MBA 8439 Bailout Doh

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					Global Economic
Crisis and the
Emerging Markets
Jonathan Doh
Manny Nunez

Jonathan P. Doh
July 6, 2009
Outline of our Session
 Key global trends
   and the rise
   of emerging                              Emerging
      markets                               markets as
                                           laboratories
              Emerging markets             of innovation
              business systems
               and relationships


                             Emerging markets
                                  and the
                              economic crisis
Is the world flat?
  1.     11/9/89: when the walls came
         down and the windows went up
  2.     8/9/95: when Netscape went public
  3.     Workflow Software: let’s do lunch –
         have your application talk to my
         application
  4.     Open sourcing: self-organizing
         collaborative communities
  5.     Outsourcing: Y2K
  6.     Offshoring: running with gazelles,
         eating with lions
  7.     Supply-chaining: eating sushi in
         Arkansas
  8.     In-sourcing: what the guys in funny
         brown shirts are really doing
  9.     Informing: Google, Yahoo!, MSN
         Web Search
  10.    The Steroids: digital, mobile,
         personal, and virtual (…wireless the
         icing on the cake)


        >3
A “spiky”world: population




     >4
A “spiky”world: economic activity




     >5
A “spiky”world: innovation




     >6
Reflection question

  • From your perspective, is the world:

     • Round?


     • Flat?


     • Spiky?


     >7
Changing balance of economic power
Shift in World GDP
                              2005 % World GDP




                                6%
                       4%2%                      21%
                  8%
                3%


                                                       21%

                       35%

           US                           EU
           Asia                         Russia
           Latin America                Middle East and North Africa
           Sub-Saharan Africa           Other
                                                       Source: Economist Intelligence Unit.

      >8
Changing balance of economic power
Shift in World GDP
                            2010 % World GDP




                          2%    3%
                     4%                             20%
             8%

       3%




                                                                      20%
            40%
           US                         EU
           Asia                       Russia
           Latin America              Middle East and North Africa
           Sub-Saharan Africa         Other
                                                   Source: Economist Intelligence Unit.

      >9
Changing balance of economic power
Shift in World GDP
                           2020 % World GDP
                     5%   2% 3%
                                                           18%
         8%

  3%




                                                                                     19%



       42%
          US                         EU
          Asia                       Russia
          Latin America              Middle East and North Africa
          Sub-Saharan Africa         Other
                                                  Source: Economist Intelligence Unit.

       >10
Changing balance of economic power
At present, U.S. by far largest GDP

                                   2005 GDP (US $bn at PPP)

      14000

      12000

      10000

       8000

       6000

       4000

       2000

             0
                 United States   China   Japan    India   Germany          United
                                                                          Kingdom




                                                              Source: Economist Intelligence Unit.

       >11
Changing balance of economic power
China surpasses U.S. in 2020 (ppp basis)

                                        GDP 2020 (US$bn at PPP)


       30,000

       25,000

       20,000

       15,000

       10,000

        5,000

            0
                United States   China        Japan     India      Germany       United
                                                                               Kingdom




                                                                     Source: Economist Intelligence Unit.

      >12
Relative size of Big 4 economies
market exchange rates
Constant 2004 US $bn
 40000
 35000
 30000
 25000                                                                                                              US
                                                                                                                    China
 20000
                                                                                                                    India
 15000
                                                                                                                    Japan
 10000
  5000
     0
           2006
                  2009
                         2012
                                2015
                                       2018
                                              2021
                                                     2024
                                                            2027
                                                                   2030
                                                                          2033
                                                                                 2036
                                                                                        2039
                                                                                               2042
                                                                                                      2045
                                                                                                             2048
    >13
Relative size of Big 4 economies
PPP exchange rates
Constant 2004 US $bn at PPPs
 60000

 50000

 40000                                                                                                              US
                                                                                                                    China
 30000
                                                                                                                    India
 20000                                                                                                              Japan

 10000

     0
           2006
                  2009
                         2012
                                2015
                                       2018
                                              2021
                                                     2024
                                                            2027
                                                                   2030
                                                                          2033
                                                                                 2036
                                                                                        2039
                                                                                               2042
                                                                                                      2045
                                                                                                             2048
    >14
Changing balance of economic power
China and India propel growth in Asia

                            Contribution to Global Growth (2006-2020, %)


             30     26.7
             25

             20             15.9
                                     12.2
             15

             10
                                               2.4      2.3      2.3      2.1
              5                                                                       1.9

              0
                  China    U.S.    India    Brazil   Russia Indonesia   South       U.K.
                                                                        Korea



                                                                        Source: Economist Intelligence Unit.

