The most important feature of any market is the ease with which buyers and sellers can come together to do business, note Tarun Khanna and Krishna G. Palepu in ‘Winning in Emerging Markets: A road map for strategy and execution’ ( >www.hbr.org ). “In developed markets, a range of specialised intermediaries provide the requisite information and contract enforcement needed to consummate transactions. Most developing markets fall short on this count,” they add.
To some extent such ‘institutional voids’ may be mitigated by functional substitutes in the form of informal institutions. But these often exist on an uneven playing field, accessible only to certain local players, the authors observe. “A local loan provider might seem like a substitute for a venture capital industry, but only if the loan provider evaluates applicants on their merits or business plan. Seldom are informal market intermediaries truly open to all market participants.”
Rather than see institutional voids as mere roadblocks, think of building businesses based on filling these voids, urge Khanna and Palepu. For instance, in China, Ctrip.com, established in 1999, aggregates ‘hotel reservation and airline ticket information, providing rates and schedules, and offering a platform for customers to complete transactions – a powerful proposition in a market without a well-developed network of alternative intermediaries, such as travel agents.’
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A section on ‘capital markets’ explains how ‘complicated sets of mechanisms’ address the voids in well- developed economies: “Financial reporting facilitates investor communication. Accounting standards and independent auditors enhance the credibility of financial reports. Information intermediaries such as analysts, rating agencies, and the financial press provide analysis.”
Also, as the authors elaborate, financial intermediaries such as venture capitalists, commercial banks, insurance companies, and mutual funds help investors channel their funds to attractive investment opportunities and facilitate access to capital for entrepreneurs and established companies; and stock exchanges create liquidity by enabling investors to trade with each other at a low cost.
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These markets are strictly regulated, remind Khanna and Palepu. “The central bank, securities regulators, and stock exchanges enforce these rules. Courts act as arbiters of disputes between various parties… Investors can hold corporate managers and directors accountable through the threat of securities litigation, proxy fights, and hostile takeovers.” By reducing risks to investors, these institutions make it possible for new enterprises to raise capital on approximately equal terms as big, established companies, the authors reason.
Action items for companies
Since institutional voids can frustrate, stifle, and undermine the business models and operations of any company doing business in emerging markets, a key action item for companies is to experiment to fit their strategies to the unique contexts of emerging markets, instead of expecting to get things right the first time out, the authors instruct.
Another suggestion is to position the business as a partner in progress. “The employment Tata Consultancy Services brought to Uruguay enabled the company to receive fast-tracked visas for employees travelling from India… Metro Cash & Carry’s primary business filled voids in the food supply chains in emerging markets, reducing waste and bringing more transactions into the tax net.”
An important advice from the authors is that multinationals should balance ambition with humility in emerging markets. “Segmenting these markets, and carefully aligning ambitions and capabilities can help multinationals avoid costly mistakes.”
Not too different is the challenge before emerging market-based companies that are venturing into globalisation. An apt quote of a Tata executive sums up the risk versus ambition consideration, thus: “How fast can we go? What’s our capability? How far can you test people who’ve never done it? We’ve got lots of smart people whose experience is very limited in international business. So that’s the balance between throwing people in versus holding people back because you don’t have the bench strength to do it.”
Threat of burnout
Towards conclusion, the authors caution businesses that the euphoria of growth and opportunity in emerging markets can quickly end when companies are burned by corruption, abrogation of contracts, wanton expropriation, and so on.
What are the options, then? “Companies can exit these markets, limit their ambition so as not to encounter them squarely, limit their exposure by operating through an agent or other party, or build in mechanisms, such as audits and internal vigilance, to deal with corruption.”
Of interest is the data cited in the book that the U.S. Department of Justice is investigating more than a hundred companies for potential violations of the Foreign Corrupt Practices Act. Not surprisingly, the taxonomy of market intermediaries has new such as specialised anti-bribery compliance firms and credibility enhancers!
Wish the book’s index had an entry for Satyam, a company in which Palepu served as a director during the dubious Maytas acquisition. A void perhaps more intentional than institutional.
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