The Oxford Handbook of Management in Emerging Markets (Oxford Handbooks) 0190683945, 9780190683948

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T h e Ox f o r d H a n d b o o k o f

M A NAG E M E N T I N  E M E RG I N G MARKETS

The Oxford Handbook of

MANAGEMENT IN EMERGING MARKETS Edited by

ROBERT GROSSE and

KLAUS E. MEYER

1

3 Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and certain other countries. Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America. © Oxford University Press 2019 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by license, or under terms agreed with the appropriate reproduction rights organization. Inquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above. You must not circulate this work in any other form and you must impose this same condition on any acquirer. Library of Congress Cataloging-​in-​Publication Data Names: Grosse, Robert, editor. | Meyer, Klaus E., 1964– editor. Title: The Oxford handbook of management in emerging markets / edited by Robert Grosse and Klaus E. Meyer. Other titles: Handbook of management in emerging markets Description: New York : Oxford University Press, [2019] | Includes bibliographical references and index. Identifiers: LCCN 2018022158 | ISBN 9780190683948 (hardcover) Subjects: LCSH: Management—Developing countries. | Marketing—Developing countries—Management. | Small business—Developing countries—Management. Classification: LCC HD70.D44 O94 2018 | DDC 658.009172/4—dc23 LC record available at https://lccn.loc.gov/2018022158 1 3 5 7 9 8 6 4 2 Printed by Sheridan Books, Inc., United States of America

Contents

About the Editors Contributors

ix xi

PA RT I   T H E BU SI N E S S E N V I RON M E N T I N E M E RG I N G M A R K E T S 1. Introduction to Managing in Emerging Markets Klaus E. Meyer and Robert Grosse 2. Conceptual Approaches to Managing in Emerging Markets Robert Grosse and Klaus E. Meyer 3. International Business and Emerging Markets in Historical Perspective Geoffrey Jones

3 35

55

4. Economics, Transitions, and Traps in Emerging Markets John M. Luiz

77

5. Institutional Theory Perspectives on Emerging Markets Tatiana Kostova and Valentina Marano

99

6. Emerging Markets and the International Investment Law and Policy Regime Karl P. Sauvant

127

PA RT I I   M A R K E T S A N D G OV E R NA N C E 7. Financial Decisions, Behavioral Biases, and Governance in Emerging Markets Emir Hrnjic, David M. Reeb, and Bernard Yeung 8. Comparative Corporate Governance in Emerging Markets Ruth V. Aguilera and Ilir Haxhi

161 185

vi   Contents

9. Consumer Behavior in Emerging Markets Raquel Castaño and David Flores

219

10. Examining Base of the Pyramid (BoP) Venture Success Through the Mutual Value CARD Approach Krzysztof Dembek and Nagaraj Sivasubramaniam

241

11. Regulatory Institutions and Multinational Companies in Emerging Markets Farok J. Contractor

267

12. Corporate Political Ties in Emerging Markets Pei Sun

291

PA RT I I I   F OR E IG N M N E S I N E M E RG I N G MARKETS 13. Adjustment of MNE Geographic Market Strategy in Responding to the Rise of Local Competitors in an Emerging Market J.T. Li and Zhenzhen Xie

311

14. Global Production Networks, Territoriality, and Political Authority Stephen J. Kobrin

333

15. Innovation in Emerging Markets George S. Yip and Shameen Prashantham

351

16. Human Rights, Emerging Markets, and International Business Florian Wettstein

373

17. Spillovers from FDI in Emerging Market Economies Sumon Kumar Bhaumik, Nigel Driffield, Meng Song, and Priit Vahter

399

18. Risk Management for Companies Operating in Emerging Markets Donald Lessard

427

PA RT I V   L O C A L F I R M S A N D E M E RG I N G MARKET MNES 19. Entrepreneurship in Emerging Markets Saul Estrin, Tomasz Mickiewicz, Ute Stephan, and Mike Wright

457

Contents   vii

20. Innovation and Internationalization of SMEs in Emerging Markets John Child

495

21. Family Business in Emerging Markets Rodrigo Basco

527

22. The Economic and Sociological Approaches to Research on Business Groups in Emerging Markets 547 Chi‐Nien Chung and Rose Xiaowei Luo 23. State-​Owned Multinationals in International Competition Aldo Musacchio, Felipe Monteiro, and Sergio G. Lazzarini 24. Local Firms Within Global Value Chains: From Local Assembler to Value Partner Shameen Prashantham and George S. Yip 25. Emerging Market Multinationals in Advanced Economies Lin Cui and Preet S. Aulakh 26. Investments by Emerging-​Market Multinationals in Other Emerging Markets Jing Li and Daniel Shapiro 27. Human Resource Management in Emerging Markets Dana Minbaeva

