There are more than a billion people in China. Add India and Indonesia to the mix, and you have 40 percent of the world's population. From Argentina to Russia, from the Czech Republic to Thailand, huge new international markets are emerging for goods and services. Recognizing this a number of years ago, the late Roberto Goizueta, longtime CEO of Coca-Cola, commented, "We are global, because 95 percent of the world's consumers are outside this country."

It comes as no surprise, therefore, that the proportion of foreign direct investment in developing nations nearly doubled between 1992 and 1996, surging from 18 percent to 33 percent. "Emerging markets constitute the major growth opportunity in the evolving world economic order," says HBS assistant professor David Arnold. Yet there is little guidance for corporate managers charged with assessing the opportunities and risks that emerging markets present, and for subsequently creating marketing strategies that address their potential. "The default option," Arnold adds, "is to use the mainstream marketing frameworks formulated and applied in the developed world." Arnold's research, however, suggests a better alternative.

	Emerging markets are not reflections of the U.S. economy in the 1950s.

A three-year collaborative effort with Harvard Business School professor John A. Quelch involved extensive research in several developing countries that enabled the two international marketing scholars to observe firsthand the entry strategies and methods adopted by a number of multinational corporations (MNCs). According to their work, which will be reported in the fall issue of the Sloan Management Review, "the distinctive marketing environments in these countries require a rethinking of accepted wisdom" in regard to market assessment, timing of entry, partnering policies, and product life cycles.

Arnold and Quelch note that many executives are reluctant to tread where bulwarks of the marketing infrastructure such as market data, distribution systems, and communications channels are either rudimentary or nonexistent. Rather than view this as a barrier to entry, they say, MNCs can often turn these deficiencies to their advantage by building the necessary foundations themselves. Arnold points out that when Procter & Gamble first entered Russia, for instance, there was no distribution network capable of meeting its extensive needs. Undaunted, the company established a network of thirty semi-independent distributors that now rely on computers and other systems provided by P&G -- systems specifically designed to meet P&G's needs.

To assess the potential of an emerging market, Arnold and Quelch propose a new framework that breaks from established practice in several respects. It begins with an evaluation of market demand over the long term -- five to ten years, by their definition. This core information is subsequently tempered by factors such as convertibility to profit, short-term demand, economic and political risk, and level of infrastructure development.

Because estimating demand can be difficult in countries where reliable market data are often scarce, they have devised a simple formula that goes beyond per capita GDP comparisons to measure spending power adjusted for differences in living costs. Comparing 1995 per capita GDP for China (U.S.$620) and the Philippines ($1,050), for example, puts the former at a distinct disadvantage for marketers. But by comparing them on the basis of "purchasing power parity," the gap between the two countries narrows considerably ($2,290 for China versus $2,850 for the Philippines).

While the hurdles to entering emerging markets can seem overwhelming, Arnold and Quelch point out the numerous advantages that can befall those willing to leap in ahead of the pack. Where both demand and risk are high, they say, the preferred approach may be to establish a market beachhead, then hold firm until risks abate. Such a strategy can minimize investment exposure while positioning the company for rapid expansion once conditions improve.

For smaller companies in a particular industry, emerging markets offer an opportunity to "leapfrog" competitors onto the world stage. Consider Mary Kay Cosmetics. "Although it has not been a major player in developed countries abroad," says Arnold, "it is giving giant Avon a run for its money in markets such as China and Russia, where both entered the scene at about the same time."

First movers can also lock up scarce infrastructure resources and build solid relationships with the best service providers and partners before competitors rear their heads. "In many of these markets," observes Arnold, "communications and distribution channels have very limited capacity. By arriving early, a company can control advertising kiosks or sign up the sole distributor." Another important advantage for the first mover, according to Arnold and Quelch, concerns the creation of laws and regulations regarding commerce. In emerging countries, these often are still in the early stages of development, giving firms that enter first a greater opportunity to influence the process in ways consistent with their own interests.

Finally, Arnold and Quelch advise against the common corporate practice of viewing emerging markets as reflections of the U.S. economy in the 1950s. Advancements in global communications and travel, among other factors, they say, now create familiarity with a brand even before it becomes available in a developing nation. Such preexisting awareness generates pent-up demand, especially among the pockets of wealthy consumers often found in these countries' urban areas. This situation typically produces a spike in sales immediately after a product launch, despite the fact that promotional spending may be low. "It is clear from this and other scenarios," states Arnold, "that the product life cycle in emerging markets does not go through the same progressions that we are accustomed to seeing in this country."

Emerging economies offer MNCs a wide array of challenges that can be overcome by going beyond traditional assumptions and practices. Arnold and Quelch's research can help corporations avoid a marketing nightmare as they go about their business in this fertile sector of the global marketplace.

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