We are witnessing a shift in global economic activity from advanced markets to emerging ones. According to the World Bank Group (2021) Global Economic Prospects report, emerging markets and developing economies (EMDEs) have experienced higher real gross domestic product (GDP) growth rates than advanced economies for the past four years and are expected to continue to do so through 2022 and beyond. Currently, EMDEs account for approximately 42 percent of the world’s GDP and are expected to account for more than 50 percent by 2035. Additionally, EMDEs comprise 55 percent of the world’s population, and more than half of the world’s population is now living in middle-class or upper-class households. EMDEs also have plentiful natural resources, technology, consumers, suppliers, financial capital, and human capital (Dunning, 2009). In short, they are more “growth markets” than “emerging markets.”
EMDEs also present unique challenges and heightened risk. For example, emerging markets are fraught with institutional voids: a lack of structured organizations that provide product, capital, and labor markets that enable buyers and sellers to transact business effectively. The result is often information asymmetry, misguided regulations, and inefficient judicial systems, which can cause markets to fail. Firms cannot rely on efficient markets in emerging market economies.
However, successful enterprises exist in emerging markets, and many are doing quite well. Tencent, Haier, and Huawei in China; Infosys, Ranbaxy, and Tata in India; Nautra, Embraer, Sadia & Perdigao in Brazil, Groupo Modelo, America Movil, and Cemex in Mexico; Koc Holding, Vestel & Sisecam in Turkey; and LG Group, Hyundai Group, and Samsung in South Korea are but a few examples.
And that raises a question: If these markets hold potential opportunities yet present significant risk, how can a firm enter them successfully?
Established firms in any market, whether advanced or emerging, have built credibility in the marketplace. Consumers, suppliers, and other stakeholders believe that those firms will adhere to their commitments and fulfill their obligations. Similarly, new entrants in an emerging market must build trust and establish a reliable reputation with their stakeholders. There are several ways a firm can do that. One way is to form a partnership with a recognized firm in the marketplace, but finding a suitable partner can be difficult. Alternatively, a firm can acquire an established firm, but that, too, is difficult in an emerging market.
A third option is for the firm to fill the institutional void itself, though a void would not exist if it could be readily filled. Perhaps the most logical option is for a company to build its reputation with consumers and suppliers by delivering on its promises. However, the resilience, finances, and time needed to do so can be exhaustive.
In a new paper, we examine whether a firm can demonstrate its competencies, build its reputation, and even fill institutional voids through excellence in corporate social responsibility (CSR). We argue that it can: By demonstrating its commitment to sustainability, the firm can build its reputation, create a buffer against competition, and grow its business while securing its long-term survival.
Research has shown that CSR provides long-term benefits to a firm’s reputation and bottom line, and firms are increasingly adopting sustainability practices. However, despite the rise of standards boards, regulatory organizations, and rating agencies, firms generally have significant leeway in adopting and reporting their adherence to CSR principles. Further, each country has its own set of priorities. Research has shown that firms expanding overseas may adopt lower standards as long as they meet local requirements.
We believe firms can build their reputation and instill trust in the marketplace by committing to the highest sustainability measures possible. Employees, for example, would feel more comfortable and confident working for an organization that embraces a diverse and inclusive work environment. Local government officials would support a business that promotes sound ecological practices. The community would embrace an environmentally friendly company over one that, say, pollutes the water.
Of course, many factors can affect a firm’s success, and following good CSR practices is no guarantee of an organization reaching its financial and business goals. A firm’s level of CSR will depend on its size, level of diversification, research and development, advertising, government sales, consumer income, labor market conditions, and stage in the industry life cycle. However, we believe a committed adherence to established standards and protocol would enable the firm to differentiate itself from its competition and build a stronger relationship with the community.
This post comes to us from Dale Herndon and Richard Baskerville at Georgia State University. It is based on their recent paper, “Building Reputation in Emerging Markets through Corporate Social Responsibility,” available here.