An analysis of emerging markets

Introduction

According to Jensen, T.H and Larsen, J.A.K (2004) from Denmark National Bank, emerging markets are defined as “sets of markets where by its economic and financial potential become sharper, an average of 5% of annual growth, an improving purchasing power-adjusted exchange rate due to lower price levels in these emerging markets and a fluctuated economic growth which explains a relatively larger share of the global cyclical fluctuations than their economic weight would indicate”.

According Cavusgil, S.T (2002) the main characteristic of an emerging economy is it has started economic reform process to alleviate problems and have achieved steady gross national product (GNP) per capita growth, regional economic powerhouse with large populations, large resources bases, and large markets, increasing middle income population and governments tend to promote easy fiscal and expansion monetary policy to encourage Foreign Direct Investments (FDI) and improve the living standards of its people.

In this assignment, I have chosen China and Brazil as my choice of emerging markets. In my findings, I will discuss about business environments when doing business in these countries, suitable entry modes when dealing with different emerging markets and major business issues when entering emerging markets.

In my conclusion, I will provide a conclusion and some recommendation when entering different emerging markets and justification on using different entry modes when dealing with different emerging markets.

Findings

These days, multinational companies are rushing into emerging markets for very obvious reasons. Emerging markets are full of potential with its untapped markets which has the ability to create new demand for consumer goods. This new wave of demand would help these multinational companies to gain more market shares and profits as liberalisation and globalisation forces are bringing the competition for customers into a higher level.

With the saturation of markets in developed economies such as US, multinational companies such as Ford’s Motor has turn to emerging markets such as India to maintain its position as one of the leaders in the automobile industry. (The Economists, 2009).

Why are emerging markets so attractive to international companies?

the worthiness of these emerging markets. PEST analysis will be conducted on China and Brazil.

Political

China has a fairly stable political stand these days. Its central government went through a political reform in 1978 and since promote openness in having political relationship with foreign countries. However even with its political reform, China remained as a communist State with high intervention by the central government on economy issues. (CIA FactBook, 2009). With its political reform, liberalisation forces sweep through the country where by exports, imports and FDI are moving in and out smoothly without much interference from the central government comparing to before its political reform. China also gained entry into World Trade Organisation (WTO) in 2001 and this represents that China has the obligation to act within the context of WTO when dealing with trade issues.

China is country which emphasize on “guanxi” or good relationship. According to Financial Times Limited (2002), having bad relationship with the government officials mean cutting down the chances of entering China or having any good business prospects in this country as can be seen in the PepsiCo case.

As China realises than openness policy brings in the money flow and trades, China are working on to have trade agreements with its neighbouring countries. Example of Preferential Trade Agreements (PTAs) China has joined such as ASEAN + China (WTO, 2009).

However, corruption is high in China. According to Transparency International (2008), China ranked at 72 out of 180 countries. (Refer Appendix 1). This might be a huge letdown for Multinational Enterprises (MNEs) to enter China as corruption create enormous unseen costs to these MNEs.

Economy.

According to Reuters (2008), China is currently pursuing beggar-thy-policy. According to Economist (2009) beggar thy policy is where a country purposely undervalued its own currency to encourage more exports from its country. By doing so it would improve the country’s balance of payment (BOP) and encourage more inward FDI as production costs in China would be cheaper compare to the rest of the world.

There is also evidence of growing middle class in China with the economy reform taken by the central government. Private sectors and individuals have the opportunity to own property and invest in foreign firms. However, with growing purchasing power, inflation rate then becoming a companion to purchasing power. According to CIA FactBook (2009), inflation rate of China is said to be at 6% which is acceptable for an emerging market. However, MNEs also have take notice of price elasticity in China. As most of its people are middle income people, MNEs have to be caution with its price setting strategies as middle income people tend to be more prices sensitive. This shows that China markets have a very elastic demand as most of the consumers are categorised in working class or middle class.

Being the host of the recent Olympic 2008 also help China to make its mark in the world map as this has help to introduce China to the rest of the world. Participation in global activities and openness in economy tend to promote efficiency, create healthy competitions between producers and help to diminish weakness of monopolies enterprises in China.

Social

According to CIA Fact Book (2009), China has the highest population rate in the world. With MNEs trying their hands in emerging markets to find new customers base, China serve as their new untapped customers base. With 72.1% of its population are categorised into 15- 64 age group, this shows a huge potential demands for goods and services. (CIA Fact Book, 2009).

However, China is still marred by huge income differential among its regions. Standards of living in some its region remained low due to different budget allocation by the central government.

Even with its huge differential in income, 90.8% of its people are literate. This provides an opportunity for MNEs as huge population means cheap labour costs and with high literacy rate, this provide MNEs with high skilled labour at cheaper costs.

