STRATEGY & EMERGING

MARKETS (IBUS3109):
INSTITUTIONAL
ENVIRONMENTS IN EMs

S2, 2023

Presented by
Dr. Sangeeta Ray
Faculty of Business
Discipline of International
Business

The University of Sydney Page 1

 AGENDA
CHALLENGES IN EMERGING MARKETS: INSTITUTIONAL
WEAKNESS/ VOIDS

UNDERSTANDING
– INSTITUTIONS IN EMs
– INSTITUTIONAL VOIDS IN EMs
– TRANSACTION COSTS IN EMs

The University of Sydney Page 2

 UNDERSTANDING INSTITUTIONS

– What do we mean by Institutions,

…and how do they affect factor markets, transactions costs & firm
strategy?

– What are “Institutional voids”,

…and how do they affect factor markets, transactions costs & firm
strategy?

The University of Sydney Page 3

 CHALLENGES IN EMERGING MARKETS

INSTITUTIONAL WEAKNESSES & VOIDS

– Institutions (structures, policies, regulations relating to
business) in Emerging Markets differ considerably from
those in Developed Countries.

– Institutional voids refer to gaps in the institutional

infrastructure that is required to enable smooth & efficient
functioning of market transactions between buyers &
suppliers

– Institutional voids are one of the most predictable features

of an Emerging Market (i.e markets are less efficient than
those in developed countries)

The University of Sydney Page 4

 GROWTH INDICATORS OF EM
Emerging markets growth indicators, are more than twice those of
developed economies

Country Average GDP GDP Growth Population Ease of doing

per Capita (annual %) business (index)
(US$)

Brazil 10,710 7.5 194.9 mil 126

China 4,428 10.4 1,338.2 mil 91

India 1,475 8.8 1,170.9 mil 132

Russia 10,440 4.0 141.7 mil 120

Indonesia 2,946 6.1 239.8 mil 129

Republic of 20,757 6.2 48.8 mil 8

Korea

World Bank (2010 databank)

The University of Sydney Page 5
 GROWTH INDICATORS – G7 NATIONS
Developed nations – growth indicators
Country Average GDP per GDP Growth Population Ease of doing
Capita (US$) (annual %) business (index)

Canada 46,236 3.2 34.1 mil 13

France 39,460 1.5 64.8 mil 29

Germany 40,152 3.7 81.7 mil 19

Italy 33,917 1.3 60.4 mil 87

Japan 42,831 4 127.4 mil 20

UK 36,144 1.4 62.2 mil 7

USA 47,199 3 309 mil 4

World Bank
The University of Sydney (2010 databank) Page 6
 EASE OF DOING BUSINESS (EDB) 2017 (Selected Countries)
Economy EDB Starting Construc Getting Register Getting Investor Paying Trading Enforce Resolve
Rank a tion Electricity Property Credit Protecti Taxes Across Contract Insolven
business permit on Borders cy

Singapore 2 6 16 12 19 29 4 7 42 2 27

HK SAR, China 5 3 5 4 55 29 9 3 31 28 43

USA 6 49 36 49 37 2 42 36 36 16 3

UK 7 14 14 9 47 29 10 23 28 31 14

Russian Fed. 35 28 115 10 12 29 51 52 100 18 54

S. Africa 82 136 94 112 107 68 24 46 147 115 55

China 78 93 172 98 41 68 119 130 97 5 56

Brazil 125 176 170 45 131 105 43 184 139 47 80

India 100 156 181 29 154 29 4 119 146 164 103

Source: Ease of Doing Business Report 2018,

http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual-
The University of Sydney Reports/English/DB2018-Full-Report.pdf Page 7
 UNDERSTANDING INSTITUTIONS
(NORTH, 1990)
INSTITUTIONS: THE RULES OF THE GAME
– North’s Definition: Humanly devised constraints that structure
human interactions.
– Institutions govern individual and firm behavior.
– Institutions provide framework within which firms conduct business
in an economy

– Formal institutions: Constitutions, laws and regulations,

property rights protection, contracts and their enforcements
– Informal institutions: Norms, customs, traditions, and code of
conducts (culture and ethics)

The University of Sydney Page 8

 UNDERSTANDING INSTITUTIONS (CONT’D)
– Formal and informal institutions provide a framework that
influences the efficiency of market and determines the cost of
doing business (or transaction costs)
– Transaction costs, offer one measure of how well a market
works.

– TRANSACTIONS COSTS?
– Include all costs associated with conducting purchase, sales or
other enterprise related market transactions (eg. cost of writing
or enforcing contracts).

