"Relative Competitive Position of East European Countries in 2011"

January 2013 Journal of Competitiveness & Strategy 1

enhancingprosperity

JOURNAL OF COMPETITIVENESS & STRATEGY

January 2013, Volume 3ISSN 2250-3587

Creating Shared Value on a Global Scale: Possibilities for the United Nations’ EngagementMichel Rixen, Ingo Böbel and Claude Chailan

Financial Agglomerations in the UK: Geographical Cluster Size and Firm PerformanceRelative Adrian Kuah, Terence Tse, Mark Esposito

Relative Competitive Position of East European Countries in 2011 Nebojsa Savic, Goran Pitic and Snezana Konjikusic

The formation of clusters as an alternative to the development and strengthening of SMEs in MexicoSergio Garcilazo Lagunes

Transforming Mindsets creating Innovative Business Models In Emerging MarketsMark T. McCord, Amit Kapoor, Sandeep Goyal, M P Jaiswal

Creating Shared Value in the Brazilian context: The ideology of WEG Electric Corporation Siqueira de Morais Neto, Maurício Fernandes Pereira

EDITORIAL BOARD

ADVISORY BOARD, INSTITUTE FOR COMPETITIVENESS

Arturo, CondoProfessor of Competitiveness and Strategy, INCAE, Costa Rica

Dharwadkar, RaviProfessor of Management, Martin J. Whitman School of Manage-ment, USA

Doyle, EleanorSenior Lecturer in Economics, University College Cork, Ireland

Du!ll, DavidDeputy Dean, Robert Kennedy College, Switzerland

Elazar, BerkovitchDean, Arison School of Business, Israel

Hergnyan, ManukProfessor, Strategic Management Yerevan State University, Arme-nia

Kapoor, AmitProfessor of Strategy and Industrial Economics, Management De-velopment Institute, India

Kini, RameshProfessor of Automation and Computer Science Department, Ka-zakh British Technical University, Kazakhstan

Lall, AshishAssociate Professor Lee Kuan Yew School of Public Policy, Singa-pore

Mishra, AbhishekProfessor of Business Policy and Strategy, Indian Institute of Man-agement- Ahmedabad, India

Prasad, AjitProfessor of Strategy International Management Institute, India

Rolfe, RobertProfessor of International Business, Moore School of Business, USA

Steinbock, DanResearch Director of International ResearchIndia, China & America Institute, USA

Unger, MichaelAssociate professor of management and international business, Sellinger School of Business andManagement

Esposito, MarkAssociate Professor of Management Grenoble School of Manage-ment Visiting Scholar, Harvard University

Balaji, G.Senior Director, Fidelity Business Services India

Batra, AnuragMD and Editor-in-Chief, Exchange4-Media Group

Doyle, ChristopherMD, Dynamic Results India, Former Country Manager, In-dia, Economist Intelligence Unit

Ffowcs-Williams, IforCEO, Cluster Navigators

Jakhu, Ram S.Associate Professor, Institute of Air and Space Law, McGill University

Kapoor, AmitHonorary Chairman, Institute for CompetitivenessProfessor of Strategy and Industrial Economics, MDI

Ketels, ChristianPrincipal Associate, Institute for Strategy and Competi-tiveness, Harvard Business School

Verma, SanjayExecutive Managing Director, South Asia, Cushman & Wake!eld

JOURNAL OF COMPETITIVENESS & STRATEGY

enhancingprosperityenhancingprosperityenhancingprosperityenhancingprosperityenhancingprosperityenhancingprosperityenhancingprosperityenhancingprosperityenhancingprosperityenhancingprosperityenhancingprosperityenhancingprosperity



Celebrating the Harvard Business School MoC program’s anniversary is more than just a joyful recurrence of these past successful 10 years. The network has provided wealth of inspiration, support and conceptual framework to many of us in these past years, allowing for the regionalization and localization of Competitiveness, as a result of a strong belief in a model of economic development, nurtured through cluster initiatives across regions and continents.

As a sign of our gratitude, this special issue is populated by intellectual contributions with research papers coming from each corner of the network. With its emphasis on the role of policy in the process of competitiveness, this special issue of the Journal of Strategy and Competitiveness has experienced ample evidence, empirically and conceptually, that when policies are set up to facilitate the natural dynamism of cluster initiatives, competitive regions emerge, driven by strong innovative orientation and output, regardless of the industry and the genesis of the cluster, but more important, regardless of any macroeconomic indicators.

During these times of turbulence, knowing that clusters are able to provide those answers to the instability of the current global economic apparatus, it is reassuring of something that, less respondent and dependent on classic economic theory, can still enhance the state of the world. With this reinforcing evidence in mind, our call for action wants to be advocate for more policies that look at the development of competitive environments rather than fear-driven with austerity, protectionism and redistribution. Our contributing authors have enlarged the spectrum of our current knowledge on the relationship of policy vis a vis of the enabling factors that accelerate clusters formation while improving the parity of those regions. Their representation in this special issue, adds more critical purposefulness to the impact of the MoC network and its seminal investigation in this !eld.

If the !nancial crisis is being cited and remembered as a true black swan to the alleged order of the already "awed economic system that used to run the mechanism of development, we would like to invite for a re"ection on the post-traumatic opportunities of growth and learning ahead of us. In light of that retrospection, our special issue wants to voice its presence.

On a conclusive note, If we hold for true that each original investigation plays a role in the formation of the “wall of knowledge”, then the “brick” that our MoC a#liates have added to it, has particular signi!cance, as we witness an emerging shared impact we pride ourselves of, since 10 years.

With the hope of an ever inspiring continuity of our network, as we look forward to serving our community even further, onwards, we remain yours attentively.

Dr. Mark Esposito & Dr. Amit KapoorCo-Leaders, Institute Council & A#liate FacultyMicroeconomics of Competitiveness ProgramHarvard Business School

To submit your papers for double-blind review, email [email protected].

EDITOR’S NOTE

January 2013Journal of Competitiveness & Strategy2

Creating Shared Value on a Global Scale: Possibilities for the United Nations’ Engagement*

*We would like to thank Duncan Pollard, Sustainability Advisor to the Executive Vice President of Operations at Nestlé, for useful discussions and inputs about the CSV concept from a corporate perspective.The designations employed in this publication and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of WMO concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundar-ies. Opinions expressed in this article are the sole authors’ opinions and do not necessarily re"ect those of WMO or its Members. 1International University of Monaco, 2 Av. Prince Albert II, MC-98000 Monte Carlo, Monaco 2World Meteorological Organization (WMO), 7bis Avenue de la Paix, CH1211 Genève, [email protected]@monaco.edu (Contact address)[email protected]

Michel Rixen1,2, Ingo Böbel1 and Claude Chailan1

Abstract

The concept of “Creating Shared Value” (CSV) con-veys the idea that a business must do two things simultaneously to be successful in the long-term: create economic value for both the company and the society. Current economic well-being indicators “beyond GDP” integrate some CSV elements but are lacking a holistic two-way approach to expose busi-ness practices and engagement in CSV principles to all stakeholders.

We investigate whether the United Nations (UN) (which is at the heart of CSV on all fronts of society) can play a role in CSV through its Global Compact (UNGC) initiative (complemented by the new UN Sustainable Development Solutions Network). This initiative o$ers corporations a platform for com-mitment to sustainable principles by reporting and exposing their engagement to the feedback of the public at large (for example through social media). The UNGC public reporting exposes the e$ective implementation of CSV strategy to the review and

judgment of the rest of the world, calling for an indirect feedback from all potential stakeholders, not just shareholders. The UNGC hence defers the CSV metric issue to the wider public’s complex cost function and the resulting companies’ financial statements.

This framework is not exempt of challenges. Corpo-rations may not agree to a single CSV reference point such as the UNGC. This goes then back to the eternal debate of regulated versus free markets and the extent to which nations would then enforce the rules of the game and adhere to the UNGC principles.

JEL classi"cation: O19, M14, E01, E6, F5

Keywords: Role of International Organizations, Social Responsibility, Creating Shared Value, Macro-economics, Macroeconomic Policy, United Nations, Global Compact



1See the invaluable work and publications on CSR and CSV that FSG (a non-pro!t consulting !rm) has made available on its website at www.fsg.org2The most comprehensive topical analysis of Nestle’s CSV-related e$orts is available at http://www.nestle.com/Media/NewsAndFeatures/Pages/what-is-CSV.aspx?WT.mc_id=InsightCSV_alert_nf_25092012

INTRODUCTIONSince its recent inception, the concept of Creating Shared Value (CSV) (Porter and Kramer, 2006, 2011) has gained a lot of attention both in academic cir-cles and in various sectors of the economy, especial-ly within large corporations. Whilst the early stages have seen the initiative been championed by some major multinational private companies, CSV aware-ness is now starting to spill over to smaller private entities and is gaining attention even in the public sector and civil society as well1.

There has always existed a deep interdepen¬dence and interconnectivity between economic activity and societal advancement. The new CSV de!nition of the role of business in society has emerged with a clear focus on long-term thinking and aligning the interests of shareholders and societies for mu-tual bene!ts. CSV carries the idea that – in order to overcome the profound and harmful disconnect be-tween the needs of society and business - a business must create value for society alongside creating value for shareholders to be successful in the long-term. It intrinsically places societal issues at the core of the companies’ strategy and operations. Corpora-tions create shared value when they simultaneously generate economic and societal value by address-ing social and environmental challenges. “Shared Value is a transformational dynamic that drives the relationship of humanity with business and thus creates continual broad shoulders for broader glo-cal outcome” (Tse and Esposito 2012, p. 7)

The CSV approach di$ers in many ways from the traditional “Corporate Social Responsibility” (CSR) that focused on compliance with relevant regulations and “philanthropy”, aiming primarily at improving a corporation’s reputation (Kitzmueller and Shimshak 2012). Obvious limitations of the CSR approach lie in its reactive stance to governments’ decisions and the regular disconnect between the core activities of the business in question and target charities. Strikingly,

companies often operate their philanthropic redis-tributive activities through a separate foundation but recently, they have been paying increased attention to the alignment of these activities with their overall business philosophy and possible indirect returns. CSV would hence be a sort of “optimized CSR” or “op-timized philanthropy” whereby the business entities’ activities performed in the value chain are symbioti-cally articulated with their bene!ciaries through posi-tive feedback loops (McManus 2012).

