EMERGING MARKETS

International Business Report

Submitted By: MMS-A

Aditi Sharma – 49
Anurag Sharma – 50
Ashmita Sharma – 51
Shreya – 52
Prashant Shukla – 53
Sneha - 55
WHAT ARE EMERGING MARKETS?
Emerging Market is used to describe a country in the process of rapid growth and
industrialization.

Emerging markets, also known as emerging economies or developing countries, are nations that
are investing in more productive capacity. They are moving away from their traditional
economies that have relied on agriculture and the export of raw materials. Leaders of developing
countries want to create a better quality of life for their people. They are rapidly industrializing
and adopting a free market or mixed economy.

Emerging market economies often have lower per capita income than developed countries, and
often have liquidity in equity markets, are instituting regulatory bodies and exchanges, and see
rapid growth.

The term "emerging market economy" was first used in 1981 by Antoine W. Van Agtmael of the
International Finance Corporation of the World Bank.

Emerging markets have played a large role in stimulating global economic growth, especially after
the 1997 currency crisis - which necessitated an overhaul of many emerging market economies to
become more sophisticated.

Around 80% of the world's economy is comprised of emerging markets - including some of the
largest countries in the world like China, India and Russia.

As of 2017, China and India made over $32.6 trillion worth of economic output - while also making
up 40% of all labor force and population on the planet. And, according to World Bank data last
year, China is expected to represent over 35% of global gross domestic product (GDP) growth from
2017-2019.

PAGE 1
DEFINITION OF EMERGING MARKETS
Emerging market countries are those that are striving to become advanced countries and are
generally on a more economically disciplined track to become more sophisticated - including
increased fiscal transparency, focus on production, developing regulatory bodies and exchanges,
and acceptance of outside investment.

Although some countries like China and India have high production and industry, other factors
like low per capita income or a heavy focus on exports qualify even large countries as emerging
markets.

FIVE DEFINING CHARACTERISTICS

1. Lower-Than-Average Per Capita Income:

Emerging markets have lower-than-average per capita income. Low income is the first important
criteria because this provides an incentive for the second characteristic which is rapid growth. To
remain in power and to help their people, leaders of emerging markets are willing to undertake
the rapid change to a more industrialized economy.

The World Bank defines developing countries as those with per capita income of less than $4,035.

2. Regulatory body, market exchange and common currency

Additionally, emerging markets typically have some sort of regulatory body as well as a market
exchange for investment and a common currency. For example, China has a common currency -
the Chinese Yuan, as well as a regulatory body, The China Securities Regulatory Commission.

3. High Volatility:

Rapid social change leads to the third characteristic which is high volatility. That can come from
three factors: natural disasters, external price shocks, and domestic policy instability. Traditional
economies that are traditionally reliant on agriculture are especially vulnerable to disasters, such
as earthquakes in Haiti, tsunamis in Thailand, or droughts in Sudan. But these disasters can lay
the groundwork for additional commercial development as it did in Thailand.

4. Currency Swings:

Emerging markets are more susceptible to volatile currency swings, such as those involving the
U.S. dollar. They are also vulnerable to commodities swings, such as those of oil or food. That's
because they don't have enough power to influence these movements. For example, when the
United States subsidized corn ethanol production in 2008, it caused oil and food prices to
skyrocket. That caused food riots in many emerging market countries.

PAGE 2
When leaders of emerging markets undertake the changes needed for industrialization, many
sectors of the population suffer, such as farmers who lose their land. Over time, this could lead to
social unrest, rebellion, and regime change. Investors could lose all if industries become
nationalized or the government defaults on its debt.

5. Potential for Growth:

This growth requires a lot of investment capital. But the capital markets are less mature in these
countries than the developed markets. That's the fourth characteristic. They don't have a solid
track record of foreign direct investment. It's often difficult to get information on companies listed
on their stock markets. It may not be easy to sell debt, such as corporate bonds, on the secondary
market. All these components raise the risk. That also means there's a greater reward for investors
willing to do the ground-level research.

If successful, the rapid growth can also lead to the fifth characteristic which is the higher-than-
average return for investors. That's because many of these countries focus on an export-driven
strategy. They don't have the demand at home, so they produce lower-cost consumer goods and
commodities for developed markets. The companies that fuel this growth will profit more. This
translates into higher stock prices for investors. It also means a higher return on bonds which
costs more to cover the additional risk of emerging market companies.

