Answer These 4 Questions Before Investing in an Emerging Market
I love this definition of an emerging market from Harvard Business School professors Tarun Khanna and Krishna G. Palepu, primarily because it has nothing to do with GDP, population size or location on a map.
"An emerging market is anyplace where buyers and sellers cannot easily and efficiently do business with each other."So right off the bat, the challenge to being successful has less to do with the quality of your product than with overcoming barriers, everything from poor transportation infrastructure to uneducated labor. If you can conquer these roadblocks -- fill the institutional voids -- then you have a great competitive advantage against others just coming into the market.
"The more institutional voids there are," Palepu says, "the more niches there are for entrepreneurs to fill. That is why growth in these economies is so high."In an interview with HBS Working Knowledge, Khanna and Palepu offer up four questions new-market entrants should ask themselves:
- In this particular market, which market institutions are working, and which institutions are missing?
- Which parts of our business model can be adversely affected by these institutional voids?
- How can we build competitive advantage based on our ability to navigate institutional voids?
- How can we profit from the structural reality of emerging markets by identifying opportunities to fill voids, serving as market intermediaries?
One tip they offer is to position your business as a partner in progress.
"Foreign as well as domestic companies have found success in emerging markets by positioning themselves as partners in progress, building businesses that also advance market development. Initiatives along these lines can take a number of forms -- from advancing traditional corporate social responsibility to filling institutional voids -- in service of businesses or as stand-alone projects."Have you done business in an emerging economy? What lessons would you pass along to those who would follow in your footsteps?