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Measuring The Potential Of Emerging Markets: An Indexing Approach S, Tamer Cavusgil

A

number of worldwide trends are making 3 group of economies prime targets for Western companies-the so-callecl emerging markets. As industrialized countries continue to mature, these markets have become increasingly more attractive and promising as a market for technology and goods as well as 3 pool for offshore sourcing. Ongoing economic liberalization, more markets open to international competition, and rising consumer expectations are some of the reasons these nations require special attention by Western companies. Just what constitutes an emerging market? Essentially, these are high-growth developing countries that represent attractive business opportunities for Western firms. The 1J.S. Department of Commerce lists 18 “Big Emerging Markets”: China, Hong Kong, Taiwan (the Chinese Economic Area), Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei (ASEAN), Vietnam, India, South Korea, Argentina, Mexico, Brazil, Poland, Turkey, and South Africa. The Ecwmrzisi adds Chile, Venezuela, Greece, Israel, Ibtugal, the Czech Republic, Hungary, and Russia. The emerging markets (EMs) share remarkable features in terms of economic potential. Some are large ~~~~rapI~j~ally. ~el~lo~r~phi~~lly they have a young labor force. They are attractive for both selling and sourcing, enjoy outstanding growth rates and prospects for market expansion, and have undertaken significant economic reforms. In addition, many EMS zre a major political influence in their region :ts well ;ts a regional economic driver. The economic potential of EMS is already well established. As a group, they comprise more than half the world population and account for a large share of global output. They offer promisMeasuring

The Potential

Of Emerging

Markets:

An Indexing

ing opportunities for trade as their need increases for capital equipment, machinery, power transmission equipment, transportation equipment, and high-technology products. EMS pose special chdlenges for Western firms. Many have an inadequate cotnmercial infrastructure, such as banking and transportation. Distribution and channels are usually underdeveloped and inefficient. ~e~#~~~~ of Western firms often have difficulty identifying qualified, competent intermecliaries. The government sector is often the primary economic actor. In many cases, a state-owned enterprise is slow in decision making, and large national debt has produced an inflationary economy-a situation with which many Western managers are unfamiliar. Moreover, environmental awareness is rising in EMS, and ethical issues are uncler increasing scrutiny. Despite these challenges, no ~rowtl~-tnin~ie~~ company can overlook the potential EMS hold out. What strategies are appropriate for capitalizing on this potential? Three issues must be considered: (1) tnarket potential estimation and access; (2) market entry; and (3) market establishment. Although each step in foreign market expansion is critical, the initial assessment of opportunities is especially important. Various techniques can be used, such as gathering background information (desk research), evaluating unsolicited inquiries from foreign customers, and monitoring

