What is different about managing in developing countries?
The fundamental difference is the distinctive nature of the business environment, which varies considerably from that of the more developed nations. This carries significant managerial implications. Some of the implications and problem areas are, production difficulties, financial restrictions, market disruptions, transferring technology, difficulty in training new employees, and when involved in a Joint Venture, the local partner is likely to perceive quality in a different way. Also problems concerning the macro-economic environment often occur, such as inflations and the result on the value of the currency. Tumultuous political environments often confront companies as well. Different styles of political believes and actions by the government can cause the legal system of a country to have different conceptions of for example private property and the societal role of business.
Cultural diversity in developing countries also dictated the need for distinct marketing environments, and cultural diversity also dictates the need for distinct strategies. In some Islamic countries the charging of interest is prohibited by religious norms, so different approaches to financial transactions are called for.
Distinct business environments derive directly from differences in development levels and processes between the LDCs and more developed nations. Those differences significantly affect all functional areas of management as well as overall strategies.
How important are developing countries to the international economic and business system? The 142 developing countries in the world are very significant actors in the international business arena. They are buyers, suppliers, competitors, and capital users. The economic importance of these developing nations is great and becoming even greater.
The bulk of the world’s consumers live in the developing countries, between 70 and 80%. The LSCs produce about 20% of the output of the world’s market economies, and therefore only posses a very small piece of the world’s economic pie. The developing countries satisfy a significant portion of their domestic demand through purchases in the international market. In 1987 they accounted for 25% of the world’s imports. Their main imports in order of importance are machinery, manufactured goods, fuels, foods, chemicals, and other raw material.
The developing countries are also important suppliers in the international marketplace. By the mid 1980s they accounted for 28% of the world’s export, with 70% of their sales going to the more developed nations. The industrial countries, in turn, depended upon the developing nations for about 22% of their total international purchases in 1987. For certain products the developed nations’ dependence on the developing countries as suppliers is even greater.
Pushing the trend of more manufactured exports from LDCs has been the strategic decision of many major companies from the developed countries to move their production of components or entire products offshore. They can take advantage of the cheap labor and sometime immunities granted by the government in terms of financial subsidies or tax free operating.
As the industries of developed nations mature, particularly more labor-intensive ones, their costs relative to those on LDCs tend to rise and their technologies become more internationally accessible. Developing nations, with their lower labor costs, increasingly gain comparative economic advantage in these industries and foster them as part of their industrialization.
The developing countries have become fierce competitors in various manufacturing products, capturing market shares from producers based in the developed nations. In the aggregate, developing nations have increased their share of manufacturing imports by developing countries from about 11% in 1960 to about 25% by the mid 80s. Becoming international class competitors has required heavy capital outlays by the developing countries. The inherent scarcity of domestic capital has required that they tap foreign capital sources.
As capital users
The developing countries receive external capital from three main sources; private creditors (mainly the international banks), foreign direct investment (mainly multinational corporations), and official government assistance (foreign governments and multilateral agencies).
Bank lending. The principal change in the mix of annual capital flows during the 1970s was the dramatic increase in bank lending. In 1970 it constituted 15% of total flows to the developing countries and 39% of the private flows; by 1981 it had increased to 37% of total flows and 70% of private flows. By 1988 nearly 60% of the developing countries’ long-term debt was owed to private creditors. What fueled the extraordinary expansion of international lending during the 1870s and 1980s was the pressure on banks to recycle petrodollar deposits, along with the existence of attractive interest-rate spreads and the LDCs’ insatiable demand for capital.
Initially these LDC loans were a major source of profit growth for the international banks. However, many observers contend that the banks failed to analyze adequately the LDC environments and over lent. The banks and countries were exposed to the harsh effects of market change. The financial burden of the debt of the LDCs has increased significantly. Outstanding debts rose from 28% of GNP in 1980 to 50% in 1987.
Developing countries will remain important actors in the international credit system, for both new borrowings and repayments. The debt-servicing burden will heighten the priority that governments place on foreign exchange generation and saving, and this will place special demands in this direction on companies.
