Emerging Markets 2018

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Author: Shuaihua ChengManaging Director, ICTSD China, International Centre for Trade and Sustainable Development (ICTSD)

In recent decades, the forces that have driven growth in emerging economies have been well documented. Less studied, however, is the contribution made by globally competitive, nimbly managed, and highly productive private companies.

We analysed the growth performance of more than 70 countries and found that 18 emerging economies have exceeded certain development thresholds – per capita GDP growth of at least 3.5% annually over 50 years or 5% annually over 20 years – that can help them narrow the income gap with rich countries. These 18 economies include the long-term success stories of China, South Korea and Malaysia; recent high-growth economies such as India and Vietnam; and less-heralded countries such as Ethiopia and Uzbekistan.

These “outperformer’ economies have twice as many companies with revenue over $500 million as other emerging economies. The revenue of big firms relative to GDP in these economies almost tripled from 22% between 1995 and 1999 to 64% between 2011 and 2016. At the same time, their contribution to the value added to GDP rose from 11% to 27% – double the level among developing-economy peers, according to McKinsey Corporate Performance Analytics.

These companies have done well for themselves and their shareholders. On a global level, they contributed about 40% of the revenue and net income growth of all large public companies from 2005 to 2016, even though they accounted for only about 25% of total revenue and net income in 2016. More than 120 of these companies have joined the Fortune Global 500 list since 2000.

What has driven the success of these large, emerging-market companies? Competition has a lot to do with it. It’s hard to succeed in emerging economies: just 45% of the large companies in outperforming economies have stayed in the top quartile by economic profit generation over the last decade, compared with 62% in high-income economies. This landscape makes top firms more innovative and hungry to expand. Our survey of 2,000 company executives suggests that big firms in outperforming economies derive 56% of their revenue from new products and services – eight percentage points more than their advanced-economy peers – and are 27 percentage points more likely to prioritize growth abroad.

Examples of creative innovation abound. The Chinese phone manufacturer Transsion has become the leading brand of smart and feature phones in Africa by making handsets that are not only affordable but also accommodate up to four SIM cards, allowing customers in many African countries to avoid the high cost of calling someone who uses a different mobile provider. AmorePacific, a South Korean cosmetics manufacturer, successfully launched and sold 100 million “cushion compacts” – a new cosmetics and skincare product – in the US through a product development process involving 3,600 tests and 26 patents. Unsurprisingly, the number of patents granted annually in Bangalore, Beijing and Shanghai grew more than twice as fast as in Silicon Valley, the largest innovation cluster in the world.

Many outperformer countries have recognized the importance of competitive private-sector firms and nurtured environments in which they could invest and grow, even as they created incentives to improve productivity. Rather than picking winning sectors or winning companies within sectors, these countries have focused on actions that boost productivity and enable competition within sectors. In some economies, governments actively helped incubate competitive domestic companies through sector-wide support for infant industries, including low-cost loans, preferential exchange rates, low tax rates, and R&D subsidies. However, and crucially, protection was gradually lifted as these industries became more competitive, limiting market distortions.

In some cases, support was tied to conditions that would encourage firms to increase productivity. For example, South Korean “performance requirements” from the 1960s to 1980s made meeting specific export sales targets a condition for accessing scarce licences or concessional credit. Indonesia’s Investment Coordinating Board were willing to remove borrowers’ promotion certificates if they did not follow loan terms and conditions.

While the extent may vary between countries, the lesson remains: fostering the growth of large, globally competitive firms can elevate emerging economies to the rank of outperformer. The size of the prize is significant: if all emerging economies matched the historical productivity growth of outperformers, global GDP would rise by $11 trillion in 2030, the equivalent of adding an economy the size of China’s. About half of the world’s billion-dollar companies could be headquartered in emerging economies by 2030 in this scenario. It is important that these engines of growth are unleashed for the sake of the global economy and the hundreds of millions of people who strive to enter the middle class.