1. Global Economic Crisis and the Emerging Markets Jonathan Doh Manny Nunez Jonathan P. Doh July 6, 2009

2. Outline of our Session Key global trends and the rise of emerging markets Emerging markets business systems and relationships Emerging markets and the economic crisis Emerging markets as laboratories of innovation

3. >3 1.11/9/89: when the walls came down and the windows went up 2.8/9/95: when Netscape went public 3.Workflow Software: let’s do lunch – have your application talk to my application 4.Open sourcing: self-organizing collaborative communities 5.Outsourcing: Y2K 6.Offshoring: running with gazelles, eating with lions 7.Supply-chaining: eating sushi in Arkansas 8.In-sourcing: what the guys in funny brown shirts are really doing 9.Informing: Google, Yahoo!, MSN Web Search 10.The Steroids: digital, mobile, personal, and virtual (…wireless the icing on the cake) Is the world flat? >3

4. >4 A “spiky”world: population >4

5. >5 A “spiky”world: economic activity >5

6. >6 A “spiky”world: innovation >6

7. >7 From your perspective, is the world: Round? Flat? Spiky? Reflection question >7

8. >8 Changing balance of economic power Shift in World GDP Source: Economist Intelligence Unit.

9. >9 Changing balance of economic power Shift in World GDP Source: Economist Intelligence Unit.

10. >10 Changing balance of economic power Shift in World GDP Source: Economist Intelligence Unit.

11. >11 Changing balance of economic power At present, U.S. by far largest GDP >11 Source: Economist Intelligence Unit.

12. >12 Changing balance of economic power China surpasses U.S. in 2020 (ppp basis) >12 Source: Economist Intelligence Unit.

13. >13 Relative size of Big 4 economies market exchange rates Constant 2004 US $bn

14. >14 Relative size of Big 4 economies PPP exchange rates Constant 2004 US $bn at PPPs

15. >15 Changing balance of economic power China and India propel growth in Asia >15 Source: Economist Intelligence Unit.

16. >16 Changing balance of economic power Greater Asia will generate 67% of global jobs 2005-20 Source: Economist Intelligence Unit. >16

17. >17 Changing balance of economic power High (but slowing) GDP growth in China… >17

18. >18 Changing balance of economic power …Makes China largest (absolute) economic power by 2040 2040-2045 >18

19. >19 Changing balance of economic power But growth is uneven >19

20. >20 Emerging countries’ share of GDP >20

21. >21 Changing global demographics The global population is aging >21

22. >22 Changing global demographics Fertility rates falling below replacement in G-7 2.1 >22

23. >23 Changing global demographics Life expectancy growing in G-7 >23

24. >24 Changing global demographics Some G-7 aging faster than others >24

25. >25 MenWomen Year: 1960 Median Age: 29.6 Inversion of age pyramid 1960 Distribution in Developed World

26. >26 MenWomen Year: 2050 Median Age: 46.4 Inversion of age pyramid 2050 Distribution in Developed World

27. >27 1 2 3 4 5 6 7 8 9 10 11 12 1950 China Soviet Union India United States Japan Indonesia Germany Brazil United Kingdom Italy France Bangladesh 2000 China India United States Indonesia Brazil Russian Fed. Pakistan Bangladesh Japan Nigeria Mexico Germany 2050 India China United States Pakistan Indonesia Nigeria Bangladesh Brazil Congo Ethiopia Mexico Philippines 12 Largest Countries Ranked by Population Source: UNDP (2005) Changing global demographics Developing countries on the rise

28.  In 2008 Deloitte found that "medical tourism" is a hot trend among U.S. health care consumers  Nearly 40 % said they would travel outside the country for medical treatment, if the quality was comparable and the cost was cut in half  Market drivers for medical tourism: Cost savings; Comparable or better quality health care; Shorter waiting periods thus quicker access to care  World medical tourism market is estimated to have reached $60 billion in 2008, and grow to $100 billion by 2010. Over 35 countries are serving around 1 million medical tourists annually  Medical Tourism Video Medical Tourism Video Assumptions: In 2007, approximately 750,000 Americans traveled outbound for medical care. That number will increase to 6 million by 2010. Therefore the growth rate from 2007 to 2010 is 100% for the base estimate. After 2010, the growth rate will begin to fall due to supply capacity constraints in foreign countries. Upper/Lower bound estimates assume the growth rate is higher/lower than the base case estimate. Source: 2008 Deloitte Development LLC Global trends in health care Medical tourism on the rise >28

29. Global trends in health care Medical tourism on the rise >29

30. Reflection question Which aspects of the key global trends outlined here do you believe are the most meaningful and long-lasting? Which aspects of the demographic trends are most profound? Do you believe the projections re: growth of global health care tourism are realistic?