Shared value can be created in many ways by tapping into several activities of a corporation within the value chain, by rede!ning products and markets, by re-considering productivity and by developing the necessary networks and synergies around the corporation, hence requiring a sort of holistic approach to a corporation’s overall environ-ment (Bockstette and Stamp 2011). In other words, the corporate system combines its broadest foot-print extension and potential symbiosis with related actors, market participants and stakeholders. The motivation for a corporation to expand its business frontier and to adopt the perspectives of CSV might comprise the inclusion of external and internal fac-tors, such as an energy crisis, a change in leadership, a new business opportunity, a change in the imme-diate business environment, its customers and/or employees. Porter and Kramer (2011) believe that widespread adoption of the CSV approach could re-shape current business practices and market-based economies. It would carry along a major innovation wave and associated growth by simultaneously tap-ping unexplored ways of conducting business and meeting societal needs. It could, in fact, reshape capitalism (Kramer et al. in Forbes India 2012).

As major corporations join the initiative (see, e.g., Nestlé’s long-term CSV initiative2 or Campbell’s more recent contribution to CSV; Conant 2012; Schwarz 2010), it would accelerate the potential for societal impacts at a pace and scale far beyond the reach of


A key question remains then how to explore the impact of CSV in order to get a more thorough pic-ture of its relationship with economic activity. The biosphere, mankind included, is a provider of natural resources and also the receptor of various undesir-able costs of the production/consumption processes which feedback negatively on business activities sooner or later. Global societal and environmental challenges call for an increased integration of inter-national governance and business practices (Sachs 2012). Another central question relates to what could be the potential role of the United Nations system in the context of this growing CSV awareness?

In order to answer these questions the paper is organized as follows. In Section 2 we brie"y present relevant macro-economic aspects of CSV and limita-tions of current metrics of economic value. Section 3 describes the UN system and associated entities and their relevance for CSV. Based on Section 4 where we introduce the UNGC, we then discuss in Section 5 some opportunities and challenges given the mar-ket forces at play in the global economy.

MACROECONOMICS AND VALUE-METRICS OF CSVEconomists measure the economic output of a soci-ety using indicators such as gross national product (GNP) or gross domestic product (GDP). GDP has become the main tool for measuring the success (or failure) of a country’s economy (see Stiglitz et al. 2009 for the most comprehensive study on the measurement of socio-economic performance). It refers to the market value of all !nal goods and ser-vices produced within that country in a given period of time. GDP per capita (adjusted for PPP – Purchas-ing Power Parity) is mainly considered as a statistical indicator of measuring a country’s standard of liv-ing. GDP may serve as a zero-order CSV metric as it re"ects some of the business sector expenses to the resource market and investments which generate household consumption. While it is widely recog-nized that such measures do not quantify human

the non-pro!t sector. It could ideally complement and leverage governments’ actions towards qual-ity of life and the provision of public goods and services. But it is probably more the mindset of cor-porations (and corporate leaders) rather than their size which will dismantle and break the mentality of trade-o$s and thus determine the amplitude of this innovation wave which ultimately creates opportu-nities for win-win situations.

Many of the major societal, environmental and global development challenges involve all compo-nents and actors typically mapped within the tradi-tional Macroeconomic Circular Flow Model (Gärtner 2009, p. 10). Such (an open- or closed economy) model illustrates the regeneration of labor and manufactured capital goods along with provision of basic stu$ (such as food and other necessities). However, it is obvious that economic circular "ow models are unable to e$ectively deal with capturing societal value (Harris and Codur, 2004) as they are rather represented by totally self-contained, static entities operating through "ows of equally sized pairs of leakages and injections into and out of the circular "ow. Another potential model for mapping the social opportunities within an economy is pro-vided by an extension of “Porter’s Diamond” (Porter and Kramer 2006) which may be applied at various levels of analysis (both micro- and macroeconomic) and may be viewed from di$erent impact-angles: factor (input) conditions, context for !rm strategy and rivalry, related and supporting industries and, !nally, local demand conditions set the frame. Note that an industry’s footprint is “glocal”, that is, it ranges from local to global, from a family business to a large multinational corporation (like Coca-Cola or Nestlé). Governments act at local, regional, na-tional or an international scale. Supranational gov-ernments such as the European Union, MERCOSUR (in South America), NAFTA (in North America), the African Union, and APEC (in the Asia-Paci!c region) are examples where countries join forces to increase the in"uence to steer the societal system in their de-sired organizational direction.



well-being, both economists and policy makers of-ten “assume” that an increase in GDP corresponds to an increase in welfare. An understanding of what GDP includes, and excludes, however, suggests that the relationship between economic production, economic success and welfare is more complex (Stiglitz et al. 2009, p. 13; Rustin 2012).

There are many limitations to using GDP as a way to measure social impact through shared value. GDP does not include a quantitative estimate of qual-ity of life and the environment. Human well-being depends on household income and consumption of goods and services, but on many other objective factors as well. Such activities can be divided in two broad categories: those which imply a monetary "ow and those which do not. Only the !rst type is taken into account in computing wealth and GDP while other (often more subjective) operations (such as domestic and family tasks, taking care of children and elderly relatives, volunteer community work, and leisure time activities such as reading, cooking, playing music, going to the beach) are not included in standard economic indicators. The stan-dard circular "ow model does neither consider how hard people work when they produce nor the quan-tity of a$ordable leisure time available. Harmful side e$ects such as noise and air pollution, loss of wet-lands and biodiversity, family breakdown, unequal gender income, automobile accidents, commuting time, and other non-economic aspects of peoples’ life are not included in GDP statistics either. These “externalities”, not re"ected in the cost of goods and services are deferred until they feed back nega-tively to the system with some latency, for example, in terms of sanitation or costs for medical care. Ad-ditional negative feedback mechanisms of deplet-ing resources have been stressed by Meadows et al. (2004). In the long-run, they may materialize in higher taxes, investments or expenses. At a national level, GDP would need to be adjusted to take these e$ects into account. A more reliable measure of so-cial performance would require a broader approach to include the sphere of human activities, beyond

purely monetary activities. One realizes the di#-culty to quantify these activities, as some become apparent only with a tremendous time-lag (often decades). It also highlights the need for a cumula-tive approach to measure CSV (taking into consid-eration that you have to be committed to CSV for the long term).

Many alternatives beyond GDP have been proposed so as to include these hidden expendi-tures which eliminate, mitigate or avoid damages caused by other economic activities (and thus to be deducted from GDP or GNP). For example, adjust-ing GDP to account for the depreciation of “natural capital” yields “Environmentally-adjusted Net Do-mestic Product” (EDP). When Adam Smith wrote “The Wealth of Nations” in 1776, he was concerned not only about why some nations are wealthier than others in terms of physical and !nancial as-sets. He was also concerned about the question of how wealth is allocated among the people living in a nation. Today, many economists are starting to realize that a true measure of a nation’s wealth creation should consider distributional aspects of income and consumption as well as more sophis-ticated types of capital. The World Bank has ex-panded the measure of national wealth to include human and natural resources. National net savings rates are calculated as the amount of total domes-tic saving less the depreciation of produced capi-tal. “The World Bank’s Genuine Saving Indicator” (Everett and Wilks, 1999) adds a social and envi-ronmental element to national saving rates (taking pollution damages, depletion of natural resources and capital depreciation as well as education ex-penditures into account. Consequently, such an indicator may even become negative!).

An ambitious e$ort to reform the calculation of an indicator of economic well-being and welfare has resulted from the partnership between an econ-omist, Herman Daly, and a theologian, John Cobb. Daly and Cobb (1989) named their proposed sub-stitute for GDP the “Index of Sustainable Economic Welfare” (ISEW). Another more recent measure,


the “Genuine Progress Indicator” (GPI) (Hamilton 1999), resembles the ISEW but includes additional factors such as the cost of underemployment, the loss of leisure time, and the loss of virgin forests. A divergence of the GPI and GDP would consequently suggest that economic growth is coming at the ex-pense of other contributors to well-being, such as environmental quality or leisure time. ISEW or GPI have been calculated for a number of countries (Costanza et al, 2009). For example, the growth in ISEW for Sweden closely follows the growth in GDP for the period from 1950 up to 1980. The divergence between GDP and the GPI for the United States is more extreme over the same period (Harris and Co-dur, 2004), probably linked to the di$erent degrees to which these countries invest in environmental and social priorities.

Just recently, in response to this urgent need for new methods of wealth accounting, the International Human Dimension Program (IHDP) devoted much of its work to the !nal development of the Inclusive Wealth Report 2012 (UNU-IHDP and UNEP 2012). The report (which was introduced during the Rio+20-Conference in Brazil in June 2012) presents a prom-ising economic index which o$ers a comprehensive analysis of a nation’s progress, well-being, and long-term sustainability. “The Inclusive Wealth Index” (IWI) assesses changes in a country’s productive base, in-cluding produced, human, and natural capital over time. Most importantly, as the IWI takes a holistic ap-proach to calculating a country’s wealth, it provides national governments and planning authorities with a valuable tool to support macroeconomic planning and to determine if investments are targeted towards increasing society’s well-being and sustainability.

Considering the global scale and the interac-tions between developed and developing countries (which comprise our $70-trillion-per-year global economy), the !nancial market plays a key role in shaping the multidimensional macro-economic cir-cular "ow model (see Shiller 2012 for an excellent analysis of !nance as one of the most powerful po-tential tools for increasing the general well-being.).

Just to pick one point: Economist Susan George perfectly illustrated the “debt boomerang e$ect” of externalities and its detrimental impact on de-velopment, con"icts and the environment (George, 1992). Debt-induced poverty causes Third World constituents to exploit natural resources in the most pro!table but least sustainable way, with further consequences on global warming and depleted bio-diversity. Such debt may create social unrest and war. The United Nations High Commissioner for Refugees estimates that – because of war - about 43 million people are displaced in the world today (UNHCR, 2012).

At the global and long-run time scale, another striking example is climate change and its plausible impact on the world economy. Climate change should be treated as an externality, i.e. a cost-to-the-environment component not re"ected in the price paid for goods or services. There have been numer-ous studies on the impact of climate change on the global economy. The most comprehensive work on the subject is the “Stern Review on the Economics of Climate Change”, a 700-page report published in 2006 for the British government (Stern, 2006a). The report discusses the e$ect of global warming on the world economy and concludes that the bene!ts of strong, early action on climate change far outweigh the costs of no-action. It points to the potential wide-ranging impact of climate change on natural hazards, water resources, agriculture, health, and the environment (Sachs 2012). According to Stern, the overall costs of no-action would be equivalent to losing at least 5% of global GDP each year, now and forever. The Stern Review proposed a 1% investment of global GDP per annum to avoid the worst e$ects of climate change (Stern 2006b). In June 2008, Stern increased the esti-mate for the annual cost of achieving stabilization to 2% of GDP to account for faster than expected global warming as these estimates are also supported by numerous similar national reports in many countries (Stern 2008; The Guardian, 2008; on the mitigation of climate change see IPCC 2011 and the “Better Life In-dex”, OECD 2011).



