Next-11 Emerging Markets
The two-speed recovery has been confirmed as an enduring reality for businesses around the world. For many industries, it has become clear that the vast majority of growth in the near to medium term will occur within emerging markets, and that the companies that compete in them need to be there in order to participate in that growth.
The increasing importance of emerging markets in the global economic landscape is no longer a futuristic idea but a measurable fact. As a consequence, investors are realizing the importance of keeping up to date on emerging markets’ key developments so as to find the right opportunities. Given the sheer number of countries under the label “emerging market”, it seems necessary to narrow down the list to a number of key economies.
Several groupings of countries have been coined so far, the most widely known being Brazil, Russia, India and China (BRIC). While path-breaking when coined, the concept of BRIC seems outdated today given increase growth differential among the four countries involved. Furthermore, it seems difficult for the group to be revising membership any time soon as it is not based on objective criteria. This is the same problem that the G7 and G10 have suffered from for many years.
The Next 11 countries are Bangladesh, Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam. Although varied both geographically and economically, these 11 countries have features in common that are believed to single out their high economic potential:
- All have large and growing populations. Between 1980 and 2008, population growth was highest in Pakistan at 110.8%, with the lowest being in South Korea, with 28.4% period growth
- Of the N-11 countries, Indonesia had the largest population, with 228.9 million people, while South Korea had the smallest at 47.6 million
- Mexico had the highest sum of private final consumption expenditure, totaling US$567 billion. Vietnam had the lowest, at US$36.8 billion
- All 11 countries demonstrate population growth rates above those of Western developed economies, indicating greater consumer market potential over the medium term. Large populations represent a wide potential pool of consumers for businesses to target, while high growth rates mean that this market will expand rapidly, providing proportionally more potential customers
Sustained strong economic growth in the N-11 countries is creating new consumer markets that can be targeted by businesses. However, differences in levels of growth mean that some higher-growth countries may prove more profitable for businesses.
- While the N-11 countries share certain characteristics, they are not at the same level of economic development so consumer-focused businesses must target these markets in different ways:
- The N-11 countries can be categorized in two different ways: developing economies and newly industrialized economies. These are both ’emerging economies’, but the latter have greater industrial capacity and are typically beginning to export heavy manufactured or refined products, while the former are still largely reliant on primary exports, with some industrial capacity. Typically, developing economies have lower standards of living than newly industrialized economies
- Of the N-11 countries, Bangladesh, Iran, Nigeria, Pakistan and Vietnam can be categorized as developing economies, while all the others except South Korea can be categorized as newly industrialized economies. South Korea is the only N-11 economy that could be categorized as a developed economy, owing to its high level of industrialization and relatively stable macroeconomic fundamentals
- For example, South Korea is a predominantly technological state, exporting manufactured goods and services expertise. By contrast, Bangladesh is an exporter of primary goods while Nigeria is an oil exporter and an exporter of lower-level manufactured goods
- Sales of high-end consumer goods are therefore likely to be higher in a higher income country such as South Korea, while a lower income N-11 state may be more suitable for targeting more basic consumer durables
Consumer incomes in N-11 countries are not necessarily comparable, but are at different levels and will grow by varying rates in the long term. This allows international businesses to target these markets for different products.
N-11 business environments
- The N-11 countries are also different in their business environments, affecting their relative attractiveness as an investment destination:
South Korea was ranked 30th out of 178 countries in the World Bank’s Ease of Doing Business survey, the highest of the N-11 countries. This is due to its well-regulated tax and investment code, heavily influenced by the US model, and the adherence of state and financial institutions to this code
- Iran is ranked the lowest at 135th. This reflects its authoritarian state-owned business environment, which in many cases actively deters foreign investors. In other cases, the regulatory environment is opaque and arbitrary, offering few incentives for investment
- Turkey received the greatest amount of foreign direct investment of the N-11 countries. This reflected its unique role as a bridge between Europe and the Middle East, and its consequent position as an export and re-export hub
- By contrast, Iran received the least foreign direct investment, at US$901 million, indicating its investor unfriendly business environment and also the economic sanctions imposed on it by the USA
Business environment is a major contributing factor for potential growth, since investors can easily choose to invest elsewhere if operating environments are too difficult, restricting the potential for wage and job growth in those countries.
Both domestic and international factors will affect growth prospects for the N-11 countries going forward:
- Demand from key export markets will determine economic growth. For the N-11 countries, the USA and China are the main export markets. Although US GDP growth is forecast to reach only 1.9% year-on-year in 2008 owing to ongoing concerns about poor credit, China’s economy will grow by 10%
- Those countries that are most stable – whether via democracy or dictatorship – will have better prospects for consistent growth. These include South Korea, Vietnam and Mexico.
- A key factor for Iran will be the continuation of economic sanctions by the USA, which would curtail growth
But simply relying on past approaches used to expand into other developed markets is not sufficient; companies need to define an emerging market entry strategy and operating model that links directly to their long-term corporate strategy and is tailored to handle the different success drivers and unique characteristics of each market. While the specifics will vary both by industry and country, what follows are several key general considerations for successful emerging market entry.