       >15
Changing balance of economic power
Greater Asia will generate 67% of global jobs 2005-20


             New Jobs in the World Economy (% of world net
                            increase 2005-20)
                                      3%

                          19%              2%    10%

                                                            14%



                    23%
                                                29%



      U.S.   EU25     Latin America   China     India      Other Asia            Other
                                                        Source: Economist Intelligence Unit.


      >16
Changing balance of economic power
High (but slowing) GDP growth in China…


                                                Real GDP Growth (% )

  8   7.6

  7
                   6
  6
                              5
  5                                     4.5
                                                     4         3.8         3.8                               China
  4                                                                                    3.4
                                                                                                             U.S.
            2.8                                                      2.7         2.7         2.6   2.8 2.6
  3                                                      2.5
                       2.2        2.1         2.2
  2
  1
  0
      2005-10     2010-15    2015-20    2020-25     2025-30    2030-35     2035-40     2040-45     2045-50




        >17
Changing balance of economic power
…Makes China largest (absolute) economic power by 2040

                                   China vs. U.S.: GDP

            60000

            50000
                                                  2040-2045
            40000
                                                                        China
            30000
                                                                        U.S.
            20000

            10000

                0
                    2005 2010 2015 2020 2025 2030 2035 2040 2045 2050




      >18
Changing balance of economic power
But growth is uneven

                   Rural and urban real incomes in China,
                                 1990=100

            350

            300

            250

            200                                             Rural
            150                                             Urban

            100

             50

              0
                  1990 1992 1994 1996 1998 2000 2002 2004



      >19
Emerging countries’ share of GDP

               Emerging and developing countries' share of
                              world GDP
    49.00

    47.00

    45.00

    43.00

    41.00

    39.00

    37.00

    35.00
            Y1994 Y1995 Y1996 Y1997 Y1998 Y1999 Y2000 Y2001 Y2002 Y2003 Y2004 Y2005 Y2006 Y2007 Y2008 Y2009

                                   % of world total, calculated at PPP exchange rates




    >20
Changing global demographics
The global population is aging
      Sourc




             30%

                    Percent of Population                                                                26%
                                                                                                   25%
             25%    Aged 65 & Over:
                    History and UN Projection                                              23%

                                                                                19%
             20%
                                                                         16%
                                                                   14%                                   15%
             15%
                                                         13%                                       13%
                                                12%
                                       10%                                                 10%
             10%               9%
                     8%                                                         8%
                                                                         6%
                                                                   5%
                     4%        4%               4%       4%
             5%                        4%



             0%
                    1950               1970             1990             2010              2030          2050


                                                 Developed World                Developing World

                   Source: UN (2005)




       >21
Changing global demographics
Fertility rates falling below replacement in G-7


                                4.0                                                         2.1
    Lifetime Births per Woman




                                                                                    3.6
                                3.5      3.3      Total Fertility Rate,
                                3.0                       2.9           2.8
                                                                                                               2.5         2.5
                                2.5
                                               2.0                                                 2.0
                                2.0                             1.9
                                                                              1.7         1.5
                                1.5                                                                      1.3         1.3         1.3
                                1.0
                                0.5
                                0.0




                                                                      1960-1965                 2000-2005
                                      Source: UN (2005)




                                >22
Changing global demographics
Life expectancy growing in G-7

            85
                    Life Expectancy at Birth, by Country                                81.9
                                                          79.4      79.7      80.0
            80                       78.3      78.6
                      77.3

            75
        Years




            70   68.9           69.2                             69.1
                                            67.5
                                                      66.5                 66.0
            65                                                                       63.9