31. >31 Emerging markets essentials 1.What is an emerging market? 2.What are these markets emerging from? 3.What are these markets emerging to? 4.What signals help identify a country as emerging? 5.What signals suggest a country is submerging?

32. >32 Emerging market: one definition Gross National Income (GNI)/capita (US$): $1,001 (Lower) to $9,999 (Upper) Excludes countries: >$10,000 GNI/capita – deemed developed market <$1,000 GNI/capita – deemed GAVI/developing market Source: World Bank Definition Rationale World Bank definition of GNI: Used 3-year average of exchange rates to ‘smooth’ out annual fluctuations due to policies and interventions Classified countries in low-, middle- and high-income categories Source: World Bank

33. >33 Developing countries v. emerging markets High risk for foreign investors Economically underdeveloped Technologically inferior Low purchasing power Host government restrictions Few significant opportunities for foreign business Developing Countries (prior to 2000) Emerging Markets (Since 2000) Risks increasingly manageable Faster income growth than developed countries Technologically competitive Increasing purchasing power Host government liberalization Greater opportunities for foreign business: BOP, OS

34. >34 My perspective on emerging markets Developing countries “on the move” Consistent pattern of policy reform Privatisation (e.g. sale of SOEs) Market liberalisation (e.g. trade, regulatory) Monetary and Fiscal policy (independent Central Bank; efficient tax system) Resultant record of sustainable growth Faster than average annual growth Growth in private (often foreign) capital) Increased trade and FDI Sustained social progress Improved education, health care, etc

35. >35 Types of emerging markets BRIC: Big emerging markets China and India: “Giants” Others: Brazil, Russia, Mexico “Second tier” but coming on fast Vietnam, Indonesia, Malaysia, Thailand “Graduates” South Korea, Taiwan, Singapore? “Transition” economies Poland, Russia, Hungary “Other” Turkey, Middle East economies

36. >36 BRIC Economies (Brazil, Russia, India, China + Mexico?) Fastest growing, dynamic, highest potential EMs Leaders in respective regions Between 2000-2007, contributed 28% of global growth More than 15% of global FDI and trade; 30% FX reserves China overtakes US by 2040; India beats Japan by 2033 Significant similarities among each All faced substantial acceleration in growth, democratic political reform, market-oriented reforms manifest in FDI and some macroeconomic and reform setbacks Substantial differences as well Each has had difference experience in pace, breadth, depth of reform, with some now experiencing some backtracking in their commitment to pol/econ reform

37. Outline of our Session Key global trends and the rise of emerging markets Emerging markets business systems and relationships Emerging markets and the economic crisis Emerging markets as laboratories of innovation

38. >38 1.Institutional systems are a critical and overlooked variable in global markets 2.Different countries look differently across these measures 3.Important implications for strategy Emerging markets: Institutional systems >38

39. >39 Institutional systems: Political/social systems Political Accountability: free/fair elections Political Accountability: independent judiciary Government regulatory interference Protection of private property rights Independence of quasi-judiciary agencies Religious, linguistic, ethnic, geographic tensions Civil society and NGOs and Corruption Development/independent finance regulator Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June >39

40. >40 Receptivity to/restrictions on FDI Local content/ownership requirements? Presence/quality of foreign intermediaries Support/constraints to new venture development Restrictions on portfolio investment/FX Import tariffs on intermediate/capital goods Participation in FTAs/EIAs Free flow of executives in/out of country Financial liberalization (WTO/unilateral) Institutional systems: Openness Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June >40

41. >41 Development of transportation infrastructure Development of distribution systems/networks Existence and sophistication of market research Availability of raw materials/dependability of suppliers Government restrictions on FDI Nature/quality of retail/credit system Consumer receptivity to new products/services Ability to develop network of branches or other financial distribution systems Institutional systems: Product markets/distribution Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June >41

42. >42 Institutional systems: Labor markets Educational Development Employee mobility Quality of training/management development Pay/performance and motivation Receptivity to foreign managers Laws and regulations on labor reduction Consumer receptivity to new products/services Ability to deploy foreign nationals and hire/fire local employees Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June >42

