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Where Are Future Centers of Growth? Familiar, Emerging, or Frontier
As we near the end of 2014, growth remains elusive for many American companies. The World Bank shows U.S. GDP grew at a mere 1.2 percent rate between 2009 and 2013, and the debate on whether U.S. GDP growth can be put back on a high-speed track continues. Add to this economic uncertainty in the Eurozone and slower growth in China after three decades of double-digit growth, and it’s not too hard to see why many U.S. business-to-business companies are exploring their options. While China was stealing the show other countries (emerging and frontier) were growing at nearly the same rate over the past 10 years (though from a far smaller base). Many provide attractive growth opportunities for companies across a wide array of industries. Yet success in these environments requires new trains of thought.
How Should You Look for New Markets to Achieve Growth?
When looking for new markets beyond North America, Europe, and the now-familiar Asia to achieve growth, success requires a deliberateness that maximizes opportunity and reduces risk. For any potential investment, it is necessary to evaluate new markets individually along multiple dimensions—not just market size and growth. Furthermore, opportunities and risks, must be assessed on a case-by-case basis.
Though there are frontier markets across the globe, for the purpose of this post, we focus on two specific geographies to demonstrate how a comparison of new markets across a number of dimensions could be done: Sub-Saharan Africa and Latin America.
Though Africa reminds some of corrupt leaders like Mobutu Sese Seko, or of endemic diseases like the recent Ebola virus outbreak, some countries deserve credit for their progress over the past decade. Many African countries have been plagued by corruption and single resource dependence (gold, oil, or diamonds), but are starting to become attractive destinations for business operations. For example, Nigeria—the economic capital of Africa and seventh most populated country in the world—and Tanzania, a much smaller economy with accelerating growth.
Nigeria claims both the largest labor force and economic force in Africa, and already hosts manufacturing operations for large, U.S. corporations such as Nestle, Unilever, and Proctor & Gamble. While these statistics measure broad economic success, Worldwide Governance Indicators tells us more about the political climate of the country. For example, Nigeria is struggling with political instability, corruption, and weak government effectiveness, ranking in the bottom 16th percentile in the world in each category. On the positive side, their economic development has led to improved trade logistics, as their trade infrastructure, logistical competency, tracking and tracing, and timeliness all rank in the top half of the world.
Tanzania looks similar to Nigeria by numbers, however, its institutions are far different. Tanzania ranks in the top two-thirds of countries in political stability, rule of law, and private sector regulatory quality, all of which are on par with Chinese rankings (political stability is actually far stronger than in China). Further polarizing from Nigeria, Tanzania falls short in its trade logistics and infrastructure, ranking in the bottom 35 countries in the world in areas such as customs, international shipments, logistical competency, and tracking and tracing. While Nigeria and Tanzania rank similarly low in competitiveness rankings, each country has a unique political and economic identity, which create different opportunities for foreign investment.
Growth in South American frontier markets over the past decade has also been robust, albeit not as high as in Africa. For example, Colombia, often unfortunately stereotyped as a drug war zone, has fostered a relatively advanced economy. Most of its GDP comes from services and manufacturing, and pragmatic economic policies have led to investment grade debt ratings. On the other hand, Venezuela was transformed into a socialistic economy by Hugo Chavez and has practically lived off nationalized oil production for the past decade and a half. Although both countries have grown, the political institutions of Colombia far outshine those of Venezuela. While Colombia is comparable to China’s political standing, Venezuela has very low rankings in rule of law, regulatory quality, corruption, government effectiveness and political stability. Yet Venezuela has developed better trade infrastructure, as was necessary from its oil exports. Colombia, alternatively, has room for improvement in many of these areas, such as tracking and tracing, timeliness, and infrastructure, which could be quickly improved by foreign investment.
Companies considering other markets can array those markets on a chart and benchmark against countries that are more familiar, similar to the following figure. However, the factors chosen for analysis (e.g., competitiveness, governance, infrastructure, etc.) should be as tailored as possible to the investment being contemplated.
As you consider other markets, consider what your business requires and the type of investment. Use this information as a starting point to develop the dimensions and evaluate this criteria according to your own business. In doing so, you will develop the knowledge to deliberately balance the increased risks against the higher rewards in frontier markets.