Understanding Emerging Markets

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CAVUMC09_254-283hr 10/15/07 11:23 AM Page 269 Estimating the True Potential of Emerging Markets 269 Middle-class Percent of population income held Per-capita GDP, Country (millions) by middle class (PPP, U.S.$) China 587 45 $8,486 India 534 49 4,031 Indonesia 105 48 4,616 Russia 67 47 13,210 Brazil 65 35 9,531 Mexico 42 41 11,761 Turkey 32 45 9,629 Thailand 28 45 9,638 South Korea 26 55 25,403 Exhibit 9.8 Magnitude of Middle-Class Population for a Sample of Emerging Markets, 2007 SOURCES: International Monetary Fund at www.imf.org, World Bank at www.worldbank.org, and globalEDGE at globaledge.msu.edu respectively. Contrast this to Brazil where the middle class citizens control only about 35 percent 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. Use of a Comprehensive Index to Measure Market Potential While a large and growing middle class points to a promising emerging market, with growing opportunities for internationalizing firms, managers should consider other indicators as well. Exhibit 9.9 presents one such comprehensive approach, the Emerging Market Potential Index (EMPI). The EMPI compares emerging market countries using factors that, together, provide managers of western firms with a realistic measure of export market potential. What makes a good market? For emerging markets, the following dimensions serve as comprehensive indicators of market potential (For a detailed discussion of the EMPI methodology, see Cavusgil, 1997): 13 • Market Size: the country’s population, especially those living in urban areas. • Market Growth Rate: the country’s real GDP growth rate. • Market Intensity: private consumption and gross national income per capita represent discretionary expenditures of citizens. • Market Consumption Capacity: the percentage share of income held by the country’s middle class. • Commercial Infrastructure: characteristics such as number of mobile phone subscribers, density of telephone lines, number of PCs, density of paved roads, and population per retail outlet. • Economic Freedom: the degree to which government intervenes in business activities. 14 • Market Receptivity: the particular emerging market’s inclination to trade with the exporter’s country as estimated by the volume of imports. • Country Risk: the degree of political risk.
CAVUMC09_254-283hr 10/15/07 11:23 AM Page 270 270 Chapter 9 Understanding Emerging Markets Countries Market size Market growth rate Market intensity Market consumption Commercial capacity infrastructure Economic freedom Market receptivity Country risk Overall index Rank Index Rank Index Rank Index Rank Index Rank Index Rank Index Rank Index Rank Index Rank Index China 1 100 1 100 25 23 12 59 16 45 27 1 22 3 13 49 1 100 Hong Kong 24 1 20 23 1 100 13 54 2 97 6 79 2 75 2 90 2 96 Singapore 27 1 18 27 9 59 11 62 6 83 10 71 1 100 1 100 3 93 Taiwan 12 5 6 57 11 57 – – 1 100 8 76 5 23 3 87 4 79 Israel 25 1 12 45 2 79 4 82 3 94 3 86 4 26 5 63 5 78 S. Korea 7 12 16 30 5 63 2 99 5 90 7 78 10 13 4 65 6 75 Czech Rep. 23 2 9 48 13 55 3 97 4 91 2 93 9 15 6 63 7 73 Hungary 26 1 24 14 3 76 1 100 7 78 4 83 8 16 8 62 8 64 India 2 44 3 63 22 37 7 77 25 17 17 44 27 1 16 39 9 55 Poland 14 5 27 1 10 58 6 80 8 71 5 82 14 7 9 58 10 46 Turkey 9 8 7 55 12 57 10 67 12 51 16 45 18 5 20 27 11 37 Exhibit 9.9 Emerging Market Potential Index, 2007 Note: Data for top 11 emerging markets are provided. For the full table, visit http://globaledge.msu.edu/resourceDesk/mpi.asp SOURCE: globalEDGE at globaledge.msu.edu Managers can use the EMPI in several ways. First, they can use the rankings as an objective basis for prioritizing emerging markets in the course of planning international expansion. For example, using the data of Exhibit 9.9, a manager would conclude that China, Hong Kong, and Singapore represent highly attractive export markets. China has steadily risen in the Index in recent years, as well as the central European economies of the Czech Republic, Hungary, and Poland. Second, online EMPI rankings are interactive, so users can rank markets on the basis on any of the eight dimensions making up the overall Index (see the EMPI at globalEDGE TM , globaledge.msu.edu). Third, managers can modify the assigned weights to fit the unique characteristics of their own industry. For example, in evaluating market size, food industry firms may attach more weight to market size, while firms in the telecommunications equipment industry may attach more weight to infrastructure and country risk. Fourth, managers may add additional indicators that are not currently included in the EMPI as a way of refining the tool for greater precision, or they may add additional countries beyond the emerging markets already represented in the Index. Risks and Challenges of Doing Business in Emerging Markets Emerging markets exhibit certain risks that affect their viability for international business. Let’s review the most common, and most detrimental, of these risks.
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