Innovations In Emerging Markets

Russia's Gazprom Board Battles to Up Degrees of Separation from State

A little over six months ago, Russia's energy company Gazprom allowed foreign investors to buy its stock. This week, its board of directors is engaged in a battle which could spell the death knell of the former Soviet ministry once and for all.

The contest for a place on Gazprom's 11-member board will take place at a general shareholders' meeting. The International Herald Tribune describes what is at stake:

"The question is whether an independent outsider -- and perhaps a foreigner, at that -- can break into the [club of government ministers and appointed businessmen] circle and bring a more market-oriented view to the board of one of the largest publicly-traded energy companies."   

Global investors have been watching Russian companies closely over the past year or so, unhappy  about the ties that bind many --especially those in Russia's vital natural resources sectors-- with the Kremlin. The battle shaping up for admission of foreign investors to the Gazprom board of directors will be a watershed mark for instituting several degrees of separation between Russia's firms and the state.

New Business Mantra Drives India Firm's Creation of $2,000 Car

The keys to successful competition in emerging markets, we've said in an earlier post, is to innovate, customize, and cut prices. The latest case in point: India's Tata Group is ready to introduce a $2,000 car to the Indian market as early as 2008.

By applying the formula of tailoring products to the needs of its local consumer base, the Tata Group is poised to revolutionize the concept of mass transportation. A great thing, says World Resources Institute's NextBillion.net blog posting, where we first saw this item. While voicing concerns about the impact of more cars,the post correctly underlines the most direct effect of the revolution: Tata's innovation is making transportation accessible to millions among India's neediest.

With transportation comes access to markets, and with access to markets, millions have a better shot at a livelihood. In IFC's book, that's the crucial first step toward development.   

Korea Kookmin Bank Strategy To Lead in Asia Does Not Include China

It's the season for startling pronouncements by global company CEOs. We just ran a post about IBM chief Sam Palmisano calling for a major shift in the business models of multinationals. A week earlier, Korea's Kookmin Bank chief Kang Chung-won cautioned firms against rushing into China.

The head of Korea's largest lender, which is also looking to become Asia's leading bank, explains his reasoning in a June 14 interview with the Financial Times (closed access). "We are looking at emerging markets with good bureaucracies that are committed to growth," Kang said. Vietnam, India, and Indonesia are at the top of Kookmin Bank's list of markets to expand into. Beyond Asia, he says Russia, Kazakhstan, and Ukraine have great potential too.

Commenting on the attractiveness of the Chinese market, where South Korea is the largest foreign investor, Kang notes: "A lot of Korean companies have moved to China and they are having difficulties." He added Korean companies such as Samsung, Hyundai, and SK Corp have invested heavily in China, but the country was a "tough market" for firms.

Africans Aim for Bigger Slice of Global Investments Pie

Africa attracted 3 percent of last year's international investment, according to a senior South African official quoted in EngineeringNews.com. That's 3 percent of net private capital flows to developing countries, which World Bank Group data showed reached $491 billion in 2005.

What must Africa do to capture more of the private capital looking for sustainable investments around the globe? The official says local promotion agencies should work on expanding investments in the region to the agribusiness and manufacturing sectors. So far, the bulk of investments has gone to resource-rich countries and has bypassed others. And more emphasis should be put on the burgeoning Asian investment in the region.

That would be working in step with local government and global initiatives underway (see Investment Climate Facility for Africa in which IFC is a partner) to help Africa get a bigger slice of the global foreign investments pie.

 

The End of the Multinational Business Model?

IBM's Sam Palmisano has announced the end of the multinational. That, at least, is ComputerWeekly.com's take on the usually taciturn IBM chief executive's recent call for corporations to become globally integrated enterprises rather than simply offloading activities to low-wage countries. Palmisano wrote in the Financial Times that a more integrated way of organizing business activities is inherently more profitable and benefits developing countries.

Palmisano's declaration may appear self-serving -- it was coupled with news of a $6 billion IBM investment program in India -- but it will resonate among his peers. Like the "End of History" heralded by Francis Fukuyama at the conclusion of the cold war, the hyperbole contains a valid insight: greater integration between foreign investment projects and the local economy is a win-win proposition.

On the other hand, integrating the projects of foreign investors into a local economy can be surprisingly hard to do. Project managers want to buy locally, for example, but they need assurances of quality and consistency of supply. Local suppliers often need technical support and financing to become credible suppliers. Last, but not least, the local business environment may need improving. IFC has long worked with clients on projects in emerging markets. Click here for more details.

The end of the multinational is not near, but the end of the "enclave" project is. The shift to a new model of integration with the local economy is a win-win for foreign investor and host country -- and it is taking place before our eyes.

