Post for study purposes, mainly lessons from managming in emerging markets:

Emerging markets present opportunities as well as challenges for businesses and executives from advanced economies. Operating in emerging markets involves identifying, investing in, and managing business opportunities in such markets. While the business environment in emerging markets is increasingly moving in the direction of norms in advanced economies, there are fundamental differences that business executives and managers have to address when managing in emerging markets. These include adjustments to the host countries’ macroeconomic structure, control of financial and currency exposure, management of business–government relations, dealing with inadequacies in infrastructure, and the handling of thorny issues of business ethics, intellectual property right protection, and workers’ rights and working environment. Effective management in emerging markets requires a conscientious understanding of the often opaque set of conditions in the host country, proactive attitudes toward the opportunities and challenges, and long-term strategies and enduring efforts.

Political stability and a viable legal system are conducive to the success of business. Yet these are inherently lacking to various degrees in many, if not all, emerging markets.  There are often irregular business practices, which may be considered to violate the business norms or even the rule of law in advanced economies. These practices include the piracy of computer software or patented products, extravagant business dinners and gift-giving, and improper involvement of government officials in business transactions. It is important to understand that the issue is not that there are no laws to regulate business conduct in emerging markets, but that the enforcement of laws may be ineffective. This lack of efficacy in many cases is intrinsic for emerging markets because of insufficient trained personnel to understand and implement laws. Instead of lamenting, complaining, or retreating, those who choose to operate in emerging markets should take a more proactive approach.  On the one hand, they should not compromise laws or moral standards to gain business. On the other hand, they should actively pursue venues of dialogue with government officials and business partners and try to understand each other better. One should realize that even in emerging markets where business environment may be considered “rotten,” people still cherish businesses that are strictly law-abiding and represent business ethics. This is exactly why well-known and well-behaved multinational companies enjoy better reputations in emerging markets than their counterparts in the host country. Multinational companies operating in emerging markets should also focus on competitive advantages in financing, technology, and managerial skills to attract business.

Managing relationship with the host government is essential for doing business in emerging markets, as it is in advanced economies, although managers in emerging markets may face a very different framework of government-business relations. Stereotypical views of governments in emerging markets are that they are corrupt or inefficient. While there is truth in these views, one needs to understand that corruption and inefficiencies of governments are also evident in advanced economies but vary in degrees or appearance.  Managers in emerging markets should avoid a journalistic or generalized branding of host governments as “corrupt” or “inefficient,” which may alienate their relationship with the host government. They should take an analytical approach toward specific cases in business. In fact, many emerging markets have embarked on reform programs that have made their governments more transparent and efficient. Most governments in emerging markets strive for economic development and are enthusiastic in improving business environment for foreign investment. To the extent that governments in emerging markets play a bigger role in affecting business operations, keeping a regular channel of communication with relevant government agencies and trying to comprehend government policies can often forestall problems that may arise in emerging markets. Maintaining good relations with the host governments and behaving as good local citizens help build a harmonious and tranquil business environment. Some multinational companies have helped host governments in times of difficulties such as natural disasters and epidemics instead of abandoning these markets. Multinational companies have often participated in host government initiatives in poverty reduction, public education, and other social and development programs. Such actions often impress the host governments and the general public, and enhance their public image and relations in emerging markets. 

Inadequacy in infrastructure and scarcity of resources are a common challenge for managing in emerging markets. Adaptability to local conditions and creative strategies can help alleviate the difficulties. When trucks are not available to transport products, some companies in emerging markets have used other means that are locally available to transport their products at a similar or even lower cost. When power supply is erratic, companies have to plan operations accordingly, leaving enough room for irregularities to meet production schedules and deliveries. 

Given the weakness of their macroeconomic infrastructure, the primitive nature of their financial markets, and the volatility of international capital flows, emerging markets are more susceptible to currency and financial crises. Currency crises occur when the host country’s currency loses a significant amount of value within a short period of time.  Such crises not only dent the equity value and profitability of foreign as well as domestic firms, but also affect their long-term competitiveness in the host country market. One important strategy to hedge foreign exchange exposures is to match the company’s cash flows in the local currency. This is called natural hedging. One may also consider contractual hedging for their foreign exchange exposure if derivative products (such as currency forwards, futures, and options) for the host country’s currency are available in the financial markets. More often than not, these products are not available in emerging markets. In some cases, multinational corporations, through their accessibility to the global financial markets and worldwide network of operations, are able to create synthetic products to hedge their foreign exchange risks in emerging markets.

Management in emerging markets involves value chain adjustment, lawful use of intra-company fund transfer strategies, and tax incentives offered by the host governments. Companies may adjust their sourcing of raw materials, production, and marketing according to currency valuation, production cost, and other market conditions across countries and design an overall production and marketing strategy.  Many emerging markets offer incentives for foreign investment in certain industries.  These incentives include tax holidays and preferential treatment in local resource allocation. For example, China offers several years of income tax exemptions or reductions for foreign investors in designated industries (such as high-tech or environmental protection) or designated areas (less developed areas in the inland regions).  We recommend that managers explore these opportunities and take these advantages in their planning and budgeting for their operation in emerging markets. Lawful use of fund-repositioning strategies such as fund transfer between parent and subsidiary companies can also help improve financial management of operations in emerging markets.

Managing relations with local partners is always a delicate issue. Local partners in emerging markets are often the recipients of capital investment, technological transfer, or management skills, and thus perceived to be in a disadvantageous position and lack bargaining power in negotiations or business interactions. Any behavior that may give the impression of arrogance, imposing, or patronizing on the part of the foreign partners may be detrimental to the relationship with the local partner. It is important to realize that viable business transactions are mutually beneficial and foreign and local partners should treat each other with equal respect. Many conflicts and disputes arise from misunderstanding and lack of communications. A more conciliatory and collaborative approach toward differences among partners often help, particularly in emerging markets.      

Compared with advanced economies, emerging markets are mostly labor abundant and enjoy advantages in labor-intensive products. One of the major motivations of foreign investment in emerging markets is to take advantage of the low labor cost and engaged in labor-intensive manufacturing. Managing relations with local employees is crucial to the productivity and sustainability of operations in emerging markets. Workers in many emerging markets appear to be less demanding in terms of compensation, working environment, and workers’ rights. Labor laws are either incomplete or inadequately enforced in some emerging markets. Managers should not take this for granted, for those who maintain high welfare standards for their employees will stand out among competitors in the long run. Local firms in emerging markets often look up to foreign operations for examples of management of relationships with employees. Successful companies have brought their home country practices to emerging markets and are rewarded for employee satisfaction and productivity improvement.

Besides these issues pertinent to emerging markets we have discussed above, managing international operations in general need to have global marketing and manufacturing strategies, handle accounting and capital budgeting issues in a global context, and choose staffing policies for a better coordination of headquarters and subsidiaries. All these apply to managing in emerging markets as well, albeit extra due diligence is required.

Published in WIIT, http://www.wiit.org/news/Spring2006/ManaginginEmergingMarkets.htm