43. >43 Institutional systems: Capital markets Development of banking/insurance/ securities Ownership/transparency of institutions Sophistication/liquidity of debt/equity markets Reliability/quality of information on markets Corporate governance/board independence Regulatory effectiveness Takeover/bankruptcy laws Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June >43

44. Shape: Institutional system in flux may be subject to shaping (China/financial services, health care?) Adapt: Established and well-developed institutional system suggests adaptation (Chile, telecom) Withdraw: Inferior and unpredictable institutional system suggests withdrawal (Venezuela, Bolivia oil and gas) Emerging market institutions: Shape, adapt, or withdraw? >44 Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June

45. Reflection Question Which institutional category is most important for the industry or area you cover? Which specific aspect of that institutional category is most important? Can you think of a specific example of how a firm “shaped” and emerging markets institutional environment?

46. >46 Global-local relationships Global companies seek partners with local knowledge, distribution, government connections Local companies seek avenues into global economy and seek foreign partners with technology, managerial expertise, brand Local governments seek relationships that capture employment, technology and other direct/indirect benefits and often serve as intermediaries Adapted from authors’ reseearch and Adarkar, A., Adil, A., Ernst, D., and Vaish, P. Emerging market alliances: Must they be win-lose? McKinsey Quarterly, 4: 120–137. >46

47. >47 Four possible outcomes of Global-local alliance Power shift toward local partner Sustainable Power balance Power collision Power shift toward global partner Initial alliance >47

48. >48 Global-local relationships: Hofstede’s Cultural Dimensions Extent to which less powerful members of institutions and organisations accept that power is distributed unequally High power distance countries: people blindly obey orders of superiors, centralised organisation structures Low power distance countries: flatter and decentralised organisation structures, smaller ratio of supervisors Power Distance Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors, institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage. >48

49. >49 Extent to which people feel threatened by ambiguous situations and have created institutions to avoid such situations High uncertainty avoidance countries: people have high need for security, structured organisational activities, more written rules, less risk taking Low uncertainty avoidance countries: more willing to accept risks associated with unknown, less structured organisational activities, fewer written rules, more risk taking by managers Power Distance Uncertainty Avoidance Global-local relationships: Hofstede’s Cultural Dimensions Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors, institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage. >49

50. >50 Individualism: Tendency of people to look after themselves/family Countries high in individualism: support work ethic, greater individual initiative, merit promotions Collectivism: Tendency of people to belong to groups or collectives and to look after each other Countries high in collectivism: less support of work ethic, less individual initiative, seniority promotions Power Distance Uncertainty Avoidance Individualism/ Collectivism Individualism/ Collectivism Global-local relationships: Hofstede’s Cultural Dimensions Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors, institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage. >50

51. >51 Masculinity: dominant social values are success, money, things Countries high in masculinity: great importance on earnings, recognition, advancement, challenge, and wealth. Femininity: a culture in which the dominate social values are caring for others and the quality of life Countries high in femininity: importance on cooperation, group decision, employment security. Power Distance Uncertainty Avoidance Individualism/ Collectivism Masculinity/ Femininity Masculinity/ Femininity Global-local relationships: Hofstede’s Cultural Dimensions Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors, institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage. >51

52. >52 Cultural rankings of emerging markets, US and EU Power Distance Uncertainty Avoidance Individualism (Collectivism)Masculinity China80402066 Philippines94443264 Malaysia104362650 India77404856 Czech Republic57745857 Hungary46825588 Poland68936064 Slovakia57745857 Mexico81823869 Brazil69763849 South Africa49 6563 US40469162 EU (avg)45746159

53. Outline of our Session Key global trends and the rise of emerging markets Emerging markets business systems and relationships Emerging markets and the economic crisis Emerging markets as laboratories of innovation

54. Global pushback against business >54

55. Global pushback against business >55 Prior to crisis, some developing/emerging markets questioning Western economic models (“Washington consensus) Trend especially apparent in Latin America (Venezuala, Ecuador and Bolivia) China, others blame crisis on U.S. and capital markets model of finance In general, however, emerging markets doing better than developed countries throughout crisis with some exceptions (Central/Eastern Europe)

56. In U.S., trust in business at lowest level including post-Enron 56 Enron, the dot-com bust and September 11 20 point drop U.S. is the new Europe Source: Edelman Trust Barometer 2009