It is this quality that makes emerging markets attractive to investors. Not all emerging markets
are good investments. They must have little debt, a growing labor market, and a government that
isn't corrupt.

PAGE 3
DIFFERENT CATEGORIES OF EMERGING MARKETS
Broadly the countries can be classified in 3 categories:

1. BRICS Nations - The BRICS nations are Brazil, Russia, India, China and South Africa.

2. Advanced Emerging Markets (AEMs) – These consist of Brazil, Hungary, Mexico,

Poland, South Africa and Taiwan.

3. Secondary Emerging Markets (SEMs) – These consist of Argentina, Chile, China,

Columbia, Czech Republic, Egypt, India and Indonesia.

BRICS NATIONS
BRICS is the acronym coined for an association of five major emerging national
economies: Brazil, Russia, India, China and South Africa. Originally the first four were grouped as
"BRIC" (or "the BRICs"), before the induction of South Africa in 2010.

PAGE 4
1. Economists believe these five nations will become dominant suppliers of manufactured
goods, services and raw material by the year 2050. China and India will become the
world's dominant suppliers of manufactured goods and services, respectively, while
Brazil and Russia will become similarly dominant as suppliers of raw materials.

2. This growth is due to lower labor and production costs in these countries. BRICS
nations are also viewed as a source of foreign expansion, or FDI opportunities. Foreign
business expansion happens in countries with promising economies in which to invest.

3. In 1990, BRICS countries accounted for 11% of global GDP. By 2014, this figure rose to
nearly 30%. These figures include a high in 2010, following a plunge in value,
surrounding the 2008 financial crisis.

4. BRICS countries have not announced formal trade agreements, but leaders regularly
attend summits together and often act in concert with one another's interests.
5. Goldman Sachs, which coined the term, also created an investment fund especially
targeted at opportunities in the BRIC economies.
6. BRICS nations were forecast to grow more quickly than the G-7. The G-7 are a group of
the seven most advanced global economies which includes Canada, France, Germany,
Italy, Japan, the United Kingdom, and the United States.
7. The world’s most significant economies would, thus, look drastically different in four
decades, with the largest global economic powers, by income per capita, no longer being
the wealthiest nations.

PAGE 5
CRITICISM OF BRICS

1. The BRICS thesis has been challenged over the years as the economic and geopolitical
climate has shifted.
2. Arguments include the notion that raw materials in BRIC nations China, Russia, and South
Africa are limitless. Those critiquing the growth models say they ignore the finite nature of
fossil fuels, uranium, and other critical and heavily used resources.
3. It has also been argued that China outstrips the other BRIC members economies in GDP
growth and political muscle, putting it into a different category.
4. Some commentators state that China's and Russia's large-scale disregard for human rights
and democracy could be a problem in the future.
5. Brazil's economic potential has been anticipated for decades, but it had until recently
consistently failed to achieve investor expectations. Only in recent years has the country
established a framework of political, economic, and social policies that allowed it to resume
consistent growth.
6. Other critics suggest that BRIC is nothing more than a neat acronym for the four largest
emerging market economies. but in economic and political terms nothing else (apart from
the fact that they are all big emerging markets) links the four. Two are manufacturing-
based economies and big importers (China and India), but two are huge exporters of
natural resources (Brazil and Russia).
7. Based on IMF's World Economic Outlook Database, October 2016, the top economies in
2021 (by projected nominal GDP, are going to be China, the U.S., India, Japan, Germany,
Russia, Indonesia, Brazil, the U.K., and France respectively. There is no South Africa.

PAGE 6
VARIOUS OPPORTUNITIES IN EMERGING MARKETS

1. Growing number of educated middle class consumers:

To a certain extent, an emerging market is really a market where a middle class is emerging. As
jobs and opportunities are created, more people move out of poverty and into a comfortable
middle zone where they can afford some luxuries that were previously unimaginable. They go out
and spend their money, creating more economic activity.

The middle class isn’t the only beneficiary. As a country’s economy improves, the poorest people
tend to become less poor, and even they have more money to spend. Even a small improvement
in income represents a huge increase in purchasing power. Yes, the money goes to subsistence
needs, especially food, but even that spending power represents an improvement in an economy
and in the health of the people.

