The importance of emerging markets has been recognised for years, but the potential they offer has not been fully realised by multinational companies from the West. Alumnus, Dr Mehdi Safavi (PhD 2014), explains why.

Mehdi Safavi by David P Scott
Photography by David P. Scott

Business can’t stand still, particularly when the competition is growing in strength and depth. The rise of emerging market multinationals from the early 2000s is not a flash in the pan, but rather the early stages of a long-term trend.

Emerging economies are catching up with the West in terms of GDP, share of exports, and both inward and outward investment. The population of emerging economies also far outstrips that of advanced economies, presenting huge potential customer bases for multinationals that can access these markets.

The definition of what constitutes an emerging market is hotly debated – the Dow Jones classifies 23 nations within this grouping – but in reality, these countries are nations with social and business activity in the process of rapid growth and industrialisation.

Because of the breakneck speed of change and relatively adolescent infrastructures in emerging markets, companies that grow and flourish from those nations tend to be better equipped to expand into other emerging markets than those from Western countries with developed markets.

Companies that succeed in emerging markets have the benefit of developing metaphorical thick skin, and equipping themselves with tools to deal with, for example, infrastructure challenges or market volatility. In fact, a growing body of research corroborates the theory that multinational organisations from emerging markets value and nurture different skill-sets to those from developed markets.

These organisations tend to value ‘soft’ skills more highly than counterparts from developed markets and you’ll often find that these companies are headed by strong, ‘hands on’ leaders. Also, while companies who are more used to doing business in developed countries tend to favour reducing complexity in relation to their international operating models (which makes them better suited to stable markets) those in emerging markets are better at absorbing complexity.

But can companies from developed markets adapt their approach to make more headway in emerging markets? If they want to compete, then simply, they must. Companies that don’t will miss out on huge consumer and labour markets and the opportunities for growth that emerging markets offer.

We’re likely to see the number of emerging market multinational companies increase, their power grow, and a shift in the balance of power in the global economy in their favour.

Efforts to adapt to new economic conditions can, however, be stymied by the rules, regulations and frameworks in a developed market organisation’s home country, limiting their ability to adapt. For example, Chinese companies have enjoyed great successes in investing in infrastructure in Africa partially because they are equipped to deal with poorly regulated and sometimes corrupt economic environments that developed market organisations could not handle.

That said, companies in developed markets can and do access emerging markets by adopting creative strategies. One of the most common strategies in this kind of expansion is through joint-venturing with companies who already have a foot-hold in the emerging economies.

Emerging market companies, on the other hand, utilise mergers and acquisitions to move into developed markets, but often to capitalise on brand recognition, or to access research and development, or established marketing functions within an organisation. We’ve already seen headline-making deals about financial direct investment into developed markets from emerging ones like Tata Motors’ acquisition of Jaguar Land Rover or Russia’s Lukoil take-over of America’s Getty Oil.

We’re likely to see the number of emerging market multinational companies increase, their power grow, and a shift in the balance of power in the global economy in their favour. To keep pace, developed market organisations need to develop creative strategies to access and benefit from emerging markets.

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