Global Economic Crisis and the Emerging Markets Jonathan Doh Manny Nunez

1. Global Economic Crisis and theEmerging MarketsJonathan DohManny Nunez Jonathan P. Doh July 6, 2009

2. Outline of our Session Key global trends and the rise of emerging markets Emerging markets as laboratories of innovation Emerging markets business systems and relationships Emerging markets and the economic crisis

3. 11/9/89: when the walls came down and the windows went up 8/9/95: when Netscape went public Workflow Software: let’s do lunch – have your application talk to my application Open sourcing: self-organizing collaborative communities Outsourcing: Y2K Offshoring: running with gazelles, eating with lions Supply-chaining: eating sushi in Arkansas In-sourcing: what the guys in funny brown shirts are really doing Informing: Google, Yahoo!, MSN Web Search The Steroids: digital, mobile, personal, and virtual (…wireless the icing on the cake) Is the world flat? >3 >3

4. A “spiky”world: population >4

5. A “spiky”world: economic activity >5

6. A “spiky”world: innovation >6

7. From your perspective, is the world: Round? Flat? Spiky? Reflection question >7

8. Changing balance of economic powerShift in World GDP Source: Economist Intelligence Unit.

9. Changing balance of economic power Shift in World GDP Source: Economist Intelligence Unit.

10. Changing balance of economic powerShift in World GDP Source: Economist Intelligence Unit.

11. Changing balance of economic powerAt present, U.S. by far largest GDP Source: Economist Intelligence Unit. >11

12. Changing balance of economic power China surpasses U.S. in 2020 (ppp basis) Source: Economist Intelligence Unit. >12

13. Relative size of Big 4 economiesmarket exchange rates Constant 2004 US $bn

14. Relative size of Big 4 economiesPPP exchange rates Constant 2004 US $bn at PPPs

15. Changing balance of economic powerChina and India propel growth in Asia Source: Economist Intelligence Unit. >15

16. Changing balance of economic powerGreater Asia will generate 67% of global jobs 2005-20 Source: Economist Intelligence Unit. >16

17. Changing balance of economic powerHigh (but slowing) GDP growth in China… >17

18. Changing balance of economic power …Makes China largest (absolute) economic power by 2040 2040-2045 >18

19. Changing balance of economic power But growth is uneven >19

20. Emerging countries’ share of GDP >20

21. Changing global demographicsThe global population is aging >21

22. Changing global demographicsFertility rates falling below replacement in G-7 2.1 >22

23. Changing global demographicsLife expectancy growing in G-7 >23

24. Changing global demographicsSome G-7 aging faster than others >24

25. Inversion of age pyramid1960 Distribution in Developed World Men Women Year: 1960 Median Age: 29.6

26. Inversion of age pyramid2050 Distribution in Developed World Men Women Year: 2050 Median Age: 46.4

27. Changing global demographicsDeveloping countries on the rise 12 Largest Countries Ranked by Population 1 2 3 4 5 6 7 8 9 10 11 12 2000 China India United States IndonesiaBrazil Russian Fed.PakistanBangladeshJapanNigeriaMexicoGermany 2050 India China United States PakistanIndonesiaNigeriaBangladeshBrazilCongoEthiopiaMexicoPhilippines 1950 China Soviet Union India United States Japan Indonesia Germany Brazil United Kingdom Italy France Bangladesh Source: UNDP (2005)

28. In 2008 Deloitte found that "medical tourism" is a hot trend among U.S. health care consumers Nearly 40 % said they would travel outside the country for medical treatment, if the quality was comparable and the cost was cut in half Market drivers for medical tourism: Cost savings; Comparable or better quality health care; Shorter waiting periods thus quicker access to care World medical tourism market is estimated to have reached $60 billion in 2008, and grow to $100 billion by 2010. Over 35 countries are serving around 1 million medical tourists annually Medical Tourism Video Global trends in health care Medical tourism on the rise • Assumptions: • In 2007, approximately 750,000 Americans traveled outbound for medical care. That number will increase to 6 million by 2010. Therefore the growth rate from 2007 to 2010 is 100% for the base estimate. • After 2010, the growth rate will begin to fall due to supply capacity constraints in foreign countries. • Upper/Lower bound estimates assume the growth rate is higher/lower than the base case estimate. • Source: 2008 Deloitte Development LLC >28

29. Global trends in health care Medical tourism on the rise >29

30. Reflection question • Which aspects of the key global trends outlined here do you believe are the most meaningful and long-lasting? • Which aspects of the demographic trends are most profound? • Do you believe the projections re: growth of global health care tourism are realistic?

31. Emerging markets essentials What is an emerging market? What are these markets emerging from? What are these markets emerging to? What signals help identify a country as emerging? What signals suggest a country is submerging? >31

32. Emerging market: one definition • Gross National Income (GNI)/capita (US$): • $1,001 (Lower) to $9,999 (Upper) • Excludes countries: • >$10,000 GNI/capita – deemed developed market • <$1,000 GNI/capita – deemed GAVI/developing market • Source: World Bank Definition • World Bank definition of GNI: • Used 3-year average of exchange rates to ‘smooth’ out annual fluctuations due to policies and interventions • Classified countries in low-, middle- and high-income categories • Source: World Bank Rationale >32

33. Developing countries v. emerging markets High risk for foreign investors Economically underdeveloped Technologically inferior Low purchasing power Host government restrictions Few significant opportunities for foreign business Emerging Markets (Since 2000) Developing Countries (prior to 2000) • Risks increasingly manageable • Faster income growth than developed countries • Technologically competitive • Increasing purchasing power • Host government liberalization • Greater opportunities for foreign business: BOP, OS >33

