Module: International Management

Lesson: Working in developing economies

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Working in developing economies

Introduction

Welcome to the tenth and final lesson in the module on international management. In this
lesson, we will focus on working with emerging and developing economies and reviewing some
of the opportunities and challenges that these can present. As the global economy expands,
more and more organisations find themselves engaged in business relationships with
companies from all over the world. With fierce competition in many sectors, one of the key
ways in which companies can seek competitive advantage is by driving down production and
labour costs. This often means working with rapidly developing economies where there is more
margin to reduce the effect of these significant costs. However, this also presents significant
challenges, as the business infrastructures in these economies are often not as developed as
those that many international managers will have been used to operating with.

By the end of this lesson you will be able to:

Explore and review working in developing and fast-growing economies.

Identify and evaluate the challenges and opportunities of working in developing economies.

Review a case study of service quality in the service sector in India.

The following narrated presentation will give you an overview of the key concepts that will be
covered in this lesson.

https://vimeo.com/216518186/cb6ef14272

Transcript

The economic categorisation of countries

What do we mean by developing economies? Each year, the World Bank revises its analytical
classification of the world’s economies based on estimates of gross national income (GNI) per
capita for the previous year. The updated GNI per capita estimates are also used as input to
the World Bank’s operational classification of economies, which determines lending eligibility.
The World Bank classifies economies as low, middle or high income.

As of 1 July 2015, low-income economies are defined as those with a GNI per capita,

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calculated using the World Bank Atlas method, of $1,045 or less in 2014; middle-income
economies are those with a GNI per capita of more than $1,045 but less than $12,736; high-
income economies are those with a GNI per capita of $12,736 or higher. Lower-middle-income
and upper-middle-income economies are separated at a GNI per capita of $4,125.

The World Bank collects and publishes large data sets on trading nations, which you can
access here: http://data.worldbank.org/.

Developing economies present enormous potential as untapped markets for many

international businesses. However, these markets present unique challenges that are not
present in industrialised nations. In terms of global trade and commerce, the terms
“developed” and “developing” countries or economies are often used. How do we define
these? Generally, a developed country will have:

High living standards, generally distributed

Highly technical infrastructure

Complex and productive economy.

Most of the poorest people in the world live in countries that are in the “Global South”. These
may be categorised as:

Developing (growing, but below developed standards)

Less developed (may or may not be growing, and below developed standards)

Underdeveloped (stagnated and below developed standards)

Therefore, poverty is associated with less complex economies and less technologically
advanced infrastructure. The reasons for this are often complex, but it can be as a result of:

War or civil war

Corruption

Resource curse (dependence on exporting natural resources, often a single such resource
- e.g., copper, oil, agricultural products, which are valuable, but not as valuable as finished
products and which tend to concentrate wealth in a few hands)

Isolated situation that makes domestic and international trade difficult

Current or legacy of colonial and other exploitative economic relationships between the
area and developed countries.

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 Figure 10.01 - Rostow’s stages of growth development model

Rostow (1962) identified five key stages in the move from a developing/low-income to a
developed/high-income economy. He took an historical approach in suggesting that developed
countries have tended to pass through five stages to reach their current degree of economic
development. These stages are:

Traditional society

This is an agricultural economy of mainly subsistence farming, little of which is traded. The size
of the capital stock is limited and of low quality, resulting in very low labour productivity and
little surplus output left to sell in domestic and overseas markets.

Preconditions for take-off

Agriculture becomes more mechanised and more output is traded. Savings and investment
grow, although they are still a small percentage of national income (GDP). Some external
funding is required - for example, in the form of overseas aid or perhaps remittance incomes
from migrant workers living overseas.

Take-off

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Manufacturing industry assumes greater importance, although the number of industries
remains small. Political and social institutions start to develop; external finance may still be
required. Savings and investment grow, perhaps to 15% of GDP. Agriculture assumes less
importance in relative terms, although the majority of people may remain employed in the
farming sector. There is often a dual economy apparent, with rising productivity and wealth in
manufacturing and other industries, contrasted with stubbornly low productivity and real
incomes in rural agriculture.