Approach

~~~e~~r#~~e each

Figure 1 Guidelines

For Doing Business

In Emerging

Markets

PHASE 1: Mark& Potential Assessment and Access l

i

l l l l l

Engage in formal market potential Gather market intelligence

Employ early monitoring and he 3 “first mover” Tie into informal networks of influence Offer financing 3s well 3s technical expertise and solutions Explore government incentives and procurement

I PHASE 2: Market Entrv l l l l l

l l l l

I

Choose qualified partners c:uefull>~; hild their calx~hilitics ln\,est in long-term rel;itionshipa 13~culturally sensitive Consider adapting product features, selling qxoadi. etc. Ue prcparecl to deal with inadequate conimercial infrastructure

PHASE 3: Market Establishment l

analysis

I

Adjust to operating in ;I high infl:~tion;cleh environment. leading to commercial and currency risk Learn to deal \vith lalxx force productivity and niotivation issues He prcpxed to deal with government bweaucr:icy and regulations Look for opportunities in sourcing Espand networks and :rlliances

competitor acti\,ity. A formal and systematic analysis of aggregate market potential can be particul3rly fruitful; such is the focus of this ;irtitle. Verifying m:irket potential and qu;mCfying opportunity in a foreign market can bc vital to ;I firm’s success. Sufficienr c~onsideration must :ilso Ix given to qualifying market opportunity. Managerial guidelines for the three phases of :I foreign marketing strategy arc offered in Figure 1. The Study

The study reported here develops and illustrates a methodology for quantifying and mnking the market potential of 25 countries identifiiecl as EMS I,v the fkorwr~2ist. (Taiwan LV;ISexcluded txxiiise oi insufficienr data. ) An index was devek~pec~ to masure market potential in EMS. First. 13 economic. political. and social vari;it3les Lvere chosen to characterize ;I market’s attractiveness from the \.ie\\rpoint of Western management. These 13 variables represent the se\w3 funcl;inicnt:~l dimensions to consider when determining the 0vcr:ill attractiveness of ;I marker (sho\\n in Figure 2). Next, an index was created from the raw values of the 13 ~ariahles by st:mct;irdizing the items and purling them into :L scale of 1 to 100 by ;I formuh. (Stanclarttization is ;i statistical procedure enabling us to directly compare \3riat~les \\?th \w-y different distributions. The original data are

first transformed into standardized data, or zscores, before country comparisons are attempted.) Third, the relative importance of each dimension was determined by interviewing a small number of international business professionals and educators (a Delphi process). The result was the relative weights shown in the second column of Figure 2. Finally, the seven dimensions were combined into the Overall Market Opportunity Index (OMOI) by using the corresponding weights. To avoid the effects of variance :)f each dimension on the final index, the figures used to calculate the l-100 scales for each dimension were again stnndarclizecl; the Lveights were then applied to the z-scores and conversion into a l-100 scale established the OMOI. The index values for each dimension and the OMOI are presented in Figure 3. The data used were for the most recent year awilatde. The Seven Dimensions of Market Opportunity Each of the dimensions that comprise the OMOI is descrihecl briefly, 3s follo\vs: Market Size. Measured by a country’s total population, market size serves as 3 rough estimate of market potential. Although the entire country niac’ not be targeted by any one conipany, total &pulation indicates the relative iniportanc‘e of that countv’s market. The relative weight for this \wiat,le is 4’20. Market Growth Rate. Also measured hy ;I single variatde, average annual gro\vth rate of inclustv, this important dimension was given :I weight of 3/20. Industri~ilization triggers expenditures on ;I w.ide variety of goods 3rd set-\%w. Market Intensity. ‘~LVOvari;lbles were used to measure market intensity: ( 1) purchasing power parity (1’1’1’)estimates of GNP per capita. and (2) personal consumption expenditure pet capita in I1.S. dollars. l-‘W is measured by \vages. salaries, employee benefits, corporate earnings, income from business operations, net interest, and royalties, using the U.S. 21s;I t~enchnurk (\~ilue = 100 for the Li.S., vbith other countries estimated proi”)rtion~itely). Personal consumption expenditure per capita represents tlic vduc of purchases t>y households :ind private nonprofit institutions on current goods and sen;ices. less the sdc of similar goods, tlividecl by the fatal population. Unlike GNP per capita, this varialde is oriented more toa.3r.d pri\*;ite expenditures ;ind exclucles txsiness mnwctions. To produce :I single index of m:lrket intensity, each mewurt’ was converted to 21 z-score and :ireraged for each country, with the me:in values expressed hy ;i l100 scale. The cveight of this dimension is 5’20. Market Consumption Capacity. The size of rhc middle class was used as 3 measure of mar-

Figure 2 Dimensions And Measures Of Foreign Market Potential

Weight

Dimension Market Size Market Growth

Rate

4/20

l

Total population

3/20

l

Average annual growth

3/20

l

Market Intensity

Market Consumption Commercial

Measures

Capacity

Infrastructure

l

PPP estimates of GNP per capita (50% weight) Private consumption expenditure per capita (50% weight)

2/20

l

Size of the middle class

2/20

l l l l l

Economic

Freedom

Market Receptivity

rate of industry

2120

l

4120

l

l

Telephone Paved road Trucks and Population Percentage

mainlines per capita (20% weight) density (20% weight) buses per capita (20% weight) per retail outlet (20% weight) of homes with color TV (2O?/uweight)