Foreign direct investment. Government sometimes prefers direct equity investment by foreign corporations over loans, because, in addition to capital, they bring in technologies and, sometimes, access to international marketing networks. Furthermore, if the project fails, the government does not have any loan to pay back. Although there is considerable diversity in foreign investment strategies, there does appear to be an evolutionary pattern related to a product’s life cycle that holds for many firms. Production begins in the developed country and is marketed there. Next, exports to developed and developing countries are added to increase volume and achieve economies of scale. As the product advances in its life cycle, foreign manufacturing operations are set up in developed and the developing countries to serve the local markets previously handled by exports. More recently, firms are becoming more flexible and devising strategies and production systems that are more global. These involve developing and developed countries in an integrated network that tries to use various countries’ comparative advantages to achieve global economies of scale or to make preemptive moves to achieve competitive advantage.
Expansion of direct foreign investment in LDCs is expected to rise even more. Multinational corporations will remain important economic actors in developing countries, and developing countries will remain an important business environment for the MNCs. For local LDC firms the increased MNC presence is double-edged: It can mean the threat of increased competition or the opportunity for productive partnerships.
Government assistance. Governments and multilateral agencies, such as the IMF and the World Bank, are important sources of short and long-term loans for LDCs. Historically there has been a de facto segmentation of country recipients in terms of the source of capital flows. Higher-income, more industrialized developing countries tend to be served more by private lenders and foreign investors, while lower-income countries rely more on official sources for their external capital flows.
It is clear that the developing countries play a significant role in the global economy as buyers, suppliers, competitors, and capital users. Understanding their business environments is critical for international business managers. That understanding required an appreciation for the diversity among LDCs.
How diverse are developing countries? Any manager who has traveled to several developing countries will quickly point out that no two LDCs are alike. The distinctive business environments of developing countries are due to the different levels and processes of development, not just between the developing and developed but also among the developing countries themselves. LDC diversity can be revealed by differences in levels if development. The following development indicators are commonly used by international development organizations and can give a perspective about how the business environments of LDCs are likely to vary.
Gross National Product per Capita.
The GNP per capita reveals a country’s output and national income in relation to its population, thereby partially showing the level of effective demand. One of the indicator’s weaknesses is that as an average it does not reveal income distribution or real standards of living.
The absolute magnitude of a country’s economy is indicative of aggregate demand and market size. There are ten giant LDC economies, which in total constituted 50% of the LDC’s combined 1987 gross domestic products. The measure total GNP can be useful to companies as an indicator of a country’s current level of industrial infrastructure and technology.
This indicator can be misleading because it does not reveal scope, quality, or technological sophistication of the industrialization.
GNP growth rates
Another measure is how fast the country is moving along the economic development spectrum, rather than where it lies on it. This can be ascertained by measuring growth rates of either GNP or GNP per capita. The growth rates indicate one aspect of demand behavior and possible market dynamics. The business environment in a high growth versus a low growth market can be quite different. The causes of these growth rates can vary significantly even more among the countries in the fast or slow groups.
Physical Quality of Life Indicator (PQLI)
The PQLI measures development in non-economic terms. This is an composite index based on a country’s literacy rate, infant mortality rate, and life expectancy.
Countries can also be characterized by the degree of skewedness or inequality of its income distribution. One indicator of income distribution is the Gini coefficient, which measures the percentage of income going to each income bracket. Ina ‘perfectly equitable’ distribution each 1% of the population would earn 1% of the available income, and the Gini coefficient would be zero. In a completely inequitable economy the top percentile of the population would earn all the income, and the Gini coefficient would be one.
Other Diversity indicators
One can also characterize countries according to types of political systems, such as military governments, single-party regimes, and multi-party democracies. Culture is another dimension but very difficult to us as a categorizing parameter. Other indicators are Demographically ones and Geographical.
Chapter 2: Environmental Analysis Framework The key to effective management in Developing Countries (DCs) is the capacity to analyze, understand and manage the external forces influencing the firm. This means answering to two questions:
WHAT to analyze in the environment?
HOW to assess its relevance to the firm’s strategy?