– HIGH TRANSACTION COSTS IN EM

– Firms rationally pursue their interest and devise their strategy

under institutional framework

The University of Sydney Page 9

 REASONS FOR INSTITUTIONAL WEAKNESSES

– WEAKNESSES IN MARKET RELATED INSTITUTIONS DUE TO

– Historical Legacies
– Late Industrialisation
– Economic System: Centrally Planned or Mixed Economy
• Highly regulated / Extensive State intervention in
business activities/ decisions
(State rather than private sector played a central role in
capital markets - nationalised banks, product markets,
License Raj, public sector/ SOEs)
– Until Liberalisation these economies were less open to
Foreign Trade & Investment & protected domestic markets

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 REASONS FOR INSTITUTIONAL WEAKNESSES

INSTITUTIONS: PRE-LIBERALISATION
– Protectionist policies
– Import Restrictions (eg.high import tariff, import quota)
– Import Substitution
– Preferential treatment of domestic firms (eg. lower taxes,
cheap capital by state in China)
– Foreign Ownership Restrictions (eg. Foreign MNCs entered
via JVs, until 2001 foreign MNCs were not allowed 100%
ownership)

The University of Sydney Page 11

 UNDERSTANDING INSTITUTIONS (CONT’D)
FORMAL INSTITUTIONS IN EMs
– Weak Intellectual Property Rights until TRIPs (Trade Related
IPRs) in 2005
– No penalty for piracy, copyright infringement, generic versions
of patented drugs
(Implications: Product markets? Innovation?)

Price control order for Indian pharmaceutical drugs

– State sets price for selected essential drugs
– (Implications: Product markets?)

The University of Sydney Page 12

 PIRACY OF COMPUTER SOFTWARE

In 2011
• Violations of IPRs cost PC software firms revenues of $63
billion
• Business Software Alliance reported that 42% of all software
applications used in the world were pirated.
• China - worst offender with piracy rates at 77% (vs 19 % in
US)
• Lost sales: $9.8 billion (2011) vs $444 million (1995)

Source: Charles Hill, International Business: Competing in the Global Market Place,10e, pg. 52; McGraw Hill
Education.

The University of Sydney Page 13

 UNDERSTANDING INSTITUTIONS (CONT’D)

FORMAL INSTITUTIONS IN EM contd

– Weakness in contract enforcement
– Goods return policy, enforceable warranties, debt collection
mechanisms
– (Implications: Transaction costs?)

– Foreign investment in retail sector prohibited in India until 2005

– Retail sector is informally organised, market intermediaries such
as cold chain missing
– (Implications: Transaction costs?)

The University of Sydney Page 14

 UNDERSTANDING INSTITUTIONS (CONT’D)
FORMAL INSTITUTIONS IN EM contd
– Weak quality certification/ standard setting/quality audit
infrastructure
– Variance in product/ service quality
(Implications: Transaction costs?)

Vocational training : weak

plumbers, electricians, mechanics may not be qualified to
provide reliable support services such as repair/ maintenance
(Implications: Transaction costs?)

The University of Sydney Page 15

CHANGING INDUSTRY STANDARDS : VEHICULAR EMISSIONS

Source: http;//www.Hindustantimes,com/india-news/vehicular emission;

accessed on 16 Aug, 2017

The University of Sydney Page 16

 UNDERSTANDING INSTITUTIONS (CONT’D)
INFORMAL INSTITUTIONS IN EMs
Norms
– Education : Curriculum has a theoretical focus & needs more
industry orientation, not problem based, few top quality
management schools
(Implications: Transaction costs?)
– Unionised work force:
– Independent unions are not allowed in China,
– Unions strong in Brazil & India
– Disputes/ conflict resolution procedures/ rules might not be
transparent or contracts might not be enforceable
(Implications: Management Practices? relating to hiring & termination
clauses? Transaction costs? )

The University of Sydney Page 17

 UNDERSTANDING INSTITUTIONS (CONT’D)
Norm in Chinese School Education
– Rote-based Learning
– Emphasis on memorising
– Analysis & Critical Thinking considered dangerous qualities for
Chinese children to develop
– System skewed towards exams
– Fierce competition for the best middle & high schools
– ‘Gaokao’ rut – teenagers cram for years for the Goakao, the
competitive university entrance exam

Jack Ma, founder of Alibaba, China’s largest e-commerce company,

voiced concerns that China’s education system encourages emulation
rather than innovation.
Source: F. Rocco. Ïmagining a New China. The Economist & 1984, Feb – March, 2018.
The University of Sydney Page 18
 UNDERSTANDING INSTITUTIONS (CONT’D)

INFORMAL INSTITUTIONS IN EMs

Values
– Age & Experience – Hierarchy/ Seniority based on age
(Implications for labour markets? Merit based promotion?)
– Interpersonal Relationships
(Implications for labour markets? Merit based promotion?
Transaction costs?)

– Risk averse ( especially financial risks)

• Strong focus on savings/ price conscious consumers
• Strong focus on premium quality/ brand consciousness
consumers
(Implications for capital markets/ pricing strategy/ innovation?)
The University of Sydney Page 19
 CULTURE

Cultural Orientation
& Value Patterns

Attitudes Toward
Work Authority
Money Change
Time Risk
Family Equality

Management functions
Organising & Controlling Decision making
Negotiating Communicating
Incentives & Motivation Managing change
Source: Adapted from International Management, Ed Phatak, Bhagat & Kashlak
The University of Sydney Page 20
 Source: Atsmon, Kuentz and Seong. 2012. Building Brands on Emerging Markets. McKinsey Quarterly.

