of the world’s steel and one-half its pork. China endures serious problems of air, water, and land pollution and has 8 of the world’s top 10 polluted cities. Since launching market reforms in 1970s, China has achieved explosive economic growth, often 10 percent or more per year. Although income per person is still around $6,500, China is the second largest economy in the world (after the U.S.). Since the WTO, China expanded its role in global manufacturing and intensified its massive exports worldwide. The country attracted an impressive $92 billion in FDI in 2008. But success in China has come slowly for most foreign firms. A big challenge is low per-capita income. About one-third of China’s population (roughly 400 million people) lives on less than $2 per day. Of a total population of 1.3 billion, the realistic target consumer segment is the 250 million residents of urban areas, largely in the developed eastern regions. Yet many companies have succeeded in China, including Airbus, Coca-Cola, Motorola, and Volkswagen. Rapid, under-regulated industrialization has produced much environmental harm. China is home to 8 of the world’s 10 most polluted cities. China emits more carbon dioxide than any other country (although the United States is highest in per-capita terms). More than one million Chinese are thought to die every year from pollution-related causes. Copyright © 2014 Pearson Education Inc.

14 What Makes Emerging Markets Attractive?
1. Emerging Markets as Target Markets Many have huge middle classes with significant income for buying electronics, cars, health care services, and countless other products. Many exhibit high economic growth rates. 2. Emerging Markets as Manufacturing Bases Home to low-wage, high-quality labor for manufacturing and assembly operations Large reserves of raw materials and natural resources as in South Africa, Brazil, Russia Emerging markets have become important target markets for a wide variety of products and services. Exports to such countries account for 1/3 of total merchandise exports from the U.S. Roughly a quarter of Mexico’s 105 million people enjoy affluence equivalent to that of the middle class in the U.S. The fastest-growing markets for power tool companies like Black & Decker and Robert Bosch are in Asia, Latin America, Africa, and the Middle East. Technology firms like Cisco, Hewlett Packard, and Intel generate a large and growing proportion of their revenues from sales to such countries. Emerging markets are home to low-wage, high-quality labor for manufacturing and assembly operations. Some emerging markets have large reserves of raw materials and natural resources. Mexico and China are important platforms for manufacturing cars and consumer electronics. South Africa is a key source for industrial diamonds. Brazil is a center for bauxite, the main ingredient in aluminum. Thailand has become an important manufacturing location for Japanese MNEs such as Sony and Sharp. Motorola, Intel, and Philips manufacture semiconductors in Malaysia and Taiwan. Copyright © 2014 Pearson Education Inc.

15 What Makes Emerging Markets Attractive? (cont’d)
3. Emerging Markets as Sourcing Destinations MNEs have established numerous call centers in Eastern Europe, India, the Philippines, and elsewhere. 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, production capacity, transfer of technology. and linkages to the global marketplace. With global sourcing, firms procure selected value-adding activities, including production of intermediate goods or finished products, from suppliers located abroad. Global sourcing helps firms obtain competitive advantages. Emerging markets have served as excellent platforms for sourcing. Numerous MNEs have established call centers in Eastern Europe, India, and Mexico. Firms in the IT industry like Dell and IBM reap big benefits from outsourcing certain technological functions to knowledge workers in India. Intel and Microsoft have many of their programming activities performed in Bangalore, India. Copyright © 2014 Pearson Education Inc.

16 Estimating the Potential of Emerging Markets
Estimations are challenging because of peculiar economic and social environments in these countries. Limited availability and reliability of data Market research can be very costly and less precise, as compared to the advanced economies. Market potential indicators include: GDP growth rate, income distribution, commercial infrastructure, unemployment rate, and consumer expenditures for discretionary items. Copyright © 2014 Pearson Education Inc.