34. My perspective on emerging markets Developing countries “on the move” Consistent pattern of policy reform Privatisation (e.g. sale of SOEs) Market liberalisation (e.g. trade, regulatory) Monetary and Fiscal policy (independent Central Bank; efficient tax system) Resultant record of sustainable growth Faster than average annual growth Growth in private (often foreign) capital) Increased trade and FDI Sustained social progress Improved education, health care, etc >34

35. Types of emerging markets BRIC: Big emerging markets China and India: “Giants” Others: Brazil, Russia, Mexico “Second tier” but coming on fast Vietnam, Indonesia, Malaysia, Thailand “Graduates” South Korea, Taiwan, Singapore? “Transition” economies Poland, Russia, Hungary “Other” Turkey, Middle East economies >35

36. BRIC Economies (Brazil, Russia, India, China + Mexico?) Fastest growing, dynamic, highest potential EMs Leaders in respective regions Between 2000-2007, contributed 28% of global growth More than 15% of global FDI and trade; 30% FX reserves China overtakes US by 2040; India beats Japan by 2033 Significant similarities among each All faced substantial acceleration in growth, democratic political reform, market-oriented reforms manifest in FDI and some macroeconomic and reform setbacks Substantial differences as well Each has had difference experience in pace, breadth, depth of reform, with some now experiencing some backtracking in their commitment to pol/econ reform >36

37. Outline of our Session Key global trends and the rise of emerging markets Emerging markets as laboratories of innovation Emerging markets business systems and relationships Emerging markets and the economic crisis

38. Emerging markets: Institutional systems • Institutional systems are a critical and overlooked variable in global markets • Different countries look differently across these measures • Important implications for strategy >38

39. Institutional systems: Political/social systems • Political Accountability: free/fair elections • Political Accountability: independent judiciary • Government regulatory interference • Protection of private property rights • Independence of quasi-judiciary agencies • Religious, linguistic, ethnic, geographic tensions • Civil society and NGOs and Corruption • Development/independent finance regulator Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June >39

40. Institutional systems:Openness • Receptivity to/restrictions on FDI • Local content/ownership requirements? • Presence/quality of foreign intermediaries • Support/constraints to new venture development • Restrictions on portfolio investment/FX • Import tariffs on intermediate/capital goods • Participation in FTAs/EIAs • Free flow of executives in/out of country • Financial liberalization (WTO/unilateral) Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June >40

41. Institutional systems: Product markets/distribution • Development of transportation infrastructure • Development of distribution systems/networks • Existence and sophistication of market research • Availability of raw materials/dependability of suppliers • Government restrictions on FDI • Nature/quality of retail/credit system • Consumer receptivity to new products/services • Ability to develop network of branches or other financial distribution systems Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June >41

42. Institutional systems:Labor markets • Educational Development • Employee mobility • Quality of training/management development • Pay/performance and motivation • Receptivity to foreign managers • Laws and regulations on labor reduction • Consumer receptivity to new products/services • Ability to deploy foreign nationals and hire/fire local employees Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June >42

43. Institutional systems:Capital markets • Development of banking/insurance/ securities • Ownership/transparency of institutions • Sophistication/liquidity of debt/equity markets • Reliability/quality of information on markets • Corporate governance/board independence • Regulatory effectiveness • Takeover/bankruptcy laws Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June >43

44. Emerging market institutions:Shape, adapt, or withdraw? Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June >44 Shape: Institutional system in flux may be subject to shaping (China/financial services, health care?) Adapt: Established and well-developed institutional system suggests adaptation (Chile, telecom) Withdraw: Inferior and unpredictable institutional system suggests withdrawal (Venezuela, Bolivia oil and gas)

45. Reflection Question • Which institutional category is most important for the industry or area you cover? • Which specific aspect of that institutional category is most important? • Can you think of a specific example of how a firm “shaped” and emerging markets institutional environment?

46. Global-local relationships • Global companies seek partners with local knowledge, distribution, government connections • Local companies seek avenues into global economy and seek foreign partners with technology, managerial expertise, brand • Local governments seek relationships that capture employment, technology and other direct/indirect benefits and often serve as intermediaries Adapted from authors’ reseearch and Adarkar, A., Adil, A., Ernst, D., and Vaish, P. Emerging market alliances: Must they be win-lose? McKinsey Quarterly, 4: 120–137. >46

47. Four possible outcomes of Global-local alliance Sustainable Power balance Power shift toward local partner Power shift toward global partner Initial alliance Power collision >47

48. Global-local relationships:Hofstede’s Cultural Dimensions Power Distance • Extent to which less powerful members of institutions and organisations accept that power is distributed unequally • High power distance countries: people blindly obey orders of superiors, centralised organisation structures • Low power distance countries: flatter and decentralised organisation structures, smaller ratio of supervisors Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors, institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage. >48

49. Global-local relationships:Hofstede’s Cultural Dimensions Power Distance • Extent to which people feel threatened by ambiguous situations and have created institutions to avoid such situations • High uncertainty avoidance countries: people have high need for security, structured organisational activities, more written rules, less risk taking • Low uncertainty avoidance countries: more willing to accept risks associated with unknown, less structured organisational activities, fewer written rules, more risk taking by managers Uncertainty Avoidance Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors, institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage. >49

50. Global-local relationships:Hofstede’s Cultural Dimensions Power Distance • Individualism: Tendency of people to look after themselves/family • Countries high in individualism: support work ethic, greater individual initiative, merit promotions • Collectivism: Tendency of people to belong to groups or collectives and to look after each other • Countries high in collectivism: less support of work ethic, less individual initiative, seniority promotions Uncertainty Avoidance Individualism/ Collectivism Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors, institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage. >50