The Economic Freedom Index (Johnson and Sheehy 19951, which measures trade policy, taxation policy, government consumption of economic output. monetary and banking policy. capital flows and foreign investment. w~age and price controls. property rights, regulatory climate. and black market activity Average annual growth rate of imports from the U.S. over the past five years (6W weight) Per capita imports from the 1J.S. (40?4 weight)

Figure 3 Market Potential Indicators For 23 Emerging Markets

Countq

Market Size

Market Growth Rate

Market Intensity

Runk ImIex

Runk Index

Rank Index

China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Thailand Argentina Brazil Chile Mexico Venezuela Greece Israel Portugal South Africa Turkey Czech Rep, Hungary Poland Russia

Mrasuring

The Potentid

1 21 : 15 7 23 10 9 13 4 16 6 14 17 22 20 11 8 18 19 12 5

100 1 76 17 2 6 1 4 6 4 14 2 8 3 2 1 2 4 6 2 2 4 13

Of Emerging

1 16 16

100 51 51

2 18 15 10 6 3 4 5 13 9 19 8

:::

41 63

14 11 20 12 7 21

52 57 30 56 64 1

51 59 70 72 71 71 53

62

22 1 23 21 10 20 2 16 9 15 7 14 :: 3 5 13 19 12 11 18 17

Markets: An Indexing

4 100 1 7 28 7 89 44 19 28 22 29 26

29

54 86 50 26 15 27 27 16 18

Approach

Market Consumption Capacity Runk Imlex 4 : 7 14 12 10 5 13

88 71 80 77 46 63 64 82 53

18 16 15 11

1 25 39 63

3

98

17

12

1 2 8

100 100 72

Commercial Infrastructure Rank Index 20 262 21 14 23 3 5 17 4 19 18 16 8 1 7 2 12 13 15 9 10 11

13 50 4 9 32 1 54 52 26 53 16 24 26 47 100 2: 32 32 31 43 40 32

Economic Freedom Rank Index 23 1 22 20 4 18 : 6 11 18 7 15 12 8 16 8 12 12 3 8 17 21

1 100 5 18 65 20 100 65 59 SI; 20 51 30 32 40 28 40 32 32 67 40 22 17

Market Receptivity Rauk

lrrciex

5 10 18 15 13 14 t

42 25 11 18 20 19 100 44 56 11 38 34 50 3 11 24 9 27 6 22 1 4 35

2 17 6 8 3 22 16 11 19 9 20 12 23 21 7

OMOI Rurlk Irrdex 2 3 12 20 8 23 : 6 10 15 13 11 17 7 ; 19 21 1x 14 16 22

z 31 13 37 1 100 58 48 32 23 31 32 21 40 56 33 15 11 17 24

22 7

ket consumption capacity. The proportion of the population earning 20 to 80 percent of 3 nation’s income indicates the spread of the consumption base. Neither poor nor rich, middle class consumers have a reasonable degree of spending capacity. For most marketers of consumer goods, this is the target segment. The dimension was given a weight of 2/20. Commercial Infrastructure. The ease of access to distribution and communication channels indicates the attractiveness of a market from the standpoint of commercial infrastructure. Five variables measure this dimension: telephone mainlines per capita, density of paved roads, trucks and buses per capita, population per retail outlet. and percentage of homes with color television sets. All five were standardized and given equal weight within the dimension. Then, converted into a l-100 scale, the dimension was weighted 2/20. Economic Freedom. The measure of economic freedom is an index developed for the Heritage Foundation by Johnson and She&y (1995). It incorporates trade and taxation policy. government consumption of economic output, monetary and banking policy, capital flows ancl “The OMOI rankings are foreign investment. wage perhaps most useful for and price controls, property rights. regulatory gaining insight abouf policy. and black market individual markets in a activity. The index ranges from l-5 (most free to comparative sense. /I least free). but for the purposes of this study it was reversed, so that higher values should rcpresent freer markets, and reconverted into a l-100 scale. The dimension was weighted as 2/20. Market Receptivity. The extent to which a foreign market is open to IJ.S. imports is represented 1,); two nriables: per capita imports from the LJnited States and the average annual growth in U.S. imports over the past five years. The cli mension has a weight of 4/‘20. Limitations

of the Index

Managers need to use some care in applying the in&x presented in Figure 3. First, the OMOI is an aggregate measul-e of an EM’s attractiveness and is useful only in the initial stage of qualifying and ranking countries. For the market entry and market establishment stages. much more detailed and in-depth analysis are required, such as that provided in Cavusgil (19x5). Second. although the seven dimensions provide a comprehensive characterization, additional aspects and alternative measures can be considered. For example, a more explicit representation of risk (commercial,

monetary, and political) can be accommodated. In the OMOI. risk is imbedded in the market receptivity dimension, because this reflects the openness of a country’s U.S. imports. Third, the index is designed primarily for exporting companies. Rusinesses considering other forms of entry, such as direct investments and equity ventures, need to examine additional variables. A final caveat about the reliability of the statistics used: The most credible sources and most recent available data were used, but, as with any data set, there is always room for improvement. Measuring Market Attractiveness Using The OMOI

