Chapter 2

The Emerging
Global
Environment
 The World from 1993 to 2016

1993 2016
East Asia & Pacific 25% 30%
North America 29% 27%
European Union 30% 22%
Latin America & Caribbean 6% 7%
Middle East & North Africa 2% 4%
Sub-Saharan Africa 1% 2%
Russian Federation 2% 2%

World GDP (Billion USD, current) 25 859 75 845

2
 The World From 1993 to 2016

GDP per Average

GDP capita Population, yearly growth
(current billion US$) (current US$) total (Million) (1993-2016)
1993(%) 2016(%) 1993 2016 1993 2016 (Per Cent)

East Asia & Pacific 6552 25% 22480 30% 3462 9788 1892 2297 4.18
North America 7458 29% 20160 27% 25822 56082 289 359 2.50
European Union 7815 30% 16487 22% 16211 17173 482 511 1.74
Latin America &
Caribbean 1565 6% 5300 7% 3332 3761 470 638 2.81
Middle East & North
Africa 608 2% 3145 4% 2224 2269 273 437 3.82
Sub-Saharan Africa 300 1% 1513 2% 540 512 556 1033 4.21
Russian Federation 435 2% 1283 2% 2929 2663 149 144 1.72

World 25859 100% 75845 100% 4667 4937 5541 7442 2.90

3
 Globalization growth indicators, 2000–2014

30

25

20

15

10 Trade Growth
GDP Growth
FDI growth
5

0
a a ia pe
ies ric ric s o
m Af m e :A Eu
r
no ts : A ets
eco k e ts : rk ets :
ze
d ma
r
rk e ma rk
ali ng ma ng ma
tri rgi g rgi ng
us e rgi
n e rgi
Ind E m e Em m e
Em E

4
 What is an Emerging Country?

No clear definition of what is an “emerging country”.

Often describes countries that exhibit:

• High economic growth

• Increasing development of a middle class
• A high degree of infrastructure and educational investment
• A progressive shift from agriculture and services
• An economy in which market mechanisms play an increasing
role
• Opening of their market to international trade and investment.

5
 Different Types of Emerging Countries

The BRICS emerging giants - Brazil, Russia, India, China and South
Africa

The Transition Economies (Eastern Europe)

The Emerging Industrial Economies of Latin America, Asia and Africa

(such as Chile, Mexico, Turkey, Malaysia and Indonesia)

The Developing World (such as Vietnam, Nigeria, Pakistan)

6
6
 Country Life Cycles
4.50
Sub-Saharan
Africa
4.00 East Asia and the Pacific

3.50
Middle East and
Average Yearly 3.00
North Africa
North America
Growth
Rate
2.50 Latin America
(1993-2016) & Caribbean
European Union
2.00

1.50 Russian Federation

1.00
0 10000 20000 30000 40000 50000 60000

GDP /Capita 2016)

(Bubble size proportional to GDP 2016)

7
 High Economic Growth
400

BRICS

350

300 Developing
Economies

Emerging Indus-
250 trial
Economies

Transition
200 Economies

World
150

100
1990 2000 2010 2012 2013 2014

GDP Growth : Emerging Countries vs. the World Source: Data from World Development Indicators
(1990-2014) -Base 100 in 1990

8
 Increasing development of a middle class
Forecasted increase in Middle Class Population
in Emerging Regions from 2009 to 2030 (Million)
10000

2703 3039

1000

132 129
100 75

10
Central & South Asia Pacific Sub Saharian Middle Est & N World
America Africa Africa

9
Middle Class Effect in Emerging Countries

10
Evolution of Urban Household Income in China

11
 High Degree of Infrastructure Investments

14%
BRICS
Average yearly growth of fixed capital formation

12%
Developing
10% Transition
% of GDP 1990-2014

8% EIE

6%

USA World
4%
EU
2%

0%
18% 20% 22% 24% 26% 28% 30% 32% 34% 36%

Average fixed capital formation

% of GDP 1990-2014
Source: Data from World Bank. World Development Indicators

12
 Opening to International
Trade and Investment
14%
BRICS
Average yearly growth of fixed capital formation
12%
Developing
10%
Transition
% of GDP 1990-2014

