Explore Rice

9/15/2005 12:08:00 AM

 

Changing markets, as in China and India, mean U.S. firms must change to compete

For years, firms from highly developed countries like the U.S. operated abroad with clear advantages over their local counterparts in newly developing regions of the world.

Today, these firms face serious challenges from companies in such mature emerging markets as Brazil, China, India and Russia.   A new study by university researchers claims that U.S. firms doing business in those countries need to take different approaches to learn about their competition, their partners and the business environments in which they operate.

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Firms operating in today's emerging markets face a highly competitive, changing landscape. The combined emerging markets of Brazil, Russia, India and China, for example, are predicted to be larger than the G6 countries in less than 40 years.

What U.S. firms believed they needed to learn a few years ago about a potential market's local institutions, practices and norms, is less important in the current business environment, according to a new study by university management researchers.

"With markets that are more open, larger and more mature, the competition is also likely to be more intense and their consumers more demanding," predicts Haiyang Li of Rice University's Jesse H. Jones Graduate School of Management.

"These changes among emerging markets also mean that firms doing business in those countries need to reconsider what they've learned or considered important in the past about the local institutions, practices and norms - not to mention, their consumers."

As an example, Li points to China's transition from a centrally-controlled, planned economy to a marketing economy and how this shift has affected the way foreign firms operate there. Up until several years ago, firms operating in the Chinese market depended on their relationships with China's government officials.   Since the market itself became more powerful, however, a firm's ability to compete there has depended more on the company's resources, capabilities and products than on people it knows in the government.

The importance of learning about the changing business environment in the world's emerging markets, particularly by foreign firms working in those countries, is the focus of a recent article in Management and Organization Review by Li and Texas A&M management professors Michael Hitt and William Worthington IV.  

"Emerging Markets as Learning Laboratories: Learning Behaviors of Local Firms and Foreign Entrants in Different Institutional Contexts" is the first study to compare the strategies of foreign firms as they learn how to successfully operate in emerging markets with local firms within those emerging market countries. Most important, they examine how learning behaviors of both foreign and local firms vary depending on the market in which they are operating.

"Firms need to take advantage of their particular capabilities and resources," Li says, "but in developing their strategies, they also need to take into account competition from local companies and other foreign firms and the different approaches they need to make toward potential partners in those countries."

In looking at the developing economies in Latin America, the Middle East and Southeast Asia and those undergoing transitions in China and Russia, Li and his colleagues show that not all emerging markets are alike.   Specifically, they argue that these markets differ in terms of their economic growth maturity and institutional stability.

"The Chinese market is bigger and more mature than is the case in Nigeria, for example, so the market in China is more competitive and its customers may be more demanding," Li says. "What U.S. firms sell to American consumers might have been attractive to Chinese customers a decade ago, but they can't assume that strategy will still be successful."

Li also notes that firms from more economically advanced emerging markets like Brazil, China, India and Russia may be more similar to less advanced emerging markets, such as Nigeria and Iran, and, therefore, find they have a competitive advantage over U.S. firms in these less advanced emerging markets.

"In Nigeria, for example, Chinese firms may be more knowledgeable than U.S. firms about Nigerian customers, given that the economic development and maturity gap between the U.S. and Nigeria is much greater than between China and Nigeria," Li says.

As U.S. firms go into other emerging markets, they also have to use different learning approaches with their partners in those different countries. Russian firms, for example, are more focused on local domestic markets and tend to develop strategies designed more for survival than for competing over the long term. Chinese companies, on the other hand, often use long-term strategies and support investments in learning new skills.

Li believes that this study has implications for U.S. firms with regard to their expatriate management in emerging markets. "U.S. firms entering emerging markets with the intent of learning have to assign higher quality personnel to their operations in these markets," Li says.

An expert on product innovation and business strategies in China's transition economy, Li has done other research on this emerging market.   Her research appears in a number of scholarly publications, including the Academy of Management Journal, Strategic Management Journal, the Journal of Marketing, Management and Organization Review, the Journal of International Marketing and the International Business Review.

Li earned his bachelor's and master's degrees in economics from Renmin (People's) University of China and his Ph.D. degree from City University of Hong Kong.

For more information on this research, contact Li at haiyang@rice.edu or Debra Thomas in the Jones School at dthomas@rice.edu.