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By TaRUn KHanna & KRiSHna PalePU
Emerging Markets: Look Before You Leap
SPOTTInG MARkET VOIDS
S ince the concept was popularized in the 1980s, emerging markets have i n c r e a s i n g l y a t t r a c te d a t te n t i o n . Multinational corporations regard
emerging markets as a cheap source of manu- facturing, an offshore location for technical support, a driver of growth amid stagnation and financial crisis at home, as well as the front line of new competitive pressures.
Yet emerging markets defy facile catego- rizations. An alternative definition conceives of a market as “emerging” when the special- ized intermediaries necessary for the proper functioning of any market are absent or poorly
functioning, requiring market participants to work to find new ways to bring buyers and sell- ers together for some productive exchange. Put this way, most markets, including those considered developed like the United States, are, to some degree, emerging.
This article discusses emerging markets based on this broad conception. We define the institutional voids that qualify a market as being emerging, and describe the factors that condition their development. With this richer understanding, managers will be in a much better position to leverage emerging opportu- nities in all their guises – whether in Asia, Latin
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think “emerging markets,” and most people think briCs. The problem with this approach is that it is too simplistic and tends to treat emerging markets as one homogeneous whole, when the exact opposite is true. instead of asking, “What’s my emerging market strategy for Brazil, Russia, india or china?” companies should ask themselves, “in which ways is this particular market emerging?” Viewed this way, the answer may surprise them.
The authors synthesize a decade of their research to clear up the confusion that abounds as to whether a
market is or isn’t emerging. They first explain which institutional mechanisms need to be in place for the healthy functioning of any market, so managers will be able to recognize when these vital mechanisms are absent or deficient. Asking a series of key questions will help managers spot voids, making them better equipped not only to tackle the challenges but to leverage emerging opportunities in all their guises – whether in the countries that attract the most attention, or in the United states and Western europe, which may still be “emerging” in some ways.
executive summary
the best opportunities for investors. The problem with this approach is that it is
too simplistic and tends to treat emerging mar- kets as one homogeneous whole, when the ex- act opposite is true. It also tempts multination- al corporations to set their sights exclusively on what they see as the fastest growing markets abroad. They then attempt to fit those foreign markets around their own value proposition, only tinkering here and there at its edges. As a result, their business ventures often fail.
Instead, companies need to work the other way around: They need to adjust their value propositions to the markets they are most in- terested in. Above all, they need to shift their attention to the particular institutional voids that exist in these markets – for it is there the greatest challenges and opportunities exist, as shown by our research on the subject. In this article, we synthesize the lessons of dozens of scholarly and practitioner-oriented papers, 30 cases and our recent book, Winning in Emerging Markets (HBR Press), to clarify the confusion that abounds as to whether a market is or isn’t emerging.
institutional Voids: Key to Understanding emerging Markets In all markets, basic institutional mechanisms perform key functions or value-added activi- ties. We have identified four types of market institutions that need to be present in order for a market to work. If there is an absence or fail- ure of any of these institutional mechanisms, you end up with a malfunctioning market, as we witnessed with the subprime market in the United States.
CreDibiLity eNhaNCers. These include accredi- tation agencies, rating agencies, rankings and auditors, which lend credibility by indepen- dently corroborating sellers’ claims.
iNFormatioNaL aNaLyZers. The more informa- tion available to market participants, the bet- ter the decisions they make, and the smoother the market functions. In this regard, the role of
America and Africa, the regions that attract the most attention, or in North America and West- ern Europe, less typical but no less full of busi- ness potential.
Beyond the BRiCs Over the past decade, business people have tended to define emerging markets along pure- ly geographical lines; hence, the obsession with BRIC (Brazil, Russia, India and China) and all its countless variations: BRICS (plus South Af- rica), BRICET (plus Eastern Europe and Tur- key), BRICM (plus Mexico) and BRICK (plus South Korea).
Then there are the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) and the EAGLEs (the Emerging and Growth-Leading Economies of China, India, Brazil, Indonesia, South Korea, Russia, Mexico, Egypt, Taiwan and Turkey, featured in IESE In- sight Issue 10). Financial institutions regularly produce rankings to highlight which of these markets are growing fastest and/or represent
Over the past decade, business people have tended to define emerging markets along purely geographical lines. This article clarifies the confusion that abounds as to whether a market is or isn’t emerging.
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financial analysts, consumer reports and me- dia rankings is vital.
aGGreGators & Distributors. Big box retail- ers, financial institutions and talent placement agencies bring buyers and sellers together in an efficient way.
traNsaCtioN FaCiLitators. Credit card provid- ers, clearing institutions, brokers and employ- ment exchanges further help to oil the wheels of commerce.
In addition to these four types of market insti-
tarun Khanna is the Jorge Paulo Lemann Professor at Harvard Business school and director of the south Asia institute at Harvard University. He studies and works with multinational and indigenous companies and investors in emerging markets worldwide. He has a degree in engineering from Princeton University and a Phd from Harvard. His work has been published in a range of economics and management journals. He serves on the boards of the global power company Aes and sKs Microfinance, among others, and also mentors startups in Asia. in 2007, the World economic Forum nominated him as a Young Global Leader, and in 2009, he was elected a Fellow of the Academy of international Business.
Krishna Palepu is the Ross Graham Walker Professor of Business Administration at Harvard Business school
and senior Adviser for Global strategy to the President at Harvard University. Prior to this, he was a senior Associate dean at Harvard Business school, leading its global strategy and research programs. during the academic year 2012-13, he has been a visiting professor at the china european international Business school and iese.
He has published more than 100 articles and case studies on governance and strategy, particularly the globalization of emerging markets and the opportunities and challenges for Western investors and multinationals.
