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

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

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

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

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

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

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

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

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

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

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 www.doingbusiness.org/

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 www.doingbusiness.org/

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: www.heritage.org

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

BRICs Imports 2006-10 % Source: www.intracen.org

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: www.intracen.org

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

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

SMEs perceptions of Obstacles Source: UKTI, 2011

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%)

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

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

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%)

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

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

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

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

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

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

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