            60
                    US               UK     Germany    France     Canada     Italy    Japan

                                              1950-1955      2000-2005
                 Source: UN (2005)




      >23
Changing global demographics
Some G-7 aging faster than others
     40%                                                                      39%      39%
                 Percent of the Population
     35%         Aged 65 or Over, by Country
                                                                     31%
     30%
                                          27%          27%
                                  24%
     25%

                   20%                                                      20%      20%
     20%                                                          19%
                                16%                  16%
     15%                                13%
               12%

     10%

      5%

      0%
                  US             UK     Canada       France       Germany    Italy   Japan

                                              2005         2050
            Source: UN (2005)




      >24
Inversion of age pyramid
1960 Distribution in Developed World
                                                                                            100+

             Men                                                              Women         90-94
                                                                                                    Year:
                                                                                            80-84
                                                                                                    1960
                                                                                            70-74

                                                                                            60-64   Median Age:
                                                                                            50-54   29.6
                                                                                            40-44

                                                                                            30-34

                                                                                            20-24

                                                                                            10-14

                                                                                            0-4

    50000         40000   30000   20000   10000   0   10000   20000   30000     40000   50000


            >25
Inversion of age pyramid
2050 Distribution in Developed World
                                                                                            100+

             Men                                                              Women         90-94
                                                                                                    Year:
                                                                                            80-84
                                                                                                    2050
                                                                                            70-74

                                                                                            60-64   Median Age:
                                                                                            50-54   46.4
                                                                                            40-44

                                                                                            30-34

                                                                                            20-24

                                                                                            10-14

                                                                                            0-4

    50000         40000   30000   20000   10000   0   10000   20000   30000     40000   50000


            >26
Changing global demographics
Developing countries on the rise
             12 Largest Countries Ranked by Population

             1950               2000                2050
       1     China              China               India
       2     Soviet Union       India               China
       3     India              United States       United States
       4     United States      Indonesia           Pakistan
       5     Japan              Brazil              Indonesia
       6     Indonesia          Russian Fed.        Nigeria
       7     Germany            Pakistan            Bangladesh
       8     Brazil             Bangladesh          Brazil
       9     United Kingdom     Japan               Congo
      10     Italy              Nigeria             Ethiopia
      11     France             Mexico              Mexico          Source: UNDP (2005)

      12     Bangladesh         Germany             Philippines

       >27
Global trends in health care
Medical tourism on the rise
   In 2008 Deloitte found that
  "medical tourism" is a hot
  trend among U.S. health care
  consumers
   Nearly 40 % said they
  would travel outside the
  country for medical treatment,
  if the quality was comparable
  and the cost was cut in half
   Market drivers for medical
  tourism:
  •Cost savings;
  •Comparable or better quality
  health care;
  •Shorter waiting periods thus
  quicker access to care
   World medical tourism          Assumptions:
  market is estimated to have      • In 2007, approximately 750,000 Americans traveled outbound for medical care.
  reached $60 billion in 2008,     That number will increase to 6 million by 2010. Therefore the growth rate from
  and grow to $100 billion by      2007 to 2010 is 100% for the base estimate.
                                   • After 2010, the growth rate will begin to fall due to supply capacity constraints in
  2010. Over 35 countries are      foreign countries.
  serving around 1 million         • Upper/Lower bound estimates assume the growth rate is higher/lower than the
  medical tourists annually        base case estimate.
                                   •Source: 2008 Deloitte Development LLC
  Medical Tourism Video

       >28
Global trends in health care
Medical tourism on the rise




       >29
Reflection question

• Which aspects of the key global trends outlined
  here do you believe are the most meaningful and
  long-lasting?
• Which aspects of the demographic trends are
  most profound?
• Do you believe the projections re: growth of
  global health care tourism are realistic?
Emerging markets essentials

  1. What is an emerging market?


  2. What are these markets emerging from?


  3. What are these markets emerging to?


  4. What signals help identify a country as
     emerging?


  5. What signals suggest a country is submerging?

    >31
Emerging market: one definition
               •       Gross National Income (GNI)/capita (US$):
  Definition           $1,001 (Lower) to $9,999 (Upper)
                       Excludes countries:
                       >$10,000 GNI/capita – deemed developed market
                       <$1,000 GNI/capita – deemed GAVI/developing market
                       •       Source: World Bank