Eastern European Firms -- Where Are They on the Innovations Track?

Eastern European firms are attracting their fair share of investors, and some are wooing --who else?-- China. Though the record varies across the region, solid performances amid increasingly political stability is the norm, with some anxious questions being raised by investors, in some cases on the extent of governance and pace of reforms. What's striking, however, is the absence of reports on innovations --especially set against the seeming deluge of changes in global business models initiated by firms in Asia.

Poland, the Czech Republic, Hungary, Slovakia, Slovenia, and Croatia represent an investor-friendly business environment characterized by political stability, proximity to other European markets, and skilled labor, an Ernst & Young report says. Romania is not doing as well on reforming its business environment, prompting requests by American, British, and Canadian investors for changes in taxation policies, the Bucharest Daily News says. Bulgaria, meanwhile, is beefing up its commercial ties with China and expanding export opportunities for its high tech, pharmaceutical, and energy sectors.

This is admittedly a cursory review of the most recent Eastern European business news. It is certainly not enough to draw any conclusion about where the region's firms ft in the global innovations picture. However, a recent article in Silicon.com is telling. It notes that a survey of companies found a "general trend of innovation moving East" away from Europe, to China and India. More than three-quarters of new research and development sites to be set up over the next three years will be in the latter two countries, the Booz Allen Hamilton/Insead study said.

Foreign Investors Stay Away from Firms with Poor Corporate Governance

A study on investment decision-making by U.S. firms finds that they shy away most from overseas companies with ownership structures that "are more conducive to outside investor expropriation." The study of 4,411 firms in 29 emerging and developed markets is carried by the Development Gateway. It notes that lack of information about firms and the state of national legal institutions are greater factors in investment decisions than a country's economic development.

In an era when foreign capital is an increasingly important source of financing for emerging market companies in particular, the study's findings go a long way toward answering the question of whether corporate governance matters and how to address it.       

Vietnam Small-Scale Producers Hardest-hit by Avian Flu

Small scale farm producers in Vietnam suffered the most in relative terms among producers, following the last outbreak of the avian flu in that country. Their losses were equivalent to upwards of 50 times their daily income ($2 a day or less).

In the dairy farming sector in Kenya in the 1980s, losses in milk production accounted for 30 percent of all losses caused by an outbreak of foot and mouth disease. The economic ripple effects of animal diseases, including avian flu, is the focus of World Bank Group initiatives, which also address the human and social toll.

The World Bank Group is providing $500 million in financing as part of an international effort to strengthen countries’ abilities to coordinate, monitor, and implement measures against future threats from livestock-borne diseases.

Small scale producers of poultry in Egypt received IFC support to address the risk of an outbreak in that country. IFC is also working more broadly to address the challenges faced by business and the general public in other emerging markets.

Green Growth: Not an Either/Or Proposition in South Africa

Recent postings on South Africa's Business Day site reflected an interesting discussion on their country's need to mesh growth and environmental responsibility. One posting said: "Striving for higher growth in SA is not incompatible with observing the highest environmental standards."

Anyone interested in how the debate is shaping up in emerging markets such as South Africa should look into this discussion. Managing national development by fostering growth and environmental responsibility is the focus of a dialogue that is alive and well in those countries. Their citizens are dealing with the nuts and bolts of the issue as it unfolds on the ground, addressing the roles of government, business, and society, working in tandem to achieve the goal of sustainable development.

Yet another reason why emerging markets are increasingly the engines of innovation on a wide range of global business trends, as well as global public goods. 

Innovations Not Just in BRIC Firms Anymore

Firms in BRIC (Brazil, Russia, India, China) countries usually get all the attention. But companies in emerging markets such as Malaysia, South Africa, or Vietnam merit a closer look. Several articles in those countries's business publications over the past week attest to the level of activity and the corporate development strides made by companies in each.

Vietnam's Saigon Times Weekly provides a listing of companies on the move in the country's priority sectors, including tourism and IT. In Malaysia's Straits Times, the talk is of intra-regional competitiveness and investment opportunities in India. South Africa's Business Day, meanwhile, carries a discussion of the country's human skills capital and its potential for attracting foreign investors.

The business coverage in those sources reflects the difference in the level of development within each country. But for foreign investors looking beyond the big players in emerging markets, they provide a treasure trove of information about firms innovating quietly in a wide range of sectors.

There are many others besides Malaysia, South Africa, and Vietnam that are worth watching closely, of course. IFC is involved in providing both lending and technical assistance to firms in developing countries, in the BRIC countries and well beyond (see IFC activities in Africa). In the race to reduce poverty and improve lives in developing countries through sustainable investments and jobs, it is important to post this reminder that innovations in emerging markets is not just happening in BRIC countries anymore.