Wednesday, June 27, 2012

China's Advantage in Emerging Markets

The article in this week's reading on "Strategies that Fit Emerging Markets" is clearly written for an American or 'Western' audience. The term 'institutional void' to describe the weak or nonexistent institutional resources and processes in some emerging markets is obviously in relation to the more robust institutions in the U.S. and Europe. It seems that some of the largest hurdles in developing strategies for entering emerging markets (namely most areas of the world outside of the U.S. and Europe) are the required adjustments to 'institutional voids' and differences across political and social systems, levels of openness, product markets, labor markets and capital markets.

Does this mean that China has an advantage over the U.S. and Europe in understanding, addressing or adjusting to the context of other emerging markets? would seem so, especially in the case of Africa. According to an article in the Wall Street Journal from last year, "China's exports to Africa last year totaled about $54 billion, up from $5.6 billion a decade before, according to the IMF. U.S. exports to Africa totaled $21 billion last year, up from $7.6 billion in 2000....Western European companies, many of which had lingering business interests in Africa from colonial days, also took their eye off the ball. Western Europe's share of overall trade—the sum of imports and exports—with sub-Saharan Africa dropped to 30% in 2009 from 52% in 1990, according to McKinsey. The share of China and other Asian countries in Africa trade more than doubled to 30% from 14% in the same period, while North America's share slipped to 13% from 16%."

One key strategic difference is the fact that China makes less demands on its trading partners in the areas of human rights, democratic reform and overall development indicators than do other countries. While this 'laissez-faire' strategy has come under fire from multilateral development organizations, non-profits, and U.S. and European-based critics, African nations have largely  appreciated this approach, which entrusts their development trajectories to their own leadership rather than making what have been called patronizing demands. On the other hand, the phenomenon of cheap Chinese products flooding African markets has also been critiqued. Some local business ask if the Chinese are becoming too comfortable on African turf.

It is clear that emerging markets, in Africa in particular, are the next market frontier. But who will win these markets and based on what competitive advantage? Is China's current success based on its intimate familiarity with dynamic and less structured emerging market contexts? If so, will the U.S. and Europe ever be able to catch up?

Source: Hagerty, James & Connors, Will. "U.S. Companies Race to Catch up in Africa" Wall Street Journal, June 6, 2011.

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