57. Trust in leaders 0102030405060 Average Across All Countries Surveyed NGO leaders Leaders at the U.N. Spiritual/religious leaders Leaders of Western Europe Managers of global economy Managers of national economy Executives of MNCs Leaders of the U.S.A. 52 42 41 36 35 33 27 Trust in Leaders: Percentage Saying “A Lot” and “Some Trust” Percentage Saying “A Lot” and “Some Trust” >57 Source: Edelman Trust Barometer 2009

58. Technology most trusted industry sector globally 58 Source: Edelman Trust Barometer 2009

59. Global economic crisis indicators 2009 down turn in world GDP and trade Global growth est. cut by 2.6% points by World bank March 2009 vs. November 2008 forecast Global Economic Prospects 2009 Forecast Update, World Bank, March 30, 2009, http://siteresources.worldbank.org/INTGEP2009/Resources/5530448-1238466339289/GEP- Update-March30.pdf >59

60. Real GDP growth forecast (March 2009) (percent change from previous year) Source: World Bank. Notes: a: GDP in 2000 constant dollars, 2000 prices and market exchange rates. b: GDP measured at 2000 PPP weights. c. GDP figures for South Asia refer to fiscal years (FY). The FY runs from Jul-1 through Jun-30 in Pakistan and Bangladesh; and from Apr-1 through Mar-31 in India. Due to reporting practices, where FY2007/08 is reported in 2008 for Pakistan and Bangladesh and in 2007 for India, there is an illusion of a lag in the impact of the global crisis upon Pakistan and Bangladesh compared with India. >60

61.  Global GDP estimated to have fallen by 5 percent in the fourth quarter (annualized), led by advanced economies, which contracted by 7 percent.  GDP declined in the fourth quarter by around 6 percent in both the U.S. and Euro area, plummeted at a post-war record of13 percent in Japan.  Growth also plunged across a broad swath of emerging economies, reflecting the confluence of weakening external demand, tightening financing constraints, and plunging commodity prices. Source: IMF Report: Global Economic Policies and Prospects, Group of Twenty Meeting of the Ministers and Central Bank Governors, March 13–14, 2009, London, U.K. Global economic crisis indicators >61

62. Vulnerabilities of European banks with substantial exposures to Central/Eastern Europe The vulnerabilities of banks with substantial exposures to Central and Eastern Europe are raising perceptions of sovereign risk in advanced economies. Many banks’ exposures are high relative to their home country GDP. Austrian banks’ exposures, for example, amount to about 75 percent of Austria’s GDP. Other countries with relatively high exposures to emerging Europe include Switzerland, Belgium, the Netherlands, and Sweden. Source: IMF Report: Global Economic Policies and Prospects, Group of Twenty Meeting of the Ministers and Central Bank Governors, March 13–14, 2009, London, U.K.

63. Vulnerability indicators by region Current account balance Over the past few years, current account balances have become more divergent. Emerging Europe has seen large and sustained deficits, while many countries in Asia, the Middle East, and the Commonwealth of Independent States (CIS) have shifted to surpluses— partly because of the commodity price boom. Source: IMF, World Economic Outlook (WEO), April 2009, http://www.imf.org/external/pubs/ft/weo/2009/01/index.htm

64. Economic Indicators Retail Sales Source: IMF Report: Global Economic Policies and Prospects, Group of Twenty Meeting of the Ministers and Central Bank Governors, March 13–14, 2009, London, U.K.

65. Economic Indicators Commodity Prices and Inflation Source: IMF Report: Global Economic Policies and Prospects, Group of Twenty Meeting of the Ministers and Central Bank Governors, March 13–14, 2009, London, U.K.

66. The Collapse Of Emerging-Market Currencies Council on Foreign Relations (CFR), Lessons of the Financial Crisis, Council Special Report No. 45, March 2009, http://www.cfr.org/publication/by_type/special_report.html

67. iShares MSCI Emerging Markets Index ETF (historical data for 1 yr prior to May 18, 2009) Source: iShares MSCI Emerging Markets Index ETF, MarketWatch, 19 May 2009, http://www.marketwatch.com/investing/fund/EEM/charts

68. Outline of our Session Key global trends and the rise of emerging markets Emerging markets business systems and relationships Emerging markets and the economic crisis Emerging markets as laboratories of innovation