17 Purchasing Power Parity (PPP) Adjustment to per capita GDP
In relying on per capita GDP for comparison of different countries, one should use PPP exchange rates, rather than the market exchange rates. PPP adjustment provides a more realistic indicator of purchasing power of consumers in emerging and developing economies. PPP adjusted per capita GDP 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. What should managers do to accurately estimate market potential? The answer lies in using per-capita GDP figures adjusted for price differences. Economists estimate real buying power by calculating GDP statistics based on purchasing power parity (PPP). The PPP concept suggests that, in the long run, exchange rates should move toward levels that would equalize the prices of an identical basket of goods and services in any two countries. Since prices vary greatly among countries, economists adjust ordinary GDP figures for differences in purchasing power. Adjusted per-capita GDP more accurately represents the amount of products consumers can buy in a given country, using their own currency and consistent with their own standard of living. Copyright © 2014 Pearson Education Inc.

18 Difference in Per Capita GDP in Conventional and PPP Terms
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19 Difference in Per Capita GDP in Conventional and PPP Terms
Managers should exercise caution in relying on per-capita income as an indicator of market potential in an emerging or developing economy. There are four reasons for this caution. (1) Official data do not account for the informal economy, where economic transactions are not officially recorded and are thus left out of government calculations of a nation’s GDP. In developing economies, the informal economy is often as large as the formal economy (2) Most 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, median income provides a more accurate depiction of purchasing power. (3) Household income is often much larger than per-capita income because of multiple wage earners within individual households in these countries. Multiple income households naturally have more spending power than individuals. (4) Governments in these countries may underreport national income so they can qualify for low-interest loans and grants from international aid agencies and development banks. Copyright © 2014 Pearson Education Inc.

20 Magnitude of Middle-Class Population for a Sample of Emerging Markets
In every country, the middle class represents the segment of people between wealthy and poor. They have economic independence; work in businesses, education, government, and hourly jobs; and consume many discretionary items, including electronics, furniture, automobiles, and entertainment. Middle-class households account for most households in advanced economies. In emerging markets, the size and growth rate of the middle class serve as signals of a dynamic market economy. For marketers of products and services, emerging markets are prime prospects. India and Indonesia rank at the very top, given their large populations. But 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. However, the percentage of income held by the middle class in India and Indonesia is relatively high, at 49 and 48 percent, respectively. Contrast this to Brazil where the middle class controls 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, acquiring enormous spending power. As incomes increase, spending patterns will evolve, fueling growth across various product and service categories. Copyright © 2014 Pearson Education Inc.

21 Copyright © 2014 Pearson Education Inc.
The Big Mac Index Another way to illustrate the PPP concept is to examine the Big Mac Index developed by The Economist (www.economist.com). The Index first gathers information about 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 assess whether a nation’s currency is under- or overvalued. The exhibit presents the Big Mac Index for the most recent year. It reveals that the currencies of most European countries (mainly the euro) are overvalued, while those of most developing economies or emerging markets are undervalued. The Big Mac Index also implies the Chinese yuan is undervalued. It suggests the yuan is below its fair-value benchmark with the dollar. Copyright © 2014 Pearson Education Inc.

22 Copyright © 2014 Pearson Education Inc.
Market Potential Informal Economy Distribution of Income Household Income Underreporting / overreporting of GDP Copyright © 2014 Pearson Education Inc.

23 Copyright © 2014 Pearson Education Inc.
Key Criteria for Assessing the Attractiveness of Emerging Markets and Developing Economies Market Size: the country’s population, especially those living in urban areas Market Growth Rate: the country’s real GDP growth rate Market Consumption Capacity: income of the middle class Commercial Infrastructure: density of telephone lines, number of personal computers, density of paved roads, population per retail outlet, and other such characteristics Economic Freedom: the degree to which government intervenes in business activities Country Risk: degree of political risk Copyright © 2014 Pearson Education Inc.