2. Cultural shifts:

A country’s social environment is also important. Sometimes the biggest challenge for companies
expanding into emerging markets is understanding the local culture, market, and expectations.
Because emerging markets can be so complex, companies can benefit from creating detailed plans
and products tailored to a specific market. This can be done by taking the time to observe
consumer habits and local customs present in a company’s desired market.

3. Demand for infrastructure and other products & services from developed
economies:

The rapid growth in emerging markets facilitates investments in both hard and soft infrastructure
that reduce transaction costs and facilitate commerce. Hard infrastructure refers to physical
infrastructure such as electricity, roads, ports, and bridges. Soft infrastructure refers to
institutions—intermediaries that produce information, trading platforms, and regulation.
Absence of information can lead to lack of trust which stunt commerce in emerging markets.
Emerging markets are characterized by under-developed or absent hard infrastructure and
institutions; these voids have a significant impact on market outcomes. However, these
constraints may encourage firms to innovate in different dimensions like product design or
distribution. However, these constraints may encourage firms to innovate in different dimensions
like product design or distribution.

4. Source of highly skilled but low-cost labor:

Low labor costs are one of the biggest advantages in Emerging Market Economies. As cost is a
major determinant for businesses, there is growing demand for low-wage labor in EMEs from

PAGE 7
high-wage countries in the advanced world and has led to ‘offshoring’ and ‘outsourcing’ where
companies in developed economies shift activities to EMEs.
5. Great potential for inorganic growth of companies:
Consistent with the view that high-growth developing markets represent the overwhelming
opportunity in terms of business flows, companies are quickly positioning themselves to provide
the advice and distribution capability that the emerging markets and its customer base will
require. As developed countries stagger under the weight of ballooning deficits, it is emerging
markets that offer the opportunities for growth. The shift to emerging markets is particularly
evident in the mergers and acquisitions activity. The more traditional and organic route,
although it is undoubtedly more appropriate in some territories, will no doubt be a lot slower
and take a lot more time to achieve our goal. However, the inorganic route will give companies a
market leadership position in a much shorter time.

KEY RISKS ASSOCIATED WITH ENTERING AN EMERGING

MARKET

1. Political and Social Risk

In any country, investors have to be concerned about changes in the political climate or in the way
that society is organized. Even changes that make most people better off may leave a few behind,
and sometimes those left behind are investors.

Many emerging markets began their economic improvement because of a major political change.
For example, the emerging markets in Eastern Europe were once Communist nations that had to
stay in good graces with the Soviet Union. Now, most of these countries are parliamentary
democracies with market economies. Such profound changes create risk, and many nations in
Eastern Europe have had economic and social upheaval on the way to economic stability. (One of
these nations, Poland, has come so far that many observers are surprised to find that it’s still
classified as an emerging market.)

Politics being politics, things may turn against investors, too. A country could come into a
situation such as war or a natural disaster that destabilizes the economy and pushes commerce
down the list of priorities. Investors, especially those outside the country, won’t necessarily be a
consideration when the government is tackling what it sees as bigger issues.

2. Corruption and Bureaucracy

In many emerging markets, corruption is a fact of business. In some cases, it’s rooted in cultural
differences, where people receive tips for services that wouldn’t be rewarded anywhere else. In
other cases, corruption is rampant because the people have dealt with ineffective institutions for

PAGE 8
years and have had to figure out ways to work around them. And in still other cases, the problem
is nothing more than basic human nature combined with lax law enforcement.

Corruption affects a business’s ability to present fair financial statements. It adds costs that may
not be predictable or manageable. It can throw in surprises and make contracts void in court. It
may seem as though a bribe is the quickest way to get business done, but corruption is costly in
the long run. Investors usually find that the less corruption a country has, the better its
economy. Academic research shows that the less corruption a country has, the less volatile its
investment returns are.

3. Currency Risk
In most emerging markets, you use a currency other than your own. That means that your
investment returns are affected by changes in the value of both your currency and the emerging-
market currency.

Currency risk can work in your favor! In general, a country’s currency becomes stronger (that is,
more valuable) as its economy grows.

