Over the past decade, the corridors of trade and investment have increasingly been occupied by emerging markets—engaging with each other, “E2E.” This development is bound to upset complacent attitudes in mature economies about long-held dominance in strategy, innovation and talent.
Wander around any of the plush shopping districts that dot Brasilia today, and it is hard not to notice a subtle yet profound change: Chinese-made cars prominently displayed in fashionable new showrooms.
Similarly, at Beijing’s airport, aircraft made in Brazil increasingly transport China’s growing legion of domestic tourists; and in Chinese factories, Brazilian ore and oil keep the machines whirring night and day. Burgeoning Sino-Brazilian trade flows—totalling some US$77 billion in 2011—attest to this growing economic interdependence, with China having already surpassed the United States to become Brazil’s largest trading partner in 2009. This pattern of deepening trade is not unique to China and Brazil, but is emblematic of a wider web of economic relationships forming between emerging markets. Trade between India and China, for example, hit a record high of almost US$74 billion in 2011 and may surpass the US$100 billion mark as early as 2015.
Commentary about emerging markets often focuses on their high growth rates. But this represents only part of the story. What often gets overlooked is the integration that is occurring between emerging markets—most prominently through trade but also increasingly via investment and flows of talent.[ms-protect-content id=”9932″]
The rise of E2E trade
In 2000, nearly half of world trade, as measured by exports, excluded emerging economies altogether. Just ten years later, the share of world trade that included emerging economies reached a record high of 70 percent. But when we focus on trade flows exclusively between emerging economies (or E2E trade, for short), the pace and depth of integration becomes evident. Between 2000 and 2010, the E2E share of the global export market went up from 15 to 28 percent, with an average annual growth of 25 percent. (See Figure 1.)
New alliances, partnerships and trade deals have been signed between emerging economies, giving added momentum to trade integration. For example, in 2011, ambassadors from four Latin American countries—Uruguay, Paraguay, Mexico and Peru—stated their interest in forming free trade pacts with India, in areas including information technology as well as oil and agriculture. India has also signed an agreement with South Africa to increase bilateral trade form US$10 billion in 2010 to US$15 billion by 2014.
In some cases, E2E trade flows already overshadow those involving developed economies. For example, India increased the share of its exports to emerging economies by nearly 20 percentage points between 2000 and 2010, and in 2010 four of its top five export destinations were emerging economies, with the United Arab Emirates topping the list. (See Figure 2.)
Huge attention has been paid recently to the fact that executives in developed markets are looking primarily to emerging markets for their next wave of growth. What may surprise is that this tendency is even more pronounced among executives in emerging markets. An Accenture survey found that nearly 90 percent of business leaders in Latin America and Asia-Pacific are looking primarily at emerging economies for their next wave of growth, compared to about three-fourths of the leaders based in Western Europe and North America. Emerging market executives are also upping their trade and investment in developed markets, scenting an opportunity amid changes in preferences, spending power and asset-price volatility. These developments underscore a very real change in global competitive dynamics.
The magnetic pull of emerging market integration is not confined to trade: it increasingly draws in flows of talent too. Not so long ago, international students almost entirely headed west and north. Hundreds of thousands left emerging economies to receive higher education in European or North American universities. Today, the map of educational opportunity is much more diversified. In 2009-2010, almost 120,000 international students received higher education in China, up from 78,000 five years earlier. More than 60 percent of these students were from other emerging economies in Asia, but Africa and Latin America also contributed significant numbers.
China is also seeking to entice Chinese talent that went abroad to return. Generous grant programs and salaries are one key to this effort. For example, China’s Thousand Talents program aims to bring 2,000 experienced engineers, scientists, and other experts of Chinese origin back from the West.
Thinking laterally as well as locally
In their quest to reap the benefits of globalisation, companies have amassed a wealth of information on individual markets. They have focused on building the capabilities that enable them to be local—to understand existing competitors and address specific consumer needs.
