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Stimulating growth, trade and business together

How are the rights of workers protected? Are financial institutions managed well? Is their decision making transparent? Do noneconomic considerations, such as family ties, influence their investment decisions? Can companies raise large amounts of equity capital in the stock market? Is there a market for corporate debt?

Does a venture capital industry exist? If so, does it allow individuals with good ideas to raise funds? How reliable are sources of information on company performance? Do the accounting standards and disclosure regulations permit investors and creditors to monitor company management? Do independent financial analysts, rating agencies, and the media offer unbiased information on companies? How effective are corporate governance norms and standards at protecting shareholder interests? Do the laws permit companies to engage in hostile takeovers? Can shareholders organize themselves to remove entrenched managers through proxy fights?

Is there an orderly bankruptcy process that balances the interests of owners, creditors, and other stakeholders?

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In socialist societies like China, for instance, workers cannot form independent trade unions in the labor market, which affects wage levels. Such transfers usually price assets in an arbitrary fashion, which makes it hard for multinationals to figure out the value of South African companies and affects their assessments of potential partners. The thorny relationships between ethnic, regional, and linguistic groups in emerging markets also affects foreign investors.

This policy arose because of a perception that the race riots of were caused by the tension between the Chinese haves and the Malay have-nots. Although the rhetoric has changed somewhat in the past few years, the pro-Malay policy remains in place.

Mapping Out Your Best Possible Direction

Managers must also determine how decentralized the political system is, if the government is subject to oversight, and whether bureaucrats and politicians are independent from one another. Companies should gauge the level of actual trust among the populace as opposed to enforced trust.

For example, executives believe that China is an open economy because the government welcomes foreign investment but that India is a relatively closed economy because of the lukewarm reception the Indian government gives multinationals. Consequently, while it may be true that multinational companies can invest in China more easily than they can in India, managers in India are more inclined to be market oriented and globally aware than managers are in China.

Multinationals, therefore, will find it easier to function in markets that are more open because they can use the services of both the global and local intermediaries. The two macro contexts we have just described—political and social systems and openness—shape the market contexts. Similarly, openness affects the development of markets. That has happened in India, for example, where capital markets are more open than they are in China. Likewise, in the product market, if multinationals can invest in the retail industry, logistics providers will develop rapidly.

This has been the case in China, where providers have taken hold more quickly than they have in India, which has only recently allowed multinationals to invest in retailing. Developing countries have opened up their markets and grown rapidly during the past decade, but companies still struggle to get reliable information about consumers, especially those with low incomes.

There are few government bodies or independent publications, like Consumer Reports in the United States, that provide expert advice on the features and quality of products. Because of a lack of consumer courts and advocacy groups in developing nations, many people feel they are at the mercy of big companies. There are relatively few search firms and recruiting agencies in low-income countries. The high-quality firms that do exist focus on top-level searches, so companies must scramble to identify middle-level managers, engineers, or floor supervisors.

For instance, several Indian companies have sprung up to train people for jobs in the call center business, but no organization rates the quality of the training it provides. The capital and financial markets in developing countries are remarkable for their lack of sophistication.

Mapping Out Your Best Possible Direction

Corporate governance is also notoriously poor in emerging markets. Several CEOs have asked us why we emphasize the role of institutional intermediaries and ignore industry factors. But when Harvard Business School professor Jan Rivkin and one of the authors of this article ranked industries by profitability, they found that the correlation of industry rankings across pairs of countries was close to zero, which means that the attractiveness of an industry varied widely from country to country.

So although factors like scale economies, entry barriers, and the ability to differentiate products matter in every industry, the weight of their importance varies from place to place. An attractive industry in your home market may turn out to be unattractive in another country. When we applied the five contexts framework to emerging markets in four countries—Brazil, Russia, India, and China—the differences between them became apparent.

In China, state-owned enterprises control nearly half the economy, members of the Chinese diaspora control many of the foreign corporations that operate there, and the private sector brings up the rear because entrepreneurs find it almost impossible to access capital. India is the mirror image of China. Public sector corporations, though important, occupy nowhere near as prominent a place as they do in China.