The University of Sydney Page 21

 VALUE FOR MONEY

Source: Atsmon, Kuentz and Seong. 2012. Building Brands on Emerging Markets. McKinsey Quarter

The University of Sydney Page 22

 Institutional
Transitions:
RUSSIA

The University of Sydney Page 23

 Institutional
Transitions:
BRAZIL

The University of Sydney Page 24

 UNDERSTANDING INSTITUTIONAL VOIDS

INSTITUTIONAL WEAKNESSES & VOIDS

– Specialised intermediaries include support services such as
• In Capital markets: Financial advisory/ Auditing/
Risk Analysis/ Venture Capitalists
• In Product markets: Market research/ Quality
certification/ Licensed Real Estate Agencies
• In Labour markets: Recruitment agencies

– Institutional voids may be more than structural gaps, such

as missing specialised intermediaries, and include
regulatory systems and contract enforcement mechanism
(eg. laws relating to Disclosure/ FDI/ IPRs/ redressal
mechanisms).

The University of Sydney Page 25

 UNDERSTANDING INSTITUTIONAL VOIDS

INSTITUTIONAL VOID & TRANSACTION COSTS IN EMERGING

MARKETS

– Institutional voids make markets of Emerging Economies less

efficient than those in Developed Countries markets.

– Institutional voids give rise to high transaction costs in Emerging

markets

The University of Sydney Page 26

 UNDERSTANDING INSTITUTIONAL VOIDS, CONT’D
TRANSACTION COSTS
HIGH TRANSACTION COSTS IN EM

– Transactions Costs?
– Include all costs associated with conducting purchase, sales or
other enterprise related transactions.

– Why High Transactions Costs?

– Institutional Voids (missing/ poorly functioning specialised
intermediaries)

The University of Sydney Page 27

 UNDERSTANDING INSTITUTIONS (CONT’D)
TRANSACTIONS COSTS
HIGH TRANSACTION COSTS IN EMs
High Information & Search costs
– Information failure/ asymmetry
– Sources of accurate market information – often absent/
unreliable
• (eg. absence of
• standard prices/ rates for many products & services
• certification/ accreditation of quality
• redressal mechanisms / contract enforcement procedures
• market research on consumer preferences/ behavior)
– Quality of information – Lacks transparency/ poorly
communicated
• eg Disclosure rules/ Financial reporting
The University of Sydney Page 28
 UNDERSTANDING INSTITUTIONS (CONT’D)
TRANSACTION COSTS
HIGH TRANSACTION COSTS IN EM
Time intensive transactions (Enormous amount of time required to
complete transaction)
– High level of bureaucracy/ red tape
(Hierarchical/ multi-tiered structures - organisational,
political)
No. of start up procedures:
US- 6 , India - 13, China - 13 , Brazil - 18, Russia – 8
– Inefficient/ unreliable judicial system
• (Delays in dispute settlement / contract enforcement
• Indian courts have a backlog of cases, 5 – 15 yrs for dispute
settlements)
• Contract enforcement mechanisms may be unreliable ,
unpredictable
The University of Sydney Page 29
 UNDERSTANDING INSTITUTIONS (CONT’D)
TRANSACTION COSTS
HIGH TRANSACTION COSTS IN EMs

High Uncertainty & Risks

– Misguided regulations (free market perspective)
• Distort functioning of markets (may even cause market
failure)
• Until 2005 - weak IPR laws
• Price control order in pharma
• License Raj – industrial licensing policy (restricts entry)
– Unstable Regulatory Environment

– Association Risk (damages global reputation)

The University of Sydney Page 30

 INDIA’s UNION BUDGET (2023):
REDUCING TRANSACTION COSTS
• DIGITAL TECHNOLOGY & AI ENABLED SOLUTIONS
• National Data Governance Policy (Anonymised Data for
Research, Start-ups)
• Less Stringent Contract Execution (SMEs)
• Easier & Standardised Settlements (contractual disputes of
Govt./ Govt. Undertakings)
• E-Courts (Effective administration of justice)
• Entity Digi Locker (Secure online storing & sharing
documents with business eco-system)
TAX PROPOSALS
• SIMPLIFICATION OF TAXES to deliver
• Reduce compliance burden
• Promote entrepreneurship

Source:
The University of Sydney Page 31
 SUMMARY: INSTITUTIONAL WEAKNESS/ VOIDS

INSTITUTIONAL TRANSITION IN EMERGING MARKETS

– Institutional voids make markets of Emerging Economies less

efficient than those in Developed Countries markets.

– Markets in Emerging Economies are developing or emerging as

they attempt to become as efficient as those in developed
countries.

– In doing so they are reforming their market related institutions.

Hence all Emerging Markets are undergoing institutional
transitions.

The University of Sydney Page 32

 THE END

The University of Sydney Page 33