Or so says Tarun Khanna, the Jorge Paulo Lemann Professor at the Harvard Business School, where he has studied and worked with multinational and indigenous companies and investors in emerging markets worldwide. He has most recently co-authored Winning in Emerging Markets — A Road Map for Strategy and Execution. In this interview, he speaks to DNA. Excerpts:
One of the major things you talk about in your book is the institutional void in emerging markets. Can you elucidate?
The definition for us has got more to do with the rudimentary nature of mechanisms of bringing buyers and sellers together. In that sense, when you want to sell me something, and you and I cannot find each other, or can’t trust each other for a variety of reasons because the contracting regime isn’t robust or you worry about the courts and adjudication, then that market will not emerge. It will be non-existent.
Can you get into some detail?
It has more to do with structure of opportunities available at a given point of time and the mechanisms available to deal with those opportunities. For example, any time you have a big technological change you are likely to have a lot of institutional voids. Take the dotcom bubble — suddenly there were a variety of different ways of transacting that hadn’t been available before. But the mechanisms to bring transacting partners together virtually had not been formalised yet, so that was very much an emerging market.
Of course, political change would be another reason why things dramatically change, like when Korea decided to transition to an equity-based market. It is one thing to say that we want to have a robust equity market, for whatever set of reasons, but it’s quite another thing to develop the mechanisms to identify potential listers or to tell people who want to buy certain stocks what stocks are good and what stocks are bad. So the market takes a while to develop as these institutions emerge over time.
Can you give us an example?
A good example is a company called Aspiring Minds, with which I have been working very closely of late. It’s the ultimate institutional void in India. The idea being that, we have 300-400 million people, depending on how you count, who are locked out of urban India or out of the mainstream economy.
But, nonetheless, there is a lot of talent there. There is a big void between companies that demand talent, which are often complaining about attrition and scarcity and so on, and all these people who would like to get a job and are often qualified to get one, but there is no mechanism to break down the institutional barriers between them.
And Aspiring Minds is trying to fill that gap?
Yes. There are two entrepreneurs — one from Massachusetts Institute of Technology and one from the Indian Institute of Technology, who have created this assessment mechanism which is state-of-the art and world-class. The idea is to very cost-effectively, almost seamlessly, test almost hundreds of thousands, perhaps millions of people, in different locations around the country and make those available to corporations.
So when you go around to our biggest corporations and say where are you sourcing talent from? Even the most ambitious of them will say from fifty, sixty or hundred colleges. You can tell them why not twenty thousand colleges? Here is a cost-effective way to do it.
A theme running through your book is that when multinationals enter emerging markets, they have to at times develop their own infrastructure as they go along.Can you give us some examples of this?
Most large global multinationals would have encountered this at virtually all times when expanding into particular countries. One is a company that is trying to create a foothold in India — Metro Cash & Carry — which happens to be a German wholesaler. What they do, among other things, is offer rural-to-urban connectivity of produce and goods and services of different sorts. So they make large amounts of material available to urban consumers often sourcing it in different places.
Take the simple example of sea food or fish of some sort. For sea food to be made available to large numbers of people in good condition and in a hygienic way there has to be a cold chain and that cold chain often does not exist. In many countries there are established entrepreneurs who deal with cold chain services. And they provide the cold chain. Metro has had to create the cold chain. It is not that cold chain providers don’t exist in India but it is just that sector isn’t vibrant enough to meet the needs of specialised users that particular service
Any other example?
McDonald’s is a company which has had to do it over and over again. The particular instance that is quite striking for McDonald’s is in Russia where they literally discovered that a lot of support mechanisms they needed to run their business in the West were missing. What was worse that many of their conventional suppliers refused to come to Russia in those days, which is a couple of decades a go, because they did not find the opportunity attractive enough.
So McDonalds had to set up a horticultural institute, a transportation system, an educational institute, a cleaning service, and a quality adjudicating service. All the things that it took for granted for in the West, in order to cater to its business which is ultimately selling clean fast food. And over time, as institutional infrastructures emerged in Russia, they have been able to spin off these businesses and are left with a narrow footprint business that does much less than it had to do in the past.
Comments