The most important difficulty facing multinational firms today, according to their CEOs and top management groups, is globalization. This is especially true in North America, Europe, and Japan. They are also well aware of how difficult it has gotten in the last ten years to determine internationalization strategy and which nations to do business with. However, the majority of businesses have continued to use the tactics they have always used, which emphasize standardized approaches to new markets while occasionally experimenting with a few local tweaks. Because of this, many multinational firms are having trouble creating winning strategies for emerging regions.
We think that a portion of the issue is that the application of globalization techniques is hampered by the lack of specialized intermediaries, regulatory frameworks, and contract-enforcing mechanisms in emerging markets, or “institutional voids,” as we called them in a 1997 HBR paper. The crucial role that “soft” infrastructure plays in the implementation of businesses’ business models in their domestic markets is typically taken for granted by companies in industrialized nations. However, in emerging markets, that infrastructure is frequently lacking or inadequate. There are plenty of instances. In order to personalize items to individual demands and raise people’s willingness to pay, businesses are unable to locate competent market research organizations that can provide them with accurate information about client preferences. There aren’t many end-to-end logistics companies that can carry raw materials and completed goods, allowing businesses to cut expenses. Companies must screen a significant number of applicants themselves before hiring because there aren’t many search services that can handle this task for them.
Numerous multinational corporations have performed poorly in developing countries as a result of all those institutional gaps. Since the 1990s, American firms have reportedly performed better at home than abroad, particularly in emerging economies, according to all the anecdotal data we have obtained. Unsurprisingly, many CEOs avoid investing in emerging economies and rather do so in industrialized countries. According to the Bureau of Economic Analysis, a division of the U.S. Department of Commerce, American corporations and their affiliate companies had assets totaling $173 billion in Brazil, $514 billion in Canada, and $1.6 trillion in the United Kingdom by the end of 2002.
Just 2.5% of the $6.9 trillion in investments that American corporations had at the conclusion of that year were represented by that amount. In spite of the fact that between 1992 and 2002, U.S. firms’ investments in China increased almost double, they still represented less than 1% of all of their foreign assets.
Many businesses avoided entering new markets when they ought to have done so. The majority of goods and services have had the fastest global market growth in developing nations since the early 1990s. By locating manufacturing and service operations there, where skilled labor and qualified managers are comparatively affordable, businesses can cut expenses. Additionally, a number of multinational firms from developing nations have expanded into North America and Europe using creative business models and low-cost techniques, such as China’s Haier Group in the home appliance industry. Western businesses must expand farther into emerging markets in order to create counterstrategies since these markets support different types of innovations than mature markets.
Western businesses won’t likely last very long if they don’t create strategies for interacting with developing nations along their value chains. CEOs cannot assume they can conduct business in emerging markets in the same manner that they do in developed countries, despite the fact that tariff barriers are falling, cable television and the Internet are becoming more widely used, and these countries’ physical infrastructure is fast improving. This is due to the fact that each country has a different level of market infrastructure. In contrast to less developed nations, which typically have inexperienced intermediaries and ineffective legal systems, industrialized economies typically have vast pools of seasoned market intermediates and efficient contract enforcement procedures.
Corporations are unable to easily adapt the tactics they utilize in their home nations to those new markets since the services offered by intermediaries either aren’t available there or aren’t very sophisticated.
We have conducted research and advised major corporations all around the world over the past ten years. We all took part in the McKinsey & Company Global Champions research project, and one of us oversaw a Harvard Business School comparative study of China and India. We know that successful businesses find ways to fill institutional gaps. They create unique business strategies for operating in developing markets in addition to creative ways to put those plans into practice. Additionally, they adapt their strategies to the institutional framework of each country.
We’ll demonstrate how businesses that take the time to comprehend the institutional variations among nations are more likely to pick the greatest markets to enter, pick the best tactics, and get the most out of doing business in developing nations.
Over the past ten years, developing nations have opened up their markets and experienced fast growth, but businesses still find it difficult to gather accurate data about consumers, particularly those with low incomes. For instance, it’s challenging to build a consumer finance company in emerging nations since there aren’t the same data sources and credit histories that Western companies can use. In developing nations, market research and advertising are still in their infancy, and it can be challenging to locate the extensive datasets on consumption patterns that enable businesses to segment people in more developed markets.
The lack of sophistication of the capital and financial markets in emerging nations is noteworthy. There aren’t many trustworthy middlemen like credit-rating agencies, investment analysts, merchant bankers, or venture capital firms, except a few stock exchanges and government-appointed regulators. In order to finance their activities, multinationals cannot rely on raising debt or equity money domestically. Similar to investors, debtors lack access to up-to-date information on businesses. Businesses find it difficult to evaluate the creditworthiness of other companies or collect receivables after extending credit to clients. Additionally, emerging markets have notoriously bad corporate governance. Therefore, multinational corporations cannot rely on their partners to uphold local regulations and joint venture agreements. In fact, multinationals cannot assume that local enterprises are driven solely by the profit motive because crony capitalism is rife in emerging nations.
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