Drive to maturity

Industry becomes more diverse. Growth should spread to different parts of the country as the
technology improves. The economy moves from being dependent on factor inputs for growth,
towards making better use of innovation to bring about increases in real per capita incomes.

Age of mass consumption

Output levels grow, enabling increased consumer expenditure. There is a shift towards tertiary
sector activity and the growth is sustained by the expansion of a middle class of consumers.

Exercise 1: Emerging economies

Think about the product or service sector that the organisation you work for is most involved
with. Do some research on Google to find out which emerging economies are most involved
with this product or service. You can also use data from the World Bank and other widely
available databases to help with your search.

The BRICS economies

Over the last two decades, world markets have become more open as a result of increased
trade. For several years, prior to the 2008 financial crisis, a number of new or emerging
markets were growing at an exponential rate, compared to the more established and
developed economies. These included countries such as China and India, whose economies
have undergone a total transformation in the last 20 years. When considering the contribution
of emerging economies, the term BRICS is often cited in the literature. The acronym BRICS
was initially formulated in 2001 by economist Jim O’Neill, of Goldman Sachs, in a report on

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growth prospects for the economies of Brazil, Russia, India and China, which together
represented a significant share of the world’s production and population.

The BRICS nations, which used to be known for their tremendous growth potential, are today
in the midst of severe economic crisis. Falling global commodity prices have affected these
emerging markets, which rely heavily on export-led growth. Moreover, the structural
transformation of China, which has been the main driver of this group, from an export-driven
economy to one relying on domestic consumption has added to the current woes of the
BRICS countries. Among these economies, India is the only country that has shown signs of
strong potential for growth. Despite these pressures, growth in these economies is still an area
of interest and investment for many international and multinational corporations.

The World Bank has estimated that in the event that growth in BRICS economies fall one
percentage point below expectations, this would knock 0.8 percentage points off growth in
other emerging markets over a period of two years and reduce global growth by 0.4
percentage points. The effects of a BRICS slowdown on other emerging markets and the
global economy are significantly worse if one assumes that financial sector turbulence will also
accompany the slowdown.

Bremner (2015) claims that the economies to watch and engage with for growth now are:
India, Indonesia, Malaysia, Mexico, Colombo, Poland and Kenya.

For a more recent analysis of the current state of the BRCS economies, see this Guardian
article by Simon Tisdall, which you can access here:

The impact of trade policies on growth in developing economies

Adopting liberal trade and investment policies is often considered a vital component of
economic growth. However, for developing economies, who are at the early stages of opening
up their markets, such actions can promote resistance from their own industries, domestic
corporations and host-country nationals (employees), who may perceive foreign investment as
a threat to their own precarious positions. For the international manager, this can pose many
challenges in gaining trust and co-operation in these environments.

Cutting high tariffs on imports gives countries an opportunity to make industry more efficient
and competitive, and thus to boost growth and living standards. But this process inevitably
creates some losers as well as winners. This is true for both developed and developing
countries. However, the experiences of developing countries indicate that, because of their
different policy environment, adjusting to change poses greater challenges for them than for
developed countries.

One reason is that developing countries generally have higher existing levels of protection -
barriers, such as high import tariffs, that make imported goods more expensive than
domestically produced ones. This means that, while the potential benefits of cutting tariffs are

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greater in the long term, the short-term adjustment costs may also be greater if the full scope
for reducing protection is exploited.

Factors that can present challenges to managing growth in these highly complex economies
can include:

Political instability

The absence of reliable or consistent governance from recognised government authorities

adds to business costs, increases risks and reduces managers’ ability to forecast business
conditions. Political instability is associated with corruption and weak legal frameworks that
discourage inward investment and the development of a reliable business environment. In
Russia, for example, evolving political conditions threaten the business activities of foreign
firms. Bureaucratic practices favour well-connected, homegrown firms. Western oil companies
have been denied access to Russia’s energy resources.

Weak intellectual property protection

Even when they exist, laws that safeguard intellectual property rights may not be enforced or
the judicial process may be painfully slow. In Argentina, enforcement of copyright on recorded
music, videos, books and computer software is inconsistent. Inadequate resources and slow
court procedures hamper enforcement. Counterfeiting - unauthorised copying and production
of a product - is common in China, Indonesia and Russia, especially of software, DVDs and
CDs. In India, weak patent laws often discourage investment by foreign firms.

