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Summary innovation in emerging market
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Innovation in Emerging Markets LecturesLecture 1 – Introduction – Nature of Emerging Markets
What is an emerging market?
There is a stagnation in the developed world, firms have to look for new avenues for growth. A
possible avenue is represented by the emerging markets.
Benefits for western multinationals:
- Lowering production costs
- New source of demands
- Testing grounds for new ideas (incubators)
Risks of emerging markets:
- Institutional voids and high transaction costs
- Jobs being lost to emerging markets (by shifting production to these regions)
Frequently used criteria for defining emerging markets
Poverty Low- or middle-income country
Low average living standards
Not industrialised
Capital markets Low market capitalisation relative to GDP: the
ability to generate cash by floating to the stock
market
Low stock market turnover and few listed
stocks
Low sovereign debt ratings
Growth potential Economic liberalisation
Open to foreign investments
Recent economic growth
Institutional voids
- Shortly said, these are shortcomings of formal institutions
1
, - Definition: the absence or underdevelopment of specialized intermediaries (information
providers) such as database vendors, and quality certification firms, regulatory corporations
and control-enforcing mechanisms
How developed markets work
- Product markets
Soft infrastructure (market research companies) vs. hard infrastructure (roads, electricity
networks)
- Capital markets: refers to availability of finance for companies to expand (nothing to do with
consumers)
- Labour markets: e.g., educational institutions, recruitment options
Continuum of institutional voids
- Institutional voids can also exist in developed markets -> continuum
- An example of how developed markets are also characterised by institutional voids is the
financial crisis in 2008, or the cryptocurrency markets (lack of regulation)
Article Ramamurti (2012)
- Puzzle 1: given the economic and technological backwardness, emerging markets should not
produce multinationals
These countries do not have global brands, superior talents, so how can they develop MNEs?
- Many EMNEs have ownership advantages in the form of having the ability to function in
difficult business environments, e.g., shown by the prevalence of Chinese FDI in Africa
relative to American FDI in Africa
- Puzzle 2: do multinationals internationalise in wrong ways? (E.g., they do not follow PTI)
EMNEs seem to skip some stages of the PTI model. Some intermediary steps of PTI are
skipped.
What explains the influx of emerging market investments in western markets?
- The world has become a flatter place: EMNEs horizontally move to acquire resources
- Strategies based on exploiting differences rather than similarities: EMNEs are more
interested in exploiting institutional differences rather than avoiding risks
- Booming industries in emerging markets (steel and cement market is booming in China)
whilst these markets are mostly declining in developed markets
PTI
- Physic distance: factors preventing or disturbing firms learning about and understanding of a
foreign environment.
Critique on PTI
- The theory is in general too rigid and deterministic
2
, - Applies to a firm’s initial internationalisation
Lecture 2 – Responding to institutional voids
Business strategy in any economy is driven by three primary markets: product, labour and capital.
Types of institutional voids
- Product market void: difficulty in assessing product attributes, especially quality, due to
information asymmetries. Can be in both upstream and downstream activities.
- In the example in the lecture, Brazil represents the best developed retail sector
Labour market void
- Limited availability of skills and knowledge and protection of worker rights
- In the example in the lecture, Brazil represents the least risk with regards to labour market
void
Capital market void
- Limited availability and accessibility of financial options
- Both Brazil and India look to have the least risk
Not all voids are relevant for the report (only product market void)
International Business Responses to voids (Article Doh)
- Internalisation strategy: internalising activities to reduce transaction costs, e.g. by forming a
business group
- Substitution strategy: draw on privately accrued information instead of collecting public
information.
- Institutional borrowing strategy: observed in contract enforcement situations. You are not
able to hold the other party accountable. As a solution you draw on your home market
institutions. In this way, you build in a contract safeguard.
- Signalling strategy: companies signal that they are credible, for instance through CSR
activities. This enhances a firm’s social capital, reduces its risk and increases external parties’
trust.
3
, Organisational Institutionalist Perspective
- Opportunity spaces between (absent or weak) formal institutions and (multiple) informal
institutions in different social domains like religion and family life.
- Difference with IB Responses is that here the societal aspect is included. IB perspective is
more passive
International Business Perspective only considers the regulative institutions with regard to its
theoretical roots, organizational institutionalist considers all three institutional dimensions by Scott
(cognitive, normative and regulative)
Article Mair & Marti – Entrepreneurship and voids in Bangladesh
- NGO called BRAC is good at socially mobilising the poor in Bangladesh
- The NGO looked to transform several informal institutions by creating an internal repertoire
of resources, physical assets, experiences combined with an external network.
- This paper is looking at an unexplored institutional void; the void which impedes market
participation.
- How do entrepreneurs enable the poor and marginalised to participate in market activities in
a developing country?
Bricolage
- The continuous combinations, recombination and re-deployment of different practices,
organisational forms, physical resources and institutions for purposes than these were
intended for.
- E.g. theatre performances are popular in Bangladesh – its goal is entertainment. BRAC used it
as an education tool, to talk about the importance of the active role that women need to
assume in the market.
- Also BRAC aligned with religious values – these were Muslim values. One of the pillars of
Islam is to help someone who is needy.
Informal vs. formal institutions
- Formal institutions: written rules that are officially enforced by the state
- Informal institutions: unwritten cultural and normative rules
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