4. Liquidity Risk
It’s not always easy to buy and sell securities in emerging markets. Some markets are just very
small! Jamaica, for example, has a total market capitalization of $4.8 billion. Compare that to one
company, Apple Computers, at $254.6 billion! Getting a position in some of these markets may
be difficult, and you may have a hard time selling your position when you’re ready to get out.
This is known as liquidity risk.

If you limit your emerging-market commitment to the part of your portfolio that’s intended for
long-term goals, low liquidity will be less of an issue because you’re less likely to have to sell
your positions on short notice.

Emerging markets are generally less liquid than those found in developed economies. This
market imperfection results in higher broker fees and an increased level of price uncertainty.
Investors who try to sell stocks in an illiquid market face substantial risks that their orders will
not be filled at the current price, and the transactions will only go through at an unfavorable
level.

Additionally, brokers will charge higher commissions, as they have to make more diligent efforts
to find counterparties for trades. Illiquid markets prevent investors from realizing the benefits of
fast transactions.

PAGE 9
 5. Difficulty in raising capital
A poorly developed banking system will prevent firms from having the access to financing that is
required to grow their businesses. Attained capital will usually be issued at a high required rate
of return, increasing the company's weighted average cost of capital (WACC).

The major concern with having a high WACC is that fewer projects will produce a high enough
return to yield a positive net present value. Therefore, financial systems found in developed
nations do not allow companies to undertake a higher variety of profit-generating projects.

6. Poor corporate governance

A solid corporate governance structure within any organization is correlated with positive stock
returns. Emerging markets sometimes have weaker corporate governance systems, whereby
management, or even the government, has a greater voice in the firm than shareholders.

Furthermore, when countries have restrictions on corporate takeovers, management does not
have the same level of incentive to perform in order to maintain job security. While corporate
governance in the emerging markets has a long road to go before being considered fully effective
by North American standards, many countries are showing improvements in this area in order to
gain access to cheaper international financing.

7. Increased chances of Bankruptcy.

A poor system of checks and balances and weaker accounting audit procedures increase the
chance of corporate bankruptcy. Of course, bankruptcy is common in every economy, but such
risks are most common outside of the developed world. Within emerging markets, firms can more
freely cook the books to give an extended picture of profitability. Once the corporation is exposed,
it experiences a sudden drop in value.

Because emerging markets are viewed as being riskier, they have to issue bonds that pay higher
interest rates. The increased debt burden further increases borrowing costs and strengthens the
potential for bankruptcy. Still, this asset class has left much of its unstable past behind.

PAGE 10
EMERGING MARKETS AS A STRATEGY OF INTERNATIONAL
EXPANSION

Reasons why businesses increasingly operate overseas:

1. To grow revenues directly.

2. Cross-border acquisitions and joint ventures.
3. Organic Growth overseas.
4. Moving production overseas.
5. Increasing use of offshoring.

Ansoff Matrix

The Ansoff Matrix can be used to explain the benefits of entering into an emerging market.

To portray alternative corporate growth strategies, Igor Ansoff presented a matrix that focused on
the firm's present and potential products and markets (customers). By considering ways to grow

PAGE 11
via existing products and new products, and in existing markets and new markets, there are four
possible product-market combinations.

Ansoff's matrix provides four different growth strategies:

1. Market Penetration - the firm seeks to achieve growth with existing products in their
current market segments, aiming to increase its market share.
2. Market Development - the firm seeks growth by targeting its existing products to new
market segments.
3. Product Development - the firms develop new products targeted to its existing market
segments.
4. Diversification - the firm grows by diversifying into new businesses by developing new
products for new markets.
The Ansoff Matrix explains how the existing businesses in developed markets can grow in new
markets with existing products which will aid them in market development and grow in new
markets with new products that will help them in diversification.

PAGE 12
METHODS OF REACHING EMERGING MARKETS

Exporting direct to The UK business takes orders from international customers and ships
customers them to the customer destination

Selling via overseas A distributor or agency contract is made with one or more
agents or distributors intermediaries. Distributors & agents may buy stock to service local
demand

Opening an operation Involves physically setting up one or more business locations in target
overseas markets. Initially may be a sales office – potentially leading to
production facilities (depending on the product)

Joint venture or buying The business acquires or invests in an existing business that operates
a business overseas in the target market.