                   •       World Bank definition of GNI:
  Rationale                Used 3-year average of exchange rates to ‘smooth’ out annual
                           fluctuations due to policies and interventions
                           Classified countries in low-, middle- and high-income categories
                           •     Source: World Bank




      >32
Developing countries v. emerging markets


      Developing Countries                   Emerging Markets
      (prior to 2000)                        (Since 2000)

  •   High risk for foreign investors   •   Risks increasingly manageable
  •   Economically underdeveloped       •   Faster income growth than
  •   Technologically inferior              developed countries
  •   Low purchasing power              •   Technologically competitive
  •   Host government restrictions      •   Increasing purchasing power
  •   Few significant opportunities     •   Host government liberalization
      for foreign business              •   Greater opportunities for
                                            foreign business: BOP, OS




        >33
My perspective on emerging markets

 • Developing countries “on the move”
 • Consistent pattern of policy reform
    • Privatisation (e.g. sale of SOEs)
    • Market liberalisation (e.g. trade, regulatory)
    • Monetary and Fiscal policy (independent Central Bank;
      efficient tax system)
 • Resultant record of sustainable growth
    • Faster than average annual growth
    • Growth in private (often foreign) capital)
    • Increased trade and FDI
 • Sustained social progress
    • Improved education, health care, etc


    >34
Types of emerging markets

  • BRIC: Big emerging markets
     • China and India: “Giants”
     • Others: Brazil, Russia, Mexico

  • “Second tier” but coming on fast
     • Vietnam, Indonesia, Malaysia, Thailand

  • “Graduates”
     • South Korea, Taiwan, Singapore?

  • “Transition” economies
     • Poland, Russia, Hungary

  • “Other”
     • Turkey, Middle East economies

    >35
BRIC Economies
(Brazil, Russia, India, China + Mexico?)

   • Fastest growing, dynamic, highest potential EMs
      • Leaders in respective regions
      • Between 2000-2007, contributed 28% of global growth
      • More than 15% of global FDI and trade; 30% FX
        reserves
      • China overtakes US by 2040; India beats Japan by 2033
   • Significant similarities among each
      • All faced substantial acceleration in growth, democratic
        political reform, market-oriented reforms manifest in
        FDI and some macroeconomic and reform setbacks
   • Substantial differences as well
      • Each has had difference experience in pace, breadth,
        depth of reform, with some now experiencing some
        backtracking in their commitment to pol/econ reform


      >36
Outline of our Session
  Key global trends
    and the rise
    of emerging                            Emerging
       markets                             markets as
                                          laboratories
              Emerging markets            of innovation
              business systems
               and relationships


                            Emerging markets
                                 and the
                             economic crisis
Emerging markets: Institutional systems

   1. Institutional systems are a critical and
      overlooked variable in global markets


   2. Different countries look differently
      across these measures


   3. Important implications for strategy



    >38
Institutional systems:
Political/social systems
          • Political Accountability: free/fair elections
          • Political Accountability: independent judiciary
          • Government regulatory interference
          • Protection of private property rights
          • Independence of quasi-judiciary agencies
          • Religious, linguistic, ethnic, geographic
            tensions
          • Civil society and NGOs and Corruption
          • Development/independent finance regulator

Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June


             >39
Institutional systems:
Openness
          • Receptivity to/restrictions on FDI
          • Local content/ownership requirements?
          • Presence/quality of foreign intermediaries
          • Support/constraints to new venture
            development
          • Restrictions on portfolio investment/FX
          • Import tariffs on intermediate/capital goods
          • Participation in FTAs/EIAs
          • Free flow of executives in/out of country
          • Financial liberalization (WTO/unilateral)
Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June


             >40
Institutional systems:
Product markets/distribution
     • Development of transportation infrastructure
     • Development of distribution systems/networks
     • Existence and sophistication of market research
     • Availability of raw materials/dependability of
       suppliers
     • Government restrictions on FDI
     • Nature/quality of retail/credit system
     • Consumer receptivity to new products/services
     • Ability to develop network of branches or other
       financial distribution systems
Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June