From a historic point of view it is interesting to remember that already back in 1971, James Tobin suggested to levy a tax (“Tobin tax”) to penalize short-term !nancial transactions and to dissuade speculators active on highly volatile and irrespon-sible markets. This idea has been relayed during the last decades by various non-governmental commu-nities to !nance development and environmental programs but has never been put into practice so far. During the current economic crises, the Euro-pean Union has envisaged to implement such a tax to sanitize the market and protect the Euro from hostile speculations on its weakest member coun-tries. By matching the resources with the ambition, a worldwide implementation of such a tax could act as a force-multiplier for the UN system so as to implement its mandate on all economic, social and environmental challenges. Governments are at the heart of maintaining an appropriate equilibrium be-tween stabilizing forces within a country. Dedicated taxes may o$set some of these unaccounted costs ignored in the GDP (see Weaver et al. 2003 for an extensive discussion).

Traditional monetary, !scal and trade policies rely on various indices and indicators to regulate or steer national economies’ sustainability. Most of these indicators are closely related to the “Human Development Index” (HDI), a summary measure that aggregates averages across objective domains (Stiglitz et al., 2009, p. 16). Adopting alternative in-dices (such as the novel “Happy Planet Index” 2012) results in scenarios that lead to di$erent (local and global) glocal macro- and micro-economic equilib-ria. Measures of human well-being and shared value require subjective multi-dimensional judgments about what to include and how to value di$erent im-pact variables. Room exists for disagreement about how to construct a relevant CSV-index-measure and associated governing and control mechanisms. Yet the information provided by these measures gives important insights beyond GDP. However, if each of these indicators has outstanding virtues and re-

markable qualities, they cannot stand on their own to fully measure the interaction between economic activity and societal advancement. For this reason, a pragmatic meta-approach, shared by all, is required. This is where the UN could step in.

DESCRIPTION OF THE UN SYSTEMThe major international institution established to rep-resent nations of the world is the United Nations Orga-nization (UN). It was build on the grounds of the League of Nations, a precursor intergovernmental organiza-tion founded in 1919 as a result of the Paris Peace Con-ference that ended the First World War. This !rst per-manent international organization, whose principal (political) mission was to maintain world peace, was replaced by the UN in 1945, which currently comprises 193 nations. It aims at achieving world peace through international cooperation on security, human rights, and economic and social development.

Because of the UN’s wide-ranging (global) foot-print on all societal sectors, our study examines a possible unique role for the organization in facilitat-ing, or even maybe streamlining and leading CSV e$orts worldwide.

The UN structure3 is composed of !ve principal organs - the General Assembly, the Security Coun-cil, the Economic and Social Council (ECOSOC), the Secretariat, and the International Court of Justice - each of which comprises a complex series of insti-tutionalized bodies, commissions, programs, spe-cialized agencies, departments and o#ces. The UN headquarters is based in New York with other main o#ces in Geneva.

The General Assembly is the main deliberative body of the United Nations and is composed of all United Nations member states. The United Na-tions Secretariat is headed by the Secretary-Gen-eral (currently Mr. Ban Ki-Moon) and assisted by a sta$ of international civil servants worldwide. It helps resolving international disputes, administer-

3The UN structure is available at http://www.un.org/en/aboutun/structure/pdfs/un_system_chart_colour_large.pdf


ing peacekeeping operations, organizing interna-tional conferences, gathering information on the implementation of Security Council decisions, and consulting with member governments regarding various initiatives. ECOSOC assists the General As-sembly in promoting international economic and social cooperation and development.

The United Nations Charter stipulates that each primary organ of the UN can establish various spe-cialized agencies to ful!ll its duties. Many UN organi-zations and agencies have been established to work on particular issues and bene!t from some decision-al autonomy to ful!ll their UN mandate. It is through these agencies that the UN performs most of its economic, social and development work. Several of those subsidiary organizations have an explicit eco-nomic or !nancial mandate such as the World Trade Organization (WTO), the International Monetary Fund (IMF) and the World Bank (WB). Others have a clearly de!ned mandate in the following !elds: edu-cation (United Nations Education, Scienti!c and Cul-tural Organization - UNESCO), labor (International Labor Organization - ILO), industry (United Nations Industrial Development Organization - UNIDO), de-velopment (United Nations Development Program - UNDP), environment (United Nations Environment Program – UNEP), food and agriculture (Food and Agriculture Organization – FAO, World Food Pro-gram - WFP), health (World Health Organization), meteorology (World Meteorological Organization) or climate (e.g. United Nations Framework for Cli-mate Change Convention – UNFCCC, Intergovern-mental Panel for Climate Change - IPCC).

The UN is !nanced by assessed and voluntary contributions of its member states. The UN General Assembly approves the regular budget and deter-mines the assessment for each member. Contri-butions are based on the relative capacity of each country to pay, as measured by their gross national income (GNI), adjusted for external debt and per capita income. UN entities are represented and gov-erned by their member states or a subset of them.

In September 2000, 192 United Nations member

states have agreed to try to achieve eight Millen-nium Development Goals (MDGs) by the year 2015, which include:

These MDGs can serve as examples of how CSV may materialize into societal bene!ts, for both de-veloping countries (in particular) and developed countries as well. The UN estimated that the share of the world population living in extreme poverty fell from 42% in 1981 to 20% in 2008 (Böbel 2007). This was rather stimulated by fast economic growth and development in emerging countries than by devel-opment aid. Development indeed favors sustainable growth, but, interestingly, it is usually impossible to establish any signi!cant correlation between for-eign aid and the growth rate of GNP in developing countries because development aid partially leaks to non-monetary sectors in the economy. Similar con-clusions can be drawn for philanthropy. However, at the micro level, donor agencies regularly report the success of most of their projects and programs. This contrast is known as the micro-macro paradox and illustrates the issue of current economic indicators and questionable economic return at larger scale (Boone, 1996).

Bene!ts from repatriation funds are large and dominate those from other sources such as debt relief. It is estimated that if only a quarter of the stock of capital "ight was repatriated to Sub-Saharan Africa, the region would go from trailing to leading other developing regions in terms of domestic investment, thus initiating a ‘big-push’-led sustainable long-term economic growth (Fo-fack and Ndikumana, 2009). Ironically, the current global economic crisis in developed countries has triggered the !rst migrations to the former devel-



oping nations, which the UN is watching carefully in terms of economic and social development and associated geopolitical consequences.

UN GLOBAL COMPACT (UNGC) AND CSV-CERTIFICATIONMultiple UN entities have traditionally engaged with civil society, that is, external stakeholders, the pri-vate sector and non-governmental organizations- to better align their mission with the growing

challenges of the global economy and - to secure additional resources not covered by

member-nations’ contributions.The private sector, for example, is an important

ally for FAO in the !ght against hunger. A thriving private sector is key to economic growth and sus-tainable development of agriculture, food, !sheries and forestry sectors. To that e$ect, FAO mobilizes CEOs of companies of the agro-industrial sector from around the world during some of its high level events. Another example is WHO which manages speci!c health related projects directly funded by the Bill & Melinda Gates Foundation.

Recently, two more systematic approaches to UN-private partnerships have been adopted through the (a) UN Sustainable Development Solutions Network (Sachs 2012) and (b) the UN Global Compact (UNGC). Both are strategic policy initiatives for businesses that are committed to aligning their operations and practices with uni-versally accepted principles in the areas of human rights, labor, environment and anti-corruption (UNGC 2012). By doing so, business, as a primary driver of globalization, can help ensure that mar-kets, commerce, technology and !nance advance in ways that bene!t economies and societies everywhere. We focus on UNGC as it assists the private sector in the management of increasingly complex risks and opportunities in the environ-mental, social and governance realms, seeking to embed markets and societies with universal prin-ciples and values for the bene!t of all.

As social, political and economic challenges (and opportunities) — whether occurring at home or elsewhere — a$ect business more than ever before, many companies recognize the need to collaborate and partner with governments, civil society, and the United Nations. This ever-increasing understanding is re"ected in UNGC’s rapid growth. With more than 8700 corporate participants and other stakeholders from over 130 countries, it is the largest voluntary corporate responsibility initiative in the world.

UNGC is a practical framework for the develop-ment, implementation, and disclosure of sustain-ability policies and practices, o$ering participants a wide spectrum of management tools and resources, all designed to help advance sustainable business models and markets by mainstreaming its (ten) principles in all business activities around the world and by catalyzing actions in support of broader UN goals, including the Millennium Development Goals (MDGs). The initiative seeks to combine the strengths of the UN, such as its global dimension, moral authority and convening power, with the pri-vate sector’s innovation, agility, and the expertise and capacities of a range of key stakeholders.

UN Global Compact is “glocal” (global and local), private and public, voluntary and accountable. It is a complement to regulatory regimes, rather than a substitute for them. It incorporates a transparency and accountability policy known as the “Communi-cation on Progress” (COP). The annual posting of a COP is an important demonstration of a participant’s commitment to the UN Global Compact and its principles. Participating companies are required to follow this policy, as a commitment to transparency and disclosure is critical to the success of the initia-tive. Failure to communicate will result in a change in participants’ status and even possible expulsion.

The “Global Compact Di$erentiation Program” (represented as a general overview in Figure 1a and as a close-up of the Leadership-level in Fig.1b) categorizes business participants based on their level of disclosure on progress made in integrating the Global Compact principles and contributing to


The UN Global Compact establishes local net-works, which cluster participants on speci!c themes and priorities in order to advance the Global Com-pact and its principles within a particular geographic context. They perform increasingly important roles in rooting the Global Compact within di$erent national, cultural and social environment scenarios. Their role is to facilitate the progress of companies (both local !rms and subsidiaries of foreign corporations) en-gaged in the UNGC with respect to the implementa-tion of ten speci!c principles4 , while also creating op-portunities for multi-stakeholder engagement and collective action. Whilst the “GC Active”-level bears

broader UN goals. The various categories imply vari-ous levels of engagement and bene!ts for compa-nies and stakeholders.

The “GC Advanced”- level, for example, requires a description of plans to meet 24 criteria in their an-nual COP in the following areas:

These criteria decline the Global Compact key principles into further granularity.

