Small and medium businesses are demonstrating stronger resilience in meeting the change in demand from international consumers as we come out of the pandemic. As things return slowly to normal, they start looking again towards growth and increased international revenue and the emerging markets might hold some financial promise, and not only. This is of relevance, as in many Western economies the recession is almost inevitable in 2023. In this article we will see how to prepare to enter emerging markets and why companies might choose to either prepare better or avoid some countries.
What is an emerging market?
Emerging markets are generally identified as countries with sustained market access, increase in middle-income levels, and greater global economic relevance. Different international organizations publish and update regularly their listing of emerging markets such as IMF, Standard and Poors, Dow Jones, Master Card, JPMorgan, MSCI etc.
Some investment related sources are identifying the emerging markets simply as fast-growing economies, since the main indicator taken in consideration is growth. This classification became relevant for investors as some of the new markets developed rapidly during the 1980s and 1990s and as a result they became more attractive to investors. These countries are supposed to provide greater potential for profit but also more risk from various factors.
The major index “S&P Emerging BMI“ which captures all companies domiciled in the emerging markets within the “S&P Global BMI“, identifies China, India, Brazil and Saudi Arabia as four major emerging markets in terms of total market capitalization in US Dollars. As mentioned, the status of an emerging market can be reviewed by these organizations. For example, in March 2022 S&P removed Russia stocks from indexes, stripping the country of “emerging market“ status as a result of international sanctions triggered by its invasion of Ukraine.
Also, a lot of attention has been paid to emerging markets since the introduction of the BRIC acronym which includes Brazil, Russia, India and China. Goldman Sachs economist Jim O’Neill proposed the denomination BRIC in 2001, as he estimated that by 2050 the BRIC economies would come “to dominate the global economy.“ South Africa was added later, though lots of controversy was generated following the addition of the S, especially due to the lack of growth delivery from this market.
As we begin 2023, the term BRIC loses the R for Russia and a lot of doubts are still hanging over the Brazilian “promise“ and as China is emerging from its zero-covid policy, we are closely watching the dynamics of this economy. Moreover, after the global financial crisis the acronym BRIC is not really fancied by investors.
In this article, we will explore the advantages and the risks related to developing a presence in the emerging markets for small and medium enterprises from developed economies.
Advantages of developing in emerging markets
SMEs need to internationalize to grow, but they often struggle to expand outside their home market or to do so strategically. High-potential SMEs often don’t conduct in-depth market analysis before expanding into new export markets, instead following opportunities which hinders their growth potential. We recommend trading very carefully when choosing to work in emerging markets and know exactly the potential your company might aim for or other goals to be reached in some emerging markets. Below you will find key advantages we selected to put forward regarding the reasons why you should explore working in emerging markets.
Conquer new types of consumers
Emerging countries open the door to new types of customers. Companies from Western countries find out that surprisingly in many emerging economies, consumers buy premium-priced branded products and are sophisticated shoppers. In Eastern countries consumers research a lot regarding the products before the act of purchase. They would rather pay more for quality than risk a product failure as they know that customer service might be limited in their region.
Emerging countries consumers are careful and they take into account many factors other than price in calculating their final costs. The brand is important, but smaller and unknown brands have a chance in those countries and in some countries especially in Eastern Europe, the consumers will study the technical description in detail and analyze your brand image in different countries before taking the final decision.
We are living in an interconnected era and as of January 2022, China ranked first among the countries with the most internet users worldwide followed by India, USA, Indonesia and Brazil. Essentially, in many emerging countries there is a high tendency for a more relationship-based approach, and your new customers will often communicate their needs and ideas of improvement.
Source of innovation
Usually companies in mature markets assume that the only reason to develop in emerging countries is to find new customers. There is strong potential for innovation in the majority of countries as for example in e-commerce. Currently many companies understand that they can gain new market shares by providing pay-on-delivery services. These practices have been learned from emerging countries in Asia and Eastern Europe and currently used quite often in developed economies.
