Innovation in Emerging Markets Lectures
Lecture 1
Emerging market (Economic view)
● Poverty
○ Low- or middle income country
○ Low average standards
○ Less industrialised
● Capital markets
○ Low market capitalisation relative to GDP
○ Low stock market turnover and few listed stocks
○ Low sovereign debt ratings
● Growth potential
○ Economic liberalisation
○ Open to foreign investment
○ Recent economic growth
Ramamurti (2012) What is really different about EMNEs?
Are existing theories adequate to study the behaviour of EMNEs?
● The need for a new theory (Mathews, 2002)
● OLI model is sufficient (Narula, 2006)
● Somewhere in between (Ramamurti, 2012)
Puzzle 1: Given their economic and technological backwardness, emerging markets should
not produce MNEs
● No ownership advantage (cutting-edge technology, global brands, management) vs.
deep understanding of customer needs in emerging markets/ ability to function in
difficult business environments/ ability to make products at ultra-low costs
● Different stages of evolution
● To obtain resources that can be exploited in the home market
Puzzle 2: Multinationals that internationalise in wrong ways?
● The world has become a flatter place
● Strategies based on exploiting differences rather than similarities
● Booming industries in emerging markets, maturing/ declining industries in developed
markets (e.g. cement, steel, beverages, processed foods, meat)
Uppsala Model (Johanson & Vahlne, 1977)
Institutional distance = factors preventing or
disturbing firms learning about and understanding a
foreign environment
,Critique of Uppsala Model in its application to EMNE behavior
● Deterministic and rigid
○ Applies to a firm’s initial internationalisation than its subsequent foreign
investment (Kogut, 1983)
○ Applies better to small firms from emerging economies with less
internationalisation experience (Lundan and Jones, 2001)
○ Emphasis on risks in internationalisation whilst downplaying possible benefits
(Cuervo-Cazurra, 2012)
Emerging markets (Institutional view)
● Institutional voids, and so higher transaction costs
● The absence or underdevelopment of specialised intermediaries such as database
vendors, and quality certification firms, regulatory corporations, and control-enforcing
mechanisms (Khanna and Palepu, 2006)
Institutional voids
● Information asymmetry (e.g. used car sale)
○ Can prevail in product markets for quality items, labour markets for talent, and
financial markets for capital and securities
○ How can the buyer and the seller consummate a transaction to their mutual
satisfaction?
■ When the price is a fair price
■ Information symmetry is based on trust
Voids can exist in:
● Product markets
○ Soft infrastructure (market research companies, advertising agencies and
media outlets, logistics consultants)
○ Hard infrastructure (roads and bridges)
● Capital markets
○ Accounting standards
○ Independent auditors
○ Information intermediaries (analysts, rating agencies)
○ Financial intermediaries (venture capitalists, commercial banks, insurance
companies)
● Labour markets
○ Educational institutions
○ Placement agencies
○ Headhunters
○ Employment regulations
○ Unions
Continuum of institutional voids
,Are institutional voids constraints or opportunities?
Lecture 2
IB perspective of institutional voids
Business strategy in any economy is driven by three primary markets: product, labour and
capital
Voids: information asymmetry in economic exchanges
Product market void = difficulty in assessing product attributes, especially quality, due to
information asymmetries (Parmigiani & Rivera-Santos, 2015)
● Do large retail chains exist in the country? If so, do they cover the entire country or
only the major cities? Do they reach all consumers or only the wealthy ones?
● Availability of reliable suppliers and their inputs?
● Demand side:
○ Purchasing power of consumers - do consumers use credit cards, or does
cash dominate transactions? Can consumers get credit to make purchases?
● Supply side:
○ Is there a deep network of suppliers?
○ How strong are the logistics and transportation infrastructures?
● Example: Should WE Fashion expand to Brazil, India or China
Labour market void = limited availability and accessibility of skills and knowledge and
protection of worker rights
● How strong is a country’s education (technical and management training)
infrastructure?
● What is the level of labour mobility?
● Example: ASML and Eindhoven University collaborate for thesis topics
Which institutional voids did Cosan face in Brazil?
- No strict labour laws / weak enforcement
- High transportation and energy costs due to fragmented production
- Lack of infrastructure
Capital market void = limited availability and accessibility of financial options
● How effective are the country’s banks?
● Can companies raise large amounts of equity in the stock market in the following
countries?
, Regulatory voids - Khanna & Palepu (2010)
World governance indicators (WGI)
● Voice and accountability
● Political stability and absence of violence/ terrorism
● Government effectiveness
● Regulatory quality (unfair competitive practices, discriminatory tariffs, excessive
protections, burden of government regulations, investment freedom etc.)
● Rule of law
● Control of corruption
Diagnostic tool for voids
Product markets
● Availability of reliable data on consumer tastes and purchase behaviors
● Availability of unbiased information on the quality of goods/ services
● Access to smallholders (are they organised as a cooperative?)
