"Institutional voids in emerging markets make for big opportunities"

Harvard Business School Professors Tarun Khanna and Krishna G. Palepu, with long years of teaching and consulting behind them, have a rich perspective on their pet subject of emerging markets. In their forthcoming book, Winning in Emerging Markets — A Road Map for Strategy and Execution, the duo moves away from extant wisdom that emerging markets are those with rapidly expanding national incomes or with big market opportunities for multinational corporations.

Instead they define such markets as those marked by information and other assymetries that come in the way of smooth and reliable transactions. With this context in mind, the authors present a tools framework for global managers and entrepreneurs. BT's Josey Puliyenthuruthel got on the phone with one of them, Khanna, for a distilled version of the book. Edited excerpts:

The starting point and context for this book was our dissatisfaction with some of the material that we were teaching in the classroom. Lot of the stuff was around strategy, finance, marketing, etc., but as you came closer to Monday morning reality, things were quite different on the ground. How does procurement work in Johannesburg, how do you manage an R&D lab in a place with a loose patent regulation....

When we started off on working on this in 1993-94, emerging markets were not so popular; today, we have dozens of case studies. Still, what was missing was an intellectual framework or model to aggregate all the case studies with some abstraction.

Economics is about buying and selling a car, hiring a CEO, engaging a logistics provider... This is where our definition of emerging market comes in: one in which buyers and sellers have trouble coming together for a litany of reasons.

Either because they can't locate each other (due to lack of information or logistics, for instance) or just not conclude the transaction (no easy mode of payments, fuzzy rules open to different interpretations or a legal mechanism that can drag on for years). We call these "institutional voids". What we have done in the book is to come up with a taxonomy that can work from Chile to China under different set of institutional frameworks.

Institutional voids can be leveraged to a business' benefit in two ways: one, fill the void yourself. Take India's Aspiring Minds (see Matching Aspirations), which found there was no grading mechanism in India for millions of graduates. There was no way the guy from Tier II or III towns could sell himself; we provide the credibility to him (if he's good).

Two, if you know you have an institutional void ahead, how do you adapt your model? For instance, when McDonald's went to Russia, none of its vendors went with it. Which meant it had to build an entire potato supply chain; it bridged the institutional void itself. Today, it is one of McDonald's more profitable units, if not the most profitable one anywhere.