Thinking about expanding your business into emerging markets?

With ever increasing globalization, emerging markets represent greater business opportunities than ever before. They boast the highest GDP growth rates in the world, are home to the majority of our global population, and offer a wealth of cheap labor, among other benefits. Companies can tap into new markets to boost sales, offshore components of their value chain to reduce costs, and earn high rates of return through foreign direct investment, while contributing to developing countries’ economic growth.

However, emerging markets also pose significant risks. Companies that expand into such markets often lack an executable strategy and, in turn, fail to capitalize on potentially lucrative opportunities. Companies can lose significant financial investment and even cause irreversible harm to their business through loss of intellectual property or reputational damage without a sound and executable strategy.

The following considerations are key to developing a strong and executable strategy:

1. Align interests of key stakeholders

Whether you are considering entering one of the BRIC countries (i.e. Brazil, Russia, India, China) or another emerging market, be sure to thoroughly assess the interests of all parties involved. To the extent possible, structure your business venture to align interests of key stakeholders in a manner that is beneficial to everyone involved, including the local government. Each market will have unique challenges (political, operational, etc.). Alignment of interests and incentives will establish a natural control structure that will prevent stakeholders from exploiting you and will generally work in your favor.

From an external perspective, choose your business partners wisely. Be sure to understand the competitive dynamics within the market. It is especially important to understand the country’s political climate and the dynamics of power and influence that your partners (or competitors) might have. In some cases, it might be advantageous to partner with a local government agency so that they have a vested interest in your business. Otherwise, consider partnering with development agencies such as the World Bank Group or other international development institutions that carry political authority.

Internally, be clear about your company’s short-term and long-term goals and create an incentive structure for all stakeholders that is aligned with your overarching objective.

 2. Maintain bargaining power to counteract contractual challenges

The institutions that support business (e.g. legal, financial) in emerging markets are often poorly defined or lack formal authority. Consequently, it can be challenging for companies to enforce contracts that are critical to conducting business. Instead of relying upon local institutions to enforce contracts, consider the following strategies:

Integration: If partnership with a local business is critical to your success, consider acquiring the local company or forming a joint venture. Integration (even partial integration) can replace the need for contracts. When forming a JV, be sure to share both investment costs and future profits with your local partner to appropriately align incentives.   

Reputation: Consider the reputational importance of your counterparty. If your counterparty wishes to do future business with you or with others, then they will be inclined to honor contracts to uphold their reputation. Avoid doing business with counterparties that are not concerned about their long-term reputation.

Optionality: When making a physical investment in an emerging market (e.g. building property, plant or equipment), consider making your investment non-specific in order to give yourself optionality (i.e. the ability to repurpose your investment for an alternative use). The more your investment is worth in its next best use, the harder it is for any stakeholder to obtain bargaining power over you. Also, consider making investments in multiple stages to mitigate risk.

Politics: Always consider the political climate of the market you are entering. Whenever possible, create political connections to guard against renegotiation. Consider how your company’s mission aligns with the political objectives of the local government. Garner local political support by partnering with an established local company, borrowing from local financial institutions, or even partnering with powerful international institutions (e.g. World Bank Group).

 3. Understand risks and proactively develop counter-strategies

Protection of your company’s intellectual property is likely a major strategic priority, especially within certain sectors like high-tech or pharmaceuticals. There are many examples of companies that have failed to adequately protect their IP in emerging markets and, consequently, have had their patents imitated or trade secrets stolen by competitors. In reality, governments in emerging markets do not always have incentive to help you protect your IP. Other times, weak court systems or lack of enforcement authority prevents them from granting such protection.

That said, certain strategies allow firms to harness advantages in emerging markets, despite weak IP protections.  Below is an overview of a few such strategies:

Supply Chain: If you are manufacturing a product that has complementary components, divide production of various components across multiple locations. In this way, the critical knowledge of compiling the finished good is concentrated within a limited, trusted group. Similarly, you might compartmentalize the production process within the same location, granting only trusted employees access to the entire facility. Moreover, you might design the production process such that key details (e.g. temperature gauges, compound ingredients) are automated or hidden from workers.

Integration: Avoid contractual relationships with suppliers for parts that require sensitive IP.

Complementarity: Build complementary services / goods such that consumers can only access your product with the real (i.e. not counterfeit) product. This works particularly well with technology products.

Staging: As R&D turns from research toward development, relocate R&D away from weak IP environments to stronger IP environments.

Summary

There is no doubt that emerging markets can represent extraordinary opportunities for many companies, but they can also present unique challenges, risks and complexities. Companies need a strong and executable strategy in order to win in emerging markets.  A winning strategy requires aligning the interests of key stakeholders, assessing the local business environment in order to identify threats such as contractual challenges and intellectual property theft, as well as the proactive development of counter-strategies that can be used to mitigate risk. By keeping these considerations in mind, companies can more successfully implement winning strategies that better enable them to seize opportunities in emerging markets.