The current economic slowdown in many emerging markets does not indicate that there are fewer opportunities in these markets, but that companies need to look more carefully for the right niches and regions that are attractive in terms of market size and profit margin, as well as for the right local partners. In short, they need to invest more time, money and thought in understanding the specific industry context for any target market abroad. The Asia Connect Center of the University of St Gallen supports SMEs as well as multinational corporations (MNCs) in this challenging process. When we talk to executives planning to enter or expand in emerging markets, to make sure they understand what is required to be successful we use the metaphor of Archimedes’ screw. This is a mechanical device used since ancient times to draw water upwards by means of a rotating helix contained with a cylinder.

First, executives need to understand what we call the 'triple I mindset': investment, intercultural and infrastructure. These represent those aspects that executives have to invest more time and effort in to develop sophisticated mental frameworks, while collecting the necessary intelligence to make the right decisions before market entry or expansion projects. 

Investment mindset (impetus)

Executives often underestimate the amount of time, money and passion (yes, passion) that is constantly required to provide the necessary energy to turn the cylinder of the Archimedes’ screw. In particular, many executives from the West are unaware of the role of personal networks in most emerging markets, what ‘trust’ actually means and how much of their personal time and therefore passion is required. Our experience shows that many internationalisation projects in emerging markets fail because the executive responsible does not have the necessary passion for the country to overcome the challenges that any such project faces. This is why we then try to work on their 'intercultural mindset' representing the lower pillar of the Archimedes’ screw.  

Intercultural mindset (lower pillar)

While most executives are aware that personal relationships are key to success in emerging markets, they rarely draw the necessary conclusions. From a Western perspective, law enforcement in emerging markets does not work as efficiently and effectively as in the US, UK or northern Europe. This results in a situation in which investors cannot rely upon courts to enforce signed contracts. Without this safeguard, in the event of something going wrong with business partners, the only alternative is the individual reputation of executives.

As a consequence, any executive doing business in an emerging market needs to develop a reputation there in order to be ‘trustworthy’, not only as a company but as an individual. Building such a reputation requires a local network including not only your business partners but also their business partners. This takes time, money and a lot of business trips (as well as passion). However, once you have built up your reputation and your local network, you have achieved what we call ‘mutual vulnerability’: the business relationship is balanced and stable only if risk is shared equally between you and your local business partner. This includes each other’s local reputation as well as joint financial commitments.

Additionally, executives need to distinguish between three levels of intercultural intelligence. The first is what we call 'intercultural communication' and includes the dos and don’ts of overseas expansion. This is generally a given and, if not, there are plenty of books available that offer specific advice. 

The second level is called 'intercultural management', and includes an in-depth understanding of the cultural background of a region as well as common business practices in order to make the right decision in key management situations. Work experience abroad and management simulations are useful to build up the required expertise. 

The third and final level is what we call 'intercultural process design', where executives focus on the structure of activities and processes that allow employees with different cultural backgrounds to understand where they can apply local approaches and where a company-wide standard has to be adhered to around the globe. It is this last aspect of intercultural intelligence where companies today leave the most money on the table. It requires a lot of resources and cultural understanding at headquarters to analyse all major processes as well as to define the local and global standards and finally train the involved employees. However, our experience shows that such investments have short payback times. 

In the context of our Archimedes’ screw metaphor, the lower pillar therefore represents the necessary starting point to understand how far and how high a company can set the upper pillar in unknown territory. 

Infrastructure mindset (upper pillar)

The upper pillar of our Archimedes’ screw metaphor represents the target location(s). This is a choice that includes an in-depth understanding of the local legal, logistics, finance and talent infrastructure as well as the local rules of the game for the company’s industry segment. 

While many companies try to gather intelligence through industry reports or trade fair visits, and mostly get a general overview of the target market, other sources of intelligence are mostly untapped. These can provide access to more specific and more forward-looking information. Our experience with SMEs as well as MNCs has taught us that contact with local industry experts is key to any market entry or expansion project as it offers not only invaluable insights about how things are done locally, but also a better understanding of how future legal, logistics, financial and talent infrastructure might look.

Such a long-term projection is vital in markets with high levels of institutional uncertainty. Our recent research on Western companies in China confirms that there are different intelligence gathering and processing behaviour profiles for different target markets, depending on levels of uncertainty. Following these leads to improved decision making and company performance. The challenge for most companies is to build the required local industry intelligence platforms and adapt the intelligence gathering and processing behaviour for every single target market. 

While the 'triple I mindset' helps executives to prepare the optimal market entry or expansion project, there is obviously more to do to actually make it happen. In our Archimedes’ screw metaphor, the helix screw represents the various specific market entry or expansion steps that are required for success. As in our metaphor, the process steps (i.e. the number, surface and form of the different helix blades) depend on the chosen target location and industry you are operating in. Therefore, any attempt to provide generalised recommendations for each of those project steps is doomed to fail. Executives must accept that they not only have to build up the required knowledge and skills in their company differently but can also rely on the support of numerous market expansion service providers.

According to our experience, the successful completion of most of these process steps is closely linked to the social capital (in our metaphor, the cylinder) that a company has access to in its specific target market. Social capital represents both the inner core around which the helix screw is turning as well as the outer part keeping the water inside. As a consequence, social capital, represented as the level of reputation and mutual vulnerability of an executive, reminds us how much continuous investments (time, money, passion) are required as well as how important access to local experts is to understand the local situation and the legal, logistics, finance and talent infrastructure. Key market entry or expansion project steps such as market assessment, product and service adaption, selection of local business partners and office space, and understanding of local regulations as well as the ongoing management only work when there is a stable core of social capital that connects your existing market with your target market. 

In summary, executives who understand all elements of the Archimedes’ screw are better prepared to make the right decisions along a market entry or expansion project in emerging markets. 

Professor Dr Roger Moser is director of the Asia Connect Center at the University of St Gallen.