Option – Exporting direct

Advantages Disadvantages

• Uses existing systems • Potentially bureaucratic

• Online promotion makes this cost • No direct physical contact with
effective customer
• Can choose which orders to accept • Risk of non-payment
• Direct customer relationship • Customer service processes may
established need to be extended.
• Entire profit margin remains with
the business
• Can choose basis of payment

PAGE 13
Option – sell via agents/ distributors

Advantages Disadvantages

• Agent of distributor should have • Lost profit margin

specialist market knowledge and • Unlikely to be an exclusive
existing customers. arrangement
• Fewer transactions to handle • Harder to manage quality of
• Can be cost-effective. customer service
• Agent/ distributor keeps the
customer relationship

Option – open overseas operation

Advantages Disadvantages

• Local contact with customers & • Significant cost & investment of

suppliers management time
• Quickly gain detailed insights into • Need to understand and comply
market needs with local legal and tax issues
• Direct control over quality and • Higher risk
customer service
• Avoids tariff barriers

PAGE 14
Option – joint ventures or acquisitions

Advantages Disadvantages

• Popular way of entering emerging • Joint ventures often go wrong –

markets difficult to exit too
• Reduced risk – shared with joint • Risk of buying the wrong business
venture partner or paying too much for the
• Buying into existing expertise and business
market presence • Competitor response may be
strong

PAGE 15
SOME EXAMPLE OF SUCCESSFUL EXPANSION IN EMERGING
MARKET

Starbucks uses joint venture to enter Indian market

• Starbucks unveils plans to open its first outlets in India.

• The US coffee giant first coffee shops opened in a 50-50
joint venture with Tata Global Beverages.
• Starbucks already operates more than 27339 café across
more than 75 countries in 2019.
• Starbucks also enjoyed rapid growth in China where
consumers highly value community, with innovative use of
social media and mobile apps to sell online promotions.
• They also launched a promotion on WeChat, China’s
leading social communications app, so customers can send
their friends coffee and gift cards. It now accounts for 29%
of all Satrbucks Transactions in the country.

Heinz into Brazil and China Heinz

• Heinz expanded in China by strong local brands and
businesses in acquiring Foodstar, a leading maker of
sauce for $100m. They are also China’s leading brand of
baby food.
• Heinz bought an 80% stake in Quero, a leading sauces
brand in Brazil
• The acquisitions in Brazil and China put Emerging
Markets on track to generate more than 20% of the
Company's total sales in 2012, up from less than 5% in 2011.
• The acquisitions are the latest examples of "buy and
build" strategy in Emerging Markets.
• For improving marketing and finance skills, Heinz has
in place a Emerging Markets Capability Team – a group
of senior people from Western businesses who travel
and coach local managers.

PAGE 16
Jollibee foods extending its reach
• Jollibee Foods, a family-owned fast-food company in the
Philippines, has extended its reach by focusing on Filipinos
in other countries.
• The company first overcame an onslaught from
McDonald’s in its home market, partly by upgrading
service and delivery standards but also by developing rival
menus customized to local tastes. Along with noodle and
rice meals made with fish, Jollibee created a hamburger
seasoned with garlic and soy sauce—allowing it to capture
75% of the burger market and 56% of the fast-food
business in the Philippines.
• Having learned what it takes to compete with
multinationals, Jollibee had the confidence to go
elsewhere.
• Using its battle-tested recipes, the company has now
established dozens of restaurants near large expatriate
populations in Hong Kong, the Middle East, and
California.

Reckitt’s targets emerging markets

•Rakesh Kapoor, took over as Reckitt’s CEO of in
2011, hopes half of "core” sales will come from
emerging markets by 2016,and is raising £100m to
market its brands.
•The maker of consumer products like Dettol and
Nurofen looks to emerging markets to sustain
growth.
•Their business was around 25% in emerging
markets – however, they now have 40% of their
business in emerging markets.
•They have continuously focused on improving
their expertise in digital and e-commerce to drive
transformational growth.
•They have been successful in creating tailored
solutions across various platforms.

PAGE 17
India’s Asian paints holds appeal in other markets

• India’s Asian Paints controls 40% of the market for

house paints in its home base, despite aggressive moves by
such major multinationals as ICI, Kansai Paints, and
Sherwin Williams.