He holds a Phd in management from the Massachusetts institute of Technology and an honorary doctorate from the Helsinki school of economics. currently, he chairs and teaches the HBs executive education program The Global Enterprise Leader.
about the authors
tutions, public sector institutions perform two other essential roles: They regulate markets and they adjudicate disputes through government regulators, consumer protection agencies and judicial systems.
To illustrate the necessity of institutional mechanisms, consider this analogy: Suppose you take down the fence around a large, open field. What have you created? A golf course? Not exactly. For it to be one, you would need flags and holes, closely trimmed greens, me- ticulously planned fairways and a clubhouse that creates and enforces a world-class golf- ing culture. By the same token, pure deregu- lation – simply lowering the barriers to entry and creating an open market space for business – doesn’t, in and of itself, create a developed market. What you have, certainly, is a large, open field. But it takes more than that to have a healthy functioning market.
An interesting case in point is Chile. Even after decades of aggressive efforts to create a functioning and effective free-market econ- omy there, vital institutional voids persist in parts of the Chilean economy, once again un- derscoring the painstaking process of creat- ing functioning market institutions, and the forces that constrain the rapid development of markets.
Four Constraints on institutional development A host of factors condition institutional devel- opment, including:
history & PoLitiCs. Take the Shanghai Stock Exchange: Despite all its outward appearances of being a fully functioning stock market, the Shanghai bourse is anything but one – for the simple reason that corporate governance and transparent financial reporting are hard to de- velop in the absence of a vibrant democracy, an independent judiciary and a free press.
humaN CaPitaL. The quality of a country’s hu- man resources depends on various factors in- cluding its levels of labor mobility, education
Pure deregulation – simply lowering the barriers to entry and creating an open market space for business – doesn’t, in and of itself, create a developed market. It takes more than that to have a functioning market.
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and training, and contractual enforcement; the standard of its merit-based performance systems; and its recognition of workers’ rights.
mutuaL DePeNDeNCy. Many of the market insti- tutions depend on the development of other market institutions.
For example, credible financial reporting requires independent auditors; independent auditors can only be trained if world-class educational institutions exist; world-class educational institutions can only be created if there are world-class professors available; developing world-class faculty takes time, and so forth. vesteD iNterests. As markets evolve, there will be losers as well as winners. The big ques- tion is: To what extent do vested interests represent a barrier to the proper functioning of a market? After all, those who stand to lose the most from institutional reform are hardly
Product markets Ask yourself these key questions to spot the voids.
n can companies easily obtain reliable data on consumer tastes and behavior? Are there cultural barriers to market research? do market research firms operate in this environment?
n can consumers easily obtain unbiased information on the quality of the goods and services they want to buy? Are there independent consumer groups?
n can companies access raw materials and components of good quality? is there an extensive network of suppliers? can companies enforce contracts with suppliers?
n How strong are the logistics and transportation infrastructures? Have global logistics companies set up local operations?
n do large retail chains exist? do they reach all consumers or only the wealthiest ones?
n do consumers use credit cards or does cash dominate transactions? can consumers get credit to make purchases? Are data on consumer creditworthiness readily available?
n How do companies deliver after-sales service to consumers? is it possible to set up a nationwide service network? Are third-party service providers available?
n What kind of product-related environmental and safety regulations are in place? How do the authorities enforce regulations?
going to stand by as their privileges and power are eroded.
None of these factors is transient or trivial – quite the opposite, in fact. These factors take decades to evolve to a stage where a country’s institutional structures actively support the proper functioning of a market. What’s more, this evolution happens in an economic con- text that is extremely complex and dynamic. As such, emerging markets are hardly utopian places to do business.
implications for Companies These complexities should serve to enhance our understanding of emerging markets. Rather than viewing them as a monolithic collective of poor but fast-growing geographies, we should think of them as a conceptual framework.
In that sense, markets are “emerging” ev- erywhere, even in pockets of the United States, Western Europe and other supposedly devel- oped markets.
A recent example is the global financial crisis, which resulted directly from the insti- tutional failings of the subprime market – a market that was, to all intents and purposes, “emerging.” Due to myriad institutional fail- ures on the part of both public and private insti- tutions, investors were not fully aware of how to rate, trade and account for the securities be- ing packaged and sold to them by Wall Street’s biggest banks.
On a more positive note, PayPal is a good example of a business taking advantage of an emerging opportunity in a mature market set- ting, by carving out a new role for itself as an intermediary in the growing world of Internet transactions.
Many companies ask themselves, “What should our business strategy be in relation to the emerging markets of China or India?” This is the wrong question to ask. Think like PayPal did: Focus on how certain markets are emerg- ing and how your company can address the challenges and opportunities posed by those markets’ institutional voids. Then, work to eliminate those voids through entrepreneurial effort and activity.
Each emerging market must be treated on its own terms. China and India are worlds apart in terms of their institutional voids and cannot be treated the same. As with most aspects of business, there is no one, simple, straightfor- ward formula for navigating the challenges before you.
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Labor markets Ask yourself these key questions to spot the voids.
n How strong is the education infrastructure, especially for technical and management training? is there good elementary and secondary education? Are data available to determine the quality of educational institutions?
n do people study and do business in english or in another international language like spanish, or do they mainly speak a local language?
n can employees move easily from one company to another? does the culture support that movement? do recruitment agencies facilitate executive mobility?
n is pay for performance a standard practice? How much weight do executives give to seniority, as opposed to merit, in making promotion decisions?
n Would a company be able to enforce employment contracts with senior executives? could it stop employees from stealing trade secrets and intellectual property?
n How are the rights of workers protected? How strong are the trade unions?
n do the laws and regulations limit a firm’s ability to restructure, downsize or shut down?
spotting institutional Voids The first step when surveying the business landscape in search of emerging opportuni- ties is to spot the institutional voids. Especially when operating in BRIC countries, companies will inevitably run up against institutional voids. The important thing is not to let yourself become paralyzed by them.
