STRATEGY & EMERGING

MARKETS (IBUS3109):
RESPONDING TO
INSTITUTIONS &
EXPLOITING EMs

S2, 2023
Presented by
Dr. Sangeeta Ray
Faculty of Business
Discipline of International
Business

The University of Sydney Page 1

 STRATEGIES FOR RESPONDING TO INSTITUTIONAL
VOIDS IN EMERGING MARKETS

SECTION 1 - MAPPING INSTITUTIONAL CONTEXTS

SECTION 2 - SPOTTING INSTITUTIONAL VOIDS

SECTION 3 - RESPONDING TO INSTITUTIONAL

VOIDS

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 SECTION 1: MAPPING INSTITUTIONAL CONTEXTS

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 MAPPING INSTITUTIONAL CONTEXTS

Khanna & Palepu, HBR, 2005

Developed the five contexts framework

Enables executives map the institutional context of any
country.

1. Political and Social Systems

2. Openness (to Foreign Investment)
3. Product Markets
4. Labor Markets
5. Capital Markets

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 DEGREE OF OPENNESS (BRIC)

• Degree of Protectionism (via Tariffs,

Industrial Policy)
• Local vs Foreign Firms (via Institutions)
• Incentives (via Tax, Subsidies)

BRAZIL

INDIA & CHINA

RUSSIA
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 OPENNESS IN ENTERTAINMENT & VIDEO GRAMES
INDUSTRY IN CHINA (2021)
• China is the world’s largest video game market - there are more than 665 million
video game players in China, spending $58.8 billion on and during their sessions.

• Chinese regulators have

a. tightened their oversight over a broad swathe of industries ranging from

technology to education to strengthen control over society and key sectors of
the economy.

b. introduced stringent rules on content ranging from video games to movies to

music, and censors anything it believes violates core socialist values.

c. introduced new rules limiting the amount of time children can spend on video
games.

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 OPENNESS IN ENTERTAINMENT & VIDEO GRAMES
INDUSTRY IN CHINA (2021)
IMPLICATIONS FOR ENTERTAINMENT & VIDEO GAME INDUSTRY?

Domestic vs Foreign firms:

• Tencent and other domestic game producers that work closely with state
regulators have a near-monopoly over China’s market.

• All imported games have to be approved. In 2019, 1385 domestic games were
approved compared to 185 foreign games.

Sources: Gabriel Crossley. SMH (Sept. 2, 2021) Beijing bans ‘effeminate’ and ‘vulgar’
screen content, caps pay for actors. https://www.smh.com.au/world/asia/beijing-bans-
effeminate-and-vulgar-screen-content-caps-pay-for-actors-20210902-p58o7q.html

Brenda Goh. SMH (Aug. 31, 2021) Game Over: China limits kids to three hours video
games a week. https://www.smh.com.au/technology/video-games/game-over-china-limits-kids-
to-three-hours-of-video-games-a-week-20210831-p58nce.html

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 INSTITUTIONAL VOIDS
Khanna and Palepu, 1997
Institutional Dimension US Japan India

Capital Market Equity-focused; Bank-focused; Underdeveloped,

monitoring by disclosure monitoring by illiquid equity markets
rules and the market for interlocking investments and nationalized banks;
corporate control and directors weak monitoring by
bureaucrats

Labour Market Many B-schools and Few B-schools; Few B-schools and little
consulting firms; company-specific training; management
certified skills enhance development of talent talent scarce
mobility
Product Market Efficient dissemination Efficient information; Little information;
of information; enforcement of liability limited enforcement of
enforcement of liability laws; some activist liability laws; few
laws; activist consumers consumers activist consumers

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 SECTION 2: SPOTTING INSTITUTIONAL VOIDS

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 SPOTTING INSTITUTIONAL VOIDS : CAPITAL MARKETS

Q1/3. How effective are the country’s banks in collecting savings and channelling them into investments?
Can companies raise large amounts of equity in the stock market? Is there a market for corporate debt?