569

591 609

631 657

PA RT V   C O U N T R I E S A N D R E G ION S 28. Managing Multinationals in Brazil: Opportunities and Challenges Jorge Carneiro 29. Managing Emerging Markets in Russia Sheila M. Puffer, Daniel J. McCarthy, Ruth C. May, Galina V. Shirokova, and Andrei Yu. Panibratov 30. How Technology-​Based Firms from India Deal with Legitimacy Challenges in International Markets S Raghunath and Jaykumar Padmanabhan 31. How Real Are the Opportunities for Multinationals in China? Peter J. Williamson and Feng Wan

677 703

725 745

viii   Contents

32. Managing in Emerging Markets in Central and Eastern Europe Kálmán Kalotay and Magdolna Sass 33. Operating Across Levels in the Global Economic Hierarchy: Insights from South Africa’s Setting in Wider Africa and the World Helena Barnard and Theresa Onaji-​Benson

763

797

34. Management in Southeast Asia: A Business Systems Perspective Michael A. Witt

821

Index

843

About the Editors

Robert Grosse is Director for Latin America at the Thunderbird School of Global Management. He has lived and worked in four emerging markets on three continents over 20 years. He writes mainly about multinational companies' strategy and dealing with governments, particularly in emerging markets. Klaus E.  Meyer is Professor of International Business at the Ivey Business School, Canada. He recently spent six years at China Europe International Business School in Shanghai and previously held professorial appointments at Copenhagen Business School, University of Bath, and University of Reading. He has been widely published in the Journal of International Business Studies, Strategic Management Journal, and Journal of Management Studies, among others.

Contributors

Ruth V. Aguilera, Northeastern University Preet S. Aulakh, York University Helena Barnard, University of Pretoria Rodrigo Basco, American University of Sharjah Sumon Kumar Bhaumik, Sheffield University Jorge Carneiro, FGV São Paulo Raquel Castaño, EGADE Business School John Child, University of Birmingham & University of Plymouth Chi‐Nien Chung, National University of Singapore Farok J. Contractor, Rutgers University Lin Cui, Australian National University Krzysztof Dembek, University of Melbourne Nigel Driffield, Warwick University Saul Estrin, London School of Economics David Flores, Tecnológico de Monterrey Robert Grosse, Thunderbird School of Global Management Ilir Haxhi, University of Amsterdam Emir Hrnjic, National University of Singapore Geoffrey Jones, Harvard University Kálmán Kalotay, United Nations Stephen J. Kobrin, University of Pennsylvania Tatiana Kostova, University of South Carolina Sergio G. Lazzarini, Insper

xii   Contributors Donald Lessard, Massachusetts Institute of Technology Jing Li, Simon Fraser University J.T. Li, Hong Kong University of Science and Technology John M. Luiz, University of Sussex & University of Cape Town Rose Xiaowei Luo, INSEAD Valentina Marano, Northeastern University Ruth C. May, University of Dallas Daniel J. McCarthy, Northeastern University Klaus E. Meyer, Ivey Business School Tomasz Mickiewicz, Aston University Dana Minbaeva, Copenhagen Business School Felipe Monteiro, INSEAD Aldo Musacchio, Brandeis University Theresa Onaji-​Benson, University of Pretoria Jaykumar Padmanabhan, Indian Institute of Management, Bangalore Andrei Yu. Panibratov, St. Petersburg University Shameen Prashantham, CEIBS Sheila M. Puffer, Northeastern University S Raghunath, Indian Institute of Management, Bangalore David M. Reeb, National University of Singapore Magdolna Sass, Hungarian Academy of Sciences Karl P. Sauvant, Columbia University. Daniel Shapiro, Simon Fraser University Galina V. Shirokova, St. Petersburg University Nagaraj Sivasubramaniam, Duquesne University Meng Song, Cardiff University Ute Stephan, Aston University Pei Sun, Fudan University Priit Vahter, University of Tartu

Contributors   xiii Feng Wan, University of East Anglia Florian Wettstein, University of St.Gallen Peter J. Williamson, University of Cambridge Michael A. Witt, INSEAD Mike Wright, Imperial College London Zhenzhen Xie, Tsinghua University Bernard Yeung, National University of Singapore George S. Yip, Erasmus University

Pa rt   I

T H E BU SI N E S S E N V I RON M E N T I N  E M E RG I N G MARKETS

Chapter 1

In t rodu c t i on to Managing i n E m e rg i n g Markets Klaus E. Meyer and Robert Grosse