• The company has thrived against foreign competitors by

developing its local assets, notably an extensive
distribution network. Its paint formulations and
packaging practices make for an extremely low-cost
product. After its success exporting to neighbors such as
Nepal and Fiji, the company is now pursuing joint
ventures abroad.
• Its managers are used to dealing with the kind of
marketing environment there—thousands of scattered
retailers, illiterate consumers, and customers who want
only small quantities of paint that can then be diluted to
save money.

SOME EXAMPLE OF FAILURES IN THE EMERGING MARKET

Jaguar Land Rover into India & China

• Jaguar Land Rover into India JLR, owned by India's Tata
Group. They bought the iconic British carmaker for $ 2.3 bn
from Ford on 2008.

• JLR opened its first assembly plant in India in 2011. The

plant initially assembled car kits shipped from JLRs plant at
Halewood in the UK.

• Taxation is a key driver of the investment. more

than100% tax on fully built imported vehicles, those whose
engines India attract an import tax of 10%, those with pre-
assembled engines or gear boxes attract a 30%import tax.

• However, JLR ultimately started bleeding cash and

eroding equity value for Tata Group.

PAGE 18
 • Their sales in China fell 40% in January due to the country’s ongoing trade war with the
U.S.

• Their production has fallen by nearly 16% last year to around 450,000 vehicles. The
company has had to axe more than 6000 jobs in recent months as part of $3.2 bn cost-
cutting plan to reduce its immense losses.

Samsung invests in Chinese production

• South Korean Govt approval for Samsung to

manufacture computer chips in China. Samsung despite
concerns about the leaking or loss of technology still wants
to operate a manufacturing plant in China.

• Global chip market worth almost £20bn p.a. and

Chinese market was almost half of that in 2012.
• Chip manufacturing needs to be close to the end-
customer in order to be competitive.

• This helped Samsung reach No.1 smartphone player in

China, however now it ranks dead last among the major
brands with just over 2% share on the Chinese mainland
considering 20% almost 5 years ago.

• Samsung’s waning fortunes in China parallels the rise in domestic Chinese brands such as
Huawei, Xiaomi, Oppo and Vivo that have a combines market share of 87%, as well as
growth of its major rival Apple holding 8% market share.

• This is due to their failure to localize its products to satisfy demands of Chinese consumers.

PAGE 19
Home depot fails to inspire DIY in China
• With the Chinese economy in the midst of a growth
spurt and the housing market following suit, 2006 seemed
liked a good year for U.S.-headquartered DIY giant Home
Depot to dip its toes into the market.
• It was until they’d opened 12 stores that they realized
the Chinese didn’t really like to do it themselves.
• Unlike the Western world where renovating your home
is considered a bit of a hobby, developing countries have a
tendency to see DIY as a sign of poverty.
• The study recommends international retailers should
have taken up prime retail space in malls in China and the
stores should be “pleasing to the eye, in colors that appeal
to women”.
• By 2012, Home Depot had shuttered its stores and taken
a US$160 million after-tax hit in the process.

Mcdonald’s failing in the Caribbean

• The Golden Arches are a staple fast food establishment
around the globe, but Ronald and Co. haven’t quite caught
on in the Caribbean.

• The company made a good effort in Jamaica, initially

opening 11 stores on the island.
• The first and most important thing they would have
discovered is that no matter how many hamburgers you’ve
sold, if it not big or ’nuff’ Jamaicans aren’t interested.
• A number of issues included high barriers to running a
McDonald’s franchise and a slow economy. In Barbados, the
company was there less than a year before closing due to lack
of sales.
• McDonald’s also saw less-than-stellar performance in
Trinidad and Tobago, pulling out of the country in 2003 due
to low sales.

PAGE 20
Starbucks fails in Australia and Israel
• Given its prolific status in the United States, it seems
almost inconceivable that Starbucks would not be a
crowd-pleaser wherever it opened its doors.

• But that was just the case in Australia, where

the BBC said the “coffee juggernaut” could not compete
with “local stores’ homespun hospitality and boutique
qualities.
• They tried to grow the empire too fast by rapidly
opening up multiple locations instead of slowly
integrating them into the Australian market.
• The chain also faced issues when it expanded into the
Israeli market, and closed its six stores there in
2003, citing “They were in prime locations, but their
product just didn’t match the Israeli taste and
pocketbook..” Some commentators criticized the chain
for not appreciating coffee culture in Israel, and
misinterpreting the local consumer base’s tastes.

PAGE 21