             >41
Institutional systems:
Labor markets
     • Educational Development
     • Employee mobility
     • Quality of training/management development
     • Pay/performance and motivation
     • Receptivity to foreign managers
     • Laws and regulations on labor reduction
     • Consumer receptivity to new products/services
     • Ability to deploy foreign nationals and hire/fire
       local employees

Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June


             >42
Institutional systems:
Capital markets

         • Development of banking/insurance/ securities
         • Ownership/transparency of institutions
         • Sophistication/liquidity of debt/equity markets
         • Reliability/quality of information on markets
         • Corporate governance/board independence
         • Regulatory effectiveness
         • Takeover/bankruptcy laws



Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June


             >43
Emerging market institutions:
Shape, adapt, or withdraw?



           • Shape: Institutional system in flux may be
             subject to shaping (China/financial services,
             health care?)
           • Adapt: Established and well-developed
             institutional system suggests adaptation (Chile,
             telecom)
           • Withdraw: Inferior and unpredictable
             institutional system suggests withdrawal
             (Venezuela, Bolivia oil and gas)

Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June
                                                                                                                      >44
Reflection Question

• Which institutional category is most important for
  the industry or area you cover?
• Which specific aspect of that institutional
  category is most important?
• Can you think of a specific example of how a firm
  “shaped” and emerging markets institutional
  environment?
Global-local relationships
         • Global companies seek partners with local
           knowledge, distribution, government connections

         • Local companies seek avenues into global
           economy and seek foreign partners with
           technology, managerial expertise, brand

         • Local governments seek relationships that
           capture employment, technology and other
           direct/indirect benefits and often serve as
           intermediaries




Adapted from authors’ reseearch and Adarkar, A., Adil, A., Ernst, D., and Vaish, P.
Emerging market alliances: Must they be win-lose? McKinsey Quarterly, 4: 120–137.

             >46
Four possible outcomes of Global-local alliance

                   Sustainable
                     Power
                    balance


    Power shift                    Power shift
                     Initial
   toward local                   toward global
                    alliance
      partner                        partner


                    Power
                    collision

     >47
Global-local relationships:
Hofstede’s Cultural Dimensions
             Power                  • Extent to which less powerful members of
                                      institutions and organisations accept that
            Distance                  power is distributed unequally
                                         • High power distance countries: people blindly
                                           obey orders of superiors, centralised
                                           organisation structures
                                         • Low power distance countries: flatter and
                                           decentralised organisation structures, smaller
                                           ratio of supervisors




Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors,
institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage.

             >48
Global-local relationships:
Hofstede’s Cultural Dimensions
             Power                   • Extent to which people feel threatened by
            Distance                   ambiguous situations and have created
                                       institutions to avoid such situations
                                          • High uncertainty avoidance countries: people
          Uncertainty                       have high need for security, structured
                                            organisational activities, more written rules,
          Avoidance                         less risk taking
                                          • Low uncertainty avoidance countries: more
                                            willing to accept risks associated with
                                            unknown, less structured organisational
                                            activities, fewer written rules, more risk taking
                                            by managers




Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors,
institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage.

             >49
Global-local relationships:
Hofstede’s Cultural Dimensions
                    • Individualism: Tendency of people to look
       Power
                      after themselves/family
      Distance
                                           • Countries high in individualism: support work
                                             ethic, greater individual initiative, merit
          Uncertainty
                                             promotions
          Avoidance
                                      • Collectivism: Tendency of people to belong to
        Individualism/                  groups or collectives and to look after each
         Collectivism                   other
                                           • Countries high in collectivism: less support of
                                             work ethic, less individual initiative, seniority
                                             promotions




Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors,
institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage.

             >50
Global-local relationships:
Hofstede’s Cultural Dimensions
       Power         • Masculinity: dominant social values are
      Distance         success, money, things
                                           • Countries high in masculinity: great
          Uncertainty                        importance on earnings, recognition,
          Avoidance                          advancement, challenge, and wealth.
                                      • Femininity: a culture in which the dominate
        Individualism/                  social values are caring for others and the
         Collectivism                   quality of life
                                           • Countries high in femininity: importance on
         Masculinity/                        cooperation, group decision, employment
         Femininity                          security.




Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors,
institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage.

             >51
Cultural rankings of emerging markets, US and EU
                           Power     Uncertainty   Individualism
                          Distance   Avoidance     (Collectivism)   Masculinity
                 China          80           40                20           66
            Philippines         94           44                32           64
              Malaysia         104           36                26           50
                 India          77           40                48           56
     Czech Republic             57           74                58           57
              Hungary           46           82                55           88
                Poland          68           93                60           64
              Slovakia          57           74                58           57
                Mexico          81           82                38           69
                 Brazil         69           76                38           49
           South Africa         49           49                65           63
                    US          40           46                91           62
             EU (avg)           45           74                61           59
     >52
Outline of our Session
  Key global trends
    and the rise
    of emerging                             Emerging
       markets                              markets as
                                           laboratories
               Emerging markets            of innovation
               business systems
                and relationships


                             Emerging markets
                                  and the
                              economic crisis
Global pushback against business




    >54
Global pushback against business
  • Prior to crisis, some developing/emerging
    markets questioning Western economic models
    (“Washington consensus)

  • Trend especially apparent in Latin America
    (Venezuala, Ecuador and Bolivia)

  • China, others blame crisis on U.S. and capital
    markets model of finance

  • In general, however, emerging markets doing
    better than developed countries throughout crisis
    with some exceptions (Central/Eastern Europe)



    >55
  In U.S., trust in business at lowest level
  including post-Enron
                                                                                                       20
                                                                                                      point
   60%
                                                                                             58%      drop
                                                   US     UK/France/Germany
   55%
                                                                                   53%
                                                        51%

   50%                                                                    49%
             Enron, the dot-com              48%                 48%
             bust and September
                     11
   45%         44%             44%



                                       41%
   40%                                                     40%
                                                                             38%
                                                                                               36%       38%
                                                                    36%              34%               36%
   35%                                          35%

                     32%                                                                  U.S. is the new
   30%                                                                                        Europe
               2001           2002           2003       2004     2005     2006     2007      2008    2009


Source: Edelman Trust Barometer 2009
                56
Trust in leaders
                                       NGO leaders                                               52
                       Leaders at the U.N.                                               42
         Spiritual/religious leaders                                                     41
        Leaders of Western Europe                                                    36
     Managers of global economy                                                      36
Managers of national economy                                                        35
                       Executives of MNCs                                           33
                      Leaders of the U.S.A.                                    27

                                                        0     10 20 30 40 50 60
                          Percentage Saying “A Lot” and “Some Trust”
                                        Average Across All Countries Surveyed
                                        Trust in Leaders: Percentage Saying “A Lot” and “Some Trust”
Source: Edelman Trust Barometer 2009

                >57
Technology most trusted industry sector globally




Source: Edelman Trust Barometer 2009
                58
Global economic crisis indicators


     2009 down turn in world                               Global growth est. cut by 2.6%
         GDP and trade                                     points by World bank March 2009
                                                           vs. November 2008 forecast




           Global Economic Prospects 2009 Forecast Update, World Bank, March 30, 2009,
           http://siteresources.worldbank.org/INTGEP2009/Resources/5530448-1238466339289/GEP-
           Update-March30.pdf
     >59
Real GDP growth forecast (March 2009)
(percent change from previous year)