Instead, treat institutional voids with com- mon sense, employing the same array of tools that you would with any business to seize mar- ket opportunities: play to your strengths, build capabilities, reshape the environment, adapt accordingly or bide your time until the context changes.
To facilitate this task, we have developed a series of questions relating to four areas of emerging market success: product markets, labor markets, capital markets and the macro context (see boxes). Let’s consider each of these areas by comparing the institutional voids as found in Brazil, Russia, India and Chi- na, as well as in Europe and the United States.
product Markets When studying a potential emerging market,
you need to ask yourself two questions that are essential for businesses looking to reach cus- tomers: Do large retailers exist in the country? Do these retailers reach all consumers or just the ones who can afford them?
In the United States, there is a long-estab- lished network of large retailers serving all sec- tions of society. In Brazil, the retail markets are developing quickly. In Russia, retail networks are still fairly undeveloped, though there are encouraging signs of improvement. In India, they are growing but still only represent 3.5 percent of sales, while China’s retail sector is modernizing but remains quite fragmented.
Another key product-related question that multinationals need to ask themselves is: Do consumers use credit cards, or does cash domi- nate transactions? Also, are data on customer creditworthiness readily available?
In Brazil, there is, on average, one credit card for every 2.26 people. In Russia, there is only one credit card for every 100 people. India is marginally better, with one out of every 42 people possessing a credit card. In China, it’s one out of every 56.
Microsoft’s delicate handling of its entry into the Chinese market illustrates how a com- pany can exploit institutional voids in product markets to carve out a profitable presence. When Microsoft realized that foreign-owned companies were not treated evenhandedly by Chinese regulators, it shifted its focus toward collaborating with a local firm, with which it codeveloped a localized version of Windows. The company also experimented with a sub- scription model, as well as with differentiated versions of products, in order to overcome the constraints on sales resulting from Chinese consumers’ limited access to credit.
Labor Markets In labor markets, companies need to explore how the rights of workers are protected. They also need to consider how strong the country’s labor unions are, and whether they defend workers’ interests or only advance a political agenda.
There is much less industrial action in the United States than in Europe, but the level of unionization varies greatly across each of the member states there. In Brazil, trade unions are strong and pragmatic; likewise in India, where the trade union movement is active and volatile. The influence of unions in Russia is declining rapidly, while the only recourse for Chinese workers is to join an official body that
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emerging markets is not for the sole purpose of knowing what you’re letting yourself in for, so you can avoid them. Quite the contrary: These voids may themselves present the best oppor- tunities for your company to gain a stronger foothold, as General Motors found when ven- turing into the Chinese market.
When GM entered China, it realized that the country’s workforce had limited technical training. Instead of compensating for this void by shipping more staff from the United States, GM saw an opportunity to make up for this shortfall. It collaborated with Shanghai Jiao Tong University to establish an automobile technology R&D and talent training institute. This initiative has paid off in two ways: It has ensured future generations of well-educated, highly trained local workers, while at the same time nurturing closer ties with key stakehold- ers, i.e., scientists and engineers dedicated to research in automotive manufacturing, ma - terials, propulsion systems and other energy- efficient technology. For GM, it wasn’t China per se but rather the lack of technical training that was the defining feature that made it an emerging market.
Capital Markets How effective are the country’s banks in col- lecting savings and channeling them into in- vestments? Can companies raise large amounts of equity capital in the stock market? Is there a market for corporate debt? These are just some of the questions related to capital markets that companies need to ask when entering a new market.
In Europe and the United States, compa- nies can usually get bank loans easily and gain access to investors through the stock markets. In many other parts of the world, capital mar- kets are not nearly as developed.
For example, Russia’s banking system is dominated by state-owned entities, although it does have a booming IPO market. Brazil has a good banking system that works efficiently and a healthy market for IPOs. India has a well-developed local banking system, and also
Capital markets Ask yourself these key questions to spot the voids.
n Are financial institutions managed well? is their decision making transparent? How effective are the banks, insurance companies and mutual funds in collecting savings and channeling them into investments?
n can companies raise large amounts of equity capital in the stock market? is there a market for corporate debt?
n does a venture capital industry exist? if so, does it allow individuals with good ideas to raise funds?
n do independent financial analysts, rating agencies and the media offer unbiased information on companies?
n How effective are corporate governance norms and standards? Are corporate boards independent and empowered, and do they have independent directors?
n Are regulators effective in monitoring the banking industry and stock markets?
n How well do the courts deal with fraud? n is there an orderly bankruptcy process that balances the
interests of owners, creditors and other stakeholders?
answers to the government. Apart from the rights of workers, compa-
nies need to assess the state of local manage- ment talent: Does the local culture accept foreign managers? Can employees move easily from one company to another? Do recruitment agencies facilitate executive mobility?
In terms of English-language skills, Brazil boasts a large pool of talent but with varying degrees of proficiency in English. In Russia, employment agencies are booming, but there are varying degrees of English proficiency. In India, local hires are generally preferred over expatriates, but the advantage there is that lo- cal candidates speak English. China’s market for managers is relatively small and static, and many of them are not fluent in English.
Recogniz ing t he inst itutional voids in
When GM entered China, it realized the country’s workforce had limited training. For GM, it wasn’t China per se but rather the lack of training that was the defining feature that made it an emerging market.
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offers the possibility of equity to both local and foreign companies. In China, by contrast, for- eign companies need to rely on home markets for financing.