8% EIE

6%

World
USA
4%
EU

2%

0%
18% 20% 22% 24% 26% 28% 30% 32% 34% 36%

urce: Data from World Bank. World Development Indicators Average fixed capital formation
d UNCTAD World Investment Report , 2010)
% of GDP 1990-2014

13
 A progressive shift from agriculture to services
Agriculture (as % Share of GDP)
1990 2014
   
 
Brazil 23% 15%
China 53% 7%
India 60% 49%
Russian Federation 16% 7%
South Africa 15% 5%
   
Egypt, Arab Rep. 39% 28%
Colombia 20% 16%
Sri Lanka 41% 30%
Philippines 37% 30%
   
Poland 25% 11%
Czech Republic 12% 3%
Hungary 18% 11%
Indonesia 56% 34%
Mexico 26% 13%
Turkey 43% 14%
   
European Union 9% 4%
United States 3% 2%
World 39% 20%

14
 Market mechanisms play an increasing role

Changes to national investment policies, 2002–2016

Source: UNCTAD: World Investment Report 2017: Table III.1, Page 99

15
 The Washington Consensus

• Fiscal discipline: limit budget deficit

• Public expenditure directed toward high economic returns, improvement in
income distribution, healthcare, education, and infrastructure
• Tax reform: broaden the tax base and lower marginal rates; tax foreign holdings
• Interest rates market determined
• Competitive exchange rate
• Trade liberalization
• Liberalization of foreign direct investment (FDI)
• Privatization of state enterprises
• Deregulation: abolish entry barriers or restrictions on competition
• Secure property rights

16
The World in 2050 according to
Goldman Sachs

17
The World in 2050 according to
Goldman Sachs

18
Institutional and Business Environments

• Governance
• Market imperfection
• Ease of doing business
• Importance of business conglomerates
• A significant presence of bottom of the pyramid market
segments

19
 Government Effectiveness
2
• Quality of public
1.5
services
• Quality of the civil
1
service & its degree of
independence from
political pressures
Scored from 0.5
• Quality of policy
-2.5
formulation and
(Weakest) 0
to 2.5 implementation
(Strongest) • The credibility of the
-0.5
governments
commitment to such
-1
policies

Source: Data from World Bank Indicators,2015

20
 Regulatory Quality
Ability of the government to formulate and implement sound policies and regulations that
permit and promote private sector development.
1.6
1.4
1.2
1
0.8
0.6
0.4
From -2.5 (Weak) 0.2
to 2.5 (Strong) 0
-0.2
-0.4
i es S es i es CD
om RIC
omi om E
n B n n O
E co E co E co
ip ng it al
r iit on
elo us an
s
De
v Ind Tr
ng
re gi
E m

Source: Data from World Bank Indicators,2015

21
 Rule of Law
Confidence in the rules of society, the quality of contract enforcement, property rights, the police,
and the courts, as well as the likelihood of crime and violence.
2

1.5

0.5

From -2.5 (Weak)

0
to 2.5 (Strong)
-0.5

-1

Source: Data from World Bank Indicators,2015

22
 Control of Corruption
Reflects perceptions of the extent to which public power is exercised for private gain, including both
petty and grand forms of corruption, as well as "capture" of the state by elites and private interests.

1.5

0.5

0
From -2.5 (Weak)
to 2.5 (Strong) -0.5

-1

ies IC
S i es i es CD
no
m
B R nom nom OE
E co co E co
lE
ip ng ts ria ii on
t
elo u an
s
De
v Ind Tr
rging
E me

Source: Data from World Bank Indicators,2015

23
 Institutional Voids in Emerging Countries

 Access to Products Markets

 Access to Labor markets
 Access to Capital markets
 Political and social systems
 Bureaucracy
Note: Not all characteristics apply to all emerging countries, and some of those can be found in some OECD
countries.
As discussed in Khanna and Palepu (1997).

24
 Access to Products Markets

 Lack of socio-economic and market data

 Lack of information on quality of products and services
 Difficulties in accessing suppliers
 Weak logistical infrastructure
 Intricate distribution and retailing systems
 Poor product-related environmental and safety regulations
 Unsophisticated consumer credit and payment mechanisms
 Poor consumer protection
Note: Not all characteristics apply to all emerging countries, and some of those can be found in some
OECD countries.
As discussed in Khanna and Palepu (1997).
.