Another way to innovate is discover new local ingredients used in pharmaceutical, beauty or food industries. By adapting to local consumers we can also enrich our own offerings and propose to clients from developed markets new and more unique products.
International development towards emerging markets can be a good diversifier for your existing portfolio of countries because economic downturns in one country or region, including the Western economies, can be offset by growth in another.
The Chief Economist’s Outlook published in August 2022 predicts small chances for recession during 2023 in countries based in the Middle East, East Asia and Pacific and South Asia. On the reverse, the Western economies, especially Europe are expected to perform poorly.
To apply the diversification technique and select your next international emerging market, perform an in-depth market analysis and know the risks that you might face compared to the opportunities you are planning to gather.
Risks related to presence in emerging markets
Building your presence in emerging markets brings new opportunities as stated above (new types of customers, innovation, diversification) nonetheless risks might be high. We recommend listing your weaknesses and measuring your capacity to manage the risks assumed in emerging markets. One of the key recommendations here is to approach your bank and see what protection measures can be put in place to avoid jeopardizing your company performance. We will list below the key risks we believe you should address when dealing with emerging markets.
According to the IMF, the average inflation rate in the emerging market and developing economies from 2017 to 2021, with projections up until 2027 varies from 5 to 15 %. In 2021, the average inflation rate in the emerging market and developing economies amounted to about 5.9 percent compared to the previous year. The volatile political systems and opaque policy-making environment in emerging economies also contribute to weak performance. There is a scarcity of information on creditworthiness in emerging markets, so work with your advisors and banks to develop your own risk model that incorporates both qualitative and quantitative factors.
Exchange rate risks
The attractivity of doing business in emerging markets is very high with lots of market opportunities, high rates of growth and new consumers looking for new products, however exchange rate volatility is a problem that needs to be managed by companies. The impact can be substantial, as unanticipated exchange rate changes can greatly affect a company’s competitive position. If you are working with companies in emerging countries with high fluctuation of their currency, you might need to prepare for finding solutions for your company and sometimes for your clients.
As an example, in 2021 Turkish businesses have been punished by the lira’s fall in value, which has caused production costs to spike, while people’s wages have been diminished. Companies trading with Turkey suffered exchange rate risk if they accepted contracts in the local currency or they lost key clients due to the economic downturn. To learn more about this subject I suggest you read our article : Exchange rate risk and how to manage it as a business ?
IP(Intellectual property) risks
Intellectual property (IP) is still a major component in company value. Growing your intangible assets is mandatory to survive in the business world, particularly for those companies that conduct business internationally. The key concept is that IP protection should be local. Since all IP protection is based on local law and practice, you must adopt an effective and realistic protection program for the country in which you are operating. If you are in Vietnam or Mexico), you must consider IP protection according to the Vietnam or Mexico laws. Local companies in emerging markets are often quite adept at using their home-country IP system to their own benefit, by using the different techniques for such situations when if a foreign company fails or forgets to register its intellectual property in their country, they will register the IP in their own name.
With any new business or market, it’s wise to not make assumptions about your buyers. For example, Mexican buyers and business owners prefer close relationships with regular and direct communication. Attend some workshops, prepare a checklist, do your research on popular channels of communication in order to nurture and develop these strong relationships, and stay open to new customs that you might also include to your new business practices. Watch Prime Target webinar with Hofstede Insights on how to increase performance through better understanding your international customers. You will hear as well from other businesses how they developed globally and managed the cultural differences during their international growth.
Key take away
Emerging markets hold high promises for small and medium enterprises and they bring innovation, new types of customers and offer possibilities to balance our portfolio. Companies present in all geographic regions are more resilient, more innovative and financially better performing. Nevertheless, companies stepping on the grounds of new emerging markets should do so with good preparation and get ready to face a new type business approach, higher financial risks and put in place a strong IP protection.
How Prime Target can help you with your internationalization and identification of potential markets:
Prime Target can accompany you in your international business project, and assist you in market potential evaluation. Prime Target’s Market Ranking Report can help you evaluate the market potential of 5, 10 or 20 countries simultaneously, and identify new export markets with the highest potential.