Objectives of This Handbook Emerging markets, also known as emerging economies, have become major players in the global economy and a primary source of growth in the twenty-​first century. Many emerging markets have a track record of economic growth ahead of global averages; others have laid the foundations for growth by enacting economic reforms. Standards of living, life expectancies, and personal wealth have risen, though not uniformly. Thus, companies from Europe, North America, and Japan (the Triad) face opportunities to grow their sales, to invest capital, and to organize their supply chains on a global scale. At the same time, local firms in emerging markets are expanding, becoming more international, and competing extensively with companies from the historically advanced economies. Emerging markets are low-​or middle-​income economies with high economic growth potential. Yet, they tend to be less stable and still imperfect with respect to the efficiency and impartiality of markets due to imperfections in the institutional framework—​ commonly known as institutional voids (Khanna & Palepu, 1997; Meyer & Peng, 2016). Management practices in emerging markets are not categorically different from advanced economies in the sense that business is business. However, what is different is the environment for business. For example, Xu and Meyer describe the characteristics that typically distinguish emerging markets from developed economies: • Markets are less efficient due to less transparency, more extensive information asymmetries, and higher monitoring and enforcement costs. • Governments and government-​related entities are not only setting the rules, but are active players in the economy, for example through state-​owned or state-​controlled  firms.

4    Klaus E. Meyer and Robert Grosse • Network-​based behaviours are common, in part as a consequence of the less efficient markets, but arguably also due to social traditions, and they influence how firms interact with each other. • Risk and uncertainty are high due to high volatility of key economic, political, and institutional variables. Hence, businesses find it harder to predict parameters they need for strategic decisions, including, for example, business cycles, government actions, and the outcome of legal proceedings. (2013: 1323) To this, we would like to add the often (but not always) weak physical infrastructure and the weak skill and innovation bases available locally. On the other hand, some emerging markets are rich in natural resources ranging from agricultural produce to oil, gas, and minerals. Also, the institutional environment varies across emerging markets. While, most emerging markets rely on markets as primary coordination mechanisms, their business systems vary substantially especially with respect to the role of the state in business affairs through regulation, industrial policy, and equity ownership (Witt & Redding, 2014; also see Chapter 34). Understanding these contextual features is essential both for businesses crossing borders into and out of emerging markets and for scholars theoretically or empirically investigating management phenomena in emerging markets. This Handbook provides an overview of managerial challenges in emerging markets for both local and foreign-​invested companies, and it offers the latest scholarly insights on how businesses can succeed in these contexts. Our aim is to identify key elements of the business environment and to analyze competitive strategies and business practices. The Handbook contributors offer a wide range of theoretical and conceptual approaches to analyzing the opportunities and challenges that businesses face in emerging markets. This chapter (1)  introduces key concepts and trends. First, we discuss the sometimes confusing plethora of terms used to designate emerging markets, or to describe subgroupings. Then, we provide some data regarding the importance of emerging markets within the global economy. Finally we briefly introduce each of the chapters of this Handbook, highlighting key ideas and themes that the authors develop. In Chapter 2, we outline conceptual frameworks that run across the contributions in this Handbook, namely, the evolving global value chains and the tenuous balance between global theories and practices and indigenous ones for explaining management in emerging markets.

What Are Emerging Markets? Management scholars are often pragmatic in defining the scope of emerging markets, essentially including all economies that are not considered “advanced” (Grosse, 2015;

Introduction to Managing in Emerging Markets    5 Hoskisson, Wright, Filatotchev, & Peng, 2013; Xu & Meyer, 2013; Wright, Filatotchev, Hoskisson, & Peng, 2005).1 Some economies achieved advanced status in the 1990s, notably Israel, Singapore, and the Republic of Korea (henceforth Korea in this book). Others have been reclassified by the International Monetary Fund (IMF) and the World Bank more recently, for instance, Central and East European countries. The latter held “emerging” status until recently, and studies on those countries continue to be an important source of knowledge relevant to emerging markets. Therefore, we include them as emerging markets in this Handbook. This perspective ensures broad scoping for relevant insights, though contributors may adapt the scope of their analysis as appropriate for the topic of their chapter. A number of alternative terminologies have been used to refer to the countries covered in this Handbook. The term “emerging markets” was coined in 1981 by an economist at the International Finance Corporation, Antoine van Agtmael (Van Agtmael 1984; Wharton 2008), who was seeking an attractive label for an investment fund that would invest in a portfolio of minority stakes in companies in what was hitherto known as the Third World. The term quickly became popular among financial market analysts (e.g., Errunza, 1983; Harvey 1995) and was later adopted by management scholars studying business organizations operating in these economies (Hoskisson et al., 2000; Khanna & Palepu, 1997). The term “emerging economies” is mostly used synonymously with emerging markets (see, e.g., Wright et al., 2005; Xu & Meyer 2013); its advantage is that it indicates that these economies play a variety of different roles for businesses, for example, as production bases within global value chains, or as home bases for emerging market MNEs (multinational enterprises). Management scholars have primarily focused on the economically most dynamic of the emerging markets, especially on China. These are mostly middle-​ income economies—​neither rich nor poor—​with actual or potential economic catch-​up and an imperfect but improving institutional framework for business (e.g., Hoskisson et al., 2000; Xu & Meyer, 2013). On the other hand, management scholars have not paid much attention to low-​income economies.2 An older terminology distinguishes “industrialized economies” from “developing economies.” This terminology was popular in the discourse on economic development in the 1960s (e.g., Akamatsu, 1962; Baer & Hervé, 1966; Vernon, 1979) when industrialization was seen as essential to raise per capita incomes. However, the traditionally industrialized economies have moved to service industries while some emerging markets, especially in Central and Eastern Europe, have seen a high degree of industrialization but are lagging the advanced economies in economic prosperity. Second, many people in emerging markets find the term “developing” somewhat patronizing as they have their own rich history and culture that they perceive to be belittled by this terminology. Other terms largely rejected by the countries concerned are “underdeveloped economies” (e.g., Singer, 1949) and “third world” which refer to countries that are neither early-​industrialized economies nor the “second world” of the former socialist bloc