Technology

China is one of the most sought after production base for producers from all around the world. According to CIA Fact Book (2009), its industrial production growth rate is at 107% annually which means it has adequate equipments and competent technology compare to western multinationals. However, property rights are one of the major issues in China. Producers have to be extra cautious on their property rights, ideas and new technologies to avoid any legal problems with local producers.

Internet also becoming one of the marketing tools to reach out to people. China has the highest rate of internet users in the world (CIA Fact Book, 2009), MNEs can take advantage of this issue and helps them to decrease the expenditure on marketing activities.

PEST Analysis for Brazil.

Political

Brazil went through a political reform in 1985 and become a Federal republic after that. (CIA Fact Book, 2009). Brazil is also a member of trade agreements as it is one of the members of MERCUSOR which stands for Common Market of the South as well as a member of WTO. (BBC, 2208). This shows that Brazil is moving toward openness in its political and economy issues. However from Transparency International (2008), Brazil ranked 80 out of 180 countries on the corruption index. (Refer Appendix 2)

Economy

Brazil is listed as one of the fastest growing emerging markets at the moment as it is listed in BRIC countries. Inflation rate in Brazil is acceptable at 5.8% (CIA Fact Book, 2009). However cost of starting up a business in Brazil is very high as Brazil is ranked as the 4th highest in commercial bank prime lending rate. (CIA Fact Book, 2009). This might create difficulty and even discourage these MNEs to expand into Brazil.

Forces of liberalisation also affect the decisions of MNEs to invest in Brazil. Free Trade Agreements (FTAs) and PTAs tend to promote free trade whereby exports and imports no longer restricted by trade restrictions such as tariffs and quotas. PTAs also promote efficiency in production as price of the intermediate products are being reduced as tariffs and quotas no longer applied on the products. FTAs also promote free movement of capital and sometimes labour which then benefited these MNEs which require cheap labour costs to produce.

Social

Even though Brazil is classified as one of the fastest growing emerging markets at the moment, 31% of its population still lives below the poverty line. (CIA Fact Book, 2009). its BOP also doesn’t look promising as its public debts worth 40.7% of its GDP. (CIA Fact Book, 2009). With its public debts taken almost half of its GDP value, social welfare of its people might be sidelined by the government.

Another social issue in Brazil is where crimes rate is very high and Brazil is world 2nd largest cocaine consumer in the world. (CIA Fact Book, 2009). With these social problems, it might deter MNEs to enter Brazil at current time.

Technology

Brazil has one of the most the most advanced industrial sectors in Latin America. Its communication networks are also one the most advanced in Latin America. (Index Mundi, December 18, 2008). However due to high corruption rates, law on property rights and patterns are not fully established which might discourage western MNEs to enter Brazil.

Major business issues that MNEs Need to Take Into Account When Planning Expansion Into Emerging Markets.

Local presence.

MNEs should understand that when entering different emerging markets, different entry strategies are needed. This is because MNEs are dealing with different types of governments. Take example of MNEs such as Coke in China. MNEs that wish to enter China need to be cautious as the central government tend to play a huge role in determining the success of these MNEs. As evidence, local partner is essential for MNEs to survive in China. According to Usha C.V. Haley (2006), Coke was selling poorly in China in the early stages and to recover from that Coke sought partners such as China International Trust and Investment Corporation (CITIC), a state-owned enterprise (SOE) which provide access to top-level governmental leaders. With this move, “it allowed Coke to position itself for the longer-term, while understanding short-term dynamics”. With its partnership with local SOE, Coke able to take advantage of the political influence to obtain governmental approval for new bottling plants and gain competitive edge over its rivals. (Usha C.V. Haley, 2006).

Local presence also means that MNEs should consider factors such as local cultures and norms or having local main offices in the emerging markets they wish to enter. By understanding local culture, MNEs will be able to provide products that the consumers needed. By having a local office in the emerging markets, it also shows the level of commitment of these MNEs in the emerging markets.

Local presence also can be translated into having a local partner in the emerging markets. For example, by having local partners in China, it helps MNEs in terms of distribution networks and reaching more local consumers. According to Pacek, N and Thorniley, D (2004), “local presence is crucial to success and MNEs need to have local office focusing on marketing and sales”. Take example of PepsiCo where they injected local presence into their marketing campaign by changing their signature blue can to red-themed can as a way of showing support for China’s national Olympics team. (Wall Street Journal, 2007).

As for Brazil, local presence is also very important as most of its people do not speak fluent English. To reduce any communication problems, local partners or agents are needed to help these MNEs to better understanding of local demand.

“Local Corporate Structure”

According to Pacek, N and Thorniley, D (2004) it is essential to have a local corporate structure in every emerging markets MNEs are entering. Pacek, N and Thorniley, D (2004) also states that marketing and sales functions in of MNEs should not be centralised as “centralised marketing may save costs, but it also likely to reduce sales”. Take example of Coke which tastes sweeter in Asia compare to the one sold in Western countries.

