1. Effective business with emerging economies
Frank McDonald
Bradford Centre in International Business
8 September 2011 Copyright Bradford University School of Management

2. Outline of Talk Types of Emerging Economies (EE)
Growth of Emerging Economies markets
Costs and risks of doing business in EE
Imports of Emerging Economies
SMEs and doing business in Emerging Markets
Managing doing business in Emerging Markets

3. Types of Emerging Economies
Goldman Sachs’ typology of Emerging Economies
BRICs – Brazil, Russia, India and China –BRIs = BRICS minus China
N-11 – Bangladesh, Egypt Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey, & Vietnam – N-10 = N-11 minus Korea
Other types of economies
Economies with low income per head and erratic growth often low levels of capital and poor infrastructures many sub-Saharan countries and countries such as Haiti, Nepal and Yemen

4. Different types of Economies
Middle development economies – many Latin American countries (such as Argentina and Uruguay) & Asian countries (such as Malaysia and Thailand), and East European countries
Large developed economies with high income per head (G8 - Canada, France, Germany, Italy, Japan, UK and USA) & smaller highly developed economies such as Western European countries not in G8
Small highly developed or high income economies - Hong Kong, Singapore, Gulf States

5. Type of EE
Emerging economies are very different in terms of size, economic and political conditions
China and to a lesser extent India dominate much of the interest in EE
Important EE exist outside of these countries or even the BRICs & N-11
Good research on possible EE markets is essential

6. Source: Based on data from Goldman Sachs, 2010
Growth of EE
US$ trillions
Source: Based on data from Goldman Sachs, 2010
Share of World GDP

7. GDP per head compare to UK
Source: Based on data from Goldman Sachs, 2007
% of UK GDP per head (US$ 2006 prices)

8. Middle Class in BRICs
Rise of middle class in BRICs means they have a large number of people with high disposal income – and this class is expected to grow substantially
Population with income per annum greater than $6000 G7
BRICs
China
India
2010
790 m
870 m
560 m
90 m
2020
800 m
1600 m
1000 m
390 m
Source: Goldman Sachs, 2010

9. Trend Growth of Emerging Economies
Projections on basis of existing trends
Growth
Likely trend growth in emerging economies
Trend growth in developed economies
Current Period
Time

10. EE Potential for Exports from developed economies
Growth unlikely to proceed at current rates for those emerging economies that have developed considerable in the last decade or so
As growth they are likely to increasingly require more high-tech imports to help them to improve efficiency
The growing middle class in EE present significant markets for the type of goods produced in developed economies
The expansion of higher incomes to rural areas in EE offers new opportunities for exports – but these could be very challenging markets

11. Costs of doing business
Brazil
India
Russia
China UK
Overall rank
127
134
123 79 4
Trading across borders
114
100
162 50 15
Enforcing contracts 98
182 18 23
Paying taxes
152
164
105 16
Rank out of 183 countries in 2011
Source: World Bank

12. Differences within countries
Enforcing contracts
Time (days)
Cost (% of claim)
Beijing
340
9.6
Changchun
540
18.4
Hefei
300
41.8
Shanghai
292
9.0
Source: World Bank

13. Business and trade freedom
Brazil
Russia
India
China
Vietnam UK
Business
Freedom
54.3
50.5
36.9
49.8
61.6
94.6
Trade
69.8
50.7
64.2
71.6
68.9
87.6
From
Corruption
37.0
22.0
34.0
36.0
27.0
77.0
Out of a maximum score of 100 (2010)
Source:

14. Costs of doing business and risk
All emerging economies have higher costs of doing business and risk compared to developed economies
These costs and risks differ between emerging economies and also within them
Managing effectively these costs and risks is of crucial importance

15. BRICs Imports %
Source:

16. Major Imports 2006-2010 Top 3 imports by value % growth in ( )
Other fast growing imports
Brazil
1. Machinery (17%)
2. Elect & Electronic (12%)
3. Vehicles (29%)
Iron & Steel (30%)
Clothing (26%)
Furniture (24%)
Russia
1. Machinery (10%)
2. Elect & Electronic (9%)
3. Vehicles (-5%)
Footwear (28%)
Pharmacy products (15%)
Plastic Products (9%)
India
1. Machinery (14%)
2. Elect & Electronic (15%)
3. Organic Chemicals (18%)
Fertilizers (45%)
Vehicles (20%)
Optical and Medical (15%)
China
1. Elect & Electronic (13%)
2. Machinery (10%)
3. Optical & Medical (8%)
Pharmacy products (32%)
Vehicles (27%)
Rubber products (16%)
Excluding natural resources
Source:

17. Growth of Imports into EE
The major imports of most EE are natural resources
Nearly all EE have largest imports in areas of machinery & electrical and electronic products – often connected to capital equipment & intermediate products for export goods (especially China)
Other areas of high growth – vehicles, consumer goods for emerging middle class & health related products
Considerable differences in economic and market conditions in BRICs and N-11 and other possible emerging economies – need to carefully research possible markets

18. SMEs favoured EE markets
Survey of SMEs’ ranking of a range of EE markets as highly favourable
High :Brazil(24%) China (24%) & India (21%)
Middle: Asia - not China and India (16%) Eastern Europe (17%)
Low : South America - not Brazil (9%) Russia (8%) MENA (8%)
Low: Central America and Caribbean (6%) sub-Saharan Africa (4%)
Source: Economist Intelligence Unit, 2011

19. SMEs perceptions of Obstacles
Source: UKTI, 2011

20. SMEs perceptions of Obstacles
Survey in 2011 by Economic Intelligence Unit for Federal Express
Concern about economic risk from exchange rate changes and inflation
Top 5 concerns - bureaucracy and corruption (46%) credit risk (20%) enforcing contracts (18%) language and cultural barriers (16%) poor infrastructure (14%)

21. The Key External Obstacles
The major problem emerging from surveys of SMEs is dealing with differences in legal and regulatory frameworks and customs –often linked to corruption & bureaucracy
It is important to note that once good information about legal and customs requirements and understanding cultural settings have been secured this does not mean that these are no longer serious problems to doing business in EE – the key problem is the rules of the game are different and foreign firms are normally outsiders to these rules

22. Key internal problems
Top 6 problems lack of - appropriate management skills (37%) resources to assess risks (33%) local information (27%) finance (26%) language and cultural knowledge (22%) local market knowledge (22%)
Boil down to a lack of resources – a problem largely of the size of SMEs

23. Advantages and Disadvantages of SMEs
Advantages: ability to rapidly respond to changing market conditions (48%) speed to market (42%) relationship with customers (31%) price flexibility (25%) product specialisation (24%) ability to rapidly innovate (14%)
Disadvantages: lack of - economies of scale (58%) finance (50%) employees in host country (23%) good local contacts (22%) ability to radically cut prices (20%) market research capacity (7%) access to talented managers (6%)

24. Overcoming lack of resources
JVs domestic of foreign
Indirect exporting via agents and partners
Use of networks of partners and experienced managers
Use of web based information sources and help

25. Evidence on overcoming scarcity of resources
Main options – make or buy
Make option - use of managers with extensive international business experience & devoting a significant number of employees to international activities connected to use of networks and/or joint-ventures (JVs) to help with international activities
Buy option (outsourcing) - use of indirect exporting and licensing

26. Reducing scarcity of resources – make option
Requirement for resources
Use of experienced managers & employees devoted to international activities
Use of partners in networks and/or JVs
Managers experience and devoted employees
Helps directly by knowledge of what is needed and to select suitable partners
Helps to extract appropriate information & resources from partners
Benefits and Costs
Reduces risk and costs of doing business & high learning about foreign markets
Problems with sharing the benefits & risk of loss of core technology and knowledge

27. Reducing scarcity of resources- buy option
Requirement for resources
Use of agents for exporting
Use agents for licensing
Agents and licensing
Reduces costs of acquiring information and knowledge
Agents deal with host country issues – reduces managerial time in home location
Benefits and Costs
Low costs of dealing with foreign markets
High agent fees & poor learning about foreign markets – possible loss of knowledge & reputation

28. Empirical Evidence
Most SMEs that have a large reliance on international markets tend to more often use the make option – key benefit is ability to learn when using make option
Buy option mostly used by these SMEs in peripheral markets or in early stages of entering markets
Buy option heavily used by SMEs that are small and with limited international experience
SMEs with long-term success in international markets tend to have managers with good international experience & with employees devoted to international business & significant use of the make option

29. Key issue in doing business in EE
Research EE markets
Select target markets
Estimate resources to supply these markets
Consider number EE markets to enter & pace of entry
Consider make and buy options
Amend plan - number EE markets and pace & make and buy options
Draw up implementation plan
Implement and monitor plan
Assess what has been learned from EE markets

30. Sources of help
Many sources of information on web and from agencies such as UKTI, Chamber International and Banks and consultancy companies
Help from Bradford University
KTPs & Summer and work placement students
Research on country selection, make or buy options etc