Another issue is the reliability of perfor- mance data. In Europe and the United States, there is a high level of transparency, although the rise of off-balance-sheet items might point to growing voids. Brazil has a well-functioning system based on common law. Russia has been shifting toward following international stan- dards, so it is moving in the right direction. In- dia, whose judicial system is based on common
Most multinational corporations learn to crack emerging markets with immense difficulty. Strategies need to be constantly revised and redrawn as part of a constant process of experimentation.
macro Context Ask yourself these key questions to spot the voids.
n To whom are politicians accountable? Are the roles of the legislative, executive and judiciary clearly defined?
n does the government go beyond regulating business to interfering with it or running companies? do the laws articulate and protect private property rights?
n is the judiciary independent? do the courts adjudicate and enforce contracts in a timely and impartial manner?
n How vibrant and independent are the media? Are nongovernmental organizations, civil rights groups and environmental groups active?
n do people tolerate corruption in business? can strangers be trusted to honor a contract?
n What restrictions does the government place on foreign investment? is the presence of foreign intermediaries allowed, including market research and advertising firms, media companies, banks, management consulting firms and educational institutions?
n How long does it take to start a new business? How cumbersome are the procedures for permitting the launch of a wholly foreign-owned business?
n Are there free trade agreements with other nations? if so, do those agreements favor investments by companies from some parts of the world over others?
law, works quite well. China offers little corpo- rate transparency, and its accounting standards are weak.
The case of the Indian telecom company, Bharti Airtel, is instructive of how companies can navigate emerging capital market voids, and turn them to their advantage. The compa- ny found that local capital-providing interme- diaries were highly underdeveloped in India, so it approached foreign partners, who not only provided the necessary capital, but also opened access to global resources and strategic advice. The void of underdeveloped information pro- viders and certifiers prompted the firm to forge partnerships, which ultimately earned Bharti Airtel greater credibility among investors when it went public.
Macro Context The fourth vital area where institutional voids exist relates to the macro context. The issues include the vibrancy and independence of the media, and the level of activity and influence of non-governmental organizations, civil rights groups and other social agents.
The United States has powerful NGOs and a dynamic media sector. Similarly, India’s vigi- lant NGOs and lively media act as important safeguards against corporate and governance abuses. Brazil boasts influential media but marginal NGO influence. In Russia, the media are mostly controlled by the government and NGOs remain weak and underdeveloped. Chi- nese media are muzzled by the government, and independent NGOs are few and far between, so one cannot count on them too much to keep abuses in check.
putting it All into practice Most multinational corporations learn to crack emerging markets with immense difficulty. Strategies need to be constantly revised and redrawn as part of a constant process of experi- mentation. Only then do they stand a chance of finding the appropriate combination or se- quence of approaches to align their businesses with emerging contexts.
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Companies must also overcome the com- petitive challenge posed by the fact that firms currently operating in emerging fields – wheth- er BRIC countries or unstable, contested busi- ness environments in the developed West – are already one step ahead in their understanding of these markets’ institutional strengths and weaknesses, enabling them to scale up or go global that much faster.
Before doing anything in emerging mar- kets, you need to dedicate time to a process of introspection, reflection and assessment. What is your core business model? Which parts of it are changeable?
Next ask yourself: Which market institu- tions does your business model depend on in your home market? Of these, which are core and which are transferable?
The second phase involves a rigorous as- sessment of the emerging markets that you have set your sights on. This means defining the opportunity each market presents, and identifying the segments to target. Use the questions in the boxes to identify the institu- tional voids in this emerging market.
By going through this exercise, you will be able to pinpoint the critical institutional in- frastructures that are missing in the emerging market. You need to determine to what extent these institutional voids might affect your abil- ity to access desired market segments.
O nce this has been done, you need to choose the strategies to mitigate or leverage those voids. This means opting to:
n rePLiCate. You could choose to rely on the comparative strengths and advantages of your existing brand, credibility and know- how, and attempt to repeat that in the new context.
n aDaPt. You could choose to adapt your busi- ness model, your products or your organiza- tional framework to the institutional voids.
n Go it aLoNe. You could choose to enter the emerging space and seek to position yourself as the prime player in that environment.
n aCQuire CaPabiLities. You could choose to
n Khanna, T., K. Palepu and R. Bullock. Winning In Emerging Markets: A Road Map for Strategy and Execution. HBR Press, 2010.
to KNow more
n Khanna, T. and K. Palepu. “emerging Giants: Building World-class companies in developing countries.” Harvard Business Review, october 2006.
n Khanna, T., K. Palepu and J. sinha. “strategies That Fit emerging Markets.” Harvard Business Review, June 2005.
navigate the space through local partner- ships or joint ventures to make up for your own voids. Indeed, in some BRIC markets, partnerships between multinationals and emerging giants have proven to be vehicles for the transfer of breakthrough ideas be - tween market contexts.
n aCCePt. You could take the limiting factors of the new market context as a given and accept the implications for your business. In spite of the voids, you’ll enter anyway.
n Go eLsewhere. You could decide it’s not worth it and seek opportunities elsewhere.
Whatever you choose, one thing is certain: Emerging markets are breeding grounds for innovation and experimentation. New ideas and business models are born in such contexts, and will continue to shape industries around the world. As such, it behooves everyone to un- derstand these markets better.
Pinpoint the critical institutional infrastructures that are missing in the emerging market. Determine to what extent these institutional voids might affect your ability to access desired market segments.
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Group Strategy Project (Part 2): Country Assessment Analysis
A. General Instructions
1. Only use scholarly and reliable non-scholarly sources such as Bloomberg, Reuters, Money, Forbes, and Fortune (no answer.com, QuickMBA, eHow, Wikipedia…….), in addition to the weekly readings, multimedia and data resources listed in the classroom.