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Unlike China, India is wary of foreign investment, even by members of the Indian diaspora. However, the country has spawned many private sector organizations, some of which are globally competitive. The five contexts below can help companies spot the institutional voids in any country. An application of the framework to the four fastest-growing markets in the world reveals how different those countries are from developed nations and, more important, from one another.

Click here for the full graphic. Brazil mixes and matches features of both China and India. Like China, Brazil has floated many state-owned enterprises. Volkswagen has six plants in Brazil, dominates the local market, and exports its Gol model to Argentina and Russia. Brazil also boasts private sector companies that, like Indian firms, go head-to-head in the local market with global firms.

Some Brazilian companies, such as basic materials company Votorantim and aircraft maker Embraer, have become globally competitive.

Russia is also a cross between China and India, but most of its companies are less competitive than those in Brazil. There are only a few strong private sector companies in the market, such as dairy products maker Wimm-Bill-Dann and cellular services provider VimpelCom. The Russian government is involved, formally and informally, in several industries. Moreover, administrators at all levels can exercise near veto power over business deals that involve local or foreign companies, and getting permits and approvals is a complicated chore in Russia.

One level deeper, the financial markets in Brazil, Russia, India, and China vary, too. In China, foreign companies compete with state-owned enterprises, which public sector banks usually fund. The difference is important because neither the Chinese companies nor the banks are under pressure to show profits.

Understanding the Importance of Culture in Global Business

State-owned companies can for years pursue strategies that increase their market share at the expense of profits. Corporate governance standards in Brazil and India also mimic those of the West more closely than do those in Russia and China. When they complete this exercise, companies will find that they have three distinct choices: They can adapt their business model to countries while keeping their core value propositions constant, they can try to change the contexts, or they can stay out of countries where adapting strategies may be uneconomical or impractical.

Can companies sustain strategies that presume the existence of institutional voids? They can. It took decades to fill institutional voids in the West. To succeed, multinationals must modify their business models for each nation. But companies must retain their core business propositions even as they adapt their business models. If they make shifts that are too radical, these firms will lose their advantages of global scale and global branding.

In the United States, the hardware maker offers consumers a wide variety of configurations and makes most computers to order. Chinese companies used paper-based order processing, so Dell had to rely on faxes and phones rather than online sales. And several Chinese government departments and state-owned enterprises insisted that hardware vendors make their bids through systems integrators.

The upshot is that Dell relies heavily on distributors and systems integrators in China. When it first entered the market there, the company offered a smaller product range than it did in the United States to keep inventory levels low. Later, as its supply chain became more efficient, it offered customers in China a full range of products. Smart companies like Dell modify their business model without destroying the parts of it that give them a competitive advantage over rivals.

These firms start by identifying the value propositions that they will not modify, whatever the context. But when it tried to move into Russia in , the company was unable to find local suppliers. With the help of its joint venture partner, the Moscow City Administration, the company identified some Russian farmers and bakers it could work with. Then the company built a , square-foot McComplex in Moscow to produce beef; bakery, potato, and dairy products; ketchup; mustard; and Big Mac sauce.

It set up a trucking fleet to move supplies to restaurants and financed its suppliers so that they would have enough working capital to buy modern equipment. The company also brought in about 50 expatriate managers to teach Russian employees about its service standards, quality measurements, and operating procedures and sent a person team of Russian managers to Canada for a four-month training program.

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Many multinationals are powerful enough to alter the contexts in which they operate. The products or services these companies offer can force dramatic changes in local markets. Not only did the company cause the Indian government to lose its monopoly on television broadcasts overnight, but it also led to a booming TV-manufacturing industry and the launch of several other satellite-based channels aimed at Indian audiences.

The entry of foreign companies transforms quality standards in local product markets, which can have far-reaching consequences. During the next two decades, the total quality management movement spread to other industries in India. By , Indian companies had bagged more Deming prizes than firms in any country other than Japan.