24 Emerging Market Potential Index
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25 Challenges of Doing Business in Emerging Markets
Political instability – corruption, weak legal systems, and unreliable government authorities increase business risks and costs and hinder forecasting Weak intellectual property protection – discourages producing or selling goods that entail valuable assets Bureaucracy, red tape, and lack of transparency -- burdensome rules, excessive requirements for licenses, approvals, and paperwork; not accountable legal and political systems. E.g., it may take years, or many bribes, to obtain permissions to do business. China, India, and Russia are particularly problematic. Political Instability. The absence of reliable or consistent governance from recognized 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 inward investment and the development of a reliable business environment. In Russia, for example, evolving political conditions threaten the business activities of foreign firms. Bureaucratic practices favor well-connected, homegrown firms. Western oil companies have been denied access to Russia’s energy resources. Weak Intellectual Property Protection. Even when they exist, laws that safeguard intellectual property rights may not be enforced, or the judicial process may be painfully slow. In Argentina, enforcement of copyrights on recorded music, videos, books, and computer software is inconsistent. Inadequate resources and slow court procedures hamper enforcement. Counterfeiting—unauthorized copying and production of a product—is common in China, Indonesia, and Russia, especially of software, DVDs, and CDs. In India, weak patent laws often discourage investment by foreign firms. Bureaucracy, Red Tape, and Lack of Transparency. Burdensome administrative rules and excessive requirements for licenses, approvals, and paperwork all delay business activities. Canamo is a Venezuelan company that was eager to export its products to the United States. But it first had to obtain numerous certificates and licenses from various government authorities in Venezuela, a jumble of paperwork that can take two to six months to complete. Faced with this long and unpredictable process, Canamo all but abandoned hope of entering the U.S. market. In China, getting a bank loan is arduous, especially for smaller firms. There are many government forms to complete, and it can take several months to register collateral with the appropriate authorities. As a result, many firms cannot obtain bank loans in a timely manner, delaying their ability to grow and flourish. While smaller businesses contribute some 60 percent of China’s GDP, they account for only 15 percent of outstanding bank loans. Copyright © 2014 Pearson Education Inc.

26 Challenges in Emerging Markets (cont’d)
Poor physical infrastructure – Basic infrastructure – such as – high-quality roads, drainage systems, sewers, and electrical utilities – are often sorely lacking in emerging markets. Partner availability and qualifications – given emerging market challenges, foreign firms may seek local partners, who provide access to markets, supplier and distributor networks, and key government contacts. But qualified partners are often hard to find or require much assistance to upgrade their abilities. Poor Physical Infrastructure. High-quality roads, drainage systems, sewers, and electrical utilities are typically lacking in emerging markets. In India, many still do not have access to toilets and sewage treatment systems. Poor sanitation gives rise to widespread illness, and thousands of Indian children die every week from diarrheal illness. India’s ports, roads, railways, and airports are insufficient to handle the massive volumes of cargo that enter and leave the country every day. Industrial cities like Bangalore and Pune regularly experience power outages that can last 24 hours or more. The government is working to improve infrastructure, but MNEs often must build their own systems and employ creative solutions to support value-chain activities. A subsidiary of Tata Chemicals, part of India’s giant Tata conglomerate, had to build its own road and railway infrastructure in Africa to support the firm’s operations there. Partner Availability and Qualifications. Foreign firms should seek alliances with well-qualified local companies in countries characterized by inadequate legal and political frameworks. Through such partners, foreign firms can access local market knowledge, establish supplier and distributor networks, and develop key government contacts. However, partners that can provide these advantages are not always readily available in emerging markets, especially smaller ones. Copyright © 2014 Pearson Education Inc.