Fig. 1a: UN Global Compact Differentiation Program on implementing UNGC Principles (UNGC, 2012, p. 8)

4The ten principles are: Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; Principle 2: make sure that they are not complicit in human rights abuses. Principle 3: Businesses should uphold the freedom of association and the e$ective recognition of the right to collective bargaining; Principle 4: the elimination of all forms of forced and compulsory labor; Principle 5: the e$ective abolition of child labor; Principle 6: the elimination of discrimination in respect of employment and occupation. Principle 7: Businesses should support a precautionary approach to environmental challenges; Principle 8: undertake initiatives to promote greater environmental responsibility; Principle 9: encourage the development and di$usion of environmentally friendly technologies. Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.



some similarity to Corporate Social Responsibility (CSR), the “GC Advanced”-level (in its most extensive interpretation) would be a clear CSV engagement due to the required long-term seamless and almost symbiotic relationship between the company and the environment (partners, region, customers, pro-viders, etc) in which it is operating.

The “GC Advanced”-level provides companies with a more visible platform to declare their higher-level commitment to the Global Compact and dem-onstrates advanced sustainability performance and disclosure, including:

Global Compact database

Global Compact website

and share global best practices and continued ad-vancement of their sustainability agenda

locally.COPs are disseminated to Financial Markets

thanks to a collaboration with Bloomberg L.P, making COPs available to the !nancial community in order to mainstream the use of environmental, social and governance (ESG) information in !nancial analysis. It is expected that this will generate further incentives for companies to increase transparency and disclo-sure.

This envelope has been pushed even further. In January 2011, UNGC launched a new platform for corporate sustainability leadership – Global Compact

Fig. 1b: Close-Up of the UN Global Compact Differentiation Program on implementing UNGC Principles (UNGC, 2012, p. 8)


LEAD. The approximately 50 companies currently participating in LEAD have been invited because they have a history of engagement with UN Global Compact – locally and/or globally (UNGC, 2010). This new platform is a re"ection of the essential role that leading UNGC-participants have already played in the !eld of corporate responsibility and sustainabil-ity. At the same time, Global Compact LEAD responds to the critical need for leading companies to step up and reach new levels of performance, engagement and impact in order for the world to meet today’s so-cial, environmental and economic challenges.

The UN Global Compact hence provides a means for CSV-like certi!cation. COPs reporting process re-quires a fair level of details on how involved corpo-rations deal with the Global Compact criteria. These progress reports are then available to the general public.

CONCLUSIONS AND PERSPECTIVESCurrent economic value indicators clearly ignore im-portant elements of the value chain, which in turn may impact brand equity and economic activity on the long-term because hidden costs will feedback negatively into the system. Alternative indices take some of these elements into account but it is recog-nized that there is always a degree of subjectivity as-sociated with them.

One-way development aid and philanthropy have shown their limits in terms of relevance, sus-tainability and e#ciency. Nevertheless, certain countries have succeeded to gain some return from the development aid. Yet, appropriate means for ensuring shared value creation are required with their associated metrics.

The UN system has been at the heart of creating shared value on all fronts of society. It has also engaged recently in building wide partnerships with both pub-lic and private sectors, locally, regionally and glob-ally through both its Global Compact Initiative and the Sustainable Development Solutions Network.

Of course, CSV carries its own lot of challenges and is not immune to issues. Opportunities for growth in the noblest sense of CSV will by de!nition attract potential competitors. If one does not cease an op-portunity to capture some value, somebody else will. Thus, the traditional “Five Competitive Forces” (Porter, 2008) are constantly at play. CSV will not remove com-petition because the various CSV elements are inher-ently competitive as well (for ex., through distribution clusters, etc). CSV is a way to di$erentiate products against competitors. The value chain may exploit le-verage elements such as brand equity, customer loy-alty, employee solidarity, distribution channels, and many more. This has been the case for fair-trade al-ready, which was marginal and con!ned to NGOs and has now become wide-spread and adopted by the big global companies as part of their branding strat-egy (see Nestlé’s CSV initiative described in Schwarz 2010). CSV is also a fantastic approach to increase competitiveness and enhance the robustness of the business portfolio by adopting a holistic approach, integrating all potential risk factors and committed stakeholders into the analysis and long-term strategy of a corporation (Tse and Esposito 2012).

Companies embarking since their inception on CSV (like Nestle, Cisco Systems, HP, and IBM; see Kania and Kramer 2011 for a more extensive list of compa-nies) may have a !rst mover advantage. For others, the investment necessary to catch-up and adhere to it might be beyond the typical time scale of the busi-ness or beyond a reasonable break-even, especially in the case of SMEs. Large corporations might face less overhead on managing UN Global Compact admin-istrative matters with hence greater returns. Whilst some executives have embraced the CSV concept, some remain stuck on a balance to be achieved be-tween social needs and corporate pro!tability. The CSV approach is scalable to some extent, but the re-gional dimension requires a customized implemen-tation to best match the many factors such as culture, markets, history, and climate.

Another promising perspective on CSV might be o$ered by the angle of a global game concept



5A complementary institution is “The Global Reporting Initiative” (GRI) (a non-pro!t organization) which promotes economic, environmental and social sustainability. It provides companies and organizations with comprehensive sustainability reporting guidelines. See https://www.globalreporting.org/Pages/default.aspx

following John Nash’s idealized model (Nash, 1950) where participating players are individuals, corpo-rations, governments, NGOs, etc. In short, Nash’s model solves the question about a player’s optimal move knowing that the opponent “knows that he knows that he knows that he knows, etc”. This may prove useful, for example, in the CSV framework. Should a corporation engage and invest in CSV to gain some !rst-mover or strategic advantage over competitors? How will the market react if a corpo-ration ignores the CSV principles? Can corporations create strategic alliances around CSV agreements or is competition also inherent to CSV? Nash’s the-ory has been re-visited and extended to comprise a competitive force canvassing the reasoning behind the formation of strategic alliances such as govern-ments or pressure groups which are driving forces on the world market (e.g. boycotts of certain com-panies’ products following environmental disasters) (Brandenburger and Nalebu$, 1995). The increased role of social media such as Twitter and Facebook has de-multiplied the leveraging e$ect of these pressure groups. They represent serious threats and oppor-tunities for businesses nowadays. The UNGC public reporting exposes the e$ective implementation of their CSV strategy to the review and judgment of the rest of the world, calling for an indirect feedback from all potential stakeholders, not just sharehold-ers, which will impact the companies’ !nancial re-sults5. The UNGC hence would defer the CSV metric issue to the wider public complex cost function and the resulting companies’ !nancial statements. Most sustainability work, such as reducing CO2/energy, water and waste actually saves money. CSV, prag-matically, is about optimizing the value chain, the side-bene!t of it being environmental sustainability and social development. CSV hence should not be viewed as a short-term cost, (which is contradictory to the de!nition of CSV itself ), but as a long-term investment.

A revised and comprehensive Economic Circular Flow Model which includes a UNGC-CSV framework should include feedback-loops and links with all actors involved: governments, (pro!t and not-for-pro!t) cor-porations, NGOs, households, universities and many more. It may act through international governance on all – !nance-, trade-, environment-, and development-related - aspects of today’s global economy. Corpora-tions may, however, not agree to a single CSV reference point such as the UNGC. This goes then back to the eternal debate of regulated versus free markets and the extent to which nations would enforce the rules of the game or adhere to the UNGC principles.

CSV is not a new approach or a new reality per se (in fact, CSV-activities – then called “blended value” - go back to the 1960s). It is what economic reality al-ways should have been in the best of all worlds. CSV is a new way of framing the fundamental role of eco-nomic activity in society – to create mutual value. CSV o$ers a framework for an original approach to create the conditions for a long-term strategy and business sustainability. Historically, governments have been at the heart of creating shared value because they usu-ally have some ‘constitutional mandate’ to meet dem-ocratic and social standards, with their competitive advantage to implement them (Porter 1998). How-ever disparities between nations have created social and environmental imbalances, creating business op-portunities, which corporations, especially large ones, can more easily bene!t from, for example through outsourcing, delocalization and market power.

The UN system is, and will probably remain, the only world-wide entity which may address systemic imbalances on a global scale and guide and direct a CSV approach if it has to be embraced by the global market (as being envisioned by Porter). The UN Glob-al Compact – complemented by The UN Sustainable Development Solutions Network - may be the right universal tool to manage it if its oversight indepen-dence can be guaranteed.


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Financial Agglomerations in the UK: Geographical Cluster Size and Firm Performance

Dr. Adrian Kuah1, Dr. Terence Tse2, Dr. Mark Esposito3

Abstract

This paper reinforces the premise that cluster size has beneficial influence on performance by using data of 17,535 UK financial services com-panies. The research issue is whether having a closely related industry cluster is truly beneficial to member firms’ profitability, as recent studies alleged that a large cluster creates congestion and has negative implications for performance. However, a myriad of performance measures

were used and notably many still consider finan-cial performance as key measures. By segregat-ing a cluster into its competing and related sec-tors, I find they work in opposite directions on promoting firm growth prospects and financial performance. I argue related sectors in a cluster allow the firm to draw pecuniary benefits to bet-ter its financial performance, while the compet-ing sector promotes its growth prospects.

1James Cook University, Singapore, [email protected] Europe, London Campus, [email protected] Ecole de Management & University of Cambridge, CPSL, [email protected]



EXECUTIVE SUMMARYCluster size, measured by two established cluster strength attributes, is found to work in opposite directions in promoting the growth prospects and !nancial performance of member !rms. This study addresses three identi!able gaps in the lit-erature: (a) by providing a more precise measure-ment of cluster size; (b) by employing !nancial measurement of returns to capital employed and solvency; and (c) by demonstrating that agglom-eration of related sectors creates pecuniary ben-e!ts, which can be re"ected in the bottom line. Our !ndings support the need for related sectors to agglomerate in a geographical cluster, despite the arguments of rising congestion costs in ear-lier models of cluster growth. Policy makers must now concertedly plan for regional development through achieving critical mass in selective types of related sectors in creating pecuniary externali-ties, as well as ensuring there is critical mass in speci!c sector to promote the growth prospects of !rms.

The relationship between cluster size and !rm performance is central to the agglomeration theory, which suggests that the performance of geographically clustered !rms improves with cluster size. The research issue is whether having a closely related industry cluster is truly bene!cial to member !rms’ pro!tability, as recent studies al-leged that a large cluster creates congestion and has negative implications for performance.

Previous empirical evidence of !rm perfor-mance in clusters is limited to en-bloc consider-ation of the industry and to varied non-!nancial measurements, including survival and patenting rates. However, a lower level of disaggregation is achieved with en-bloc considerations. This does not advance the development of agglomeration theory, as it does not promote the understanding of di$erent agglomeration externalities at play,

mostly which are clearly identi!ed, except the enigmatic pecuniary externalities. Pecuniary

externalities, in particular, in"uence the !nancial performance of !rms resulting in improved prof-its.