25
 Access to Labor Markets

 Weak educational system (Improving still)

 Poor mobility of personnel
 Ethnically, politically biased performance and remuneration of
employees
 Feeble protection of employees and restriction or prohibition of trade
unions
 Difficulties in fluidity of hiring and firing employees

Not all characteristics apply to all emerging countries, and some of those can be found in some OECD
countries.
As discussed in Khanna and Palepu (1997).

26
 Access to Capital Markets
 Low liquidity of equity market
 Limited effectiveness of banking and financial institutions
in collecting savings and channeling investments
 Lack of transparency on financial performances of corporations
 Predominance of government banking sector
 Poor protection for minority shareholders
 High predominance of diversified conglomerates
 Politically motivated allocation of licenses
 Unclear bankruptcy process
Not all characteristics apply to all emerging countries, and some of those can be found in some OECD
countries.

As discussed in Khanna and Palepu (1997).

27
 Political and Social Systems

 Uncertain stability of political cohesiveness

 Lack of clarity in the distribution of power
 Strong interference in regulating business
 Uncertain protection of property rights
 Lack of independence of judiciary system
 Ethnic, religious, family, linguistic tensions
 Control of media
 Control or prohibition of non-governmental organizations
 Corruption
Not all characteristics apply to all emerging countries, and some of those can be found in some OECD countries.

As discussed in Khanna and Palepu (1997).

28
 Bureaucratic Constraints

 Investments and preferential treatment for national companies

 Bureaucratic constraints on foreign business concerning the
opening of businesses, acquisition of property, transfer of
dividends, local borrowing, imports and exports, labor and
currency

Not all characteristics apply to all emerging countries, and some of those can be found in some OECD
countries.

As discussed in Khanna and Palepu (1997).

29
 Ease of Doing Business Indicators 2018
From low ranking score (Easy) to high (Less Easy)
160
145
139
140
128 125
120 111 112
100
100
82
78
80 72
59 60
60 55
49 48
40 35 34 31
30 27
24
20
20
7 6
0
* e . a s a * y e * a * * a * *
ria voir Rep ank ine mbi s ia rke hil ico ysi d ia azil fric ina tion ry lic d
ga pub ol an a n * nce any dom tes *
ge 'I b L pp lo e u C e x al a In Br th A Ch ra n p ra m g a
Ni te d Ara Sri hili Co on T Hu R e P Ja F Ger Kin d St
d M M
o u de d e
Cô ypt, P In S F e
ec
h
ite nit
Eg is an Cz Un U
s
Ru

Source: Data from World Bank, http://www.doingbusiness.org/rankings

30
 Significant Presence of Bottom of the Pyramid Markets

Above 20000 ppp $/capita

High
Class

From 3000 to 20000

Middle Class
ppp $/capita

Below 3000 ppp $/capita

Bottom of the Pyramid

31
 Significant Presence of Bottom of the Pyramid Markets

Bottom of the Pyramid % of Total Bottom of the Pyramid % of Total

Population (Million) Population Income (Billion ppp) Income

Africa 486 95% 429 70%

Asia 2858 83% 3470 41%

Eastern 458 36%

254 63%
Europe

Latin America
360 70% 509 28%
&Caribbean
Source: Data from The Next Four Billion, IFC and the World Institute, 2007

32
 Bottom of the Pyramid Markets - Marketing

Sources: Based on concepts discussed

in Prahalad (2005) and Dawar and
Chattopadhyay (2002).
• Rural focus
• Products built to last
• Unskilled work process
• Adapt supply chains to local conditions
• Products designed for hostile environments
• Hybrid technology: combination of advanced and adaptation
• Find new price–performance relationships leading to quality at low prices
• Products, service functionalities and packaging reinvented for local conditions
• Promotion relies less on mass advertising and more on educational campaigns
using government programs and NGOs

33
 Emerging Countries Competitors

Haier (China – white goods)

Tata (India – multiple markets)

Ranbaxy Laboratories Ltd (India –Pharmaceuticals)

PETRONAS (Malaysia - petrochemicals)

CEMEX (Mexico – cement, building materials)

Infosys (India – IT, consulting)

SAB Miller (South Africa – Brewing/beverages)

Lenovo (China – PCs, electronics)

Huawei (China – telecoms, telephony hardware)