27 Challenges in Emerging Markets (cont’d)
Dominance of family conglomerates – economies are often dominated by privately-owned, local companies that are highly diversified and control supplies and employment. They are common in South Korea (chaebols), India (business houses), Latin America (grupos), and Turkey (holding companies). Dominance of Family Conglomerates. Many emerging market economies are dominated by large, highly diversified firms that are privately owned. FCs operate in industries ranging from banking to construction to manufacturing. They control the majority of economic activity and employment in emerging markets like South Korea, where they are called chaebols; in India, where they are called business houses; in Latin America, where they are called grupos; and in Turkey, where they are called holding companies. In South Korea, the top thirty FCs account for nearly half the economy’s assets and industry revenues. Samsung is perhaps the most famous Korean FC. In Turkey, the Koc Group accounts for about 20 percent of trading on the Istanbul Stock Exchange, and Sabanci provides more than 5 percent of Turkey’s national tax revenue. 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. Hyundai Group was an early mover in South Korea’s auto industry and now holds the largest share of that country’s car market. When foreign automakers tried to enter the market, they found Hyundai’s advantages overwhelming. In some cases, the government may even launch the FC, just as the Siam Cement Group was launched by the government of Thailand. One of the largest FCs in Indonesia, the Bimantara Citra Group got its start selling its foreign oil allocations to the state-owned oil monopoly. The Group has long enjoyed a close relationship with the Indonesian government and secured numerous lucrative contracts. When the Hyundai Group in South Korea experienced a financial crisis, the Korean government and Hyundai’s major creditors provided more than $300 million in assistance, including credit extension and short-term loans. Copyright © 2014 Pearson Education Inc.

28 Copyright © 2014 Pearson Education Inc.
A sampling of family conglomerates from various countries. Copyright © 2014 Pearson Education Inc.

29 Strategies for Doing Business in Emerging Markets
Customize Offerings to Unique Emerging Market Needs. Successful firms develop a deep understanding of the distinctive characteristics of buyers, local suppliers, and distribution channels in emerging markets, and customize offerings and business models accordingly. Partner with a family conglomerate – FCs can provide various advantages, including financing, bank services, local suppliers, and distribution channels. FCs can help reduce risks, time, and capital requirements; develop relationships with governments and other key players; and overcome infrastructure hurdles. Customize Offerings to Unique Emerging Market Needs. Successful firms develop a deep understanding of the market. The firm should customize offerings and devise innovative business models. Many people are illiterate and fewer than one in four have regular access to the Internet and other computer-based systems. MNEs employ creative approaches to promote their offerings. Where suppliers and distribution channels are lacking, they develop their own infrastructure to obtain requisite raw materials and components or move finished goods to local buyers. MNEs set prices appropriate for local conditions. In China, consumers favor text messaging on mobile phones to keep communication costs low. Local competitor Tencent developed a free messenger service that captured most of the local market. In India, the General Electric subsidiary GE Healthcare developed a super lightweight electrocardiograph machine that sells for just $1,500. It is targeted to doctors and clinics in poor areas. Low pricing allows for treating heart patients at a fraction of the cost of earlier technologies. Partner with Family Conglomerates. FCs can make valuable venture partners. By collaborating with an FC, the foreign firm can: (a) reduce the risks, time, and capital requirements of entering the market; (b) develop helpful relationships with governments and other key, local players; (c) target market opportunities more rapidly and effectively; (d) overcome infrastructure-related hurdles; and (e) leverage FC resources and local contacts. Ford partnered with Kia to introduce the Sable line of cars in South Korea and benefited from Kia’s strong distribution and after-service 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 about the local market. As the Turkish market leader, Sabanci knew the market, retailers, and distributors. The collaboration helped make Danone the most popular bottled water. Copyright © 2014 Pearson Education Inc.

30 Strategies for Emerging Markets (cont’d)
Target governments, which buy enormous quantities of products, such as computers, furniture, office supplies, and motor vehicles, as well as services. State enterprises operate in areas such as railways, airlines, banking, oil, chemicals, and steel. Skillfully Challenge Emerging Market Competitors. New global challengers and other emerging market firms possess various advantages that require skillful strategies and due diligence to overcome. Target Governments in Emerging Markets. Governments and state enterprises are important customers for three reasons. First, governments buy enormous quantities of products (such as computers, furniture, office supplies, motor vehicles) and services (such as architectural, legal, and consulting services). Second, state enterprises in areas like railways, airlines, banking, oil, chemicals, and steel buy goods and services from foreign companies. Third, the public sector influences the procurement activities of various private or semi-private corporations. In India the government works directly in planning housing projects. Bechtel, Siemens, General Electric, Hitachi, and other major vendors regularly participate in bidding for global tenders from emerging market governments. Some of the largest construction projects include the Panama Canal expansion and the Channel tunnel between Britain and France. Skillfully Challenge Emerging Market Competitors. The global farm equipment industry was long dominated by venerable names such as John Deere and Komatsu. Recently, however, India’s Mahindra & Mahindra (www.Mahindra.com) has been grabbing market share with brands such as the Mahindra 5500, a powerful, high-quality tractor that sells for far less than competing models. Keys to success for advanced-economy firms are to: (1) Research the market and local competitors. (2) Acquire new capabilities that improve the firm’s competitive advantages. For example, many firms boost their R&D to invent new, superior products. (3) Incumbent firms can leverage low-cost labor and skilled workers in locations such as China, Mexico, and Eastern Europe. Copyright © 2014 Pearson Education Inc.