But as emerging economies increasingly define the international trade corridors, new sets of challenges and new competitors have become more prominent. Specifically, developments in competition, standards setting and the geography of talent are changing the rules of the game. The integration of emerging markets makes it imperative for companies to understand not only local conditions but also the lateral links between markets.
The constellation of competition
The growing presence of emerging markets in international trade is generating new and complex constellations of competition. State capitalist models as well as large family-owned conglomerates benefit from simpler access to funding, as governments in emerging economies tend to adopt a more strategic and long-term view, often supporting national champions and making large-scale investments to better position them to compete.
For example, state-owned enterprises are at the core of China’s rise. Out of the 54 Chinese companies in the Fortune Global 500, 41 are state-owned, with total assets exceeding US$3 trillion—a figure roughly equivalent to Germany’s GDP. These companies have the capabilities to grow fast, thanks to an enabling policy environment and significant access to capital. In 2011 three Chinese companies made the top 10 list of Fortune’s Global 500: Sinopec Group, China National Petroleum and State Grid.
In Brazil, family-owned conglomerates represent 70 percent of the largest business groups. Their ownership structure enables them to take quick decisions and to respond to challenges swiftly, while building on long-lasting relationships among their leaders. When its share price dropped by 30 percent during the downturn, Banco Itaú smoothly merged with Unibanco to generate the largest banking conglomerate in Latin America, with assets worth US$260 billion and a double-digit growth rate.
Trade and the power to set standards
The time when developed economies had carte blanche to drive standards and regulatory norms is coming to an end. If we look back, the importance of trade relationships to standards and regulation becomes immediately clear.
In its heyday, the British Empire held sway over 450 million people, one-fifth of the world’s population at the time, and covered almost a quarter of the Earth’s total land area. This empire was built on trading posts, and it enabled the British to set laws and governance standards that remained central well after the Empire dissolved: think for example of the English common law system, still in use in 17 countries.
Historically, trade has proved to be a powerful tool in setting international standards, and today’s events are no exception: emerging economies’ newfound weight in global trade routes is shifting the balance in their favour. If not long ago standards were set by large corporations and public bodies based in North America and Europe, today the landscape is much more complex and varied. For example, the recent decision of Japan, China and South Korea to jointly adopt Internet Protocol Version 6 (Ipv6) determined a shift from the currently US-dominated market for Ipv4-based Internet technology. Similarly, the Asia Cloud Computing Association is working with governments in 14 Asian economies to standardize cloud computing regulations and security infrastructure. Having a seat at the table, and demonstrating excellence in regulatory and government relations are essential parts of many companies’ strategies for investing in their future.
A new premium on talent
As talent flows move in the direction of emerging markets, countries such as the United States—which has traditionally attracted vast numbers of overseas students to its shores—are likely to find their talent premium eroded. The ability of western companies to tap into these new E2E talent flows will be complicated by several factors: unfamiliarity with local labour markets and universities, a thin presence in local recruitment networks, and potentially different cultural expectations and norms about reward and career progression. In addition, emerging-market governments are stepping up their efforts to hold on to homegrown talent.
For example, the Chinese government has announced a program to cultivate a hundred “strategic entrepreneurs” capable of leading Chinese firms into the Fortune Global 500 ranks. And in 2011 Malaysia announced a 15 percent income tax rate for five years and the founding of Talent Corporation Malaysia Berhad (Talent Corp)—both intended to attract Malaysian professionals back home.
Navigating the E2E lattice
According to a recent study by Accenture, a majority of global business leaders say their companies are looking to emerging economies to fuel their next stage of growth, but do not believe they have the necessary capabilities to compete in these markets.
Companies need to find indicators that will help them to see laterally and navigate the lattice of economic linkages and interdependencies among emerging markets. This can enable them to gain a comprehensive perspective of the opportunities and challenges.
Follow the money
Too many companies follow the headlines and pay too little attention to how flows of goods, capital, talent and ideas are reshaping the global economic landscape. Paying close attention to the magnitude and direction of these flows can provide important clues about the location of future growth markets, and the nature and source of future competition.