34
 Globalization and local firms: The Recent View

The Strategic Logic of Emerging Countries Competitors

• Use their knowledge of local environment
• Use their “national” preference
• Use their low-labor cost
• Sometimes use their natural resource

On the Domestic Front On the International Front

• Dominate Bottom of the Pyramid

• Gain volume • Export low cost products
• Progressively push their capabilities • Buy ( copy??) technology
upward
• Eventually compete head-on with
multinational players

35
 Globalization and local firms: The Recent View
Development of National Champions

Sources of Competitive Advantage

• Proprietary Technology
• Own brand
• International marketing

• Brand creation and development

• Investment in R&D
• International expansion

• Investment in advanced production technology

• Labor costs still moderate

• Low cost manufacturing based on low labor costs and financing

• Large part of activities based on original equipment manufacturing,
• minimizing marketing costs
• Technology is acquired thru licensing or joint ventures
Time

Japan 1960s 1960s 1970s and beyond

Korea 1960s 1970s 1980s 1990s and beyond
China 1980s 1990s 2000s 2005 and beyond

36
Globalization and local firms: The Recent View
Development of National Champions
• Compete head-on with traditional
global firms

• Start International expansion mainly

by acquisitions
• Invest in modern manufacturing
technology
• Start to build their own brand
• Start their own R&D

• Protected Domestic markets

• Low-cost manufacturing based on low labor cost
• In some cases access to natural resources
• Technology is acquired through licensing
or joint ventures
• Large part of activities based on original
equipment manufacturing

Time
Step 1 Step 2 Step 3
Domestic player Internationalization Global Player
And exporter

37
 National Champions: Building The Business

High-End Markets
Dominated by Multinationals

High

th s
t Pa
n
Products/Services me
lop Low-End Markets
ve
Functionality and e D e
Dominated by Domestic Firms
tiv
Performance sr up
Di
Canon in Japan in the 60s (cameras)
Honda in the 60s (motorcycles)
Galanz in China in the 90s (microwaves)
TCL in China (televisions)
Samsung in Korea in the 80s (microelectronics)
Low Reliance in India in the 90s (pharmaceuticals)
Time

38
 Emerging Competitive Battlefield

Global Multinational firms from USA, Europe,

Japan, Korea and Australasia…plus emerging
Indian and Chinese Mutinational firms …)

Scope

Domestic players
Local both large and small

Contextual and Low resource Technology

political know-how costs and marketing

Competitive Approaches

39
 ‘Dragons at Your Door’

Chinese companies disrupt global competition through

COST INNOVATION:
using cost advantages in radically new ways to offer customers
around the world dramatically more for less

 Start in China and overcome fragmentation

 Export by looking for loose bricks in competitors’ defense
(unexplored markets or products)
 Moving upmarket: technology at low cost ( licensing, copying)
and variety at low cost
See Ming Zeng and Peter Williamson, Dragon at Your Door:
How Chinese Cost Innovation is Disrupting Global Competition
Harvard Business School Press, 2007

40
 Earth Moving Equipment
Wheel Loaders

Global Market: 720,000 units

Chinese Market: 120,000 units

Production Capacity in China:

Chinese Product
200,000 units
Prices (US$)
CAT, Volvo: 120,000
Komatzu: 60,000
Chinese Co 30,000
Chinese Co exported:
2,000 Units in 2004
3,500 units in 2005
Caterpillar

41
 The Whirlpool Story in China - 1

 By mid 1990s Whirlpool had big ambitions for Asia

 China was considered as Key Market

 Very fragmented industry with 650 appliance manufacturers

operating in China

 Customers focus was on local brands

 Some emerging Chinese leaders : KELON, HAIER

42
 The Whirlpool Story in China - 2

Whirlpool entered in 1994 using:

 JV in Beijing for refrigerators (Snowflake)

 JV in Shanghai for washing machines (Whirlpool Narcissus)
 JV in Shendu for microwaves (MCV)
 JV in Shenzhen for air-conditioners (Whirlpool Raybo)

Plus a greater China Headquarters in Hong Kong

and a Design Centre in Singapore

 Whirlpool exited in 1997 from its refrigerators and air-conditioning ventures

 Still produces compressors in Beijing, microwaves in Shendu and washing

machines in Shanghai

43
 The Whirlpool Story in China - 3
The market is dominated by local players
China’s Appliances Market -Shares in 2002

100%
90%
Other
80%
70%
60% Meiling
50% Xinfei
40%
30% Haier
20%
10% Kelon
0%

44
 Chinese Champions: Lenovo
Personal Computers, Servers

• Founded in 1984 in Beijing, (China Academy of Sciences), Listed in HK in 1994

as “Legend”

