Fernando Fischmann

A Framework for Strategists Assessing Emerging Markets

7 July, 2015 / Articles
Fernando Fischmann

Many companies start their search for global growth in an alphabet soup of emerging-market groupings such as the BRIC, CIVETS, MINT, Next 11, and so on. Is that smart?

Not really, suggests our analysis. There are several flaws in using such acronyms as the basis for entering overseas markets.

Country groupings tend to conceal more about a nation’s growth than they reveal. For instance, ever since Goldman Sachs coined the term BRIC, China and India have pulled ahead of Brazil and Russia, whose growth fell below the group average between 2001 and 2013. Likewise, Nigeria is the powerhouse among the MINT nations while Mexico’s performance may make investors question the rationale for its inclusion.

Many acronyms are rooted in the expectation that in these emerging markets, there is large, and fast-growing, demand for products and services. However, the sources of demand in each country differ, which will affect your strategy. For example, among the BRIC nations, consumption has played a key role in Brazil, India, and Russia, but in China, fixed investment was the driver until recently. As a result, some consumer-facing companies would do well to enter Brazil or India before targeting China.

Business growth can also depend on factors such as the availability of talent or scarce raw materials that influence, say, a company’s innovation capabilities or its ability to manufacture cost-effectively. However, all the popular acronyms only indicate the ripeness of countries’ consumer markets.

Similarly, when companies wish to manufacture overseas, they will encounter wide variations within the groupings. For example, the MINT nations may appear to be attractive locations, but they differ significantly. Mexico’s growth comes mainly from a growing labor force; Indonesia’s and Nigeria’s from capital productivity; and Turkey has seen positive contributions from the labor force, but negative contributions from capital. Those trends dictate different choices for a labor intensive retailer (who should choose Mexico or Turkey), a capital-intensive construction company (pick Indonesia or Turkey), and a high-value manufacturer that needs skilled labor (Nigeria may be the best bet).

Finally, operating conditions differ significantly within the country groups. The Next 11 is supposed to consist of high-growth economies, for instance, but the political instability in its member-countries such as Iran and Pakistan make the abbreviation an unhelpful guide for business. In fact, the World Bank’s Ease of Doing Business lists show that the rankings of most emerging economies covered by acronyms and abbreviations have worsened. Between 2001 and 2014, for instance, Mexico’s rank slipped from 35 to 53; Bangladesh’s from 65 to 130; and Nigeria’s from 94 to 147.

Moreover, the differences between the countries have grown over time. Thus, most groupings may be valid only in the short run.

Having said that, it is also true that executives need help managing their globalization gambits. Every company requires a way of calibrating its strategy to the growth drivers in its industry, and developing a geographic value map. We call that process the A-B-C (which stands for Analyze-Benchmark-Calibrate) of developing a globalization strategy. The steps are:

Analyze the half-a-dozen key factors driving business growth in your home market and identify the specific economic indicators that represent them in the countries you are considering. Use a mix of supply and demand factors, but ensure they are all specific to your business model.

Benchmark all the economies for which reliable data are available. If a large number of indicators affect your business, weight them according to their importance. The resulting groupings may not trip off the tongue as easily as do some acronyms, but they definitely will help ensure growth.

Calibrate your geographic strategy by scanning the horizon every year. The risk of coining a list that sticks in your memory is that they quickly become out of date.

When companies re-evaluate their strategies using the A-B-C process, the results are often surprising. Consider, for instance, a healthcare company looking for double-digit growth in an emerging market. To it, the three most relevant indicators of a country’s attractiveness are disposable incomes, the size of the population over 65 years, and latent demand. If the company were to analyze the data for those parameters, as we did, it will find that China, Czech Republic, India, and Poland are its best bets.

Similarly, for a construction company looking to expand steadily into an emerging market, its drivers will include the growth rate and the extent to which the economy is urbanizing as well as the ease with which it can import and transport raw materials around the country. When we studied that country-level data, we found that the company should choose from amongst China, India, Indonesia, and Nigeria — not exactly a standard grouping.

Likewise, an insurance company seeking to create its geographic value map should consider factors such as the size of the middle class, the maturity of the capital markets, and the extent to which there is a local culture of saving. If it were to identify the top performers across those dimensions, China, India, Malaysia, and South Africa would be great prospects. In all three cases, by the way, we normalized the data for the economic indicators to generate a consistent basis of comparison and identified the markets by calculating a weighted average across all the indicators.

Globalization decisions are undoubtedly complex. The challenge is to avoid conventional wisdom and to develop a company-specific world view of which economies to invest based on the growth drivers of your business. A-B-C may not be the snappiest abbreviation in the world, but it is a simple and sound guide for your globalization strategy.



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