Much of London’s success in !nancial services is attributed to clustering and there are reported-ly intense interactions amongst its related sectors in recent studies. We investigated the regional UK !nancial services clusters as !nancial agglomera-tions exist in many UK regions, such as a strong asset management cluster in Edinburgh (South-ern Scotland) and regional !nancial centres in Leeds (Yorkshire), Manchester (North West) and Bristol (South West). The veracity of bene!cial agglomeration e$ects is therefore an important question, not lest because many governments and regional development agencies are expend-ing vast resources supporting the development of clusters.

We used data on 17,535 UK companies found-ed between 1900 and 2001 that classi!es !nancial services as their primary activity under the Stan-dard Industry Classi!cation (SIC 1992). By using a cross-sectional frame of companies in !nancial services, this important industry can be mod-elled through a larger number of observations and would cater for macroeconomic "uctuations, which a$ect all business segments.

An established cluster model on lifetime growth is extended to consider a !rm’s !nancial performance. The model is appropriate because the net bene!ts of all the external agglomeration economies can be measured, as a certain exter-nality facing a company may have a gross positive e$ect while another may have a gross negative contribution. This model makes use of the total employment size in one’s own sector and the total employment size of related sectors of the region in investigating the thirteen UK geographical re-gions. Di$erent !nancial sectors are controlled as the localised activities represent di$erent bene!ts to other related sectors. For example, localisation of banks would not create localisation economies


for securities companies. Sources of externalities lie in the workers, as knowledge spill-overs and externalities that are more di#cult to measure, occur at the employee level and between skilled workers in an agglomeration. Employment size is particularly important for !nancial services as its output is based upon specialised labour, knowl-edge and new knowledge acquisition transferred through the workforce.

Firm !nancial performance is an important consideration, as key employees of new ventures in clusters are more likely to leave, or companies with marginal performance are more likely to close down. It is clear from this study that most !nancial services sectors in banking, leasing, trust funds, life insurance, and securities bene!t most from being located with other !nancial services sectors. Competitive sectors form competitive clusters, especially so if the sectors are inter-de-pendent and their transactions intertwined.

INTRODUCTION Agglomeration, or clustering, is believed to im-prove the performance of companies, see Marshall (1920); Porter (1990); and Krugman (1991a) and (1991b); and is a key feature of the global !nan-cial services industry (Sassen, 1991; Reed, 1981). However, the extent to which clustering provides a common and persistent bene!t to companies is debateable, see Shaver and Flyer (2000) and Folta, Cooper, and Baik (2006). These studies argue that Marshall’s (1920) sources of external economies, with varied performance measures used, result in diseconomies as the cluster becomes too large and bene!ts are disproportionate. We argue that true cluster size should include competing sector, as well as, the lateral and vertical sectors that play

a big part in generating other external econo-mies. However, Beaudry and Swann (2001) con-tend related sectors add to congestion and could attenuate !rm growth.

Whether clustering is bene!cial then becomes an important question, as many governments and development agencies are expending vast resources supporting the development of clus-ters, see McDonald, Huang, Tsagdis, and Tusleman (2007). More particularly, within !nancial services, Gieve (2007) points out, the Bank of England sees much of London’s success in !nancial services as a result of clustering. It becomes an important question to regional planners as an empirical link between !nancial development and economic growth is developed, see Levine (1997; 2003).

In spite of evidence that !nancial clusters dis-play important agglomeration e$ects (Pandit et al., 2001) and reported interdependencies of activities within a !nancial cluster (Cook et al., 2007). Many studies ignore sources of external economies, in particular, the sources of pecuniary externality1 with an in"uence to the performance of member !rms. In fact, the good working of a !nancial centre and the performance of its incumbents is a central ques-tion to many venture capitalists, bankers, and even smaller !rms. Agglomeration e$ects are believed to arise from not only from Marshall’s external econo-mies of scale, but also external economies of scope and complexity, with their net e$ect being more relevant to the member !rm’s performance, see Parr (2002). In particular, it is the pecuniary externality that remains quite enigmatic; see Parr (2002) and Autant-Bernard and Massard (2005). This paper mainly contributes to the identi!able gaps in empir-ical studies, which, at this point, fail to demonstrate that agglomeration creates pecuniary bene!ts that can be re"ected in the bottom line.

1Tibor de Scitovsky (1954) highlighted that technological externalities (knowledge spillovers that result from non-market interactions) and pecuniary externalities are two main agglomeration forces in the new economic geography. Pecuniary Externality is said to exist if the pro!ts of a !rm depend not only on its own activity but also on the activities of other !rms in upstream and lateral industries that has the e$ect of lowering the market price of inputs. Due to the indirect interactions of related industries, Antonelli (2008) argued that member !rms are also able to exploit pecuniary externalities to innovate on new products due to market knowledge of production factors available to them at prices below their marginal productivity.



The issue on firm’s increased revenue, prof-itability or performance as a main outcome to clustering is rather important, see Parr (2002) and Folta et al. (2006). For example, older estab-lished firms, with a greater accumulation of in-ternal corporate resources, could be less reliant on the external economies of scale and scope offered in the cluster. While clustering may offer younger firms parasitic opportunities to feed off the knowledge, skilled labour and infrastructure of its leading competitors. Conversely, older firms may be capable of engineering a more symbiotic relationship with their lateral and vertical sectors by offering new ideas, enterprise and additional depth in skill and service support within the cluster. Evidence has suggested that there are rampant interdependencies of activities within a financial centre. They highlight an important yet fundamental gap to the agglomeration theory - in understanding the relationship between ag-glomeration effects and firm performance. This paper generally follows Porter’s (1990) termi-nology of industrial clusters, which are “critical masses of competing sector and related sectors in a geographical region that competes and col-laborate, but where evidence of improved per-formance can be demonstrated”.

This paper examines over 17,000 UK !nancial services companies across eight sectors and thir-teen regions in the UK. The discussion will pro-ceed in section three with a review of agglomera-tion externalities and the range of empirical work so far. Section four details the model and method. The discussion presents the data and results in section !ve, which then followed by conclusions in the last section.

Review of Empirical Literature Shaver and Flyer’s (2000) study on a broad array of industries’ investments in the US looks at localisa-tion economies, but point out those agglomera-tion economies have the potential to enhance !rm performance. They use !rm survival (after 8 years)

as a performance measure, while the cluster size is measured by plant counts of the industry. Chung and Kalnins (2001) also describe Marshall’s locali-sation economies of the Texan lodging sector, to which they !nd that similar traits or similar !rms result in localized bene!ts, such as heightened demand, that improves !rm performance. Like-wise, Folta et al. (2006) combines the number of !rms in 12 related biotechnology sectors in their quest for the relationship between cluster size and !rm performance, measured through rates of patenting, alliances partnering and private eq-uity partnering in the biotechnology industries. These studies investigated the cluster size mainly through the lens of localisation economies, whilst hugely ignoring other agglomeration economies.

Beaudry and Swann (2001) examine an array of UK industries and !nd that !rm growth is positively related to the total employment of the same sector in the cluster. At the same time, !rm growth is at-tenuated by the total employment of related sec-tors (through SIC codes at the broad 1 digit level). They interpret the latter as indication of conges-tion and competition in the supply market. The result does not support the need for related !rms to cluster. The exclusion of small and young !rms from this study inhibited inferences on how small !rms bene!t from larger clusters, while the mix of industries made it di#cult to identify how service industries bene!t from cluster membership.

Parr (2002) distinguishes internally based ag-glomeration economies and external agglomera-tion economies. While it may be possible for !rms in an agglomeration to bene!t from more than one internally based dimensions (scale, scope or complexity), most cluster studies focus on exter-nal economies in scale and scope, or externalities. Firms are motivated to locate near one another because of external agglomeration economies, which Arthur (1990) de!nes, as the net bene!ts of being in a location together with other !rms in-creasing with the number of !rms in the location. Parr (2002: 724-725) points out that the net ben-


e!ts of all the external agglomeration economies should be measured, as a certain externality facing a company may have a gross positive e$ect while another may have a gross negative contribution.

Although there are suggestions on the use of !nancial measures in addressing !rm performance in clusters, see Folta et al. (2006) and Shaver and Flyer (2000), few studies have examined this (with exception to Nachum, 2003). More importantly, the literature reveals that empirical studies so far have failed to quantify the determinants at play in terms of pecuniary externalities that can bene!t !rm eco-nomically when !rms agglomerate, see Parr (2002) and Autant-Bernard and Massard (2005).

Empirical !ndings of agglomeration e$ects carry a mixed message in disproportionate ben-e!ts. Baptista and Swann (1998) caution against congestion in established clusters; and Shaver and Flyer (2000) show that for the US biotechnology sector, returns to clustering are not homogenously distributed across !rms, bene!ting only younger !rms with weaknesses in technology, human capi-tal, suppliers and distributors. Folta et al (2006) fur-ther point out that marginal bene!ts decrease with cluster size and McDonald et al. (2007) show that clusters may not promote growth or performance across a variety of UK industries.

While previous studies focus on how localisa-tion a$ects !rm performance, it is only the works of Swann et al. that look at industrial clusters with reference to its competing sector and re-lated sectors. This model has been established in numerous industries like high tech, computer, biotechnology, media and !nancial services in-dustries (e.g. Baptista and Swann, 1999; Beaudry, Cook, Pandit, and Swann, 1998, Cook et al, 2001; Pandit et al, 2001). However, they failed to relate to agglomeration externalities, with the simplis-tic suggestions that related sectors only add to congestion e$ects. Most importantly, the use of !nancial measures has been limited. The next two sub-sections will de!ne the externalities arising from groups of competing and related sectors in a

cluster, while section 2.4 will introduce the choice of !nancial performance measures.

Larger Agglomeration due to More Com-peting Firms The agglomeration of similar !rms creates localisa-tion economies, which Parr (2002) terms as an ex-ternal economy of scale. The sources according to Marshall (1920) are several: labour market pooling, creation of specialised suppliers, and the emer-gence of technological knowledge spillovers. Weber (1929), Hoover (1937), and Rosenthal and Strange (2005) suggest using the speci!c industry size (e.g., employment or output) as measures, while Hender-son (2003) and Shaver and Flyer (2000) suggests us-ing the count of plants of the speci!c sector.

External economy of scale is possible in an ag-glomeration as !rms can bene!t from the pool of resources (e.g. technology, human capital, suppliers and distributors). This would be more likely if more competing !rms co-locate, also drawing more op-portunities to collaborate for the entrepreneurs. It has been reported that many young companies pro!t from informal communications and collabora-tive practices in Silicon Valley, see Saxenian (1994). The entrepreneurs can exploit the environment in creating new organisations, SMEs and innovation; see Rocha and Sternberg (2005). Krugman (1991b) also argue that the localised industry can increase a !rm’s returns. Labour market pooling bene!ts both workers and !rms on the supply side since a large labour pool helps smaller and younger !rms cope with the uncertainty related to individual !rm busi-ness cycle. An instance would the agglomeration e$ects observed in London Financial Centre, where there are a large number of contract workers, who are very mobile (Kuah, 2008). As a strong localised industry can support a greater number of specia-lised suppliers, the suppliers in turn lowering their supplies costs and increasing its variety can estab-lish economies of scale and scope.