6    Klaus E. Meyer and Robert Grosse led by the Soviet Union (Turner, 1974; Worsley, 1964). We advise against continued usage of these terms.

Classifications Multilateral organizations each employ their own classification of countries, varying with the purpose of the organization (Table 1.1). The World Bank classifies countries in four categories based on the per capita income as low income, lower middle income, upper middle income, and high income. The thresholds are continuously adjusted; in 2016 they were: over $1025 = lower middle income; over $4035 = upper middle income; over $12,475 = high income economies. The IMF uses a similar classification but adjusts it, for example, for members of the eurozone which are considered advanced. The UN categorizes countries in three categories: developed, developing, and transition. Apart from countries that joined the EU and thence are classified as “developed,” this classification has not been updated to reflect the economic evolution of the past 25 years.3 The member countries of the Organisation for Economic Co-​ operation and Development (OECD) are generally considered advanced economies, and some studies define emerging markets as non-​OECD-​member countries. However, in recent years the boundary has blurred as Chile, the Czech Republic, Korea, and others have joined the OECD (Table 1.1, column 5). In fact, Turkey has been member of the OECD since 1961, and Mexico joined with the formation of the North American Free Trade Agreement (NAFTA) in 1994, even though both are still upper-​middle-​income economies. For the purposes of this Handbook, we adopt the operationalization of the IMF. However, we believe that the intellectual discourse on management challenges in emerging markets can greatly benefit from insights gained in countries that recently “graduated” from emerging to advanced. Therefore, for this Handbook, we use the status of a country in the IMF classification in the year 2000 as baseline (see Table 1.1). In other words, we consider Singapore, Hong Kong, Korea, Israel, Taiwan, Spain, Portugal, and Greece advanced economies. Financial investment professionals and scholars of financial markets tend to use a definition of emerging markets that starts from the perspective of internationally operating financial investors who invest some of their assets abroad to enhance their risk diversification. For them, critical criteria include the ability of foreign investors to buy and sell financial instruments in the country. The MSCI index developed by Morgan Stanley Capital International has become most popular in the finance community (e.g., Harvey, 1995), and is also used by some management scholars (e.g., Kalasin, Dussage, & Rivera-​Santos, 2014). To be included in the MSCI emerging markets index, a country needs to have a high degree of free movement of capital and stock market liberalization. Countries not meeting these criteria or lacking depth of financial markets due to their small size may be considered “frontier markets” (Table 1.2).

Table 1.1 Classification of selected countries by different organizations GDP per capita in 20161

Country

IMF classified as advanced since3

United Nations4

OECD member since

Countries not normally considered “emerging” Singapore

52,960.7

1997

Developing

Not member

Hong Kong, China

43,681.1

1997

Developing

Not member

Korea (Republic of)

37.538.8

1997

Developing

1996

Israel

37.292.6

1997

Developing

2010

Taiwan, China

n.a.

1997

Developing

Not member

Spain

26,528.5

From the outset

Developed

1961

Portugal

19,813.3

From the outset

Developed

1961

Greece

18,104.0

From the outset

Developed

1961

High-​income

economies2

considered “emerging” by other criteria

United Arab Emirates

37,622.2

Emerging

Developing

Not member

Bahamas

23,124.4

Emerging

Developing

Not member

Bahrain

22,354.2

Emerging

Developing

Not member

Slovenia

21,304.6

2007

Developed

2010

Saudi Arabia

20,028.6

Emerging

Developing

Not member

Czech Republic

18,266.5

2009

Developed

1995

Estonia

17,574.7

2011

Developed

2010

Slovakia

16,496.0

2009

Developed

2000

Lithuania

14,879.7

2015

Developed

Not member

Latvia

14,118.1

2014

Developed

2016

Chile

13,792.9

Emerging

Developing

2010

Hungary

12,664.8

Emerging

Developed

1996

Upper middle income economies (2) Poland

12,273.4

Emerging

Developed

1996

Croatia

12,090.7

Emerging

Developed

Not member

Turkey

10,787.6

Emerging

Developing

1961

Romania

9474.1

Emerging

Developed

Not member

Russia

8748.4

Emerging

Transition

Not member

Mexico

8201.3

Emerging

Developing

1994

China, P.R.