31 Strategies for Emerging Markets (cont’d)
Low-cost labor, skilled workforce, government support, and family conglomerates give emerging market firms various advantages. Advanced economy firms must: Conduct research to understand target markets and the indigenous challengers; Acquire new capabilities that build competitive advantage (e.g., develop new products, new ways of doing business, local alliances); Leverage the same advantages in emerging markets enjoyed by local firms (e.g., low-cost labor, skilled workforce, cheap capital, key partnerships). Copyright © 2014 Pearson Education Inc.

32 Catering to Emerging Market Economic Development Needs
Increasingly, firms are involved in fostering economic development in emerging markets. Assisting economic development may (or may not) be part of efforts aimed at corporate social responsibility. More commonly, doing business in emerging markets makes good business sense and generates big profits. Helpful ventures include modernization projects (power plants); infrastructure projects (highways); injections of capital (via microfinance); marketing consumer products (which leads to distribution channels, reduces prices, and creates jobs). If firms market appropriate products and employ suitable strategies, they can earn substantial profits in emerging markets and developing economies. Unilever and P&G sell Sunsilk and Pantene shampoo for less than 2 cents per mini-sachet in India. Narayana Hrudayalaya is an insurance company that sells health insurance for less than 20 cents per person per month and has millions of customers. Amul, one of India’s largest foodstuff firms, sells a wide range of food products to millions of poor people. To succeed, such firms had to devise new business models in manufacturing, packaging, distribution, and market reach. Every day in India, some 20 million people travel long distances for work or pleasure. Hotel accommodations generally fall into two categories: dirty, low-quality lodgings for the poor, or $350-per-night luxury hotels for the rich. To address the shortage of accommodations for middle-class travelers, Tata launched the Ginger chain of medium-priced hotels ($20–$40 per night; To keep costs low, the hotels have minimal staff and few furnishings, but the rooms are clean and offer broadband Internet, flat-screen TV, and a work space. By devising an innovative business model, Tata captured a major, lucrative market in a poor country and simultaneously addressed an important need of lower-income travelers. The Swedish telecommunications firm Ericsson (www.ericsson.com) helped modernize the telecom infrastructure in Tanzania by installing phone lines and cellular systems that meet communication needs of households, firms, and aid agencies. Copyright © 2014 Pearson Education Inc.

33 Foreign Firms Support Local Economic Development
Wal-Mart and Home Depot have created new, cost-effective distribution channels in Mexico. Unilever and P&G sell shampoo in India for less than $0.02 per mini-sachet. Cemex provides low-cost building materials to millions of poor people. Narayana Hrudayalaya sells health insurance for less than $0.20 per person per month in India. Various cell-phone and telecom firms have substantially increased telecommunications infrastructure in Africa. Copyright © 2014 Pearson Education Inc.

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Ethical Connections Africa bears the burden of about one-quarter of all disease worldwide, yet has only 3% of the world’s health care workers. Most Africans cannot obtain medical care. Every day, thousands die from treatable or preventable ailments such as malaria and AIDS. MNEs play a growing role to address such challenges. Private firms such as GlaxoSmithKline and General Electric use innovative business approaches to provide needed medications and medical care to impoverished countries in Africa. Numerous firms have established clinics that provide low-cost health care. Copyright © 2014 Pearson Education Inc.

35 Copyright © 2014 Pearson Education Inc.


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