Bureaucracy, red tape and lack of transparency

Burdensome administrative rules and excessive requirements for licenses, approvals and
paperwork all delay business activities. Canamo is a Venezuelan company that was eager to
export its products to the US. But it first had to obtain numerous certificates and licenses from
various government authorities in Venezuela, a jumble of paperwork that can take two to six
months to complete. Faced with this long and unpredictable process, Canamo all but
abandoned hope of entering the US market. In China, getting a bank loan is arduous,
especially for smaller firms. There are many government forms to complete and it can take
several months to register collateral with the appropriate authorities. As a result, many firms
cannot obtain bank loans in a timely manner, delaying their ability to grow and flourish. While
smaller businesses contribute some 60 per cent of China’s GDP, they account for only 15 per
cent of outstanding bank loans.

Poor physical infrastructure

High-quality roads, drainage systems, sewers and electrical utilities are typically lacking in
emerging markets. In India, many still do not have access to toilets and sewage treatment
systems. Poor sanitation gives rise to widespread illness and thousands of Indian children die

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every week from diarrheal illness. India’s ports, roads, railways and airports are insufficient for
handling the massive volumes of cargo that enter and leave the country every day. Industrial
cities like Bangalore and Pune regularly experience power outages that can last 24 hours or
longer. The government is working to improve infrastructure, but multinationals must often
build their own systems and employ creative solutions to support value-chain activities. A
subsidiary of Tata Chemicals, part of India’s giant Tata conglomerate, had to build its own
road and railway infrastructure in Africa to support the firm’s operations there.

Partner availability and qualifications

Foreign firms should seek alliances with well-qualified local companies in countries
characterised by inadequate legal and political frameworks. Through such partners, foreign
firms can access local market knowledge, establish supplier and distributor networks, and
develop key government contacts. However, partners that can provide these advantages are
not always readily available in emerging markets, especially smaller ones.

Dominance of family conglomerates

Many emerging market economies are dominated by large, highly diversified firms that are
privately owned. Family conglomerates (FCs) operate in industries ranging from banking to
construction to manufacturing. They control the majority of economic activity and employment
in emerging markets like South Korea, where they are called chaebols; in India, where they are
called business houses; in Latin America, where they are called grupos; and in Turkey, where
they are called holding companies. In South Korea, the top 30 FCs account for nearly half the
economy’s assets and industry revenues. Samsung is perhaps the most famous Korean FC.
In Turkey, the Koc Group accounts for about 20 per cent of trading on the Istanbul Stock
Exchange and Sabanci provides more than five per cent of Turkey’s national tax revenue.

FCs enjoy various competitive advantages in their home countries, such as government
protection and support, extensive networks in various industries, superior market knowledge
and access to capital. Hyundai Group was an early mover in South Korea’s auto industry and
now holds the largest share of that country’s car market. When foreign car manufacturers tried
to enter the market, they found Hyundai’s advantages overwhelming.

In some cases, the government may even launch the FC, just as the Siam Cement Group was
launched by the government of Thailand. One of the largest FCs in Indonesia, the Bimantara
Citra Group, got its start by selling its foreign oil allocations to the state-owned oil monopoly.
The group has long enjoyed a close relationship with the Indonesian government and has
secured numerous lucrative contracts. When the Hyundai Group in South Korea experienced a
financial crisis, the Korean government and Hyundai’s major creditors provided more than
$300 million in assistance, including credit extension and short-term loans.

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Exercise 2: Assessing the potential of an emerging economy

Choose an emerging economy that you are interested in and undertake a SWOT analysis of
what you consider to be some of the opportunities and challenges in relation to that particular
country. Use sites on the Internet such as the WTO, Forbes, Bloomberg and OCED to gather
data and information to inform your analysis.