● Type of distribution channels available for the delivery of products to consumers
● Strength of the logistics and transportation infrastructure
● Type of technology available for and level of automation in production and processing
● The extent to which goods from local companies vs. foreign companies are trusted
● Level of product-related environment and safety regulations in place and the
enforcement of regulations
Lecture 1
Emerging market (Economic view)
● Poverty
○ Low- or middle income country
○ Low average standards
○ Less industrialised
● Capital markets
○ Low market capitalisation relative to GDP
○ Low stock market turnover and few listed stocks
○ Low sovereign debt ratings
● Growth potential
○ Economic liberalisation
○ Open to foreign investment
○ Recent economic growth
Ramamurti (2012) What is really different about EMNEs?
Are existing theories adequate to study the behaviour of EMNEs?
● The need for a new theory (Mathews, 2002)
● OLI model is sufficient (Narula, 2006)
● Somewhere in between (Ramamurti, 2012)
Puzzle 1: Given their economic and technological backwardness, emerging markets should
not produce MNEs
● No ownership advantage (cutting-edge technology, global brands, management) vs.
deep understanding of customer needs in emerging markets/ ability to function in
difficult business environments/ ability to make products at ultra-low costs
● Different stages of evolution
● To obtain resources that can be exploited in the home market
Puzzle 2: Multinationals that internationalise in wrong ways?
● The world has become a flatter place
● Strategies based on exploiting differences rather than similarities
● Booming industries in emerging markets, maturing/ declining industries in developed
markets (e.g. cement, steel, beverages, processed foods, meat)
Uppsala Model (Johanson & Vahlne, 1977)
Institutional distance = factors preventing or
disturbing firms learning about and understanding a
foreign environment
,Critique of Uppsala Model in its application to EMNE behavior
● Deterministic and rigid
○ Applies to a firm’s initial internationalisation than its subsequent foreign
investment (Kogut, 1983)
○ Applies better to small firms from emerging economies with less
internationalisation experience (Lundan and Jones, 2001)
○ Emphasis on risks in internationalisation whilst downplaying possible benefits
(Cuervo-Cazurra, 2012)
Emerging markets (Institutional view)
● Institutional voids, and so higher transaction costs
● The absence or underdevelopment of specialised intermediaries such as database
vendors, and quality certification firms, regulatory corporations, and control-enforcing
mechanisms (Khanna and Palepu, 2006)
Institutional voids
● Information asymmetry (e.g. used car sale)
○ Can prevail in product markets for quality items, labour markets for talent, and
financial markets for capital and securities
○ How can the buyer and the seller consummate a transaction to their mutual
satisfaction?
■ When the price is a fair price
■ Information symmetry is based on trust
Voids can exist in:
● Product markets
○ Soft infrastructure (market research companies, advertising agencies and
media outlets, logistics consultants)
○ Hard infrastructure (roads and bridges)
● Capital markets
○ Accounting standards
○ Independent auditors
○ Information intermediaries (analysts, rating agencies)
○ Financial intermediaries (venture capitalists, commercial banks, insurance
companies)
● Labour markets
○ Educational institutions
○ Placement agencies
○ Headhunters
○ Employment regulations
○ Unions
Continuum of institutional voids
,Are institutional voids constraints or opportunities?
Lecture 2
IB perspective of institutional voids
Business strategy in any economy is driven by three primary markets: product, labour and
capital
Voids: information asymmetry in economic exchanges
Product market void = difficulty in assessing product attributes, especially quality, due to
information asymmetries (Parmigiani & Rivera-Santos, 2015)
● Do large retail chains exist in the country? If so, do they cover the entire country or
only the major cities? Do they reach all consumers or only the wealthy ones?
● Availability of reliable suppliers and their inputs?
● Demand side:
○ Purchasing power of consumers - do consumers use credit cards, or does
cash dominate transactions? Can consumers get credit to make purchases?
● Supply side:
○ Is there a deep network of suppliers?
○ How strong are the logistics and transportation infrastructures?
● Example: Should WE Fashion expand to Brazil, India or China
Labour market void = limited availability and accessibility of skills and knowledge and
protection of worker rights
● How strong is a country’s education (technical and management training)
infrastructure?
● What is the level of labour mobility?
● Example: ASML and Eindhoven University collaborate for thesis topics
Which institutional voids did Cosan face in Brazil?
- No strict labour laws / weak enforcement
- High transportation and energy costs due to fragmented production
- Lack of infrastructure
Capital market void = limited availability and accessibility of financial options
● How effective are the country’s banks?
● Can companies raise large amounts of equity in the stock market in the following
countries?
, Regulatory voids - Khanna & Palepu (2010)
World governance indicators (WGI)
● Voice and accountability
● Political stability and absence of violence/ terrorism
● Government effectiveness
● Regulatory quality (unfair competitive practices, discriminatory tariffs, excessive
protections, burden of government regulations, investment freedom etc.)
● Rule of law
● Control of corruption
Diagnostic tool for voids
Product markets
● Availability of reliable data on consumer tastes and purchase behaviors
● Availability of unbiased information on the quality of goods/ services
● Access to smallholders (are they organised as a cooperative?)
● Type of distribution channels available for the delivery of products to consumers
● Strength of the logistics and transportation infrastructure
● Type of technology available for and level of automation in production and processing
● The extent to which goods from local companies vs. foreign companies are trusted
● Level of product-related environment and safety regulations in place and the
enforcement of regulations