• Dominates the PC Market in China with around 27% Market Share

• Acquired IBM PC division in 2005

• N°1 PC maker in the world (after Dell and HP/Compaq)

• Revenues of 40 billion US$ in 2016

45
 Chinese Champions: Haier
Domestic Appliances, IT

• Founded in 1984 in Qingdao

• Considers itself as 4th biggest white goods manufacturer in the world

• Revenues in 2017 : 37 billion $US

• Sells products in 160 countries and produces in 13 countries

“Guided by business philosophy of CEO Zhang Ruimin, Haier has

experienced success in the three historic periods, noted as
Brand Building, Diversification and Globalization.
At the 21st anniversary of founding of the Haier Group December 26, 2005,
Haier announced its 4th strategic development stage of Global Brand Building “

46
 Chinese Champions: Alibaba Group
E-Commerce

 Established in 1999 by Jack Ma, a former English teacher from Hangzhou

 Largest e-commerce (both B-to-B and B-to-C) platform in the world; above
Amazon, Walmart
 Operates its platform in 200 Countries
 Expanded into media, entertainment, publishing, sport….
 Revenues in 2017 : 23 billion $US

47
 Chinese Champions: TCL
Multimedia, Telecommunication

• Founded in 1981 to produce telephone handsets

• Early 1990s - branched out into audio equipment and distribution of TV sets
produced in Hong Kong
• Started production of TV sets in 1996 in Shenzen
• Became n°1 TV producer in China in 2003
• Expanded production in Vietnam, Philippines, Indonesia, Thailand, Russia
• Acquired Scheider in Germany
• In 2004 created TTE (TCL Thomson Enterprise) with Thomson Multimedia
(TCL owns 67% of the venture)
• Ranked among the top 3 worldwide producers of TV sets
• In 2005, fully acquired the mobile phone handsets business from Alcatel
• Revenues of 16 billion US$ in 2016

48
 Chinese Champions: Huawei
Telecommunications (networks, products and solutions)

• Started in 1988: digital fixed switch

• In 1997: Launched GSM equipment.

Established joint R&D labs with Texas Instruments , Motorola, IBM, Intel,
Agere Systems, Sun Microsystems, Altera, Qualcomm, Infineon and
Microsoft. As of June 2005, Huawei Technologies has a total of 10 joint
research labs.

• In 2000, established R&D centers in Silicon Valley (California) and

Dallas in the US.

• Cisco Systems alleged in 2003 that Huawei had infringed some of

Cisco’s technology patents (resolved in 2004 with Huawei agreeing to
revise the technology in question).

• Revenues of 75billion US$ in 2016

49
 Indian Champions - 1
Infosys Consulting and IT Services

• Established in 1981
•1987 First office in the USA
• 2016 Revenue reaches 10 billion US$.

Sun Pharma/Ranbaxy Pharmaceuticals

• Ranbaxy founded in 1961, initially specializing in generics

• Sun Pharma started in 1983, specializing in niche therapies
• Sun and Ranbaxy merged in 2014 (Sun acquiring 100% of Ranbaxy)
• Ranked amongst the top fifty specialty generic companies worldwide
• Manufacturing operations in 40 countries
• Subsidiaries in 55 countries
• Products available in over 150 countries.
• Company Global Sales of US $5 Billion in 2017

50
 Indian Champions - 2
Bharat Forge Automotive components

• Created in 1961, now part of Kalyani conglomerate

• Largest exporter of auto components from India
• Leading chassis component manufacturer in the world.
• Manufacturing operations in 10 locations in 6 countries
• Global Sales of US $620 Million in 2017

Tata Group Conglomerate

• India’s oldest business conglomerate
• 100 companies operating in six continents
• Spread over seven business sectors:
Engineering, Chemicals, Materials, Energy,
Consumer Products, IT, Communication
• Sales of US$ 100 Billion in 2017
• Employs some 695 000 People

