Doing business in emerging economies: lessons from the Ukrainian crisis

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14 Mar
14/03/2014
Foto del profilo di Olga Annushkina

by Olga Annushkina

SDA Professor of Strategic and Entrepreneurial Management

The recent political, social and military crisis in Ukraine had a huge impact on the economic environment in Ukraine and in Russia and in global markets. Russian Ruble plunged, Russian stock prices went down, the price of gold started climbing back as a response to the war rumors, the energy prices started rising. In the interconnected economies, the issues at stake regard the mutual trade and investment relations, among all the issue of oil and natural gas (see Figure 1).

The growing uncertainty at the Europe’s South-East once again brought up the issue of risks associated to doing business in emerging markets and the main differences in business contexts in “developed” and “emerging” economies: the institutional context.

- Figure 1 -Graph2

How do we define an emerging economy?

The term “emerging economy” is widely employed but poorly defined: initially used to indicate capital markets with a high growth potential by financial institutions (e.g., Morgan Stanley Capital International, Standard & Poor’s), it was then picked up by academics leading to a proliferation of definitions, implicit and explicit. At a certain point all markets not considered as “developed” were coined as “developing” or “emerging”.

In 2011 my colleagues Renata Trinca Colonel, Elena Berselli and I* made an attempt to fine-tune the definition of emerging markets in a paper presented at Nagoya conference of Academy of International Business. Our analysis of a large sample of academic publications over a 10-year period ending in mid-2010 resulted in the classification of the following five traits of emerging markets: (1) low quality of the local institutional environment (weak legislation on property rights, customers or minority shareholders protection and so on), (2) important role of the state in business, (3) low level of financial markets development, (4) high prospects for the economic growth, (5) low quality of locally available resources and factors or production and local competitive environment characterized by market failures.
economyThese criteria were applied to the analysis of historical macroeconomic and institutional indicators for 177 economies and the results of the analysis were definitely intriguing. The statistical model suggested that the countries labeled as “emerging” in 2010 complied only with two criteria, relatively weak institutional context and relatively high past economic growth rates (therefore not necessarily indicating the future economic growth of the emerging economy).

The doubts about the presumed attractiveness of the markets currently defined as emerging in terms of the economic growth was the center of the recent debate conducted by The Economist on the growth perspectives of BRIC countries. BRIC apparently started giving ground up to new acronyms: MINT, MIKT and so on.

The only confidence about the “emerging” or “emerging-to-be” economies that remains is the high level of institutional uncertainty and relative weakness of their institutional contexts, and examples are the recent events in Russia, Ukraine, Venezuela.

Doing business in emerging economies

What it is in there for a multinational corporation or a small firm defining its global strategy? What if its sales are heavily dependent on Russian and Ukrainian markets? No one could blame the export manager for the short-sightedness and really few would have been able to predict the escalation of events around Kiev protests and Crimea only 2-3 months ago

The “new normal” volatile competitive context calls for flexible and fast reaction not only by firms operating outside its domestic economies, but also by firms dealing with industries convergence or growing specialization, demand spikes and falls, changing legislation and stock market bubbles.
While since 70s the scenario planning methods had been largely used to predict and build responses to the changing competitive environment and key macroeconomic indicators, the growing exposure of firms to the markets with unstable political, institutional and social environment requires that these companies – large or small – become aware of perils arriving from the outside of competitive and macroeconomic “playground”.

The scenario development for companies working in Ukraine prior to the current crisis might have involved the analysis of the country’s over-reliance on energy supplies from Russia and national debt issues, unstable politics and important regional political differences, complex political relations with both Western and Eastern neighbors.
Ukraine Protests

What’s next for Ukraine

The next events or indicators to watch out include the military behavior of Russia, Crimea’s forthcoming independence referendum on March 30, 2014, anticipated presidential election in Ukraine in 2014 and the next political moves of Germany, USA, China and Russia with regards to the situation in Ukraine.
The possible outcomes of as this text is being prepared vary from “business more or less as usual” to “crisis” for all parties directly and indirectly involved in Ukrainian conflict, just to quote as an example the Russian Federation Council bill on the confiscation of European and US companies should the economic sanctions for Russia be applied.

For firms, the main question though would have needed to be rather than “what will happen” in next two months in Ukraine and in Russia, but “how we are going to react to the possible events, probable or improbable”. If the highly improbable event strikes, what will happen to our firm’s customers and business partners? To its revenue flow? To its investments?

Searching for signs helping to detect future low probability but high impact events and developing fast response plans is at the core of the firms’ currently operating in volatile and institutionally uncertain economies which no longer should be labeled vaguely as “emerging”. The rapid evolution of events – political, military, environmental, economic, competitive, technological – require the companies’ boards and top management stay alert and watch out for weak signals of possible big changes and have a number of quick response plans (regarding in the first place the financial and human resources redeployment) ready in the first drawers of their desks.

* The author thanks Renata Trinca Colonel and Elena Berselli for their precious insights on the definition of emerging markets in a joint research project “What Is an Emerging Economy?”, presented at 2011 AIB conference: http://aib.msu.edu/events/2011/AIB2011_ConferenceProceedings.pdf

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2 risposte
  1. Foto del profilo di Sonia Sbolzani
    Sonia Sbolzani says:

    Dear Olga,
    taking the Ukrain crisis out of consideration, do you think that the institutional context is bound to stop the growth of a giant like Russia or China in the short run? Have you already seen a few signs of the downturn?
    And with reference to Ukraine, nobody suggests an “easy” political solution relied on a federation of regions, which everybody could enjoy (from the economic point of view too). Why?
    Thank yoy very much.
    Sonia Sbolzani

  2. Foto del profilo di Olga Annushkina
    Olga Annushkina says:

    Dear Sonia, thank you for your comment! Yes, most of emerging economies are facing the problem of weak or inefficient institutions – and in fact, the “new” multinationals from emerging economies are born with great capabilities of working in business contexts that are far from perfect (contrary to many “Western” multinationals). To look for potential problems undermining BRIC’s growth I would pay more attention to the macroeconomic indicators. For instance, Russia’s overreliance on the energy export, where the oil&gas prices are one of the key factors defining the growth prospects and the federal and regional budgets. By putting oil prices and Russia’s GDP growth on the same chart one may see some very interesting correlations. Another important issue for Russia is demography, people don’t live long enough even to benefit from their pensions and the birth rate is really low. For Chinese economy growth rates, I would look at the issue from a global perspective, given the strong interrelations of the Chinese economy with the rest of the world. For instance, now, as after the Ukrainian crisis Europe will most probably start its reorientation (as most of prominent think-tanks are suggesting) towards other sources of energy, including US shale gas, what will happen to the US dollar?
    Your second question about federalism in Ukraine: unfortunately the decisions are not always based on the rational evaluation of pro-s and con-s and I am afraid none of stakeholders involved in the debate is currently evaluating what is the best solution to achieve peace and prosperity for this great nation, I am afraid the whole reasoning is now rotating around the regional geopolitical equilibrium (and for this, the federalization of Ukraine is not a solution) and the energy issues.
    My best,
    Olga Annushkina

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