Entering new and emerging markets especially the developing world is associated with both risks and rewards. It is a tricky and challenging situation as it can go both ways, make huge profits and capture majority market shares or on the other hand fail miserably with large sunk costs. According to Khanna, Palepu, and Sinha, many multinational corporations are struggling to develop successful strategies in emerging markets. In fact, globalization has been a double-edged sword. For many multinational firms, while European markets have been successfully explored with similar strategies as in the home base (the USA), similar strategies have failed in developing countries. This is mainly because these firms have failed to adapt to new challenges in society, polity, and economic structure. The new entrants need to understand that their strategies have to take into consideration the new value chain and institutional differences.
In my opinion, firms have to give a deep thought to some critical questions before entering new markets. They have to answer as to why they want to expand in the first place, the success metrics on which they would evaluate themselves in a fixed timeframe, the reasons for when they could fail (risks) and how they could mitigate them. Basically, companies have to first convince themselves as to why they will succeed and then move ahead with their plans. While thinking of a road map for the factors to consider before entering a newly developing market we can look at five ingredients: political and social systems, openness, product markets, labor markets, and capital markets.
The Indian market is a good example to explore each of these factors. After attaining Independence in 1947, the political scenario was fairly stable with a popular democracy. But, the economy was a closed one where foreign companies were not allowed to enter most of the sectors. Openness was also very less due to the large bureaucracy machinery and red tapes in every policy implementations. Further, the labor, capital, and product markets were underdeveloped due to adverse social conditions like mass illiteracy, low standard of living, and government apathy. Further, there were regressive labor policies combined with a lack of liquid capital in many sectors. Also, the government kept control of most sectors related to manufacturing, heavy industries, and energy production.
Indian economy completely transformed since 1991 with the implementation of the new economic policy. This was mainly triggered due to changes in the world political scenario with the fall of the Soviet Union and taking down of the Berlin Wall. Multinational companies had to keep a close watch of these changing world conditions and prepare new strategies. India became one of the fastest growing countries in terms of national GDP growth and quick improvements in purchasing power parity. The country became more open to investment from outside its borders. The ecosystem was more accepting to new businesses. Further, India also developed a highly liquid pool of educated, professional, and technically competent workforce. This added to the attractive index of India. Also, India has one of the youngest population which basically meant that the scope for progress and growth was exponential. Companies will have to design a strategy which encompasses all the above characteristics to succeed in the Indian markets.