8123.2

Emerging

Developing

Not member

Bulgaria

7350.8

Emerging

Developed

Not member

Notes: 1 

Per capita income in current US$ at market exchange rates;

2 

World Bank thresholds in 2016: > $ 1025 = lower middle income; > $4035 = upper middle income; > $12475 = high income; 3 

IMF classifies eurozone member countries as advanced but not necessarily other EU countries;

4 

United Nations defines all EU member countries as developed independent of income level.

Sources: World Bank, 2017a; IMF, 2010, 2012, 2014, 2016; United Nations, 2017; OECD, n.d.

8    Klaus E. Meyer and Robert Grosse Table 1.2 Financial markets as classified by MSCI European Union

Other Europe, CIS

Middle East and Africa

Index

Americas

MSCI World Index (developed markets)

Canada, USA Austria, Belgium Norway Denmark, Switzerland Finland France, Germany Ireland, Italy, Netherlands, Portugal, Spain, Sweden, United Kingdom

Israel

Australia, Hong Kong, Japan, New Zealand, Singapore

MSCI Emerging Markets Index

Brazil, Chile, Columbia, Mexico, Peru

Czech Republic, Russia Greece, Hungary, Poland

Egypt, Pakistan,1 Qatar, South Africa, Turkey, United Arab Emirates

China,2 India, Indonesia, Korea, Malaysia, Philippines, Taiwan, Thailand

MSCI Frontier Markers

Argentina

Croatia, Estonia, Lithuania, Romania, Slovenia

Bahrain, Jordan, Bangladesh, Sri Kenya, Kuwait, Lanka, Vietnam Lebanon, Mauritius, Morocco, Nigeria, Oman, Tunisia, WAEMU3

Kazakhstan, Serbia

Asia Pacific

Notes: 1   Pakistan is included since June 2017; 2

  China is to be in the Emerging Markets Index from June 2018 onward;

3

  West African Economic and Monetary Union.

Source: MSCI, 2017.

The MSCI classification is somewhat different than the classifications used by the multilateral organizations. For example, Korea and Taiwan are still considered emerging markets although they fall in the high-​income category of the World Bank and the IMF. Also, OECD member countries Chile, Czech Republic, Greece, Mexico, and Poland are considered emerging markets. China was admitted to the emerging markets index only effective June 2018 following long-​running negotiations with the free flow of capital being a sticky point; the ability of foreign investors to invest in domestic stock markets in China is still restricted. EU member countries are found in all three categories, with Croatia, Slovenia, and Romania considered frontier markets and Bulgaria and Latvia not covered at all. Also, the relatively rich gulf states of Bahrain, Kuwait, and Oman are considered

Introduction to Managing in Emerging Markets    9 frontier markets. For financial analysts to cover a market meaningfully, the market needs to have a substantive number of assets traded, which results in small rich countries appearing in the frontier index alongside large lower-​middle-​income economies.

Dynamics of Emergence of Economies The inconsistency of the classifications points to an important conceptual issue:  no black and white distinction exists between advanced and emerging economies. Rather, the differences are a matter of degree—​and the critical challenge is not to decide which country should be labeled emerging but to develop suitable scales for the degree of development. What then are appropriate indicators of the “emergence” of economies? A  variety of different indicators have been proposed (Table 1.3). The above discussed categorization used by the IMF and the World Bank implies a priority of economic development with (average) per capita income as a key indicator. A broader perspective is taken by the Human Development Index (HDI) published annually by the United Nations Development Programme (UNDP, 2016), which focuses on the quality of life. It aggregates three indicators considered drivers of peoples’ development: life expectancy, education, and per capita income. Many management scholars focus on the prevalence of “institutional voids,” defined as imperfections in the institutional framework that cause markets to operate ineffectively, as defining criterion of economic advancement (Khanna & Palepu, 1997; Meyer & Peng 2005). Related definitions focus on property rights in the sense of protection against expropriation by the government or the elites of the country (Acemoglu & Johnson, 2005) or on institutions enabling private contracting, such as the effectiveness and independence of the court system (Coase, 1960; Williamson, 1985). These constructs of institutions are commonly proxied by selecting sub-​indices from a range of popular indices, such as the Global Competitiveness Index (GCI) (World

Table 1.3 Example indicators of emergence Economic

Institutions

Resource Endowments

• GDP per capita • GDP growth rate • Human Development Index (HDI)

• Global competitiveness index (GCI), • World Governance indicators (WG), • Economic Freedom Index (EF), • Polity IV indices of democracy • Transparency Index (TI)