Many studies on the cluster model thereby known as related studies, demonstrate that the



agglomeration of workers (or cluster strength) in one’s own sector is an exogenous factor positively in"uencing the size of incumbents. This measures the extent of localisation economies, as knowl-edge spill-overs and externalities occur at the employee level and between skilled workers in an agglomeration.

Hypothesis 1: Total employment is one’s own sector in an industry cluster has a positive in"uence on incumbents’ growth performance.

In contrast, Baum and Mezias (1992) !nd that competitors with similar traits in the Manhattan hotel industry are greater threats to each other, to the point of a$ecting their survival. As the cluster grows, there will be greater competition for work-ers, for land and for utility services, leading to short-ages and increase costs (Folta et al., 2006: 223). Hav-ing many similar !rms in an agglomeration creates congestion costs on the demand side, resulting in increased competition in the output markets, which can detract a company performance. An increase in the number of competitors in one’s own industry at a location may reduce per-!rm sales, prices, per-!rm pro!ts and per-!rm growth (Cook et al., 2001; Pandit et al., 2001). Competition is seen as an exogenous force a$ecting !rm performance (Tallman et al., 2004).

Hypothesis 2: Total employment is one’s own sector in an industry cluster has a negative in"uence on incumbents’ !nancial performance.

Larger Agglomeration due to More Related Firms

Although more !rms in an agglomeration may lead to congestion, there are bene!ts of having competitive supporting and related sectors in a cluster, see Porter (1990). Urbanisation externalities, which Parr (2002) terms as external economies of scope, arise from the diversity of industries in a city or region and would be associated with the bene!ts that arise irrespective of the !rm’s activity, see Ja-cobs (1969, 1984). Thriving industries at a location draw a more diverse labour pool, more supporting

industries, and bring about better infrastructure brought about by diversity of industries in urban concentration. Rosenthal and Strange (2005) sug-gest that urbanisation economies may be measured by the total employment in a city.

More closely associated to related sectors is the external economy of complexity (Parr, 2002), arising when several related sectors bene!t from the pres-ence of each other. For example, the nature of in-surance and reinsurance processes involves a chain of insurance !rms and private equity holders in the London !nancial centre to spread the risk acquired of a pro!table venture, and therefore may bring net pecuniary bene!ts to all involved. Banks and !nan-cial leasing companies also often transfer (or sell) their acquired loans as !nancial assets. Furthermore, within proximity, cost savings would arise from com-munication "ows to reduce input-output problems. A pecuniary externality is said to exist if the pro!ts of an incumbent depend not only on its own activ-ity but also on the activities of other companies in vertical and lateral sectors. There are known inter-dependencies of !nancial services activities within the London cluster, with profuse lateral relationships in the banking industry and the insurance industry, while fund management and investment banking maintain strong vertical relations to the commercial banks (Cook et al., 2007; Pandit et al., 2001). Another source lies in the transfer and cross-fertilisation of skilled labour between related sectors, hence train-ing provided by one may eventually bene!t another. With workers crossing between related sectors, inno-vation may be more proli!c and new entrepreneurs may emerge. Employment is a good substitute for the pecuniary externality as skilled labour and knowl-edge transfer takes place amongst the workers.

The cluster strength in related sectors, measured by the level of employment, is found to be an ex-ogenous force attenuating the !rm’s lifetime growth in related studies. The availability of the labour pool in a cluster concerns with what a !rm experiences whilst being in the cluster, and is thus an exogenous in"uence to the !rm.


Hypothesis 3: Total employment is one’s related sectors in an industry cluster have a negative in"u-ence on incumbents’ growth performance.

Chung and Kalnins (2001) then !nd that dis-similar !rms gained most in performance due to heightened demand. Barnett and Carroll (1987) also note that proximity of neighbouring !rms can be bene!cial for a !rm’s survival when such neighbours are di$erent and have inter-linked de-mands. This is likened to having related !rms in a cluster that not only support and provide services to each other but also have intertwined demand. Such pecuniary externalities may arise as the re-lated labour pool (with transferable skills) move easily across !rms in the cluster, hence entre-preneurial !rms and new entrants can compete for the same source of labour. Frank (2003) cites that one of the reasons human capital speci!city is important for companies’ location decisions is because knowledge embodied in workers, and the poaching of workers in concentrated areas is a way for companies to raise their productivity. Seemingly, having dissimilar !rms and diversity in a cluster may be bene!cial to incumbents’ perfor-mance. The total employment of related sector in a cluster is particular important for !nancial ser-vices as its output is based upon specialised la-bour, knowledge and new knowledge acquisition transferred through the workforce.

Hypothesis 4: Total employment is one’s related sectors in an industry cluster have a positive in"u-ence on incumbents’ !nancial performance.

Measures of Financial Performance There are many measures of a company’s fi-nancial performance. Variables like return-on-capital-employed, return-on-equity, firm growth and firm size are common performance measurements (Bris, Koskinen and Pons, 2004; Chittenden, Hall and Hutchinson, 1996; Jordan, Lowe and Taylor, 1998; Ozcan, 2001 and Hall et al., 2004). Nachum’s (2003) research on the London financial centre measures banks’ per-

formance solely on the merit of the returns on capital employed (ROCE) as ‘it is the most com-monly used performance indicator in financial services’. ROCE is chosen as a firm performance indicator defined as profit before tax as a pro-portion of long-term debt and shareholder equity. As a major and most common measure of profitability, the ROCE measures the rate of return on stakeholders’ investment and wheth-er the return made on an investment is better than alternatives available in other firms.

The capital adequacy (or solvency) is the stan-dard used by most governments to identify trou-bled !nancial institutions, and central banks use this to maintain su#cient funds in !nancial institu-tions, see Ahn and Cha (2004) and Central Bank of Ireland (2000). The solvency ratio (SOLV) is de!ned as shareholder equity (capital) as a proportion of to-tal assets (credit exposure). Folta et al. (2006) argue that ‘acquiring capital on a timely basis’ is a key indi-cation of a company’s value in a cluster. The ability and rate which !rms, especially entrepreneurial and young !rms, can obtain private equity to maintain its !nancial viability is most important. SOLV is a speci!c kind of gearing ratio: it indicates how much of deterioration in assets can be borne by the bank or !nancial institution. The higher the ratio, the less risk for general creditors

The overall !nancial performance of a company should be understood by the inherent risks and potential returns. These measures allow potential stakeholders to understand the level of success or pro!tability to expect, with a reasonable amount of risk, from their investments. The choice of these two ratios is far superior; say by choosing two prof-itability ratios, in demonstrating the rigour of the research hypothesis. While a high ROCE represents better pro!tability and performance of a company, a high SOLV only indicates more shareholder funds and lesser risks to creditors in the !rms. The latter does not necessarily equate to better performance, but perhaps could lead to one with a balanced view of risk and returns.



DATA AND METHODDataFAME was the main source of data for identify-ing the company’s attributes, such as its !nancial performance, location, foundation date and size. FAME captures all UK-registered companies includ-ing those yet to !le their !rst set of accounts. More importantly, this commercial database contains rich sources of !nancial and employment data needed for our models.

Several researchers have de!ned clusters ac-cording to state boundaries (Shaver and Flyer, 2000), whilst others have looked at Metropolitan areas (e.g. Oakey, 1985) or counties (Pandit et al., 2001; Cook et al., 2001) to explicitly link !rms to the economic activities of their regions. Similar to related studies, the data was classi!ed according to each widely de!ned UK geographical regions conforming to the boundaries set by the O#ce of National Statis-tics (the “ONS”). Other sources of UK information for computing other independent and dependent variables are from Regional Trends 2001 (ONS, 2001) and Business Clusters in the UK (DTI, 2001).

However, the database has a problem with miss-ing or incomplete data with respect to employ-ment. Although !nancial statements dated 2001 were available, a number of observations was last dated 2000 or 1999 at time of research. Only 7,473 companies (42.3%) provide employment !gures. In order to optimise the amount of employment data, the average !rm size (of the last !ve years prior 2001) is calculated. The aggregated employment !gures in !nancial services per region were com-pared against the ONS (2001) and the magnitudes were found to be similar.

By using a cross-sectional frame of companies in !nancial services, this important sector can be investigated using a larger number of observations. The use of average employment of !rms would counter for the e$ects of business cycles on !rm size, while the cross section analysis would cater for macroeconomic "uctuations, which a$ect all busi-ness segments to the same degree.

Dependent variablesThree measurement of !rm performance are used: employment size, return on capital employed (ROCE) and solvency (SOLV). Firm employment size is used as a !rst measure of performance, very similar to re-lated studies. The return on capital employed ratio (ROCE) is chosen as the second !rm performance in-dicator similar to Nachum (2003), while the solvency ratio (SOLV) is chosen as it is the standard used by most governments to identify troubled !nancial in-stitutions (Ahn and Cha, 2004). The FAME database provides good sources of data to estimate the latter two aspects of performance. The database contains 7473 (42.3%) observations on !rm employment size, 13,759 (78.5%) observations on !rms’ return on capital employed and 17,081 (97.4%) observations on !rms’ solvency ratio.

Independent variablesParr (2002:721) raises the important question regard-ing the level of disaggregation. One can consider an industry cluster as en-bloc or by classifying speci!c sectors. Unlike other works (Shaver and Flyer, 2000; Folta et al., 2006) that classify the cluster size as en-bloc activities only to capture the extent of localisa-tion economy, two main independent variables are used: total employment within the same sector (SIc) and total employment within related sector (SJc) in each geographical cluster.

SIc, the total employment in one’s own sector in a region, measures the localisation externali-ties. This is a common measure; see Weber (1929), Hoover (1937), and Rosenthal and Strange (2005). SJc, the total employment of other related sectors in the region, re"ects pecuniary externalities due to the intense interaction of related sector in !nan-cial services, see Cook et al. (2007) and Pandit et al. (2001). Employment size is particular important for !nancial services as its output is based upon spe-cialised labour, knowledge and new knowledge acquisition transferred through the workforce.

The two measures of cluster size (using SIc and


SJc) have been found to in"uence a !rm’s lifetime growth in related studies, and include only those !rms that were active at the given time.

