DREIESKIVA​|Roald Kvam

Expanding into emerging markets offers great opportunities but also presents challenges. Many companies struggle to find the right strategies for entering new international markets or deciding which countries to invest in. Too often, businesses rely on familiar methods without adapting to the unique conditions of developing nations. A major obstacle is the presence of «institutional voids»—gaps in key intermediaries, regulatory systems, and contract enforcement mechanisms. These deficiencies make it difficult for multinational corporations to succeed. However, avoiding these markets entirely can be a costly mistake.

Western companies that fail to develop effective strategies for these markets risk losing their competitive edge. Many decisions are made based on intuition, competitive pressure, or unreliable index analyses that fail to capture critical aspects of a country’s business environment. A better approach is to analyze institutional differences using a five-factor model. This method helps companies understand the markets they operate in and tailor their strategies accordingly.

Understanding Institutional Differences

The five-factor model provides a structured way to assess a country’s institutional environment. By analyzing these areas, businesses can make informed decisions and adapt their strategies to local conditions.

1. Political and Social Stability

A country’s political stability, government policies, and social structures significantly impact business operations. Companies must consider factors such as the rule of law, government involvement in the economy, and attitudes toward foreign companies. Some countries have a business-friendly climate, while others face challenges such as corruption and political unrest. Understanding these elements helps businesses anticipate challenges and adjust their plans accordingly.

2. Market Openness

The degree to which a country is open to foreign investment and trade varies. Some governments encourage international players by offering incentives and reducing bureaucracy, while others impose restrictions. Companies must evaluate trade policies, tariffs, and regulations on foreign direct investment to determine how easily they can establish themselves in a given market.

3. Product Market

The development level of a country’s product market affects how businesses can distribute and sell goods or services. Many emerging markets lack established supply chains and retail networks. Companies must assess available partners, consumer purchasing power, and market fragmentation. Adapting products and marketing strategies to local conditions is crucial.

4. Labor Market

Access to labor, regulations, and cultural attitudes toward work affect how easy it is to build an effective workforce. Some markets offer cheap labor but lack specialized skills, while others have well-educated professionals in certain industries. Companies must analyze labor costs, education levels, and workforce mobility to develop an effective strategy.

5. Capital Market

Financing is crucial for expansion. Many emerging markets have underdeveloped banking systems, making it harder to secure credit or attract investors. Businesses should explore alternative financing options such as government support programs, partnerships, or international funds to mitigate risks.

Adapting Strategies

Once companies have analyzed a country’s institutional framework, they can develop strategies that best suit local conditions. Here are some successful approaches:

1. Adapting to Local Conditions

Successful companies do not impose a single business model on all markets but instead adjust to local needs. This may involve modifying product offerings, distribution channels, or pricing strategies. For example, some companies develop lower-cost product variations to meet the needs of price-sensitive consumers.

2. Overcoming Institutional Gaps

Rather than avoiding markets with weak infrastructure, companies can turn these challenges into opportunities. They can develop their own supply chains, invest in local workforce training, or find alternative financing solutions such as microloans.

3. Partnering with Local Businesses

Local partnerships provide valuable insights and operational advantages. Strategic alliances, joint ventures, or franchise models can help companies navigate regulatory systems and build trust in the market.

4. Influencing Regulations

Some companies work with governments and industry organizations to improve market conditions. Through corporate social responsibility initiatives and contributions to local economic development, businesses can help shape policies that create a more favorable business environment.

5. Choosing the Right Market Entry Strategy

Businesses must carefully consider how to enter a new market. Options include exporting, franchising, joint ventures, wholly owned subsidiaries, or acquisitions. Each strategy has advantages and drawbacks depending on risk, cost, and the level of control required.

Assessing Risks and Benefits

Before committing to an emerging market, businesses must carefully weigh the benefits against the risks. Some countries offer high growth potential and low costs, but they may also have regulatory challenges, corruption risks, or weak infrastructure. Companies need to balance these factors to determine whether the market is worth the investment.

If the risks are too high, companies have two choices: either influence and adapt the market to make it more favorable or avoid investing. If they choose to stay out of the market initially, they should continue monitoring developments for new opportunities.

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Finding the right strategies for emerging markets is a complex but necessary task for companies seeking global growth. The five-factor model provides a structured approach to understanding local conditions and adjusting strategies accordingly. By analyzing political and social systems, market openness, product and labor markets, and capital markets, businesses can build a foundation for sustainable success.

Those that can adapt, collaborate, and leverage local opportunities will gain a strong competitive advantage.