But first firms should weigh the benefits against the costs.
If they find that the risks of adaptation are too great, they should try to change the contexts in which they operate or simply stay away. Developing countries. Yet many companies shy away from doing business in these nations.
Why digital strategies fail
CEOs are all too aware that such countries lack the market institutions needed to do business successfully—such as consumer-data experts, end-to-end logistics providers, and talent search firms. How to mitigate the risks? Create new market infrastructures for example, your own in-country supply chain? Or stay away because adapting your business model would be impractical or uneconomical?
SAGE Reference - The New Economy: Internet Telecommunications and Electronic Commerce?
Dell Computer chose to adapt its business model to enter China. In the U. So, with help from its joint venture partner, it identified farmers it could work with and advanced them money so they could invest in seeds and equipment. And it sent Russian managers to Canada for training. It avoids countries with weak logistics systems and poorly developed capital markets, where it would have difficulty using its inventory management system and may not be able to use employee stock ownership.
CEOs and top management teams of large corporations, particularly in North America, Europe, and Japan, acknowledge that globalization is the most critical challenge they face today. They are also keenly aware that it has become tougher during the past decade to identify internationalization strategies and to choose which countries to do business with.
As a result, many multinational corporations are struggling to develop successful strategies in emerging markets. But that infrastructure is often underdeveloped or absent in emerging markets. Few end-to-end logistics providers, which allow manufacturers to reduce costs, are available to transport raw materials and finished products. Because of all those institutional voids, many multinational companies have fared poorly in developing countries.
All the anecdotal evidence we have gathered suggests that since the s, American corporations have performed better in their home environments than they have in foreign countries, especially in emerging markets. Not surprisingly, many CEOs are wary of emerging markets and prefer to invest in developed nations instead.
By the end of —according to the Bureau of Economic Analysis, an agency of the U. In fact, although U. Many companies shied away from emerging markets when they should have engaged with them more closely. Since the early s, developing countries have been the fastest-growing market in the world for most products and services. Companies can lower costs by setting up manufacturing facilities and service centers in those areas, where skilled labor and trained managers are relatively inexpensive.
Western companies that want to develop counterstrategies must push deeper into emerging markets, which foster a different genre of innovations than mature markets do. In general, advanced economies have large pools of seasoned market intermediaries and effective contract-enforcing mechanisms, whereas less-developed economies have unskilled intermediaries and less-effective legal systems.
Successful companies develop strategies for doing business in emerging markets that are different from those they use at home and often find novel ways of implementing them, too. We have learned that successful companies work around institutional voids. They develop strategies for doing business in emerging markets that are different from those they use at home and often find novel ways of implementing them, too.
As we will show, firms that take the trouble to understand the institutional differences between countries are likely to choose the best markets to enter, select optimal strategies, and make the most out of operating in emerging markets. Others follow key customers or rivals into emerging markets; the herd instinct is strong among multinationals. For instance, the reason U. Isaacs pointed out that partly as a result of the work missionaries and scholars did in China in the s, Americans became more familiar with China than with India.
Companies that choose new markets systematically often use tools like country portfolio analysis and political risk assessment, which chiefly focus on the potential profits from doing business in developing countries but leave out essential information about the soft infrastructures there.
Executives usually analyze its GDP and per capita income growth rates, its population composition and growth rates, and its exchange rates and purchasing power parity indices past, present, and projected. Such composite indices are no doubt useful, but companies should use them as the basis for drawing up strategies only when their home bases and target countries have comparable institutional contexts.
For example, the United States and the United Kingdom have similar product, capital, and labor markets, with networks of skilled intermediaries and strong regulatory systems. The two nations share an Anglo-Saxon legal system as well.
American companies can enter Britain comfortable in the knowledge that they will find competent market research firms, that they can count on English law to enforce agreements they sign with potential partners, and that retailers will be able to distribute products all over the country. Those are dangerous assumptions to make in an emerging market, where skilled intermediaries or contract-enforcing mechanisms are unlikely to be found.
In fact, composite index—based analyses of developing countries conceal more than they reveal. For instance, in China and Russia, multinational retail chains and local retailers have expanded into the urban and semi-urban areas, whereas in Brazil, only a few global chains have set up shop in key urban centers. And in India, the government prohibited foreign direct investment in the retailing and real estate industries until February , so mom-and-pop retailers dominate. Brazil, Russia, India, and China may all be big markets for multinational consumer product makers, but executives have to design unique distribution strategies for each market.
Those differences may make it more attractive for some businesses to enter, say, Brazil than India. Companies often base their globalization strategies on country rankings, but on most lists, it is impossible to tell developing countries apart. According to the six indices below, Brazil, India, and China share similar markets while Russia, though an outlier on many parameters, is comparable to the other nations.
Contrary to what these rankings suggest, however, the market infrastructure in each of these countries varies widely, and companies need to deploy very different strategies to succeed. As we helped companies think through their globalization strategies, we came up with a simple conceptual device—the five contexts framework—that lets executives map the institutional contexts of any country. Economics tells us that companies buy inputs in the product, labor, and capital markets and sell their outputs in the products raw materials and finished goods or services market.
This will help them understand the differences between home markets and those in developing countries. The five contexts framework places a superstructure of key markets on a base of sociopolitical choices. Many multinational corporations look at either the macro factors the degree of openness and the sociopolitical atmosphere or some of the market factors, but few pay attention to both. Managers can identify the institutional voids in any country by asking a series of questions.
Are there strong political groups that oppose the ruling party? Do elections take place regularly? Are the roles of the legislative, executive, and judiciary clearly defined? What is the distribution of power between the central, state, and city governments?
The Long Tail
Is the judiciary independent? Do the courts adjudicate disputes and enforce contracts in a timely and impartial manner? How effective are the quasi-judicial regulatory institutions that set and enforce rules for business activities? Do religious, linguistic, regional, and ethnic groups coexist peacefully, or are there tensions between them? How vibrant and independent is the media? Are newspapers and magazines neutral, or do they represent sectar-ian interests?
Are nongovernmental organizations, civil rights groups, and environmental groups active in the country? Do citizens trust companies and individuals from some parts of the world more than others? What restrictions does the government place on foreign investment? Are those restrictions in place to facilitate the growth of domestic companies, to protect state monopolies, or because people are suspicious of multinationals? Can a company make greenfield investments and acquire local companies, or can it only break into the market by entering into joint ventures?