United States/EU Brazil India China

Companies can easily A good banking system The local banking The local banking
get bank loans. The exists, and there is a system is well system and equity
corporate bond market healthy market for developed. markets are
is well developed. The initial public offerings. Multinationals can rely underdeveloped.
integration of stock Wealthy individuals can on local banks for local Foreign companies have
exchanges gives invest in offshore needs. Equity is to raise both debt and
companies access to a accounts. available to local and equity in home markets.
deep pool of investors. foreign entities

Business Implications: Can we raise adequate funding with appropriate capital

structures at a reasonable cost?
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CHANGES TO CAPITAL MARKET IN CHINA (since 1997)
CHINESE BANKS (STATE OWNED) & ENTERPRISES
– are going public and offering shares to retail & institutional investors (doing Initial Public
Offering, IPOs).
– since 2000, have raised >$100 bn from equity markets. In 2005 &2006, about half of
that came largely from the country’s largest banks.
– have also been tapping global capital markets, fortifying their balance sheets, improving
corporate governance and transparency to give China’s industry leaders global
recognition.
– are listing on the HK stock exchange to signal to potential global investors their
commitment to adhere to strict reporting and governance standards as regulations in HK,
unlike Shanghai, are in accordance with international standards.
– have been extremely successful in raising capital from global /international investors/VC.
– In 2006, the Industrial and Commercial Bank of China (ICBC)’s IPO on the HK &
Shanghai stock exchanges, attracted over $430 bn, almost twice the value of Citi
Bank, from global investors.
– In 2014, Alibaba’s (China’s largest e-commerce co.) IPO on NYSE, raised $25 bn, the
largest IPO in history.
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 CHANGES TO CAPITAL MARKET IN CHINA:
MOBILE e-BANKING & FINTECHs
Rise of (2014)
 Mobile e-Banking
 eCommerce firms & Fintech start-ups
 Venture Capital
 Move to Digital Payments

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 WEAKNESS IN CAPITAL MARKETS IN RUSSIA
Russian Banking Sector (early phase: 1990s)
– Unable to attract savings or channel it towards investments
– Lacks resources, capability & trust of the people
– Contribute ~ 3 % overall investment in Russia
– Loans are only 40 % of total bank assets
– Poorly developed banking system makes it difficult for
entrepreneurs to raise capital or diversify risk.
– Perceives commercial lending as risky
– Some banks lack experience with assessing credit risk
– Reforms including stricter accounting procedures & federal deposit
insurance implemented in 2002

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SPOTTING INSTITUTIONAL VOIDS IN PRODUCT MARKETS
Q5. 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 the consumers or only the wealthy ones?
United States Brazil India China
Well-developed, highly Foreign retailers such as Modern retail growing, Modernizing but still
competitive retail sector Carrefour and Walmart but represents only fragmented retail
with strong and varied have growing presence, 3.5% of retail revenue. sector. 100 largest
retail chains and wide- though focused in urban Sector remains highly retailers account for
range of internet-based centers. fragmented; 10% of country’s retail
vendors Shopping centre sales independent grocers sales. Shopping mall
account for 1/5th of constitute 2/3rd of all building is booming.
retail sales. High taxes retail outlets. Foreign
restrain formal retail retailers present; large
growth. domestic companies
30% of retailing is growing retail presence
through informal rapidly
operators.

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 DUALITY OF EMERGING MARKETS

Source: Diaz, Magni and Poh. 2012. From Oxcart to Wal-Mart: Four Keys to reaching emerging market consumers.
McKinsey Quarterly.

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 WALMART IN BRAZIL, INDIA & CHINA
(2014)

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 Unorganised Retail in India

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 Unorganised Retail in India

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 Unorganised Retail in India

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 CHALLENGES TO WALMART IN INDIA &
CHINA
FORMAL INSTITUTIONS
INDIA
› Until 2012, Regulatory restrictions on FDI in retail; protection of mom & pop
shops
› After 2014 – 100% FDI in retail permitted conditional upon setting up front-
end infrastructure for integrating into local supply chains

INFORMAL INSTITUTIONS
CHINA
– Consumer preference for daily shopping of few fresh grocery items.
– Excessive diversity across China’s cities
– Troubled relationship with politicians – both local and national.