• Sub-​indices within the GCI, e.g. technology readiness • Secondary/​tertiary school enrollment • R&D expenditures • Rail/​road network • Broadband network

10    Klaus E. Meyer and Robert Grosse Economic Forum, 2016), the World Governance Indicators (World Bank, 2017b), the Index of Economic Freedom (Heritage Foundation, 2017), Polity IV for the quality of government (Center for Systemic Peace, 2017), or the Corruption Perception Index capturing the absence of corruption (Transparency International, 2016). These indices reflect a wide variety of different operationalizations of the idea of institutional development. Economic theory, moreover, suggests that resource endowments are critical for the prosperity. Many emerging markets are rich in natural resources. Yet, to assess economic prosperity it is more useful to focus on created assets, which include both human capital in various forms and man-​made physical assets such as transportation infrastructure and digital networks (Narula & Dunning, 2000; Estrin, Meyer, & Pelletier, 2018). In a similar spirit, Hoskisson, Wright, Filatotchev, and Peng (2013) suggest using two indicators to classify countries: institutional development and infrastructure development. Within the GCI, sub-​indices such as innovation and technology readiness capture aspects of created assets.

Taxonomies of Emerging Markets A number of studies have developed taxonomies of emerging markets that create meaningful subgroupings. A  common starting point is the assertion that the varieties of capitalism (Hall & Soskice, 2001) and business systems (Whitley, 1999) literatures that market economies vary in the ways in which economic activity is coordinated, with economies varying in their inherent logic. The original work on advanced economies distinguished coordinated market economies and liberal market economies (Hall & Soskice, 2001). Recent extensions of this work have derived taxonomies of emerging markets from the analysis of multiple economic, social and institutional indicators (Amable, 2004; Carney, Gedajlovic, & Yang, 2009; Fainshmidt, Judge, Aguilera, & Smith, 2018; Witt & Redding, 2014). For example, Witt, Kabbach de Castro, Amaeshi, Mahroum, Bohle, and Saez (2017), in addition to liberal market economies and coordinated market economies, distinguish socialist economies, emerging economies, Arab oil-​based economies, advanced city economies, advanced emerging economies, and European peripheral economies. Fainshmidt et  al. (2018) distinguish emerging economies as state-​led, family-​led, emergent liberal market economies, collaborative agglomerations, fragmented with weak state, centralized tribe, and hierarchically coordinated. Popular discussions of emerging markets tend to use conceptually easier groups that focus on the size or on the geography of the countries (Table 1.4). For example, the term “Asian Newly Industrialized Economies” (also known as Asian NIEs or Asian Tigers) comprise four economies in East Asia that distinguished themselves in terms of economic growth in the 1970s and 1980s, and, arguably, graduated from developing to

Table 1.4 Popular country taxonomies Name

definition

Usage

Origin (if known)

Asian NIEs

Newly industrialized economies in East Asia: Korea, Taiwan, Hong Kong, and Singapore

Common term in the 1980 and 1990s when these four economies stood out in economic performance

1970s, original source unknown

(East) Asian Tigers

Same as Asian NIEs

Journalistic term for Asian NIEs

1970s

BRICs

Brazil, Russia, India, and China

The four largest emerging markets by GDP; sometimes extended to include South Africa as “BRICS”

Attributed to Goldman Sachs economist Jim O’Neill, who used it in 2001

MINT

Mexico, Indonesia, Nigeria, Turkey

Next four largest emerging Attributed to markets; apart from size, Goldman Sachs they have no commonalities economist Jim O’Neill who used it in 2013

CIVETS

Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa

Emerging markets outside the BRICs believed to be promising because they have reasonably sophisticated financial systems, controlled inflation, and soaring young populations

Robert Ward of the Economist Intelligence Unit (EIU) used it in 2009.

Transition economies

Countries of Central and Eastern Europe, the former Soviet Union, China, and Mongolia

Historically planned economies that embarked on transition toward a market economy in the 1990s

World Bank, e.g., 1996

Bottom billion

58 poor countries

Poor countries with 1 billion Paul Collier, 2007 people

Least developed countries

49 poorest countries

Countries with the lowest per capita income

United Nations

Triad

Originally North America, Historically industrialized Western Europe and economies Japan; recent uses include less clearly defined North America, Western Europe, and Asia-​Pacific advanced economies

