The business world today is filled with apparent contradictions. The advent of internet, cloud based computing and social media has broken down communication barriers in an unprecedented manner.
The free movement of people between countries has also increased to extraordinary levels. Offsetting this has been the tendency for many countries to further restrict immigration and erect trade barriers. Paradoxically, both these trends have compelled international businesses to look seriously at emerging market countries.
Brazil, Russia, India and China (BRIC) have often been listed as emerging market countries. However, it is a moot point as to whether the world’s second largest economy by GDP (China) and sixth largest (India) are emerging market countries or whether they have already emerged on the world scene! Setting Russia aside (because of sanctions), BIC would therefore form a grouping of three countries with characteristics that include those of developed and emerging market economies.
Excluding BIC, the following countries could be top 5 contenders:
- Philippines
- Vietnam
- Bangladesh
- Mexico
- Costa Rica
Here’s a deeper dive: The Philippines has a pool of available skilled labor with a profile very similar to India’s 15-20 years ago. Similarly, Vietnam is today a low-cost manufacturing location just as China was approximately 20 years ago. Bangladesh also offers low cost unskilled labor especially within the garment industry while Mexico has the advantage of being part of USMCA – NAFTA’s successor. Similarly, for companies looking to do business in Latin America (LatAm), Costa Rica offers a stable political environment with plenty of available skilled labor.
Proceed with Caution
However, before venturing too far, too fast, you need to be aware that all emerging market economies share the following characteristics:
Regulations and Bureaucracy
There is considerable red tape, time and costs involved in setting up subsidiary companies. Obvious though it may seem, a business must first check if the proposed activities are allowable in the country. For example, China and India do not allow businesses to operate in certain sectors either at all or without local joint venture (JV) participation.
Regarding taxes, the tax authorities in each country will want their fair share of the tax on profits even if the subsidiary involved is a cost center and not a profit center. It is therefore very important that businesses show they are operating at arm’s length by producing appropriate transfer pricing agreements. These could be buy/sell based or for cost centers be based on the OECD recognized cost plus model (Brazil is an exception). In either case, the transfer price or cost-plus percentage needs to be benchmarked to show they are set at arm’s length rates. Benchmarking exercises of this type can be complex, but it is essential they are done to avoid problems later.
Labor Laws and HR Aspects
India is one of the easiest countries to hire and fire white collar employees because jobs are abundant. In addition, the risks of employee driven law suits is low. However, retaining skilled staff is problematic but understanding the local culture and making efforts to help employees learn new skills goes a long way to improving retention.
Employee retention is less of an issue in the Philippines because of high unemployment even in the skilled sector. However, there is a dearth of management talent and IT resources in niche technical areas such as artificial intelligence (AI) and cybersecurity software which is not the case in India.
Conversely, Brazil has draconian employment laws and in addition to this there is “an entitlement” culture that results in frequent employee driven law suits. However, any company doing business in LatAm cannot ignore Brazil, its largest economy. although market entry costs are high in Brazil and it will generally take time and effort to operate profitably.
Outsourced Manufacturing
Vietnam and Bangladesh have often been mentioned as promising locations for outsourced manufacturing (as has also Indonesia). However, any business with potential long-term plans to operate in these countries needs to consider the following factors among others:
- To what extent will advances in robotic technology allied with AI reduce costs so that it becomes more cost effective to manufacture and sell at home?
- Is the location close to my markets and what are the freight costs (now and in the future) to move product from where it is produced to where it sells?
- How robust is the power, water and transport infrastructure in my target country?
- How easy is it to operate without falling foul of home country anti-corrupt practices regulations?
This is a brief glimpse into a few key aspects businesses should consider when exploring expansion to an emerging market country.
The choice of countries and the issues involved are somewhat subjective but many of the issues that need tackling are common. It is therefore best to be well-informed before undertaking expansion to many of these exciting yet challenging markets.
Shan Nair is the president of Nucleus, a one-stop global expansion solution for businesses and a consultant on international expansion.