General challenges for developing/emerging economies

Developing or low- and middle-income economies face many challenges and in turn present
many challenges to those from more developed economies in relation to engaging in
international trade. The main challenges that low- and middle-income economies face are how
to:

Move from a supplier low cost production/service economy to a more diversified

economy

Initially, many developing economies rely on low labour and production costs for rapid
economic growth. However, unless strategies are put in place to develop all sectors of the
economy, this can be a very precarious position to occupy. China was once the capital for
textiles and other forms of production; however, as costs of living, and thus labour costs too,
increased in that economy, significant international contracts migrated to even lower-cost
economies, particularly those in South East Asia.

Access a labour force that is skilled and educated to compete globally

Levels of education and training often vary considerably in developing economies, and growth
and the need for qualified human resources can often outstrip the available supply of suitably
qualified labour. In addition, many developing economies also suffer from being mass
exporters of qualified and semi-qualified labour to rich nations such as those in the Gulf states.
Thus, countries like the Philippines, India and Bangladesh can suffer skills shortages in their
own economies as they supply the labour force needed for developed economies who can
offer more competitive wages and living conditions.

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Develop brand identity: Internationalisation of brands, e.g. Tata, Nandos

A key challenge for a number of popular domestic brands in developing economies is how to
gain international and global brand recognition. The world’s top global brands remain
dominated by US and European brands.

Some strategies that international corporations can use to overcome these challenges are:

Grow new brands that could be world class out of the culture and heritage of the country

Grow domestic companies in the face of competition from multinational corporations

Liberalise their economies, while tackling issues of poverty

Develop effective transport and business infrastructure

Tackle crime, violence and corruption.

The World Trade Organization

The World Trade Organization (WTO) is the only global international organisation dealing with
the rules of trade between nations. At its heart are the WTO agreements, negotiated and
signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to
help producers of goods and services, and exporters and importers conduct their business.

The key principles of the WTO that members are required to subscribe to are:

Trade will be without discrimination

Trade should be freer, with trade barriers negotiated downward

Trade should be predictable

Trade should be more competitive

Trade should be more beneficial to less developed countries, encouraging development

and economic reform

Copyrights, trademarks, trade secrets and other intellectual property matters should be
protected.

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What makes emerging markets attractive?

Emerging markets have become important target markets for a wide variety of products and
services. Exports to such countries account for one third of total merchandise exports from the
US. Roughly a quarter of Mexico’s population of 105 million people enjoy affluence equivalent
to that of the middle class in the US. The fastest-growing markets for power tool companies
like Black & Decker and Robert Bosch are in Asia, Latin America, Africa and the Middle East.
Technology firms like Cisco, Hewlett Packard and Intel generate a large and growing
proportion of their revenues from sales to such countries.

Emerging markets are home to low-wage, high-quality labour for manufacturing and assembly
operations. Some emerging markets have large reserves of raw materials and natural
resources. Mexico and China are important platforms for manufacturing cars and consumer
electronics. South Africa is a key source for industrial diamonds. Brazil is a centre for bauxite,
the main ingredient in aluminium. Thailand has become an important manufacturing location
for Japanese multinationals, such as Sony and Sharp. Motorola, Intel and Philips manufacture
semiconductors in Malaysia and Taiwan.

With global sourcing, firms procure selected value-adding activities, including production of
intermediate goods or finished products, from suppliers located abroad. Global sourcing helps
firms obtain competitive advantages. Emerging markets have served as excellent platforms for
sourcing. Numerous multinationals have established call centres in Eastern Europe, India and
Mexico. Firms in the IT industry, like Dell and IBM, reap large benefits from outsourcing
certain technological functions to knowledge workers in India. Intel and Microsoft have many
of their programming activities performed in Bangalore, India.

In every country, the middle class represents the segment of people between the wealthy and
the poor. They have economic independence; they work in businesses, education,
government and hourly jobs; and they consume many discretionary items, including
electronics, furniture, automobiles and entertainment. Middle-class households account for
most households in advanced economies. In emerging markets, the size and growth rate of
the middle class serve as signals of a dynamic market economy.