Kenichi Ohmae, 1985

12    Klaus E. Meyer and Robert Grosse advanced economies in the 1990s: Korea, Taiwan, Hong Kong, and Singapore. The term “Asian NIEs” is often associated with the “flying geese” model of Asian economic development, which posits that development is trickling down from the more advanced Asian economies to the less advanced ones with the help of foreign direct investment (FDI) (Akamatsu, 1962; Kojima, 1973). BRIC is an abbreviation for the four largest emerging markets by GDP—​Brazil, Russia, India, and China—​coined by Jim O’Neill around 2000. The term is sometimes extended to include South Africa in “BRICS” (with capital S). This grouping reflects the size of the economies and their importance to financial investors rather than any structural similarities among the four or five countries (see Chapters 28 to 31). In fact, only China continued its fast economic growth in the 2010s. Since the political leaders from the BRICS countries have started holding political summits, the term has also attained political significance. At times when some of the BRIC countries are showing sluggish economic growth, investors may seek further investment opportunities. Further acronyms thus have become popular for other relatively large emerging markets, notably MINT (Mexico, Indonesia, Nigeria, Turkey) for the next largest emerging markets and CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa) for the six countries predicted to experience substantive economic growth. The term “transition economies” evolved in the policy discussions after the fall of the Berlin Wall when economists associated with the World Bank, the IMF, and other think tanks were debating economic reform in the countries of Central and Eastern Europe, the former Soviet Union, China, and Mongolia. The underlying assumption was that these economies would “transition” from a central plan-​led economy to a market economy resembling Western advanced economies (e.g., Meyer & Peng, 2005; World Bank, 1996). Not all countries have joined the economic growth of the past two decades, some countries find it hard to catch up, be it due to economic hardship or incompetent political leadership. Paul Collier (2007) coined the term “bottom billion” for the people in 58 countries that he argues are failing their citizens. More formally, the United Nations classifies 49 countries, the majority of which are in Africa, as least developed countries using per capita income as the criterion (United Nations, 2017). These countries have rarely attracted attention from management scholars. On the other end of the global income scale, we refer to the countries not considered emerging markets as advanced economies or high-​income leaders. Another commonly used label is “Triad countries,” which is unfortunate, because the original construct by Kenichi Ohmae (1985) included just the USA and Canada in North America, the European Community, and Japan. Recently, the term has been used to talk about the rich, post-​industrial countries of North America (sometimes including Mexico), Europe (EU plus Norway, Switzerland, and Iceland), and Asia-​Pacific (Japan, Korea, Singapore, Taiwan, Hong Kong, Australia, and New Zealand).

Introduction to Managing in Emerging Markets    13

Emerging Markets in the Twenty-​First Century Numerous indicators show that emerging markets have gained in importance in the global economy over the past three decades.

Economic Catch-​up Trends Figure 1.1 shows the share of emerging markets in global economic activity using a variety of indicators. For example, they account for 84% of the world’s population, 49% of all cars are manufactured in emerging markets, and 48% of world exports of goods originate from emerging markets. Among emerging markets, China accounts for the largest share by most indicators, but other countries such as India, Brazil, and Russia are important by some measures. On the other hand, emerging markets account for only 21% of world stock market capitalization and 22% of world outward FDI stock. The share of emerging markets has increased substantially over the past 25 years. For example, in 1990, they contributed 16% of global GDP, compared to 36% in 2015. In 1990, they attracted 17% of global FDI inflows compared to 45% in 2015; and they accounted for 7% of FDI outflows, compared to 28% in 2015. The rapid catch-​up of emerging markets over the past decades is also evident in the macroeconomic data presented in Table 1.5 and the analysis of the economic data by John Luiz in Chapter 4.

Market Capitalization GDP Exports of Services Exports of Goods FDI inward (flow) FDI inward (stock) FDI outward (flow) FDI outward (stock) Car production Population 0%

10%

20%

30%

Brazil

40%

50%

Russia

60% India

Other emerging markets

70%

80%

90%

100%

China Developed

Figure 1.1  Emerging markets as share of the global economy, 2015 Data sources: Online databases of World Bank, WTO, UNCTAD, and OECD.