2. Assignment should be written in a paper format; not a question and answer format.
3. Paper should be with one inch margins, 12 point font, double-spacing, and should be posted as a PDF document. No introduction or conclusion needed All graphics should be placed in the appendix. At least 3 full pages
4. Use APA format for in-text citations and the reference list. Please use the references listed below. Feel free to use your own also
B. Overview & Deliverables
Examine each of the 4 countries that your group selected plus your client’s home country and provide a PESTEL analysis on each country. Once you have concluded your PESTEL analysis on each country, incorporate these results into the following outline.
V: Determination of the Target Country for the Proposed Acquisition or Joint Venture
1. Comparative risk, opportunity and overall business climate of the countries.
2. Comparative industry market potential and structure of the countries.
3. Selection, with rationale of the target country.
In developing your rationale, be sure to address the following strategic dimensions.
· How would you tradeoff the degree of country risk versus the business environment ratings, taking into consideration the market size in 2020?
Note: Write this up, integrating your answers in a way that demonstrates your critical reasoning supporting your prioritization of the countries that your group researched.
Industry: Air Travel from US (International)
Client: Southwest Airlines (US based)
Countries: England (London), France (Paris), Spain (Madrid), Italy (Rome)
References:
· Schmitz, A. (Trans.). 2012. International expansion and global market opportunity assessment.
· Schmitz, A. (Trans.). 2012. Global strategy as business model change.
· Khanna, T., & Palepu, K. (2013). Emerging markets: Look before you leap. IESE Insight, (17), 44-51. (attached)
· World Economic Forum. (2014). The global competitiveness report 2014-2015.
· The World Bank. Ease of doing business index.
· INSEAD Global Indices. The global talent competitiveness index 2015-2016.
· Kogut, B. (2006). International management and strategy. In A. Pettigrew, H. Thomas & R. Whittington Handbook of strategy and management (pp. 268-270). London: SAGE Publications Ltd. Doi: 10.4135/9781848608313.n12
· Ruigrok, W. (2006). The strategy and management of international institutions. In A. Pettigrew, H. Thomas & R. Whittington Handbook of strategy and management (pp. 327-332). London: SAGE Publications Ltd. Doi: 10.4135/9781848608313.n15
PESTEL Analysis: England
Political
England is a developed country with a strong and active government. The country functions on a constitutional monarchy and parliament system. England is part of the United Kingdom (UK) and is therefore currently a member of the European Union (EU). The UK may however be withdrawing from the EU in 2019 due to Brexit. According to the Global Talent Competitiveness Index (GTCI) the UK (there was not a rating for England) is a politically stable country (45 out of 118). They ranked higher on government effectiveness (13th). The UK’s government plays an active role in ensuring businesses are treated fairly and equally.
Economy
England is one of the largest economies in the world and the largest economy in the UK. England’s currency is the British pound sterling. Given that England is part of the UK that data presented will reflect the UK as a whole and not England as an individual country. The current population is 64 million. The GDP per capita is $39,567 USD. The GDP for the UK equals 2.75% of the world’s total. The UK is also high on the list of easiest countries to do business in (5th). This is in part because of the political and economic stability in the UK and the effectiveness of the government. The government has an active role in all businesses. The UK also has a high rating for having ease of hiring. Corruption in the UK is low. They are ranked as the 10th lowest country on corruption. The Transparency International UK is an agency that fights corruption to keep the government, businesses and citizens safe. The global competitiveness index (GCI) has ranked the UK (9th) in the top 10 competitive countries to do business in. This can be because if the fact that the UK attracts a lot of talent from individuals wanting to work in the UK. he UK is financially stable their currency the British pound is one of the most traded currency.
Social
England is also the largest populated country in the UK. The official language used in England is English and Christianity is the most practiced religion. Within the GCI rank the UK was measured on their social sustainability. The UK was ranked high, within the top 10 on being a country that is socially responsible and is concerned with making sure the health and welfare of their citizens are a priority. The UK is also one of the safest countries to live and do business in.
Technological
The UK’s infrastructure is extremely developed. Particularly, England is the birthplace of the industrial revolution. They have a very advanced economy in regards to electricity and technology. England also has a large domestic and international aviation link. The UK the the 2nd highest country for technological readiness. 89% of individuals in the UK are utilizing the internet whether it is through broadband or mobile service. Their economy is developed enough to support any new technology that comes out. The UK’s air transport infrastructure (28th) is developed and functions very well. The UK ranked 3rd on the GCI for the number of available airline seats that are available for domestic and international flights. Each flight has a passenger carrying capacity of 67 million km/week. London’s airport is the busiest airport in the UK. Many people traveling to the UK pass through London. London’s airport is making upgrades to its terminals to meet the needs of the growing population.
Environment
England is improving their environment by creating sustainable fisheries, protecting the forest and improving their water quality. The UK is helping to make sure all countries within the UK improve. The UK has an environmental department within its government to enforce laws that will maintain a safe environment for their citizens as well as for the land and forest areas. The UK is one of the top countries with strict environmental regulations. They are also involved in international efforts to addressing global environmental change.
Legal
England as well as the UK uses common law for their legal system. The UK has various laws in place to protect and support businesses. They provide legal protection for business both domestic and international. They have policies in place that promote private sector development. UK has an excellent system of resolving legal disputes and challenging regulations.
PESTEL Analysis: France
Political
France is a developed company with a stable economic environment. France is rated as the 24th best country to do business in. France’s government is a unitary semi presidential democratic republic so the president works alongside of the prime minister. They are a member of the United Nations (U.N) and the North Atlantic Treaty Organization (NATO). The government in France is highly effective however the relationship between businesses and the government is extremely low. Their business/government relationship is ranked 103 out of 118 countries.
