Become a Global Player - examine emerging market opportunities, adjust to risks

JWI 531 Financial Management II, week9 summary, 6/9/13

I have felt the force of globalization starting in the early 90s with the birth of the internet. But it was only through this week's learning that I understand the gravity of the situation. Knowing that China and India will shape world politics as major growth markets gives me greater clarity. Having spent half my life in India and half in US, I can see from both sides of the wall that separates growing markets and advanced markets. The five factors to watch for pitfalls & evaluate attractiveness of investment (JWI 531, WK9L2) prepare me  to make informed choices as a business leader:

Respect for rule of law - strong rights of appeal, low levels of corruption
Political stability and a government makes up a small percentage of local economy
Stable currency
Invest-ability
Culture

Great training !

Dr DP

JWI 531 Financial Management II, week9 notes, 6/9/13

1. Markets are Going Global
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Power shifting to Growth markets eg. BRICs, emerging markets; China & India will shape world politics.
Corporations are going abroad, transforming to Mega corporations

2. Evaluate global opportunities
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International investment has potential to spread like wildfire
With great potential comes great challenge

Five factors to watch for pitfalls & evaluate attractiveness of investment
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Respect for rule of law - strong rights of appeal, low levels of corruption
Political stability and a government makes up a small percentage of local economy
Stable currency
Invest-ability
Culture

3. Become a global player
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Examine exciting opportunities
Adjust to a variety of risks
Going global is well worth it

4. Emerging markets vs advanced markets - Differences
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The key difference between a developing and developed country is economics and quality of life (Difference, 2012). 
A developing country is in the process of industrialization, less affluence, lower education, high birth/death rates,
limited access to medicine/technology and unstable governments (Difference).  A developed country, by contrast, has a post-industrial economy,
high affluence, strong education, strong transportation infrastructure, stable government, low birth/death rates,
abundant food supply and easy access to medicine and technology (JD)

There are several important differences that need to be considered:

1. Growth opportunity
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Advanced and maturing markets grow at a slow rate while emerging markets offer higher demand and therefore superior growth opportunities. BRIC countries are therefore sought after by firms from advanced countries that are looking for ways to grow their revenues.
2. Lower Cost
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Manufacturing and labor costs are typically much lower in emerging markets. For instance, a PhD IBM engineer in Bangalore will make 1/4-1/3 the pay of his colleague in the US with similar qualifications. Shifting the workforce to such markets leads to lower costs and higher profits for the firm.
3. Innovation Hub
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Emerging markets can leap frog the advanced markets by seizing the opportunity to move to technologies even more advanced than those used in advanced markets. For instance, in India, cell phones have been embraced by even the most poorest of people - far outnumbering what we see in the US. Importantly, business model innovation is driving cost per minute for cellphone usage to drop precipitously in India - unlike what we see in the US.
4. Corruption
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Rule of Law is enforced better in the advanced markets (JWI 531, W9L2) while corruption is a significant part of business in developing markets. Legal systems are weaker in emerging markets and so risks are higher.
5. Political instability
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Advanced markets benefit from having a stable and bankable political system. Emerging markets face higher uncertainty from political turmoil and changing national policies.
6. Currency Fluctuation
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While this can affect any nation, emerging markets could be at higher risk due to high pace of change and volatility in political and business environment.
7. Invest-ability
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Some emerging markets may be closed for foreign direct investment.
8. Culture
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Cultural assumptions in advanced markets may not hold in emerging economies. Punctuality for instance is highly valued in the German culture but in India, the concept of time is more flexible and different. Hugging among colleagues of opposite sex to express warmth in relationships is considered normal in US while it may be frowned upon in conservative countries.
9. Infrastructure
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Advanced markets enjoy a superior infrastructure to get things done fast. Developing markets may face frustrating things like "power cuts" every 3-8 hours a day !!

5. Advantages & Disadvantages of emerging markets
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Advantages of emerging markets are:
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First mover: Being the first to set-up and become the recognized brand.
Access to Capital: Capital in the region may be untouched and eager stakeholders may be anxious to oblige
High returns: Untapped or developing wealth is not shared amongst a large, competitively active group of companies potentially allowing a few businesses to capitalize on being a scare provider of the wants or needs of the market.

Disadvantages of emerging markets are:
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Corruption: There may be no political or cultural standard that protects companies intellectual property or from unscrupulous authorities leaving them vulnerable to corruption.
Cultural Risk: The methods and procedures of doing business in emerging markets may develop conflict between cultural expectations, rituals and product uses
Structures and Systems: The infra and micro-structure of the market may not support the operations of the businesses. Roads and power systems may be under-developed and stressed.
Taxes: Foreign companies, with their advanced market money, are likely to pay a higher share of taxes and levies to support the development efforts that local companies
can not finance.

The responsibility of a business manager and leader is shown in Exhibit I below (JWI 510).
To execute to those time-honored responsibilities, a business manager will need to consider the factors above carefully.

6. Exhibit I - Responsibilities of a Business Leader and a Business Manager
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What a Business Leader Does (Welch, 2005):
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(1) Build great teams - The team with the best players wins and so relentlessly upgrade the team. Never be satisfied with the quality of a team. At every opportunity evaluate, coach and build self-confidence.
(2) Values - Ensure that people not only see the values but live and breathe it. Values must support a mission and must specify expectations for employees’ behaviors. Leaders define the culture and set a high bar for ethical action. Leaders cultivate emotional intelligence (EI).
(3) Optimism - Leaders get under the skin of their employees, exuding positive energy and optimism.
(4) Trust – Leaders build trust with candor, transparency and credit. With emphasis on candor, leaders engage every brain in the game, unclutter bureaucracy and drive up the speed of decision making.
(5) Courage – Leaders have the courage to make unpopular decisions through gut calls.
(6) Question – Leaders question and probe with curiosity, bordering on skepticism, making sure their questions are answered with actions.
(7) Inspire – Leaders inspire risk taking and learning by setting an example.
(8) Celebrate – Leaders celebrate accomplishments and never skip the fun part.

The role of a manager is to support the leader’s vision by taking care of details in complexity and execution. Specifically, Jack Welch points out that a manager has four major responsibilities:
(1) Planning & Budgeting – Managers are responsible for delivering results in a predictable manner, always on time and within budget
(2) People – Pick the right people for the right job. Set performance goals and measure behavior. Motivate, encourage, guide and counsel employees. Create individual development plans. Differentiate performance and decide on fair rewards. Create an environment where employees can excel and innovate. Encourage diversity, celebrate differences and play to people’s strengths.
(3) Performance – Track performance versus target and problem-solve by removing obstacles.
(4) Policies – Articulate clearly the business conduct guidelines, management policies & protocols.