Control variablesParr (2002: 729) points out that agglomeration of economic activity at a given location may sim-ply be due to coincidence or spatial organisation of an earlier industrial era, rather the presence of agglomeration economies. This presents a landscape to investigate whether a larger finan-cial agglomeration at a certain region produces greater externalities for incumbents. We do not need to adjust for policy effects as there is only one central bank (the Bank of England) and the economy is generally unified with a single regu-lator (the Financial Services Authority) in the Kingdom. Moreover, a cross-sectional analysis adjusts for any economic and policy effects on the sector. In the attempt to look at how agglom-eration externalities (through cluster strength at-tributes) affect the firm performance, the sector and regional fixed effects are controlled through dummy variables.

The data was classi!ed according to each widely de!ned UK geographical regions using their regis-tered business postal codes. The sample is divided into 13 geographical regions, as seen in Table 1, as

accordance to the ONS (2001). Consideration was also given to how Pandit et al. (2001) divide the UK into 14 regions under NUT3 system. The main di$er-ence between this classi!cation and Pandit et al.’s (2001) studies is (a) North Wales and South Wales are combined as Wales; (b) Northern Ireland is included; and (c) North West London is assimilated into re-gions of East and South East to better emulate the regional boundaries. The geographical classi!cation for each observation (!rm) is veri!ed by the postal code of its registered address, and coded as “1” in one of the 13 geographical regions, and ‘0’ in other regional dummies.

The !rms are categorised according to their primary activity (sector) on the basis of classi-!cations found in the literature on UK !nancial services (Buckle and Thompson, 1998); and the company SIC codes at the four-digit level shown in Table 2. This level of disaggregation into sectors is important as the clearer breakdown may enable the identi!cation of the relevant agglomeration externality (Parr, 2002:721). The eight sectors con-trol for di$erences in activity type as suggested by Rosenthal and Strange (2005). It is also impor-tant not to over-disaggregate unless the study is speci!c to one sector. Each observation (!rm) is coded “1” or “0” based on their primary industry as reported in FAME.

NSCOT Highlands, Islands, Aberdeenshire,

SSCOT Angus, Dundee, Argyll & Bute, Perth,

NIRE Kinross & Stirling

NWEST Borders, Fife & Clackmannanshire, Lothian, Renfrewshire, Ayrshire, Falkirk, Dunbartonshire, Lanarkshire, Dumfries/ Galloway, Glasgow, Edin-burgh, Helensburgh & Lomond

NEAST Coleraine, Derry, Ballymena, Stra-bane, Omagh, Ulster, Belfast, Newry, Craigavon, Dungannon, Eniskillen

YORKH Blackburn, Darwen, Blackpool, War-rington,

WALES Clwyd, Dyfed, Gwynedd, Powys,

EMID Gwent, Mid, South & West Glamorgan

WMID Derbyshire, Nottinghamshire, Lincolnshire, Leicestershire, Northamptonshire, Rutland

EAST Stoke-on-Trent, Telford, Wrekin, Shropshire, Staffordshire, Warwickshire, West Midlands, Worcestershire.

SWEST Luton, Peterborough, Southend-on-Sea, Thur-rock, Bedfordshire, Cambridgeshire,

SEAST Essex, Hertfordshire, Norfolk & Suffolk

LON Bath, Bristol, Bournemouth, Poole, Swindon, Torbay, Cornwall & Isles of Scilly, Devon, Dor-set, Gloucestershire, Somerset & Wiltshire

Table 1: De"nition of Regions in the UK



BSBANK 6510 - Monetary Intermediation6511 - Central Banking6512 - Other Monetary Intermediation including Banks and Building Societies

CREDIT 6520 - Other financial Intermediation6521 - Financial Leasing6522 - Other Credit Granting including Finance Houses, Factoring and Mortgage Finance Com.

TRUST 6523 - Activities of investment trust, unit trust, property trust, bank holding company, venture and development capital companies.6602 - Pension Funding

LIFE 6601 - Life Insurance

NLIFE 6603 - Non Life Insurance

FINAUX 6700 - Activities Auxiliary to Financial Intermediation6710 - Activities Auxiliary to Financial Intermediation except Insurance and Pension Funding6713 - Activities Auxiliary to Financial Intermediation not classified elsewhere

INSAUX 6720 - Activities Auxiliary to Insurance and Pension Funding

MARKET 6711 - Administration of Financial Markets6712 - Security Broking and Fund Management

Table 2: De"nition of Sectors in the Financial Services Industry

McKillop and Hutchinson (1990) point out that the level of economic activity in a given re-gion is the main factor influencing the size of its financial sector. In congruence, the level of finan-cial GDP reflects the specific regional economic activity in this industry and is used as another control variable. The specific industry structure at the region plays an important role in the per-formance of firms (Porter, 1990; McGahan and Porter, 1997), and the industry concentration of financial services is used to control that aspect. The regional population density has a significant influence on firm growth (Beaudry and Swann, 2001). Hence, control variables include the re-gional population density, the regional GDP and the concentration index of financial sectors in the thirteen regions. The firm age is used as a control variable on the basis that as the firm be-comes older, it is more able to attract and accu-mulate funds. Also as a firm gets older, it should theoretically be larger in size. Age is correlated with firm performance because of the selection

on efficiency (Jovanovic, 1982). This is again used in all the models.

Other than industry structure and economic activities variables, the study does not include !rm status dummy variables, such as a subsidiary or headquarter operations. There are reasons for this: (a) populating a substantial database on !rm attributes through company reports was infea-sible; (b) a simple dummy variable to account for potential bias would not seem to add value to the fundamental premise that the cluster size has in-"uence on !rm performance.

Model speci"cationWithin the literature, equation 1 is an established means of measuring agglomeration effects using two cluster strengths attributes, see related stud-ies. The quest for a simplified and macro model to investigate regional financial agglomerations suggests that a cross-sectional analysis involving a larger sample of available records covering the UK will be better than exploring a single cluster,


say by using input-output analysis, or a longitu-dinal modelling concentrating on a fewer firms or selected agglomerations. The cluster model with its variables explained in Table 3 can be represented as:

Perfn{I:c}

= aP + b

P(Age

n) + g

1 PlnS

Ic + g

2 PlnS

Jc

+ + Svd

v P lnV

v +n

P

removed to examine the significance of the es-timators. This was also carried out in the second stage analyses.

The second stage analyses involved divid-ing the sample according to the eight sectors as specified in Table 1. This addresses the issue raised by Rosenthal and Strange (2005) that one ought to estimate agglomeration economies

Variable Description

Perf n�{I:c} Performance of firm n from sector I at cluster c measured by either the natural logarithmic of firm size, ROCE ratio or SOLV ratio

Age n Age of firm measured from date of incorporation to time of observation

� P Regression constant for performance regression

� P Coefficient indicating the performance change with age where C-1 I-1� P = 1 + �c=1dc Dc + �i=1di Di

�1 P Coefficient indicating the effect of one’s own sector employment on the firm’s performance

�2 P Coefficient indicating the effect of related sector employment on the firm’s performance

SIc Total employment of the particular sector I at particular cluster c

Vv Represents other control variables namely:a) Population density: indicating the size of the region in supporting the economic activity, measured

by size of population in clusterb) Regional GDP per capita: indicating the general economic activities in the regionc) Employment diversity: indicating the regional concentration of the financial services industry

measured by Herfindahl index

� P Residual or disturbance term on performance regression

Table 3: De"nition of Variables for the Performance Model

Data Analyses Two stages of analysis were carried out on the 17,535 financial services companies in the UK for the analysis on firm performance: Employ-ment Size, ROCE and SOLV. The first stage analy-sis involved pooling all available observations in each of the three models. Cook’s statistics were initially used to indicate any influential observation that might generally affect each model. To test the robustness of the models, 1%, 5% and 10% observations were randomly

separately. The sector-specific model will reveal the agglomeration effects and their significance to clustered-industry performance in the UK af-ter the test of robustness.

LimitationsLongitudinal data on employment is difficult to obtain and adopting a time-series study would limit the sample under investigation. Significant events such as shocks and merg-



ers in the history of financial institutions were not really captured through this simple model, and only data on surviving firms were analysed. The supporting industries were not included in this study as it would be impossible to include relevant supporting industries in an extensive study on all the financial services sectors. The existing model assumes random assignments of firms to location, as the fundamental premise is that the size of agglomeration has ultimately some beneficial influence to firm performance, rather than why some firms choose to locate in certain agglomerations.

Beaudry and Swann (2001) also highlighted two potential issues of endogeneity. The first is the overestimate of own sector employment by including the employment of the firm in the aggregate SIc. They demonstrated that by do-ing so, the model introduces a small bias to the order of 1/n (in this case, n is large). The sec-ond issue of endogeneity arises if the depen-dent variable is included in the independent variable SIc which means that the disturbance term, �, cannot be independent of the own sec-tor employment aggregate SIc. This is a poten-tial simultaneity bias from applying OLS to the model. However, they demonstrated that such biases are again negligible.

It is not definitive that unequal variance or heteroscedasticity exists over the range of the dependent(s) using residual plots, although it can be suspected for one of the three-perfor-mance model (ROCE). There is no indication of non-linearity between the outcome and the predictor for the three models. White’s (1980) correction was used and a non-linear transform (square function of the predicted value) was at-tempted, but the results did not significantly improve and limited the sample size under in-vestigation. Beaudry and Swann (2001) also at-tempted to model the problem of unequal vari-ance in firm size by assuming that the variance is proportional to the square of age but claimed

they have only ‘touched the tip of the iceberg’. The initial analysis using a correlation matrix showed that collinearity between variables is not an issue, except for non-parametric data of population density and financial GDP that has a value higher than 0.8. The Pearson correlation did not indicate any issues between parametric variables. The models were tested using the RE-SET test, where multicollinearity was again not perceived to be a problem with VIF values less than 2.5

RESULTS AND DISCUSSIONCluster Performance by Firm SizeThe sector-specific result is shown in Table 4, depicting how the eight sectors perform with differing levels of externalities due to their UK locations. Cook’s statistics confirm that only 11 observations (out of 7,473 observations) have a statistic equal or value greater than 0.004, with only one influential case at 0.03. The regres-sion coefficients, shown in Table 4, are mostly significant at the 1% level. The regression con-stants indicate that BSBANK and MARKET start at a much larger size compared to other sectors. The coefficients on Age indicate that BSBANK (2.7%), CREDIT (3.6%), LIFE (2.2%), and MARKET (3.0%) grew much faster than other financial services sectors in the UK, such as TRUST (0.6%), NLIFE (1.5%), INSAUX (1.8%) and FINAUX (2.0%). The coefficient on Ln (SIc), being positive and significant, points to the effects that a stron-ger own sector employment in the region pro-motes the lifetime growth of firms. Also consis-tent with earlier published studies, a stronger related sectors employment in the region may attenuate incumbents’ growth.