       Source: World Bank.
        Notes: a: GDP in 2000 constant dollars, 2000 prices and market exchange rates. b: GDP measured at 2000 PPP weights. c. GDP figures for
       South Asia refer to fiscal years (FY). The FY runs from Jul-1 through Jun-30 in Pakistan and Bangladesh; and from Apr-1 through Mar-31 in
       India. Due to reporting practices, where FY2007/08 is reported in 2008 for Pakistan and Bangladesh and in 2007 for India, there is an
       illusion of a lag in the impact of the global crisis upon Pakistan and Bangladesh compared with India.
       >60
Global economic crisis indicators
   Global GDP estimated to
  have fallen by 5 percent in the
  fourth quarter (annualized),
  led by advanced economies,
  which contracted by 7 percent.
   GDP declined in the fourth
  quarter by around 6 percent in
  both the U.S. and Euro area,
  plummeted at a post-war
  record of13 percent in Japan.
   Growth also plunged across
  a broad swath of emerging
  economies, reflecting the
  confluence of weakening
  external demand, tightening
  financing constraints, and
  plunging commodity prices.        Source: IMF Report: Global Economic Policies and Prospects, Group of
                                    Twenty Meeting of the Ministers and Central Bank Governors, March
                                    13–14, 2009, London, U.K.

       >61
Vulnerabilities of European banks with substantial
exposures to Central/Eastern Europe
The vulnerabilities of banks
  with substantial
  exposures to Central and
  Eastern Europe are raising
  perceptions of sovereign
  risk in advanced
  economies. Many banks’
  exposures are high
  relative to their home
  country GDP. Austrian
  banks’ exposures, for
  example, amount to
  about 75 percent of
  Austria’s GDP.

Other countries with
   relatively high exposures
   to emerging Europe
   include Switzerland,
   Belgium, the Netherlands,   Source: IMF Report: Global Economic Policies and Prospects,
   and Sweden.                 Group of Twenty Meeting of the Ministers and Central Bank
                               Governors, March 13–14, 2009, London, U.K.
Vulnerability indicators by region
Current account balance

   Over the past few
   years, current account
   balances have become
   more divergent.
   Emerging Europe has
   seen large and
   sustained deficits, while
   many countries in Asia,
   the Middle East, and the
   Commonwealth of
   Independent States
   (CIS) have shifted to
   surpluses— partly
   because of the              Source: IMF, World Economic Outlook (WEO), April 2009,
   commodity price boom.       http://www.imf.org/external/pubs/ft/weo/2009/01/index.htm
Economic Indicators
Retail Sales




           Source: IMF Report: Global Economic Policies and Prospects, Group of Twenty Meeting of the
           Ministers and Central Bank Governors, March 13–14, 2009, London, U.K.
Economic Indicators
Commodity Prices and Inflation




        Source: IMF Report: Global Economic Policies and Prospects, Group of Twenty Meeting of the
        Ministers and Central Bank Governors, March 13–14, 2009, London, U.K.
The Collapse Of Emerging-Market Currencies




      Council on Foreign Relations (CFR), Lessons of the Financial Crisis, Council Special Report No. 45, March
      2009, http://www.cfr.org/publication/by_type/special_report.html
iShares MSCI Emerging Markets Index ETF
(historical data for 1 yr prior to May 18, 2009)




    Source: iShares MSCI Emerging Markets Index ETF, MarketWatch, 19 May 2009,
    http://www.marketwatch.com/investing/fund/EEM/charts
Outline of our Session
  Key global trends
    and the rise
    of emerging                             Emerging
       markets                              markets as
                                           laboratories
               Emerging markets            of innovation
               business systems
                and relationships


                              Emerging markets
                                   and the
                               economic crisis
Emerging markets as laboratories of innovation

   • ‘Strategy is revolution; everything else is
     tactics’” – Gary Hamel
   • Challenging dominant logic: “New game, rules”
   • Take any industry - three kinds of companies:
          1. rule makers - incumbents that built the industry, e.g.
             United Airlines or IBM
          2. rule takers - companies that pay homage to the
             industrial ‘lords’, e.g. US Airways or Olivetti
          3. rule breakers - industry revolutionaries intent on
             overturning order, e.g. Southwest or Dell
   • For companies in categories 1,2; emerging
     markets provide laboratory to move to 3
    >69
Innovation in emerging markets

   • One innovation strategy for emerging markets
     focuses on the “Base of the Pyramid”
   • To date, focus has been on upper and middle-
     class consumers in emerging markets
   • BOP shifts emphasize to larger segment of
     lower income consumers that have been
     largely ignored
   • Provides opportunity for integration of
     economic strategy and dramatic growth
     through product and process innovation


