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Winning in Emerging Markets: Spotting and Responding to Institutional Voids

By Tarun Khanna and Krishna G. Palepu

This article builds on our structural definition of emerging markets to equip managers with toolkits to spot and respond to institutional voids.1 Emerging markets are hardly uniform in the nature and extent of their institutional voids. The development of business strategy in any economy is driven by three primary markets—product, labor, and capital—and institutional voids can be found in any, or all, of these markets in developing countries.

The advantage of an institutional approach to considering emerging markets is that it specifies the particular combination of features that prevents efficient exchange in each market. Some countries might lack specialized intermediaries in the labor market but have them in abundance in the capital markets. Others may have effective labor markets but distorted capital markets. Product and factor markets within developing countries often develop at different rates.

Chile is lauded for its capital market efficiency, whereas Korea’s financial markets remain constrained by the entanglement between banks and its chaebol business groups (see figure 1).

At the same time, Korea has undergone spectacular development in its product markets, as evidenced by its world-leading broadband penetration, while Chile’s communications infrastructure is not nearly as developed (see figure 2). Moreover, different industries are not uniform in the ways in which they rely on market institutions. Some industries are more institution intensive than others, so different industries within the same market are affected differently by institutional voids.

This structural definition has actionable implications for managers. Institutional voids have real and first-order effects on business strategy.2Companies rely on intermediaries both to raise the willingness to pay (WTP) of consumers and to lower companies’ own costs. Companies need the expertise of market research firms, for example, to understand customer preferences and then adapt their offerings to raise WTP. Identifying and segmenting the market are immeasurably more difficult without market research specialists acting as intermediary.

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