51
 Multinational Corporations from:
China

India

Multinationals companies are defined as companies with sales above 1 billion US$ (as of 2004) at least 10% of which is international
Source: Data from Boston Consulting Group report The New Global Challengers (2006)

52
 Cross-Border Global Acquisitions:
Cumulative Acquisitions by the BRICS
Millions US $

12 000.0

10 000.0

8 000.0

6 000.0 2000
2016
4 000.0

2 000.0

-
China India Brazil South Africa Russian
Federation

Source: Data from UNCTAD “World Investment Report, 2006

53
 Business Groups in Emerging Countries - 1

In most emerging countries the industrial, financial and trading

sectors are controlled by three groups of players:

• Government-owned enterprises

• The multinationals

• The domestic “business groups”

The domestic business groups exhibit typical characteristics:

• Highly diversified
• Personally controlled
• Most often controlled by families or ethnic groups

54
Business Groups in Emerging Countries - 2

Business Groups control large sectors of their economies:

• Overseas Chinese in South East Asia

• Korean Chaebol

• Indian Family Groups

• Rejuvenated State-owned enterprises in China

• Latin American Groupos

55
 Overseas Chinese In South East Asia:
Traditional Role

DISTRIBUTE

BUY CREDIT IMPORT

RURAL FOREIGN
AREAS CREDIT COUNTRIES

DISTRIBUTE

URBAN
AREAS

56
Evolution Of Overseas Chinese Groups In Southeast Asia

Banking and Diversified

Financial Services Activities

Real Estate Diversified

Activities

Progressive Vertical
Integration in Diversified
Upstream Activities Activities

Investment in
Start up Industrial Activities
in (Assembling, Downstream);
either Directly, Diversified
“Trading” Activities
through Joint-Ventures
or Licensing

57
Overseas Chinese Groups
Organization And Management

58
 Farming Seeds
Animal Feed

Poultry Milk Shrimp Aqua Feed

Plant
Protection
Feedmill Chemical
Pig Farming machinery

Logistics Trading
Animal Heath
Plantation
Chaeron Pokphand
Sausage (DHANIN
Trucks
Meat CHEARAVANONT) Motorcycles
200 COMPANIES Health
REVENUE: 8 BILLION U$S Drinks
Drills
Supermarkets Frozen Foods BEFORE GFC
Distribution Telephony

Fiber PVC
Cable TV Luggage
Petroleum Optics
Real Estate Condominiums Switching Toys Sponge
Equipment Leather
Golf

59
Why so Important in Emerging Countries?

 Privileged Access to Scarce Resources;

 Political power
 Information
 Financial
 Business opportunities
 Monopolies

 Reputation attracts best talent

 Benefit from Market imperfections

 Simplified “business systems”

60
 Why So Diversified?
 In each of the businesses, limited competition (monopolies, oligopolies)

 Innovation (products, processes) is purchased (licensing, joint venture)

 Marketing is essentially a matter of sales and distribution:

Brands are sourced externally, products also....

 The key managerial task is to run logistics and production efficiently

(Reduced complexity, no search for synergies)

Innovation Logistics/
Marketing
Production

Obtained Key operational Concentrated on sales

through licensing task and distribution in
and joint ventures oligopolistic markets.
Brands and products
sourced externally

61
 Progressively Changing…

 Markets pressures: globalization, deregulation

 Increased competition - both domestic and international

 More complexity of management because of the need to develop

own R&D and marketing capabilities.

 Increasing financial stakes due to the move towards capital intensive

activities

 Overcapacities

 Higher dependencies on foreign capital

62
 Consequences ?
Since the early 2000s, a large number of Asian Entrepreneurial Conglomerates
have announced a series of moves under the generic name of :

RESTRUCTURING
• COST CUTTING: (wage cuts, bonus freezes, headcount reductions)

• DEBT RESTRUCTURING:( See 200% D/E ratio imposed in Korea)

• PORTFOLIO REDEFINITION: (Definition of Core Business,

concentration of similar activities in the same group, intergroup mergers )

•DIVESTMENT OF NON-CORE ACTIVITIES: (spinning off, or selling off)

•REORGANIZATION: ( flatter structures, decentralization of decision-making)

“ We’ve expanded too much. Now we need to focus only on businesses in

which we have a strong potential. It is impossible for us to maintain 100
different businesses under the current situation” - Samsung

63