POOR INFRASTRUCTURE
India & China - Lack of infrastructure for refrigerated distribution

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 CHALLENGES TO WALMART IN BRAZIL MARKET
FORMAL INSTITUTIONS
› High taxes
› Labor laws (strong unions, litigation due to large scale job losses)
› Financial institutions
INFORMAL INSTITUTIONS
Consumers:
– Penchant for promotions and bargain hunting
– Savings & price conscious
– Preferences for Atacarejo format of retail
– Unwilling to switch to online retailing
INFRASTRUCTURE
Poor infrastructure & sub-national variation
COMPETITORS
Strong competiton (Foreign & Local)
ORGANISATION & STRATEGY
Unstable leadership, unplanned & rapid expansion, sub-optimal location choiee
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SPOTTING INSTITUTIONAL VOIDS : LABOUR MARKETS
Q9. How are the rights of workers protected? How strong are the country’s trade unions?
Do they defend workers’ interests or only advance a political agenda?
United States/EU Brazil India China
The level of unionization Trade unions are strong The trade union Workers can join the
varies among countries. and pragmatic, and this movement is active and government-controlled
Industrial actions take means that companies volatile, although it is All-China Federation of
place in Europe, can sign agreements becoming less Trade Unions.
especially in the with them important. Trade unions Historically, there were
manufacturing and have strong political no industrial actions.
public sectors, but not in connections
the United States.

Business Implications: What constraints do we face in the hiring, firing, and

management of our employees

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 SOURCE: Taking a Bite Out of Apple: Labor Rights and the Role of Companies and
Consumers in a Global Supply Chain. (Feb 10, 2014). WDI Publishing, Univ. of Michigan,
case1-429-372.
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 SUMMARY: INSTITUTIONAL WEAKNESS/ VOIDS

INSTITUTIONAL TRANSITION IN EMERGING MARKETS

– Institutional voids make markets of Emerging Economies less

efficient than those in Developed Countries markets.

– Markets in Emerging Economies are developing or emerging as

they attempt to become as efficient as those in developed
countries.

– In doing so they are reforming their market related institutions.

Hence all Emerging Markets are undergoing institutional
transitions.

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 SECTION 3: RESPONDING TO INSTITUTIONAL VOIDS

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 RESPONDING TO INSTITUTIONAL VOIDS

– HOW DO YOU RESPOND TO THESE VOIDS?

– What strategies can you use?
– How do you navigate within the market?

– IF THERE IS AN OPPORTUNITY IN ENTERING THOSE

MARKETS…
– How do you capture it?

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 RESPONSE STRATEGIES TO INSTITUTIONAL VOIDS
– MARKET STRATEGIES – NON-MARKET STRATEGIES
– (for missing/ underdeveloped – (for weak/ underdeveloped formal &
specialised intermediaries) informal institutions)
 SUBSTITUTION
 INTERNALISATION (including MNE draws upon private information based
alliances) upon prior experience/ knowledge to make
Adapting business models by internalising up for Information void/ lack of local
functions/ activities to make up for lack of public information
external specialised intermediaries in local
market – thereby changing or shaping the  INSTITUTIONAL BORROWING
market context MNE incorporates superior-functioning
institutions of another (developed) country
in lieu of local ones into contracts in
environments with weak contract
enforcement
 SIGNALLING
MNE invests in signalling positive attributes,
commitment to CSR & ethical behaviour to
gain trust, legitimacy, generate goodwill in
host environment
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 RESPONDING TO INSTITUTIONAL VOIDS:
INTERNALISATION STRATEGY
Replicate or Adapt? – GM in China (first entry in 1997 through a JV)

Spotting Voids Question Specific Void Response

Can companies easily obtain Absent market research Replicated: Targeted segment
reliable data on customer tastes providers with relatively known tastes and
and purchase behaviours? where information for small
product modification could be
easily acquired

Can companies access raw Limited intermediaries to Adapted: Built first-class plant
materials and components of identify and assess suppliers with all-inclusive production
good quality? Established technical centre for
design, engineering, and testing

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 BUICK: GM’s FIRST MODEL IN CHINA

Mr Sun Yat-sen took Buick vehicle in the early twentieth century

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 MARKET STRUCTURES

Source: “Emerging Giants, Building World-Class Companies in Developing

The University of Sydney
Countries” Khanna & Palepu, 2006 Page 30
 RESPONDING TO INSTITUTIONAL VOIDS:
INTERNALISATION & COLLABORATION STRATEGY
Compete Alone or Collaborate? MICROSOFT in China (first entry in
early 1990s)

Spotting Void Question Specific Void Response

What restrictions does the Foreign companies not treated Collaborated: Co-developed
government place on foreign even-handedly by regulators localized version of Windows
investment? with local software firm
Can companies access raw Limited expertise in domestic Collaborated: Invested in the
materials and components of software industry development of Chinese software
good quality? industry
Do consumers use credit cards, or Limited access to credit for cash- Adapted: Experimented with
does cash dominate transactions? strapped customers subscription model,
differentiated versions of
products

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 MICROSOFT IN CHINA
NON-MARKET STRATEGY: SIGNALLING

– Importance of being viewed as PARTNER IN PROGRESS

1. Humility

2. Significant investments in developing talent, partner eco-

system and local software companies.