    >70
The world pyramid

  Purchasing Power                                         Population in millions
  Parity in U.S. dollars
                           >$20,000              200-300
                                        Tier 1



           $2,000-20,000              Tiers 2- 3      600-800



   <$2,000                        Tier 4                            5500


     >71
Distribution of income and MNC strategy
Traditional and emerging focus for India



                 Traditional
                 MNC Business
                 Model                 10-20 million, Rich
       Some MNCs?                            PPP> $15,000, 70-100 m
                 Local
  Future         Firms                          PPP $ 5-15,000, 150m
  Opportunity?
                                                        PPP $2-15,000, 200m

                                                             PPP > $2000, 600m


                                Source: CK Prahalad

       >72
Innovation via Base of the Pyramid (BOP)

   • Pursuing the “base” forces rethinking of
     conventional wisdom about:

          • Technology and business models

          • Scale and profitability

          • Price-performance relationships

          • Productivity and capital efficiency

          • Sustainable development

    >73
BOP: P&G
  • Created Nutristar: children’s powdered
    health drink
      • initially failed in Philippines
      • re-launched in Venezuela with help of NGOs, USAID,

  • PuR: water filtration system for low-
    income households marketed as single
    serving sachets
      • contain same ingredients as municipal water systems
      • Each sachet is treats up to 10 liters of water
      • One sachet added to a bucket of dirty water forces
        all bacteria, viruses and pollutants to bottom

    >74
BOP: P&G in China
   • Former view: make best, then cut cost;
     now “cheaper and better”
   • Product adaptation (using local R&D)
     for middle-low-income
      • Basic toothpaste using salt as cleaning agent
      • Expand sales of Tide beyond top 8% consumers by
        creating simpler formulas - Tide Clean White – no
        softener because unnecessary for hand washing
      • Sell diapers to consumer who did not see need;
        make attractive by getting more hours of absorbency
   • Greater China revenues up from $1.1 billion in
     2000 to $2.5 billion in 2007; 6% of total
    >75
Tata’s Nano

   • 2009: Tata unveils world's cheapest car -
     100,000 rupees (£1250)


   • Vehicle aimed at Indian and other
     developing countries where car ownership
     is low; competes against bicycles and
     motorcycles


   • Engine 600-800cc mark; goal is to sell 1
     million units within 5 years

    >76
Tata’s Nano

  • Ratan Tata told his designers that the
    vehicle “must not be seen as stripped-
    down version of a normal car”


  • To keep costs low, many parts made of
    plastic and other composites


  • Car to be sold in kit form, with final
    assembly of the vehicles to be
    completed in rural workshops in India
    >77
Tata’s Nano




    >78
GE in China

  • GE launching $6 billion health-care initiative that
    called "healthymagination
  • Resetting GE's health-care business toward rural
    and emerging markets and priorities of the
    Obama Administration
  • Develop and deploy low-cost equipment, such as
    the portable ultrasounds already being used in
    developing regions
  • Focus on services that help hospitals become
    more efficient and on health-care information
    technology

     >79
GE in China
  • Bulk of new spending will be $3 billion R&D
    development investment over the next six years into
    affordable health-care equipment designed for
    underserved populations in emerging markets
  • 1/2 of unit's spending for products/services that
    expand health care/reduce costs by 15%
  • GE will launch 50+ basic products tailored to rural or
    emerging markets, such as the lightweight portable
    EKGs machines the company has developed for India.
  • "You can deal with change, or you can get out in front
    of it," says GE Healthcare CEO John Dineen
  • GE Video


     >80
Reflection Question

• What are the long-term prospects for MNEs from
  developed countries wishing to succeed in
  emerging markets? Which firms from which
  industries will thrive and which will suffer?
• What are the long-term prospects for emerging
  markets MNEs wishing to succeed in developed
  country markets? Which firms from which
  industries will thrive and which will suffer?
Outline of our Session
 Key global trends
   and the rise
   of emerging                           Emerging
      markets                            markets as
                                        laboratories
             Emerging markets           of innovation
             business systems
              and relationships


                           Emerging markets
                                and the
                            economic crisis

				
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