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 Figure 10.02 - Magnitude of middle-class population for a sample of emerging markets

For marketers of products and services, emerging markets are prime prospects. India and
Indonesia rank at the very top, given their large populations. But while India and Indonesia
feature large middle-class populations in absolute terms, per capita GDP in these countries is
rather modest, especially when compared to South Korea, China, Russia and Mexico.
However, the percentage of income held by the middle class in India and Indonesia is
relatively high, at 49 and 48 per cent, respectively. Contrast this to Brazil, where the middle
class controls only about 35 per cent of national income. Demographic trends indicate that, in
the coming two decades, the proportion of middle class households in emerging markets will
become much bigger, acquiring enormous spending power. As incomes increase, spending
patterns will evolve, fueling growth across various product and service categories.

Another way to illustrate the PPP concept is to examine the , developed by The
Economist. The index first gathers information about the price of hamburgers at McDonald’s
restaurants worldwide. It then compares the prices, based on actual exchange rates, to those
based on the PPP price of Big Macs to assess whether a nation’s currency is under- or
overvalued. Figure 10.03 presents the Big Mac Index for the most recent year. It reveals that
the currencies of most European countries (mainly the euro) are overvalued, while those of
most developing economies or emerging markets are undervalued. The Big Mac Index also
implies that the Chinese yuan is undervalued. It suggests the yuan is below its fair-value
benchmark with the dollar.

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 Figure 10.03 - The Big Mac Index

Exercise 3: Case study on service quality in Indian hotels

This case study is based on research that sought to assess service quality levels in three-star
hotels in western India. The case focuses on reviewing domestic travellers’ expectations and
perceptions of two major resort hotels in western India. This study is quantitative in nature,
using a deductive approach and employing a cross-sectional research design. The study

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adopts non-probability self-selection sampling with the data collected through a survey
distributed to hotel guests in two major resort hotels in western India.

You can work on this activity on your own or you can connect with other students to work on it
as a group exercise. The key questions that you are asked to address are:

Advise on what key issues of concern this data should raise for the company.

Help them develop an action plan to improve service quality in response to this survey.

Prepare a presentation for the company’s senior management team on your findings and
key recommendations.

Please post your answers to the Lesson 10 Discussion Forum to share with other students.

You can access the case study and additional data here: Lesson Ten case study.

Reflect on learning from lesson

Consider what you have learnt about working in and with developing economies in this lesson.
Reflect on how this may be different to your original thoughts about how these activities might
operate in practice and what they might involve. Start to think about questions that this raises
for you. Note what particular skill sets are needed to operate as an effective manager in an
international context.

Lesson summary

In this lesson, we have focused on opportunities and challenges associated with engaging in
trade with developing or emerging economies. We have observed that often these countries
and economies display the greatest potential for growth and thus are often on the radar of
large conglomerate organisations looking for investment opportunities. For the international
manager, working in emerging economies can be very complex and challenging, and it
requires considerable sensitivity and the ability to ensure that key ethical standards are
maintained.

Further and wider reading

Key text

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Steers, R. and Osland, J., 2020. Management across Cultures: Challenges, Strategies, and
Skills. Cambridge: Cambridge University Press.

Wider reading

Dahan, N., Doh, J., Oetzel, J. and Yaziji, M., 2010. Corporate-NGO collaboration: Co-creating
new business models for developing markets. Long Range Planning, 43 (2/3), 326-342.

Hallward-Driemeier, M. and Pritchett. L., 2015. How business is done in the developing world:
Deals versus rules. Journal of Economic Perspectives, 29 (3), 121-140. Available from:
[Accessed 9 May 2020].

Meyer, K., Estrin, S., Bhaumik, S. and Peng, M., 2009. Institutions, resources, and entry
strategies in emerging economies. Strategic Management Journal, 30 (1), 61-80.

Peng, M., Wang, D. and Jiang, J., 2008. An institution-based view of international business
strategy: A focus on emerging economies. Journal of International Business Studies,
39(5)1-17.

References

Bremner, I., 2015. The new world of business. Fortune Magazine. Available from: [Accessed
25 April 2017].

Rostow, W., 1962. The Stages of Economic Growth. London: Cambridge University Press.

Tisdall, S., 2016. Has the Brics bubble burst? The Guardian. Available from: [Accessed 25
April 2017].

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© 2020 Arden University Ltd. All rights reserved
© 2020 Arden University Ltd. All rights reserved
© 2020 Arden University Ltd. All rights reserved
 © 2020 Arden University Ltd. All rights reserved

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