3. Earning trust, earning goodwill, learning to seen as good for

the country

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 APPLE _ FOXCONN: BORROWING INSTITUTIONS
FOR CHINA MARKET

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 RESPONDING TO INSTITUTIONAL VOIDS:
INTERNALISATION STRATEGY
Accept or Attempt to Change Market Context? McDonald’s in Russia
(1990)
Spotting Void Question Specific Void Response
What kind of product-related Limited standards Attempted to change context:
environment and safety Instituted training programs for
regulations are in place? service and quality standards

How strong is the country’s Limited agriculture management Attempted to change context:
education infrastructure, training Imported agriculture specialists
especially for technical and to train farmers
management training?

How strong are the logistics and Underdeveloped hard and soft Attempted to change context:
transportation infrastructures? infrastructure for logistics Established own trucking fleet

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 UBER IN CHINA: INTERNALISATION STRATEGY TO
CHANGE THE LOCAL MARKET CONTEXT
UBER in China
Institutional Void (product market) – No database of consumers,
where located
Institutional Void (product market, labor market) - No database of
suppliers/ registered drivers, where located
TCs to UBER – search & information costs
Strategy –
– replicated its product & business model
– changed the product market & labor market context by
• recruitment, training drivers
• providing subsidies for drivers & price wars with local competitor Didi
Chuxing to attract consumers.
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 RESPONDING TO INSTITUTIONAL VOIDS:
BORROWING INSTITUTIONS & SIGNALLING
Enter, Wait, or Exit? Tetra Pack in Argentina (during 2001-2002 crisis)
Spotting Institutional Void Specific Void Response

How strong are the logistics and Absent cold chain distribution Attempted to change market
transportation infrastructures? context: sold goods that
substituted for voids in cold chain

Is it difficult for multinationals to Asymmetric devaluation and Stayed: renegotiated contracts

collect receivables from local economic crisis rendered with customers, substituting, in
retailers? contracts unenforceable effect, for insurance companies

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 WAIT OR EXIT?
– Uber exits the China market after 2 years of heavy losses ($US 2
bn) & pressure from shareholders/ investors.
– Uber exits the China market by selling its China operations to Didi,
with a 20 % stake in Didi & gaining $ 1bn investment from Didi for
its global operations.
– Overall Uber ends up winning big by exiting the China market
– Should Uber have entered as JV with Didi to avoid losses?

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 GOOGLE IN CHINA: WAIT OR EXIT TO ACCEPT THE
LOCAL MARKET CONTEXT

GOOGLE in China
Political – Social system:
Data Security Breach/ Cyber Attack Information
Strategy –
– Moved operations from Mainland to Hongkong
– Exit China market in 2010

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 REFERENCES FOR INSITUTIONAL VOIDS

– Khanna, T., and Palepu, K. 1997. Why focused strategies may be

wrong for emerging markets. Harvard Business Review, 75 (4),
Jul/Aug: 41-51.
– Khanna, T., Palepu, K. & Sinha, J. 2005. Strategies that fit emerging
markets. Harvard Business Review, Jun: 63-76.
– Khanna, T. & Palepu, K. 2010, ‘Emerging Giants: Competing at
Home’ in T. Khanna and K. Palepu (eds.), Winning in Emerging Markets,
Harvard Business School Press, Boston, Ch 2 & 4.
– Charles.W.L Hill. 2015. International Business: Competing in the Global
Market Place, (10e, p369 – 370), McGraw Hill Education.
– Charles.W.L Hill and Hult, G. Tomas M. 2017. International Business:
Competing in the Global Market Place, (11e, p341), McGraw Hill
Education.
– Doh, J., Rodrigues, S., Saka-Helmhout, A. & Makhija, M. 2017.
International business responses to institutional voids. Journal of
International Business Studies, 48 (3): 293-307.

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 THE END

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