With the stated limitations in mind, the OMOI can provide managers with valuable insights into the nature of EMS. Although the EMS clo share certain features, the index shows that considerable diversity remains. The rankings for each dimension (shown in Figure 3) reveal significant variation. China, for example, is first in market size, but next-to-last in market intensity, 1ow in commercial infrastructure. and last in economic freedom. Nevertheless, because of weighting, China’s OMOI is high. EMS near the top in overall market opportunity are Singapore, China. Hong Kong, South Korea, Israel. Thailand, Greece, and Malaysia. It is noteworthy that six of these are in Asia. This is further evidence that Western companies eager to tap high-growth markets should concentrate on the Far East and develop their capabilities ancl resources accordingly. Progressive managers should be t~uilding relationships with potential business partners in these markets. Other considerations, of course, need to he examined. Singapore ranks first among EMS hut is limited in resources and population. The future of Hong Kong after 1997 is uncertain. Companies also sho~ild he developing a regional strategy to maximize potential synergies among Asian countries. It is important for managers to focus especially on the climensions and measures most relevant to their own products or services. such as the target market, distribution channels, and intensity of competition. For example. marketers of soft drinks will concentrate on surrogate indicators of protluct tlemand very different from those examined by medical equipment marketers. It is also reasonable to expect that the weight of each dimension may have to be revised for ciifferent companies and circumstances. The OMOI rankings are perhaps most useful for gaining insight about inciividual markets in a compardtive sense. The index helps reduce the complexity of evaluating the relative attractiveness of EMS. With this knowleclge of the tradeoffs involved in choosing among EMS. managers

can be more objective and systematic in selecting candidate markets. Once the number to be investigated is reduced to a manageable few, managers then can proceed to in-depth analysis of the most promising EMS. The value of an approach that ranks countries by their attractiveness as export markets can best be achieved over time. It is hoped that the rankings are validated in time when they parallel actual exports to those countries. Thoughtful managers may wish to monitor the degree to which their exports correspond to the OMOI, as well as the individual dimensions and measures. Adjustments may need to be made to the weights, dimensions, or measures if the OMOI is failing to anticipate actual export activity. Managers should also be cognizant of major macroeconomic events or country-specific developments that can cause readjustments in the rankings. For example, India-now ranked 12th overall-may fall several places if market liberalization is reversed fundamentally by a new political regime. Accession of Hungary and Poland into the European Union may lead to their transacting a higher proportion of external trade with Western Europe rather than the United States. Rapid introduction of modern banking and legal infrastructure, on the other hand, should enable Russia to move into a position of a more attractive export market than is suggested by its current OMOI ranking. And in South America, the establishment of the Mercosur Trading Area should substantially enhance the attractiveness of such countries as Argentina and Brazil.

small set of candidates for entry is selected, as suggested in Figure 1, the next step is in-depth analysis. This typically requires field research; visits are essential to verify potential and interview business partners. A competitive analysis also needs to be conducted. Sources of market intelligence at this stage include commercial banks, intermediaries, advertising/research firms, the U.S. and Foreign Commercial Service, and companies in non-competing businesses. The indexing approach proposed here provides a systematic tool for reducing the complexity of evaluation. An examination of the seven dimensions of market potential and the OMOI should provide sound insights into essential aspects of EMS. 0

I

National Trade Data Bank, U.S. Department of Conmerce, Economics and Statistics Administration.

n 1994, U.S. merchandise exports to the 18 emerging markets identified by the U.S. Department of Commerce totaled $159 billion, or approximately 30 percent of all such exports. In fact, these EMS import about as much merchandise from the U.S. as do Japan and the European Union combined. The U.S. Department of Commerce estimates that, over the next ten years, these countries could account for well over $1 trillion in infrastructure projects-energy exploration and generation, airports and air traffic control systems, telephones and satellites, hospitals and health care systems, auto and auto parts production, banking and insurance, and environmental clean-up. Competition for all these projects will be intense. Managers need to assess the opportunities methodically, carefully screening, qualifying, and selecting attractive target markets. Once a

Measuring

The Potential

Of Emerging

Markets: An Indexing

References

“The Big Emerging Markets Initiative,” America, August 1995, pp. 4-14.

Business

“Indicators of Market Size For 117 Countries,” International, July 1992, pp. 205-216.

Business

S. Tamer Cavusgil, “Guidelines For Export Market Research,” Business Horizons, November-December 1985, pp. 27-33. International Euromonitor.

Marketing 1994).

Data And Statistics (London:

H.T. Johnson and T. Sheehy, The Index Freedom (Washington, DC: The Heritage 1995).

World Development Report (Washington, World Bank, 1994).

Approach

QfEconomic Foundation,

DC: The

S. Tamer Cavusgil is the John William Byington Endowed Chair in Global Marketing at Michigan State University, East Lansing, Michigan, and Executive Director of MSU’s Center for International Business Education and Research. He gratefully acknowledges the assistance of Ms. Ayse Topaloglu of the international Business Center with data collection and analysis.

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