How to create lasting value in a fast-changing global trading environment

EMERGING MARKET OPPORTUNITIES

Emerging markets offer western businesses significant value-creation opportunities, but they also present a very different set of risks.

In Brief

• How to define value creation and why businesses operating in new markets accrue value differently
• Implications for inbound companies – how rules governing intellectual property, data privacy and establishment, typically diverge from developed economies
• Three steps businesses should take to help determine what long-term investments to make, which countries to invest in and how to establish their operations

Global trade is undergoing a period of unprecedented change, which is opening up new opportunities for businesses looking to create value whilst having to navigate volatile geopolitics and divergent regulatory and trading regimes. This article identifies a number of areas that could present challenges to businesses seeking value-creation opportunities in emerging markets and recommends three steps to manage them.

What is value creation?

Value creation refers to more than financial returns. It considers longer-term value to a wider pool of stakeholders, factoring in social and environmental impacts. For our client’s businesses, creating value in new markets could involve investing in new manufacturing capabilities, greening supply chains or adapting to emerging technologies.

Looking to new markets

From the end of the Cold War until the turn of the 20th century, global trade was dominated by three players: the US, Europe and Japan. From 2006, the balance began to shift with the emergence of the BRICS countries, comprising Brazil, Russia, India, China and, most recently, South Africa. Multinational businesses seeking to accrue, grow and maximize value from these countries soon learnt that existing business models and assumptions did not work as well in emerging markets. With the arrival of new players, the pieces of the global trade jigsaw no longer fitted together as seamlessly as they once did.

This lesson has become even clearer as nations continue to develop and grow. In addition to the BRICS members, the countries that are shifting the world’s center of gravity for economic and population growth include emerging markets such as Vietnam, Egypt, Indonesia, Kenya, Mexico, Nigeria and Turkey, all of which will become increasingly important. This shift has profound implications for international trade and investment flows over the next two decades and beyond. It will add new layers of complexity that businesses must take into account when making long-term investment decisions.

As Herbert Reutter, Chief Operating Officer of MPKi, puts it, “Basing future plans on yesterday’s solutions make no sense. Businesses need to recognize that the world’s emerging economies do things differently. This means that a business operating in these economies will accrue value differently to the way it would have accrued value using a business model suited to more homogenous, less fragmented trading environments. The timing changes, the location changes, the quantum changes, everything changes – and we need to respond accordingly.”

Through research and data analysis, MPKi has identified several key areas that demand particular attention from businesses making long-term investment decisions: intellectual property (IP) and intangible assets; data privacy and commercial secrecy; and establishment and financing.

Intellectual property and intangible assets

Whilst the international frameworks and treaties governing IP apply to all 193 members of the World Intellectual Property Organization (WIPO), the way different economies interpret and apply their legal and regulatory frameworks can differ greatly. As a result, businesses need to deal with variations in local ownership rules, challenges associated with protection and enforcement as well as tax barriers to value-creation chains that have highly centralized IP.

The IP environment in many countries is evolving, often in positive ways. China, for example, is seeking to establish more comprehensive IP protection laws. The opening paragraph of the US-China trade agreement (pdf) signed in 2020 states: “China recognizes the importance of establishing and implementing a comprehensive legal system of intellectual property protection and enforcement as it transforms from a major intellectual property consumer to a major intellectual property producer.”

In contrast, a Brazilian Court has recently created significant uncertainty for patent holders. In 2021, the country’s Supreme Court declared that an element of industrial property law that enabled patents to be enforceable for 10 years from the date they are granted was unconstitutional. This meant that patents are now limited to 20 years from the date of application, regardless of the date they were granted – and it is not uncommon for the Brazilian patent office to take well over a decade to grant a patent. The ruling meant patents being approved with reduced duration of protection; and in the case of pharmaceuticals, the ruling was applied retroactively, resulting in terms being shortened.

Data privacy and commercial secrecy

There are also marked variations in data protection regulations between different territories. Even the developed world has no common standard and there is a wide divergence between the US and EU. Without a global consensus on how to protect data, it is anticipated that mismatches between regulations at domestic level will continue to create friction and risk around trade. Overseas retailers expanding into India, for example, have discovered that regulatory amendments have forced them to change their business models.

Establishment and financing

When establishing a presence in a new market, businesses must consider a number of regulatory requirements. They may, for example, encounter restrictions linked to quotas, joint venture requirements, residency rules covering legal entities and management. Other restrictions might apply to nationality obligations, licensing or equity caps. Different sectors face higher barriers to establishment than others. Traditionally, the BRICS countries and other emerging economies have higher barriers than the US-Europe-Japan grouping, although new barriers and protectionism have been rising globally since the 2007-08 financial crisis.

Local market knowledge

Beyond complex and sometimes inconsistent trade regulations lie the more subjective cultural issues that come with creating value in a new territory. Before making long-term strategic investments in emerging economies, it is essential for inbound businesses to do their homework thoroughly and build a detailed knowledge of their target customers’ values, tastes and aspirations. As well as adapting business models to local norms, this also involves tailoring products and services to attract local buyers.

Businesses should also be mindful of the growing challenge to the historic status quo governing the world’s international trade and investment architecture. As Herbert Reutter comments, “It is somewhat blinkered for developed nations to assume that the rest of the world will continue to trade as it always has done – on Western terms. It won’t – and it is risky and potentially very costly to assume

Practical steps for international businesses

Ultimately, creating value in any country demands deep market knowledge supported by informed analysis, attention to detail and an understanding of risk. The same rules apply in the world’s emerging markets – but the risks are very different.

To minimize potential downsides and maximize return on investment, it is recommended that businesses thinking about making long-term investments in emerging economies should follow three steps:

1. Consider the interest of all stakeholders – Consider the interests of all stakeholders, not just financial stakeholders, when determining the investments your business wish to make. This determines what investments to make. For example, the option with the lowest up-front cost may not be the most sustainable or have the greatest longevity.
2. Review new markets carefully – Review new markets carefully, taking into account the full range of factors to identify the best opportunities. This determines where to make investments. Factors might include population forecasts (both in absolute terms but also the relative number of working-age or middle-class people), the possibility of obtaining grants and incentives, infrastructure, educational attainment, political and legal stability, cultural and religious factors, environmental considerations, and many more.
3. Plan for a range of scenarios – Increase long-term value by planning for a range of future scenarios through the development of a dynamic international trade strategy, identifying future value accrual for your business. This determines how to structure investments. Examples include the format of establishment, the availability of trade agreements, and the identification and then mitigation of prioritized market access barriers.

Summary

The rapid rise of emerging markets, especially in Asia and Africa, presents new trading opportunities for Western businesses. To support the creation of long-term value, businesses should develop a strong understanding of the evolving rules and ways of doing business in new markets whether they plan on selling or sourcing product or services. Applying a three-step approach can guide businesses to make more informed decisions about where to invest.