Measuring the potential of emerging markets: an indexing approach

Measuring the potential of emerging markets: an indexing approach

S. Tamer Cavusgil

Targeting foreign markets? The Overall Market Opportunity Index can help reveal both attractive and undesirable features of each country.

A number of worldwide trends are making a group of economies prime targets for Western companies–the so-called emerging markets. As industrialized countries continue to mature, these markets have become increasingly more attractive and promising as a market for technology and goods as well as a pool for offshore sourcing. Ongoing economic liberalization, more markets open to international competition, and rising consumer expectations are some of the reasons these nations require special attention by Western companies.

Just what constitutes an emerging market? Essentially, these are high-growth developing countries that represent attractive business opportunities for Western firms. The U.S. Department of Commerce lists 18 “Big Emerging Markets”: China, Hong Kong, Taiwan (the Chinese Economic Area), Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei (ASEAN), Vietnam, India, South Korea, Argentina, Mexico, Brazil, Poland, Turkey, and South Africa. The Economist adds Chile, Venezuela, Greece, Israel, Portugal, the Czech Republic, Hungary, and Russia.

The emerging markets (EMs) share remarkable features in terms of economic potential. Some are large geographically. Demographically they have a young labor force. They are attractive for both selling and sourcing, enjoy outstanding growth rates and prospects for market expansion, and have undertaken significant economic reforms. In addition, many EMs are a major political influence in their region as well as a regional economic driver.

The economic potential of EMs is already well established. As a group, they comprise more than half the world population and account for a large share of global output. They offer promising opportunities for trade as their need increases for capital equipment, machinery, power transmission equipment, transportation equipment, and high-technology products.

EMs pose special challenges for Western firms. Many have an inadequate commercial infrastructure, such as banking and transportation. Distribution channels are usually underdeveloped and inefficient. Western firms often have difficulty identifying qualified, competent intermediaries. The government sector is often the primary economic actor. In many cases, a state-owned enterprise is slow in decision making, and large national debt has produced an inflationary economy–a situation with which many Western managers are unfamiliar. Moreover, environmental awareness is rising in EMs, and ethical issues are under increasing scrutiny.

Despite these challenges, no growth-minded company can overlook the potential EMs hold out. What strategies are appropriate for capitalizing on this potential? Three issues must be considered: (1) market potential estimation and access; (2) market entry; and (3) market establishment. Although each step in foreign market expansion is critical, the initial assessment of opportunities is especially important. Various techniques can be used, such as gathering background information (desk research), evaluating unsolicited inquiries from foreign customers, and monitoring competitor activity. A formal and systematic analysis of aggregate market potential can be particularly fruitful; such is the focus of this article. Verifying market potential and quantifying opportunity in a foreign market can be vital to a firm’s success. Sufficient consideration must also be given to qualifying market opportunity. Managerial guidelines for the three phases of a foreign marketing strategy are offered in Figure 1.

Figure 1 Guidelines For Doing Business In Emerging Markets

PHASE 1: Market Potential Assessment and Access

* Engage in formal market potential analysis

* Gather market intelligence

* Employ early monitoring and be a “first mover”

* Tie into informal networks of influence

* Offer financing as well as technical expertise and solutions

* Explore government incentives and procurement

PHASE 2: Market Entry

* Choose qualified partners carefully; build their capabilities

* Invest in long-term relationships

* Be culturally sensitive

* Consider adapting product features, selling approach, etc.

* Be prepared to deal with inadequate commercial infrastructure

PHASE 3: Market Establishment

* Adjust to operating in a high inflation/debt environment, leading to commercial and currency risk

* Learn to deal with labor force productivity and motivation issues

* Be prepared to deal with government bureaucracy and regulations

* Look for opportunities in sourcing

* Expand networks and alliances

The Study

The study reported here develops and illustrates a methodology for quantifying and ranking the market potential of 25 countries identified as EMs by the Economist. (Taiwan was excluded because of insufficient data.) An index was developed to measure market potential in EMs. First, 13 economic, political, and social variables were chosen to characterize a market’s attractiveness from the viewpoint of Western management. These 13 variables represent the seven fundamental dimensions to consider when determining the overall attractiveness of a market (shown in Figure 2). Next, an index was created from the raw values of the 13 variables by standardizing the items and putting them into a scale of 1 to 100 by a formula. (Standardization is a statistical procedure enabling us to directly compare variables with very different distributions. The original data are first transformed into standardized data, or z-scores, before country comparisons are attempted.) Third, the relative importance of each dimension was determined by interviewing a small number of international business professionals and educators (a Delphi process). The result was the relative weights shown in the second column of Figure 2. Finally, the seven dimensions were combined into the Overall Market Opportunity Index (OMOI) by using the corresponding weights. To avoid the effects of variance of each dimension on the final index, the figures used to calculate the 1-100 scales for each dimension were again standardized; the weights were then applied to the z-scores and conversion into a 1-100 scale established the OMOI.

Figure 2 Dimension And Measures Of Foreign Market Potential

Dimensions Weight

Market Size 4/20

Market Growth Rate 3/20

Market Intensity 3/20

Market Consumption Capacity 2/20

Commercial Infrastructure 2/20

Economic Freedom 2/20

Market Receptivity 4/20

Dimensions Measures

Market Size * Total population

Market Growth Rate * Average annual growth

rate of industry

Market Intensity * PPP estimates of GNP

per capita (50% weight)

* Private consumption

expenditure per capita

(50% weight)

Market Consumption Capacity * Size of the middle class

Commercial Infrastructure * Telephone mainlines per

capita (20% weight)

* Paved road density

(20% weight)

* Trucks and buses per

capita (20% weight)

* Population per retail

outlet (20% weight)

* Percentage of homes with

color TV (20% weight)

Economic Freedom * The Economic Freedom

Index (Johnson and Sheehy

1995), which measures

trade policy, taxation

policy, government

consumption of economic

output, monetary and

banking policy, capital

flows and foreign investment,

wage and price controls,

property rights, regulatory

climate, and black

market activity

Market Receptivity * Average annual growth rate

of imports from the U S. over

the past five years (60% weight)

* Per capita imports from the U.S.

(40% weight)


“The Big Emerging Markets Initiative,” Business America, August 1995, pp. 4-14.

“Indicators of Market Size For 117 Countries,” Business International, July 1992, pp. 205-216.

S. Tamer Cavusgil, “Guidelines For Export Market Research,” Business Horizons, November-December. 1985, pp. 27-33.

International Marketing Data And Statistics (London: Euromonitor, 1994).

B.T. Johnson and T. Sheehy, The Index Of Economic Freedom (Washington, DC: The Heritage Foundation, 1995).

National Trade Data sank, U.S. Department of Commerce, Economics and Statistics Administration.

World Development Report (Washington, DC: The World Bank, 1994).

S. Tamer Cavusgil is the John William Byington Endowed Chair in Global Marketing at Michigan State University, East Lansing, Michigan, and Executive Director of MSU’s Center for International Business Education and Research. He gratefully acknowledges the assistance of Ms. Ayse Topaloglu of the International Business Center with data collection and analysis.

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