Another business issue is labour regulation in these emerging markets. According to Marshall, A (2004), Brazil’s labour policies undergo structural reforms in 1990s and regulations to protect its labours have been increased and strengthen. One of the main reasons for MNEs to enter these emerging markets is due to the availability of cheap labour for these MNEs however MNEs must be careful and obey local regulations when hiring local employees as any wrongdoings or unfair labour practices might tarnish MNEs’ reputation and halter operations in these emerging markets.

Most of the governments in emerging markets prefer entry modes such as joint ventures, strategic alliances or mergers. By doing so, local partners can gain from technologies transfer and local governments can exercise up to certain level of influence on the MNE’s operation. MNEs should maintain a good and diplomatic relation with the local governments in order to succeed in their expansion into these emerging markets. Countries such as China and Brazil which emphasise on personal contacts should be deal with care and sensitivity.

Local corporate structure is needed to compromise to the cultural differences in these emerging markets. According to Hofstede (1980), “cultures affect how businesses operate in certain countries and there are four cultural dimensions which comprise of power distance, individualism/collectivism, masculinity/femininity and uncertainty avoidance”. As governments’ influence in China and Brazil are much stronger than those in Western countries, it can be conclude that these two countries rank high in term of power distance and higher tendency towards collectivism. (Zigang. Z, 2004). According to ITIM International (2009) cited from Hofstede (1980) power distance means that the head of a country prefer to have a certain level of control over the operation of a company inside the country. Zigang. Z, (2004) also proved that China ranked high on the power distance and there is tendency of collectivism behaviour. According to ITIM International (2009), collectivism is defined as “individuals integrated into groups”. As most of the companies in China are States-Owned Enterprises (SOEs), China’s business culture is more to collectivism than individualism which is totally opposite from US which encourage individualism. Therefore, it is essential for MNEs to understand the way businesses are conducted in these emerging markets to avoid conflicts with the local governments.

Competitive contexts of these emerging markets

When entering these emerging markets, MNEs also should take notice of the competitive contexts in these countries. Factors that should be considered are rivalry among the firms in the industry these MNEs planned to enter, threat of substitutes, bargaining power of suppliers and customers and barriers to entry.

The main purpose of venturing into emerging markets is to seek new customers’ base. MNEs should be well informed about the local and foreign competitors’ market shares in emerging markets. By looking at the concentration ratio in the particular industry, MNEs can evaluate the level of competition in the industry. By doing so, MNEs can prepare themselves with proper business strategies to sustain in the emerging country.

As for threat of substitutes, MNEs should be aware of substitute products that are available in the emerging market. Take example of an automaker which has plans to venture into Brazil. This foreign automaker should have some understanding of the public transportations in Brazil. By having information of the switching costs between having a car or taking public transportation, it helps the automaker to determine the location of its production bases and its car sales locations.

When venturing into emerging markets, MNEs should also look at the bargaining power of suppliers and buyers in the emerging markets. Emerging markets might provide the place for cheap production plants but with inadequate suppliers, it will cause price inefficiencies in the final price of the products. Therefore, MNEs should have proper distribution channels in these emerging markets and reliable suppliers to ensure good quality on the final product. As most of the emerging markets have inadequate infrastructure for distribution of goods due to unequal developments in these emerging markets, the best option for these MNEs is to have a local partner to help in distributing the products and reach out the customers. MNEs also should take notice of the buying power of its customers. By investing in emerging markets, MNES should realise most of its potential buyers comes from working class, therefore pricing strategy should be tailored to the particular emerging market.

Lastly, barriers to entry are where MNEs must take notice when planning expansion into emerging markets. Barriers to entry come in numerous forms such as trade restrictions, trade agreements and governments’ regulations. The higher the cost of entry, the more discourages the MNEs to enter the emerging market. In order to reduce the cost of entry, MNEs should take notice if there are changes made on trade restrictions and trade agreements of these emerging markets as abolishment of trade restrictions means cheaper exports and trade agreements leads to free movements of labour and capital and cheaper exports to neighbouring countries. By taking advantages on these changes, MNEs can benefit from it and even expand their operation into more countries.

Conclusion

MNEs need to be careful when planning expansion into emerging markets as emerging markets are still marred with a lot of weakness but nevertheless full of opportunities. MNEs should plan their entry modes properly as this is deciding factor for success in the emerging market. By having a suitable entry mode, it definitely helps these MNEs to have a good relationship with the local governments which only guarantee the sustainability of this expansion plan. MNEs also must realise that there is no “globalised products or marketing strategies” due to cultures differences between emerging and developed markets. By understanding this concept, it helps MNEs to satisfy local demands and provide sustainable profitability in the future. As MNEs are rushing to invest in emerging markets, it is safe to say these emerging markets will be the developed markets in no time.