In the book, the authors outline a practical framework for developing emerging market strategies. They don’t define emerging markets based on geography, but on a structural understanding of these markets. On page 18, they share a table comparing transaction costs in emerging and developed markets. Maybe the list of emerging markets is much better than a definition because they set an example. Some of the emerging markets in alphabetical order are Argentina, Brazil, China, the Czech Republic, India, Indonesia, Israel, the Republic of Korea, Nigeria, Pakistan, Russia and Turkey.
In the table, one of the important indicators is the time to enforce a contract. This indicator shows the speed of the judiciary system in the country. If the speed is too slow, it means it will discourage entrepreneurs and investors willing to enter the market. If they go to court because of a commercial conflict or any kind of conflict, they have to wait a very long time for the resolution. Another interesting indicator is the time required to get a warehouse fully operational, which requires getting permission, purchasing or renting the warehouse and the necessary equipment, hiring the people, organizing logistics and so on. It is about the legislative, commercial, physical and service infrastructure. The time required to register a property or start a business refers to the level of bureaucracy in the country. In emerging markets, these indicators are factors such as climatic factors that influence the general performance of economy. According to the table, Turkey’s position is the best within the emerging markets, and with these numbers it deserves to add a “T” to the BRIC (Brazil, Russia, India and China) countries.
The authors also talk about the nature of institutional voids in emerging markets. Before doing that, they describe the nature of institutions in developed markets. In developed product markets there are soft and hard infrastructures. Soft infrastructure includes advertising agencies and media outlets that facilitate corporate communication, market research companies and logistics consultants that assist retailers, and credit rating agencies that collect consumer credit information to assist credit card companies. Hard infrastructure, such as roads and bridges, is also essential for low-cost movement of goods from producers to retailers. In well-developed economies, capital markets have complicated sets of mechanisms. Financial reporting facilitates investor communication. Accounting standards and independent auditors enhance the credibility of financial reports. Financial intermediaries such as venture capitalists, commercial banks, insurance companies and mutual funds exist and help investors. Labor markets in developed economies and educational institutions not only help develop human capital but also certify its quality through graduation requirements. Employment contracts and numerous regulations allow employers and employees to protect their interests. The authors define emerging markets as those where these institutions are absent or poorly functioning.
According to the authors, understanding these voids and learning how to work with them in specific markets is the key to success. Khanna and Palepu claim that to win in an emerging market, companies should make a decision whether to replicate or adapt an existing business model in a particular market; collaborate with domestic partners or act independently; navigate around that market’s voids, or actively try to fill them; enter the market immediately or look for opportunities elsewhere; stay in or exit the market if current strategies are not working.