2010

2005

2000

2,143.1

7.5

11,104

Growth Rate

GDP/​capita

11,095

GDP/​capita

GDP

3.2

Growth Rate

7,906

GDP/​capita

882.2

4.3

GDP

644.7

Growth Rate

7,714

GDP/​capita

GDP

4.4

Growth Rate

7,175

GDP/​capita

785.6

−4.3

Growth Rate

GDP

461.95

GDP

1990

1995

Brazil

Year

Country

7,156

10.4

5,930.5

4,843

11.3

2,256.9

2,667

7.6

1,198.5

1,849

10.9

734.6

1,101

3.8

360.9

China

3,374

10.3

1,708.5

2,898

9.3

834.2

1,741

3.8

476.6

1,417

7.6

366.6

1,217

5.5

326.6

India

4,259

6.2

709.2

5,101

5.7

285.9

2,679

4.9

165.0

2,785

8.4

202.1

2,073

9

106.1

Indonesia

13,627

5.1

1,051.6

14,643

3.0

866.3

11,406

5.3

683.6

9,524

−6.2

343.8

9,785

5.1

262.7

Mexico

19,647

4.5

1,524.9

18,589

6.4

764.0

8,613

10.0

259.7

7,851

−4.1

395.5

12,626

−3

516.8

Russia

10,181

3.1

365.2

11,328

5.3

247.1

7,641

4.2

132.9

7,490

3.1

155.5

7,975

−0.3

112

South Africa

46,936

2.5

14,958.3

47,744

3.4

13,095.4

39,545

4.1

10,289.7

33,874

2.5

7,664

31,899

1.9

5,980

United States

36,848

4.0

3,304.4

31,816

0.7

2,766.3

30,298

3.1

1,886.4

27,809

1.7

2,592

25,881

5.3

1,765

Germany

33,471

4.7

5,495.4

29,478

1.3

4,571.9

28,889

2.3

4,731.2

28,026

1.9

5,449

26,523

5.6

3,104

Japan

Table 1.5 GDP (market size), GDP/​capita, and GDP growth rate, selected countries and years (in billions of current $US and in annual percentage rates)

3.9

15,347

growth rate

gdp/​capita

8,677.8

GDP/​capita

2,447.2

−3.8

GDP

1,803.6

11,939

GDP/​capita

Growth Rate

1.0

Growth Rate

GDP

2,248.8

GDP

13,938

5.9

15,066.7

8,069.2

6.9

11,064.6

8,391

7.7

8,229.5

5,813

6.1

3,252.7

1,593.3

7.9

2,088.8

3,855

4.7

1,858.7

6,179

4.7

1,320.1

3,346.5

4.8

861.9

4,634

6.3

876.7

17,794

4.1

1,153.3

9,005.0

2.5

1,143.7

14,296

4.0

1,186.5

29,249

2.9

1,712.0

9,329.3

−2.8

1,365.8

21,565

3.4

2,017.5

12,720

3.4

353.4

5,718.2

1.3

314.5

10,620

2.5

382.3

55,175

2.2

22,063.0

56,115.7

2.6

18,036.6

48,828

2.8

16,244.6

Source: data obtained from World Bank, World Development Indicators, http://​data.worldbank.org/​indicator/​NY.GDP.MKTP.CD.

*IMF forecasts of GDP for 2020 from World Economic Outlook 2017.

2020*

2015

2012

44,264

1.5

3,727.7

41,178.5

1.7

3,363.4

38,193

0.7

3,426.0

40,923

1.8

5,163.8

34,523.7

1.2

4,383.0

34,604

1.4

5,937.8

16    Klaus E. Meyer and Robert Grosse For people who grew up in the twentieth century, the share of emerging markets in the global economy may look surprisingly high. In the late 1970s, China’s share in global GDP was estimated to be about 2% compared to 15% in 2015 (see Figure 1.1). However, seen in a historical perspective, the numbers are not high at all. Historically, China and India accounted for about half of the global economy. Historians estimate that at the end of the eighteenth century, China accounted for 25% to 30% of the global economy (Maddison, 2006). Yet, with the industrial revolution that started in England in the eighteenth century and then spread to continental Europe and to North America in the nineteenth century, the “Western” societies became the “advanced economies” of the twentieth century. Yet, this distinctive advantage is rapidly diminishing in the twenty-​first century as the capital and knowledge base of the rest of the world is strengthening, and institutional obstacles to economic prosperity are removed.

Markets for Goods and Services While the importance of emerging markets is evident for the 84% of the world population living in these countries, there are also compelling reasons why business leaders and management scholars in advanced economies should be concerned with the latest development in emerging markets. First and foremost, the size and rapid economic growth has made emerging markets attractive for goods and services from around the world. In the 2010s, China, India, and Brazil are among the ten largest national markets based on GDP, and Russia and Mexico are not far behind. Consumer demand is expected to grow faster than in advanced economies, not only because the economies are on a catch-​up growth path, but because the average age of consumers in emerging markets is far below that of consumers in the USA, EU, and Japan. They will be around longer, and they are reproducing at a faster rate. So, a range of factors is pushing emerging markets as the source of future growth in the world economy. Consumers in emerging markets are explored further in Chapter 9 by Raquel Castaño and David Flores, while Krzysztof Dembek and Nagaraj Sivasubramaniam discuss consumers at the bottom of the pyramid in Chapter 10. As one example, which is not representative but which is enormous, consider China (see Chapter 31, by Peter J. Williamson and Feng Wan). This country of 1.4 billion people has moved more than 500 million people out of poverty during the past 30 years, according to World Bank estimates.4 This growth has made China the largest market in the world for many products, from cars to chemicals. Within the next few years it is predicted to become the world’s largest economy. China thus is important for international companies, be it as a market for their goods and/​or as base for their production. India presents a second major case of emerging market opportunity. With a population of 1.3 billion people that is growing at a rate of about 1.3% per year, India will pass China in population by about 2025. Despite a similar population size, India’s economy is much smaller than China’s, and per capita income in 2016 was US$1709 per per