Emerging Versus Developed Economies: Do the business prospects differ?

“In the land of the blind, the one-eyed man is king.”

What does this statement by the sixteenth-century Dutch author and philosopher Erasmus have to do with conducting business in the twenty-first?

Plenty, it turns out.

Aya Chacar

“Many people believe that in emerging economies, competition is weaker, enabling new players to be like the one-eyed man in the land of the blind,” said Aya Chacar, assistant professor in the Management and International Business Department in the College of Business Administration, whose research focuses on competition, innovation, and change.

However, when she and a colleague compared data on all public manufacturing companies in India—their exemplar of an emerging economy—and the United States, representing a developed economy, their findings were quite different. The research found no difference between the countries in terms of how much companies with superior performance sustained their profitability. Over time, the performance of these companies declined and came closer to the average.

“Competition is just as strong in India for these manufacturing companies,” Chacar said. “In fact, local car companies in India are outpacing established automakers like Volkswagen and General Motors in the Indian market.”

The study also examined how below-average performers fared in the long run. Here, the results conformed to the expectation that performance would improve.

“What we saw is in line with economic theory predictions,” she said. “Poorly-performing companies in the United States face strong discipline from the market and from investors.”

Persistence does not always pay.

Indian companies that performed poorly, however, saw their performance persist more. Persistence of poor performance is important because it often reflects a waste of resources and squandering of investors’ monies. Among the possible reasons:

  • the market discipline may not be as strong, and investors—possibly family members—may not give managers sufficient incentives to improve quickly;
  • alternatively, existing regulations may impede improvement, such as policies that prevent businesses from closing due to concern for employees.

The researchers also explored the persistence of below-average performing companies that are independent, or that are part of multinational corporations (MNCs) or Indian business houses—business groupings similar to those of some American conglomerates.

“We had expected below-average performance by MNC subsidiaries to persist less,” Chacar said. “After all, managers should be under more pressure from the parent company, which would eventually sell divisions that aren’t profitable and invest in more profitable businesses. We expected the same for companies affiliated with business houses, which are thought to help and to push their affiliates to improve their performance in those countries where investor groups are not as strong.”

Once again, the research revealed a different situation. It was standalone companies that improved more.

According to Chacar, the research holds a crucial lesson for business people: innovation is key.

“Though the competitive environment is important, it is dwarfed by companies’ own resources, and most importantly, by their ability to innovate,” she said. “Plenty of companies do extremely well in highly-competitive industries and countries, and even hang on to their performance. Many do poorly and fail in less competitive environments. Managers need to invest continuously in their companies’ development to stay at the cutting edge, and they need to provide products and services that customers want and that other companies cannot provide as easily.”

Small companies, and even giants like Wal-Mart, are vulnerable if they stop evolving.

“Wal-Mart has been struggling for a while in Germany because it has not figured out how to increase its relevance to German customers,” Chacar said. “The company recently pulled out of the South Korean market, where it could not reach a significant market position.”

Chacar and Balagopal Vissa, previously her PhD student and now a colleague at INSEAD, published their findings in an article titled “Are Emerging Economies Less Efficient? Performance Persistence and the Impact of Business Group Affiliation,” which appeared recently in the Strategic Management Journal, the leading journal devoted to business strategy.

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