Companies cannot operate in emerging markets without encountering institutional voids, but once they identify the voids that will shape the environment for their businesses, they can find ways to overcome them. Recognizing the costs of institutional voids, companies might decide to build a business to fill them. Multinationals and emerging market-based companies that do not build full businesses to fill these voids face a set of strategic choices to respond to them.
Developed market-based multinationals have built their businesses on the foundation of well-developed institutional contexts. Executing these models in emerging markets, which lack such a foundation, is a challenge. Multinationals enter emerging markets without local knowledge or reputation, but often they can exploit their global capabilities by tapping into global factor markets for capital, talent or know-how or by leveraging the credibility that comes with being a global brand.
Simply exploiting these advantages can enable multinationals to enter emerging markets without significant disruption or institutional voids, but often these strategies position multinationals only to tackle the global market segment. To compete in the emerging middle-class and local segments, multinationals need to adapt their products, services, business processes or organizations. Adaptation is difficult because of institutional voids.
Replicating business models developed outside their borders— particularly in developed markets— is not a viable option for emerging market-based companies that seek to build competitive advantage. Prospective emerging giants can exploit their local knowledge of product markets or factor markets, their established reputation, or other local resources to gain advantage in the market.
Institutional voids often stifle the entry of multinationals into emerging markets because they lack local knowledge or capabilities to get around these. Multinationals can counter this disadvantage by launching joint ventures or partnerships with local companies or by quickly localizing their staffs. Many local companies in these markets have internalized some roles served by market intermediaries in developed markets and, as a result, can be resourceful partners for such multinationals. Local companies, meanwhile, can exploit partnerships or other forms of collaboration with multinationals to help develop global capabilities or other resources as well as credibility.
Companies operating in emerging markets can take institutional voids as a given, or they can actively engage with the institutional context by filling voids in service of their businesses. Consider the challenges facing a retailer operating in India. Hoping to sell fresh produce in a country that lacks a well-developed cold chain distribution system, the retailer could either build a cold chain itself or could induce another party to build it through cooperation, shared investment, or contracting for a guaranteed minimum amount of business.
Illustration: Jayachandran / Mint
If the company chooses to fill the void itself, it could do so as a catalyst and later exit its intermediary role, or it could build these operations into a business to serve other companies as well (exploiting the void as an entrepreneurial opportunity). Practical difficulties or regulations might prevent a foreign third-party logistics provider from building comprehensive infrastructure in an emerging market on its own. The company could still fill the void by providing port-to-port logistics and partnering with a local company to connect its operations deeper into the market or by inducing government or another entity to invest in infrastructure development through contracted business guarantees.
Some institutional voids are beyond the capabilities of either local or multinational firms to circumvent or otherwise alter. When faced with such situations, companies can emphasize business opportunities in other markets that do not present such voids. An emerging market company might maintain a presence in its home market while investing more seriously in markets that are more conducive to growth or learning. Similarly, a multinational might delay significant investment in a particular emerging market until regulations pertaining to foreign firms are changed. The strategic choices to respond to institutional voids do not apply as clearly to emerging market-based companies as they go global, but the institutional contexts of their home markets do shape their journeys.
Emerging giants can replicate their home market-developed capabilities by entering other emerging markets having similar market segments and institutional contexts. To enter developed markets, they need to adapt their products, capabilities or organizations to new contexts.
Emerging giants can also go global by building global capabilities. These companies are increasingly able to “borrow” market institutions from developed markets to augment their capabilities. For example, a company from a country lacking well-developed financial markets could list itself on a foreign stock exchange through a global depository receipt or American depository receipt. Not only can this help the company raise capital, but also serves as a signal that the company meets international standards of corporate governance and sees itself as globally oriented. Foreign acquisitions are another avenue to use in accessing global brands, talent or know-how. These companies can also take advantage of connections to networks of their country’s diaspora living overseas to tap into foreign resources.
Reprinted with permission of Harvard Business Press. Edited and excerpted from Winning in Emerging Markets: A Road Map for Strategy and Execution by Tarun Khanna and Krishna G. Palepu. ©2010 Harvard Business Publishing. All rights reserved. Comment at email@example.com