Economy
France currently has a population of 66.81 million people. They are considered a high income country. he GDP per capita is $39,677 USD, which is 2.62% of the total world GDP. For business the ease of doing business in France is very high. Starting a business and obtaining contacts and permits are fairly easy in France. However the ease of hiring working and employment contracts are difficult. France ranked low (104) on the GTCI list as one of the most difficult countries. This can be in part of the lack of relationship between the workers and the employer. The labour-employer relationship also fell in the bottom scores as one of the worst countries.
Social
France is one of the top populated countries in Europe. The official language is French and Catholicism is the dominate religion however freedom of religion is a constitutional right. In terms of social responsibility France landed on the 23rd spot as a socially responsible country. The health and welfare of their citizens are taken seriously and health care is provided for all citizens.
Technology
France is a contributor to science and technology which has helped to make them a very advanced country. France’s infrastructure is highly developed and capable of handling any new technology. Being that they are one of the leaders in space technology their air transport infrastructure is ranked at 17 on the GCI list. They are also ranked as the 8th best country for the number of available airline seats for both domestic and international flights. France is also highly advanced in the information and communication technology. They also have the technology to support telephone lines and wireless signals.
Environment
France is working on increasing and maintaining their environmental sustainability. Their environmental performance is ranked in the top 10. France must adhere to the EU’s laws regarding environmental sustainability as well as their own governments laws concerning energy, pollution, water, and green technologies.
Legal
France’s legal system follows written statues of the Napoleonic code. The EU also assures their laws are fair and equal for any legal issues, taxes and audits. However, the system can be quite burdensome for business regarding complying with regulations and being updated on changes in current laws or regulations. The ease of settling disputes and challenging regulations falls in the middle and can be quite difficult.
PESTEL Analysis: Spain
Political
Spain is ranked as the 35th best country to do business in. Spain is a developed country with a stable political environment. They are no conflicts with neighboring countries but there may be unrest within Spain due to their financial crisis. Spain is the fourth largest country on the European continent. The country is run as a democracy under a constitutional monarchy. Spain is a member of multiple organizations such as EU, UN, NATO, Counsil of Europe ( CoE), World Trade Organization (WTO) and Eurozone.
Economy
Spain has a population of 46.42 million. Their GDP per capita is $34, 526 USD. They are considered a middle power country which means they have some influence internationally with countries that are considered super power and small power. Spain is an easy country for foreigners looking to start a business. The government is committed to ensuring the laws are enforced. The relationship between the government and businesses are very cooperative. The relationship between the employer and the employee can be better. Depending on the management or the employer there may be issues in the workplace. Spain is currently in a financial crisis that began in 2008. Spain’s financial crisis is due to the housing bubble and the labor market. Spain is also not making any income on its R&D, “imports are so cheap, and Spanish exports so expensive, the country's economy as a whole found itself spending 10% more than it was earning” (Knight, 20012).
Social
The primary language in Spain is Spanish and it is the right and duty of all Spaniards to know the language. The government in Spain ensures that the health and well-being of their citizens are cared for. “In 2009 Spain’s healthcare was once ranked seventh best in the world by the World Health Organization” (Socolovsky, 2009). Although Spain is a developed country it still has some work to do on improving living qualities. Spain is working on improving water conditions in the entire country. A few cities in Spain, Madrid being one has safe drinking water but not all. “Spaniards are slightly less satisfied with their lives than the OECD average. When asked to rate their general satisfaction with life on a scale from 0 to 10, the Spanish gave it a 6.4 grade, lower than the OECD average of 6.5” (OECD, n.d).
Technology
Over the years Spain has built up their infrastructure and made improvements in the way of science and technology in order to stay competitive in the global world. GTCI ranked Spain 29 in their ICT infrastructure and and ranked 49 in terms of being able to learn new technology. Spain’s air transport infrastructure came in as the 10th best country. However due to budget cuts because of their financial crisis there is not enough funding to help advance the technology in Spain.
Environment
In terms of environmental sustainability Spain was ranked 35 out of 144 countries. This high rank shows that Spain is taking step to reforest the land and clean up all the damage that was caused by deforestation. Spain has multiple environmental policies in place and they are working with each city to help rebuild the forest and make it more appealing to tourist.
Legal
Spain’s legal system is a civil law system that operates under Roman law. Currently Spain’s legal framework for settling disputes and challenging regulations ranked low in the GCI. This means for international business working in Spain may have a hard time getting a resolution of disputes filed or have a hard time going through the legal system to start a dispute.
PESTEL Analysis: Italy
Political
Italy is a developed country and is the 8th largest country in the world. They are parliamentary republic that is governed by a single power. They are part of the EU and is also one of the founders of the EU. Italy is also a member of the UN, NATO, WTO and OECD. Italy is also the fifth most visited country in the world. Their overall rating as a country to do business in ranked at 40 on the GTCI list. In terms of their government Italy’s government is not very effective in terms of the quality of service you receive and the amount of political pressure you may receive. The citizens of Italy do not have much trust in the politicians and government favoritism is a big deal.
Economy
Italy is the leading country in World trade and export. The currency used is the euro and their GDP per capita is $34,715 USD. Their unemployment rate is 11.7%. The ease of doing business in Italy is 50 out of 190 and in terms of corruption they ranked 56. Italy does not have a healthy work environment. Their employer/employee cooperation scored low on the charts and this can be due to the fact that there is not a stable, comfortable work environment where management is professional toward their employees.
Social
The current population is 60 million people. The official language is Italian and their most widely practiced religion is Catholicism. Italy’s social sustainability is still very low since coming out of their recession in 2015. Their unemployment rate is still considered high (11%0 for the Eurozone and their youth unemployment rate is also high. Italy “has one of the lowest literacy rates in Europe, and the number of citizens moving into poverty has explode since 2008” (Vita, 2015).