Furthermore, emerging-market governments often have clear long-term strategies and enact industrial policies to build advantages in specific sectors. Changes in the policy environment will generate opportunities for companies ready to capitalize on them.
In late 2011, PolPharma—Poland’s biggest drug company—became the majority shareholder of ChimPharm, Kazakhstan’s largest local drug manufacturer. This move responded to the Kazakh government’s plan to build the local pharmaceutical sector by increasing the share of drugs supplied through domestic production from 30 percent to 50 percent by 2015. With Kazakhstan’s pharmaceutical market valued at more than US$1 billion in 2011, the acquisition has placed PolPharma at the forefront of untapped opportunities in Kazakhstan and Central Asia.
Find indirect market opportunities
Faced with a more complex lattice of horizontal (E2E) and vertical (local) trends, businesses may need to work obliquely to find the right positioning and entry strategies.
For example, GSK signed an agreement in 2009 with the Chinese Simcere Pharmaceutical Group, to manufacture and sell an antiviral influenza drug called Zanamivir. This collaboration not only enabled GSK to enter the Chinese pharmaceuticals market; it also provided the springboard to sell the drug in other markets, such as Indonesia, Thailand and Vietnam and 50 other emerging economies. Arup, an infrastructure-focused consulting company that has designed some of China’s iconic buildings, such as the Bird’s Nest and Water Cube in Beijing, has formed a strategic alliance with China’s largest construction group—China Railway Engineering Corporation (CREC)—in order to extend its reach in several frontier-emerging markets such as the Middle East and Africa.
SABMiller chose an indirect strategy to expand its presence in a new market. The company conducted an asset swap worth US$1.9 billion with Efes, Turkey’s largest brewer. Under the deal, SABMiller will transfer its Russian and Ukrainian businesses to Efes, in return for a 24 percent share of the Turkish brewing company. This strategic alliance will help SABMiller to beef up its stake in the Turkish market rapidly, while gaining local insights into approaching challenging markets like Moldova, Georgia and Kazakhstan.
Emerging markets are already central nodes in global networks of production, innovation and supply chains. They are also increasingly creating the regulatory landscape. In order to retain the ability to shape the regulatory playing field that will govern future industry dynamics, Western businesses will need to engage with emerging market governments and competitors.
Companies will also need to actively tap into mobile talent flows between emerging economies, as local companies become an increasingly attractive option for highly educated and skilled jobseekers. For example, in order to respond to expectations of rapid career progressions among emerging-market talent, French supermarket giant Carrefour changed its career management model in China to accelerate its internal promotion procedures.
But managerial talent is not the only thing that should be on companies’ radars. Being where ideas are generated will enable Western businesses to embed themselves in these new nodes. Emerging economy-based R&D centers are increasing in number and companies are already capitalizing on this trend. Microsoft invested over US$430 million in a new R&D facility in Beijing, its largest research center outside its American headquarters in Redmond. Acting early will enable businesses to better position themselves in shaping regulations, attracting and retaining talent, and being at the forefront of innovation.
About the authors
Swimming with the tide
Today’s currents shape tomorrow’s coastline. E2E flows enjoy a large and growing share of global trade and investment, and are a hallmark of the latest phase of globalization. Companies that swim with the tide stand to benefit from corresponding shifts in international competitiveness. The imperative is clear: international businesses everywhere need to position themselves in the new corridors of economic power. Doing so means thinking laterally, as well as locally, about emerging market threats and opportunities, working obliquely to find different routes to market entry and growth, and becoming embedded in nascent E2E networks of human capital and innovation.
The authors are all members of the Accenture Institute for High Performance (AIHP). Mark Purdy is a senior executive research fellow and the AIHP’s chief economist. Athena Peppes is a senior research specialist. Armen Ovanessoff is a senior research fellow who leads the AIHP’s research on high-growth markets. Kuangyi Wei is a research analyst. All four are based in London.