69. >69 Emerging markets as laboratories of innovation ‘Strategy is revolution; everything else is tactics’” – Gary Hamel Challenging dominant logic: “New game, rules” Take any industry - three kinds of companies: 1.rule makers - incumbents that built the industry, e.g. United Airlines or IBM 2.rule takers - companies that pay homage to the industrial ‘lords’, e.g. US Airways or Olivetti 3.rule breakers - industry revolutionaries intent on overturning order, e.g. Southwest or Dell For companies in categories 1,2; emerging markets provide laboratory to move to 3 >69

70. >70 Innovation in emerging markets One innovation strategy for emerging markets focuses on the “Base of the Pyramid” To date, focus has been on upper and middle- class consumers in emerging markets BOP shifts emphasize to larger segment of lower income consumers that have been largely ignored Provides opportunity for integration of economic strategy and dramatic growth through product and process innovation >70

71. >71 The world pyramid Tier 1 Tiers 2- 3 Tier 4 Purchasing Power Parity in U.S. dollars Population in millions >$20,000 $2,000-20,000 <$2,000 200-300 600-800 5500 >71

72. >72 Distribution of income and MNC strategy Traditional and emerging focus for India 10-20 million, Rich PPP> $15,000, 70-100 m PPP $ 5-15,000, 150m PPP $2-15,000, 200m PPP > $2000, 600m Some MNCs? Local Firms Traditional MNC Business Model Future Opportunity? Source: CK Prahalad >72

73. >73 Innovation via Base of the Pyramid (BOP) Pursuing the “base” forces rethinking of conventional wisdom about: Technology and business models Scale and profitability Price-performance relationships Productivity and capital efficiency Sustainable development >73

74. >74 BOP: P&G Created Nutristar: children’s powdered health drink initially failed in Philippines re-launched in Venezuela with help of NGOs, USAID, PuR: water filtration system for low- income households marketed as single serving sachets contain same ingredients as municipal water systems Each sachet is treats up to 10 liters of water One sachet added to a bucket of dirty water forces all bacteria, viruses and pollutants to bottom >74

75. >75 BOP: P&G in China Former view: make best, then cut cost; now “cheaper and better” Product adaptation (using local R&D) for middle-low-income Basic toothpaste using salt as cleaning agent Expand sales of Tide beyond top 8% consumers by creating simpler formulas - Tide Clean White – no softener because unnecessary for hand washing Sell diapers to consumer who did not see need; make attractive by getting more hours of absorbency Greater China revenues up from $1.1 billion in 2000 to $2.5 billion in 2007; 6% of total >75

76. >76 Tata’s Nano 2009: Tata unveils world's cheapest car - 100,000 rupees (£1250) Vehicle aimed at Indian and other developing countries where car ownership is low; competes against bicycles and motorcycles Engine 600-800cc mark; goal is to sell 1 million units within 5 years >76

77. >77 Tata’s Nano Ratan Tata told his designers that the vehicle “must not be seen as stripped- down version of a normal car” To keep costs low, many parts made of plastic and other composites Car to be sold in kit form, with final assembly of the vehicles to be completed in rural workshops in India >77

78. >78 Tata’s Nano >78

79. >79 GE in China GE launching $6 billion health-care initiative that called "healthymagination Resetting GE's health-care business toward rural and emerging markets and priorities of the Obama Administration Develop and deploy low-cost equipment, such as the portable ultrasounds already being used in developing regions Focus on services that help hospitals become more efficient and on health-care information technology >79

80. >80 GE in China Bulk of new spending will be $3 billion R&D development investment over the next six years into affordable health-care equipment designed for underserved populations in emerging markets 1/2 of unit's spending for products/services that expand health care/reduce costs by 15% GE will launch 50+ basic products tailored to rural or emerging markets, such as the lightweight portable EKGs machines the company has developed for India. "You can deal with change, or you can get out in front of it," says GE Healthcare CEO John Dineen GE Video >80

81. Reflection Question What are the long-term prospects for MNEs from developed countries wishing to succeed in emerging markets? Which firms from which industries will thrive and which will suffer? What are the long-term prospects for emerging markets MNEs wishing to succeed in developed country markets? Which firms from which industries will thrive and which will suffer?

82. Outline of our Session Key global trends and the rise of emerging markets Emerging markets business systems and relationships Emerging markets and the economic crisis Emerging markets as laboratories of innovation