Technological
“Italy has an efficient and modern infrastructure, even though it performs poorly compared to other Western European countries of comparable size” (National Encyclopedia, n.d). Their ICT infrastructure is modern and reliable but it too is not as good as their neighboring countries. Italy’s air transport infrastructure fell low on the index chart as well. Although Italy has 129 airports and they all are modern and up to date they do not perform as well as other countries. Italy is working on developing their infrastructure especially their advanced technology.
Environmental
Pollution is a big problem for Italy. Air pollution, water pollution, unsanitary waste disposal efforts are all problems that Italy faces. Being that Italy is part of the EU they must follow their laws and regulations regarding steps necessary to fight their pollution crisis. Italy is taking steps at moving into a greener society but it will take many years to combat their environmental issues.
Legal
Italy uses the Roman Law and the French Napoleonic code as their judicial system. For businesses Italy’s legal framework for settling disputes and challenging regulations fell low in the index chart. Italy’s lack of trust in politicians and high rates of organized crime and lower ethicical behaviors of firms can be reasons why the legal system may be difficult.
PESTEL Analysis: United States
Political
The United States (US) is a developed country with a strong government with political and financial stability. They are one of the largest economies in the world. The US is known as a superpower and considered the only superpower in the world. The US is a constitutional federal republic. They are the founding member of the UN and also a member of the Organization of American States and the World Bank.
Economy
The US population is 321 million. They are considered a high income country with a GDP per capita of $55,836 USD. The US ease of doing business per the GTCI list was ranked as the 6th top country. Their ease of hiring beat all the other countries as was ranked as number 1. In terms of doing business in the US there is a strong correlation between upper management and employees.
Social
The national language in the US is English and Christianity is the most practiced religion. Although the US Constitution allows individuals free exercise to practice the religion of their choice. In terms of social sustainability, the US was ranked number 3. This shows that the US is concerned with their citizen’s health and sanitation issues, the US has various social programs that are in place to help those that are in need.
Technology
The United States’ infrastructure is very well developed. They have many advanced systems that allow them to remain a superpower. The US air transport infrastructure is rated number 9, per the GTCI. They have also ranked in the top 20 for their roads, railroads, port and electric infrastructure. In terms of technology the US ranked number 2 for having the latest technologies and they ranked 3rd on the number of businesses that adopt the new technologies.
Environment
The US has multiple laws and regulations in place to be environmentally sustainable. They are concerned with protecting the environment not just within the US but around the globe. They have issued federal laws to address pollution (air and water), endangered species and National forest management, to name a few.
Legal
The US follows the American federalist system and citizens are subject to three levels of government: federal, state and local. The US has many laws in place to protect businesses as well as employees, the legal framework for settling disputes and challenging regulations is fairly easy as they ranked 23 and 18 respectively on the GCI list. The US has laws in place that will also protect businesses property rights and intellectual property.
V.1. Comparative risk, opportunity and overall business climate of the countries. (RAHSHAE)
England
The risk involved in doing business in England are fairly low. Beside the U.S, the UK (England) is the next in line as one of the top countries to do business in. England is a stable country with a stable political and business environment. The government is active in forming relationships with businesses and this allows for a more relaxed atmosphere. There is a lot of opportunity for a U.S based company to expand into England. It’s close proximity to the U.S allows for easy access to and from England when starting up the business as well as importing and exporting. Given that England is the largest populated Country in Europe and the amount of tourist that come to England daily, there is a big opportunity for business to succeed with the right business plan. The overall business climate is made to help business succeed. “U.S. companies have traditionally found establishing a base in the UK to be an effective means of accessing the EU market (Bureau of Economic, n.da.). The UK issued an infrastructure plan for 2016-2021 where they are updating and improving their digital and telecommunication infrastructure, energy, airports, roads, water, waste and social infrastructure just to name a few. Improving the infrastructure is important because is allows the UK to grow and prosper and stay an international key player.
France
Some risk involved when deciding to invest in France are “the tax environment, the high cost of labor (with the minimum wage, called the SMIC for Salaire Minimum Interprofessionnel de Croissance, at EUR 1,466 per month), rigid labor markets, and occasional strong negative reactions toward foreign investors planning to restructure, downsize or close” (Bureau of Economic, n.db). The opportunities in France are endless. Their location in Europe attracts many people as well as investors. France has a good infrastructure, modern technology and they have a skilled labor force. France has a modern business climate. They are open to foreign investors and the French government has made changes to “attract foreign investment, through policy incentives, marketing, its overseas trade promotion offices, and investor support mechanisms” (Bureau of Economic, n.db). France’s business climate is also favorable to the US. The US is one of France's top foreign investors. “Around 1,200 U.S. companies in France (affiliates with assets, sales, or net income greater than $25 million) are responsible for over 450,000 jobs” (Bureau of Economic, n.db).
Italy
Italy has a few risk that must be considered before investing in their country. “Italy's large public debt, public sector deficit, low productivity growth, and burdensome and complex tax system, are generally blamed for the poor state of the economy” (National Encyclopedia, n.d). Some opportunities in Italy is that they are actively looking for foreign investments. Since Italy is a member of the EU they are obligated to follow the EU’s rules and regulations when dealing with foreign investors in Italy especially with US companies. “Italy is generally obliged to provide national treatment to U.S. investors established in Italy or in another EU member states” (Bureau of Economic, n.dc).The business climate in Italy is not good. They are high in debt, they do not have much access to credit and they have high corporate tax. “Italy’s economy has emerged from its longest recession in recent memory and the current government is making progress on its efforts to improve Italy’s investment climate” (Bureau of Economic, n.dc).
Spain
Although Spain is starting to recover from their recession, there still is some concern in political stability and trust in their politicians. Other risk in Spain include government spending, government regulations, favoritism among government officials and intellectual property protection. Spain is looking to attract foreign investors who can help them recover from their financial crisis. But through all the bad Spain still has an excellent infrastructure and a highly educated work force. Which is good for attracting investors. Per the GTCI rank, Spain’s overall rank for their infrastructure is 13 out of 144 countries. Their railroads, air transport and post infrastructure all ranked in the top 10 countries.
Spain is offering various incentives to foreign investors who are willing to come and do business. Spain’s incentives are provided through the EU since Spain is a member. Most of the incentives are for investors who want to come and work in economically depressed regions that will help benefit Spain. There are also incentives offered through the Central Government and the Regional Governments in Spain and the funding through those programs are also backed by the EU.
V.2. Comparative industry market potential and structure of the countries.
Spain
Spain’s market size ranked 14 out of 144 countries. Per GTCI they scored a 5.4 with 7 being the highest. They have proven to have a strong infrastructure having 3 infrastructures in the top 10 (air, port and railroad). They have a strong health and primary education rating. Spain does not see major illnesses such as tuberculosis or HIV having any effect on their business culture. Spain is technologically ready. Spain is able to support broadband internet as well as international bandwidth and they have a high usage of mobile broadband subscriptions. Also they have a highly educated workforce. Spain has quality management schools and a high number of citizens going back to school to learn a skill or trade. Spain is starting to regain some stability in their economy. Government spending still remains high accounting for almost half of their DGP. However they have lowered their tariff rate and is currently the 5th country with the lowest tariff rate. This is good for investors looking to get into the importing/exporting business. “Imports and exports account for 64% of Spain’s GDP” (2017 index, n.dc). In the financial market it is difficult to obtain a business loan and business cannot obtain financing through local equity markets. However there are some protection for business in regards to bankruptcy laws that will protect their rights.
Italy
Italy’s market size ranked 12 out of 144 countries. Per GTCI they scored a 5.6 with 7 being the highest. They have proven to have a strong infrastructure in terms of providing electricity, mobile telephone and having fixed telephone lines. Italy’s air transport infrastructure is moderate but it is not one of the best infrastructure compared to other countries in Europe. Italy's business sophistication score is along the same lines as advanced economies. Italy ranked number 1 as having a number of suppliers in products and services that are spread throughout the country. Italy’s “economy remains burdened by political interference, corruption, and poor management of public finances” (2017 index, n.db). Italy’s government spending accounts for over 50% of the GDP and with their inefficiency to settle legal disputes may deter investors from coming to Italy to invest. Trade is important for Italy’s economy it accounts for 57% of the GDP. Just as Spain does, Italy also has one of the lowest tariff rate on imports and exports. Financially it is hard to obtain business loans and it is extremely difficult for entrepreneurs to find venture capitals.
France
France’s market size ranked 8 out of 144 countries. Per GTCI they scored a 5.7 with 7 being the highest. They have proven to have a strong infrastructure in both transportation and electricity. France’s best infrastructures are roads, railroads and fixed telephone lines. They also have a strong health and primary education. There are no major concerns that any illnesses will affect their business culture. France is ready to support modern technology. They have a high number of individuals utilizing the internet and has a high number of fixed broadband users. They can also support international internet bandwidth. France has a stable financial market that allows easy access to loans and financing through local equity markets. France ranked high on their foreign market size. Like Italy and Spain government spending accounts for more than half of the GDP. “The labor market is burden with rigid regulations and lacks the capacity to generate more vibrant employment growth” (2017 index, n.da). The relationships between the employee and employer is low and their flexibility of how employees’ wages are considered low as well.
England (UK)
The UK’s market size ranked 6 out of 144 countries. Per GTCI they scored a 5.7 with 7 being the highest. The UK has proven to be an advanced economy. They have a strong transportation, electric and telephone infrastructure. In health and primary education, they have a high number of people enrolled in primary education as well as they have no major or life threatening health concerns that will affect their business climate. The UK has a number of opportunities for citizens to further their education. The UK also has low tariff taxes in goods and they encourage foreign ownership. The UK attracts a high number of talented individuals looking to work in the UK. They are flexible and fair when determining wages and they look to higher professional individuals based on your qualifications.
Their financial market is stable. The financial institutions in the UK offer a wide variety of services that meet the needs of the customers. There are legal protections for both borrowers and lenders in the UK and they provide financing through local equity markets. The UK is equipped to handle modern technology and so are the citizens. They have a high number of individuals using the internet and using mobile internet. They are also able to support international internet bandwidth. Companies in the UK have the support to be able to innovate. The UK is ranked number 2 in having quality scientific research institutions.
V.3. Selection, with rationale of the target country.
To expand Southwest airline destinations internationally, we have chosen to enter into England (UK). The UK is ranked as the 5rd best country to do business in. The US is right behind the UK at number 6. Based on the GCI stage of development out of all 4 countries the UK was the only country that matched other advanced economies. The UK has a number of qualities a business from the US needs to survive and make a large profit. The UK’s economy matches the US more closely that Spain, Italy and France. They have a stable political and financial environment that will make it easy for Southwest to venture into. The UK has modern and up to date infrastructures that will allow Southwest to expanded into the market easily.
The country has the bandwidth needed to support domestic coverage and international coverage. Also a high number of citizens utilize the internet through broadband subscription and mobile subscription which will help to get Southwest recognized in the new market. Unlike the US, the UK does not have the ease of accessing loans so Southwest will need to raise a lot of capital is they decide to move into this market. However, if Southwest needs to raise additional capital the UK allows for easy financing by issuing shares on the stock market.