Table 5 reveals the outcome on the test of robustness where random observations are omitted at the 1%, 5%, 10% levels, see Section 4.6, with only consistent results being depict-ed. When a company locates in a region that is


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17

**

0.1

23

*

0.79

8 0.

286

0.94

2

N

430

733

7486

18

57

2420

18

4 21

9 42

8

**

**

Sig

nif

ican

t at

p <

0.0

1;

**

* S

ign

ific

an

t at

p <

0.0

5;

**S

ignif

icant

at

p<

0.1

0;

*S

ignif

icant

at

p<

0.2

0

Ta

ble

6:

Clu

ste

r P

erfo

rm

an

ce b

y I

nd

ustr

y –

RO

CE

Tabl

e 6:

Clu

ster

Per

form

ance

by

Indu

stry

– R

OCE



Lifetime GrowthPositive E$ect & High-

lySigni!cantNegative E$ect &Highly Signi!cant

MO

DE

L I

MO

DE

L II

Cluster Strength Variable:Employment in OWN sector in region

BSBANK , CREDITLIFE , NLIFE

FINAUX , MARKETTRUST, INSAUX

Cluster Strength Variable:Employment in OTHER

!nancial services sectors in regionTRUST, INSAUX

BSBANK , CREDITLIFE, MARKET

Control Variable:Regional specialisation in !nancial ser-

vices activities (or industry conc)None None

Control Variable:Regional GDP in !nancial services

INSAUXBSBANK

LIFENLIFE

Control Variable:Regional population density

BSBANK , INSAUX MARKET

F Change signi!cant for BSBANK, NLIFE, FINAUX and MARKET

Table 5 E#ects of Cluster Strengths on Lifetime Growth

Lifetime GrowthPositive E$ect &

HighlySigni!cantNegative E$ect &Highly Signi!cant

MO

DE

L I

MO

DE

L II

Cluster Strength Variable:Employment in OWN sector in region

CREDIT, LIFE

Positive E$ect & Highly Signi!cant Negative E$ect &


vices activities (or industry conc)LIFE BSBANK, TRUST


LIFE


LIFE

F Change signi!cant for TRUST, LIFE

Table 7 E#ects of Cluster Strengths on ROCE Performance


strong in its own sector employment, it has a tendency to grow faster than a firm that is not surrounded by its peers. Conversely, a rise in employment in related sectors has a negative effect on firm size. In this analysis, what stands out are the TRUST and INSAUX sectors, which perhaps shed light on the nature of these sec-tors as ‘non-conformists’. In the UK, trust and pension fund firms (TRUST) are set up for many diverse purposes: for investments, savings and protecting particular assets for companies and societies. There are over 3,400 such firms in the sample of 7,473 firms - mostly small and newly formed entities. Growth in such institutions is exhibited by formation of new trust funds when they are substantially successful, instead of growing the firm size in most cases. INSAUX is another sector that displays a negative effect when competing firms are clustered together. Here, it is apparent that there are fewer than 180 such firms in the entire UK and they are no-tably scattered countrywide. Both INSAUX and TRUST benefit from the activities and growth of other related sectors around them. The large number of TRUST firms would affect the model if the sectors were estimated en-bloc.5.

Cluster Performance by Returns on Capi-tal Employed The sector-specific result is shown in Table 6, depicting how the eight sectors perform in their returns on capital employed in the UK re-gions, due to differing levels of externalities. Cook’s statistics confirm that 31 cases (out of 13,757 observations) have a statistic equal or value greater than 0.004, with only one influen-tial case at 0.01. However, the fewer significant results initially indicate that the agglomeration effects play a lesser role. A couple of sectors dis-play significant results but they are interesting as these results oppose findings from the first model. Companies are found to perform better financially the region is strong in the employ-

SO

LV

by

Ind

us

try

BS

BA

NK

CR

ED

IT

TR

US

T

LIF

E

NL

IFE

FIN

AU

X

INS

AU

X

MA

RK

ET

Var

iabl

es

Coe

ff S

td E

rr C

oeff

Std

Err

Coe

ff S

td E

rr C

oeff

Std

Err

Coe

ff S

td

Err

Coe

ff S

td E

rr C

oeff

Std

E

rr C

oeff

Std

E

rr

Con

stan

t

-14.

59

23.7

38

27.8

85

***

11.6

38

26.1

46

****

3.58

3

29.9

89

****

7.16

6

13.4

79

***

5.70

9

-5.0

31

24.3

62

61.5

55

****

23.4

40

29.2

09

29.1

79

Firm

Age

0.

040

0.

092

0.3

26

****

0.10

1

0.4

52

****

0.02

5

0.3

10

****

0.05

4

0.3

17

****

0.03

8

0.7

17

***

0.22

4

0.4

75

****

0.18

5 0.4

10

****

0.14

2

Ln (S

Ic)

-2.9

64

**

1.65

8

-1.2

35

1.41

4

-1.7

67

****

0.62

0

-1.2

74

1.14

7

1.5

85

*

1.11

9

1.90

6 1.

905

1.

220

2.

632

-1.7

97

2.31

1

Ln (S

Jc)

6.9

22

***

3.11

0

0.56

0 1.

268

2.9

35

****

0.65

5

0.80

5 0.

865

-0

.535

1.

183

1.

746

2.56

2

-4.0

43

*

3.02

5 2.

394

3.54

5

Adj

uste

d R

2 1.

1%

1.3%

3.

5%

1.5%

2.

5%

5.5%

3.

3%

2.0%

RS

S 84

0511

.5

1598

745.

8 18

2588

96.9

36

8851

2.8

4223

300.

6 52

7261

.4

4734

43.7

6787

64.9

Sig

F

0.1

44

*

0.0

12

***

0.0

00

****

0.0

00

****

0.0

00

****

0.0

02

****

0.0

35

***

0.0

22

***

N

502

871

9514

21

90

2989

25

5 26

4 49

3

**

** S

ign

ific

an

t at

p <

0.0

1;

**

* S

ign

ific

ant

at

p <

0.0

5;

**S

ignif

icant

at

p<

0.1

0;

*S

ignif

icant

at

p<

0.2

0

Ta

ble

8:

Clu

ste

r P

erfo

rm

an

ce b

y I

nd

ustr

y –

SO

L

Tabl

e 8:

Clu

ster

Per

form

ance

by

Indu

stry

– S

OL



ment of related sectors. When the cluster is strong in its own sector employment, it has a negative influence to the incumbent’s financial performance.

Cluster Performance by Solvency The sector-specific result is shown in Table 8, de-picting how the eight sectors perform in terms of their solvency in UK regions, due to differ-ing level of externalities. Cook’s statistics reveal that only one case (out of 17,078 observations) has a statistic of 0.004, showing that there is no influential case that would affect the regression coefficients. The effects from external econo-mies are not clear at the first stage of analysis but there is an indication that specific sectors such as BSBANK, TRUST, LIFE, MARKET benefit from high regional employment in related sec-tors in enhancing incumbent’s solvency, mean-ing the percentage of shareholder equity to to-

SOLVENCY PERFORMANCEPositive E$ect &

Highly Signi!cantNegative E$ect &Highly Signi!cant

MO

DE

L I

MO

DE

L II

Cluster Strength Variable:Employment in OWN

sector in region

BSBANK, TRUST, LIFE, MARKET

Cluster Strength Variable:Employment in OTHER

!nancial services sectors in region

BSBANK, TRUST, MARKET

INSAUX


vices activities (or industry conc)

CREDIT, TRUST, FINAUX

LIFE


BSBANK, LIFE TRUST, MARKET


NLIFE, FINAUX INSAUX

F Change signi!cant forBSBANK, CREDIT, TRUST,

LIFE, FINAUX, INSAUX

Table 9 E#ects of Cluster Strengths on SOLV Performance

tal assets is increased. On the other hand, the negative and significant coefficient for Ln (SIc) in BSBANK, TRUST, LIFE, MARKET suggests that co-locating with firms of own sector results in inhibition of one’s financial performance.

CONCLUSION

Earlier studies have hugely ignored the inter-dependency of related sectors in an industry cluster, and treated the clustering as en-bloc to consider only Marshall’s scale economies. A large cluster, consisting of its competing sector and its closely related sectors, provides differ-ent sources and types of agglomeration exter-nalities. This paper reinforces the premise that cluster size has beneficial influence on perfor-mance, and finds that the clustering of closely related sectors improves the firm’s bottom line.


By using the established cluster model, we confirm that the agglomeration of competing firms promoted the growth prospects of incum-bents and the agglomeration of related sectors attenuated firm growth in six of the eight sec-tors. In extending the model to consider finan-cial performance, we find that when firms are

in a strong competing cluster, a negative ef-fect on their potential financial returns may be experienced. CREDIT and LIFE companies dem-onstrate that if they are located in a strong clus-ter in their own sector, they perform less well in terms of returns on the capital employed. BSBANK, TRUST and MARKET companies have a lowered solvency as a result of locating in a strong cluster in their own sector. The results suggest greater competition amongst similar firms in a concentrated cluster results in profit distribution and equity distribution (on the de-mand side from shareholders and customers).

Conversely, clustering with related sectors could enhance incumbents’ returns on capi-tal employed and solvency. CREDIT and LIFE companies would benefit from better returns on capital employed if they were located in a cluster that was strong in related sectors, indi-cating these sectors demonstrate strong inter-dependencies on related sectors for financial intermediation to take place. Also, clustering with related sectors could enhance a com-pany’s solvency, especially in BSBANK, TRUST and MARKET companies. It suggests that these sectors benefit from a lowered asset held (pos-sibly from sharing physical resources with verti-cally related firms in the supply chain) and from

increased funds derived on the demand side from customers. Generally, clustering with re-lated sectors should allow companies to derive synergies and inter-firm networking for ease of transactions and creating greater pecuniary benefits.

Our findings support the need for related sectors to agglomerate in a geographical clus-ter, despite the arguments of rising congestion costs in earlier models of cluster growth. This paper reveals better insights on the influence of cluster size to firm performance by relating more closely to the sources of agglomeration benefits, providing a more precise measurement of cluster size, and using financial performance measures. The novel contribution to knowledge is that the two main cluster strength attributes are found to work in opposite ways in promot-ing different aspects of a firm’s performance. The model fit of a large sample cross-section model may be lower compared to a longitudi-nal model focusing on fewer geographical clus-ters, but this exploratory work has revealed the important influences of the two clustering attri-butes to firm performance. It is clear that most financial services activities in BSBANK, CREDIT, TRUST, LIFE and MARKET sectors benefited most from being located with related financial services sectors. With this knowledge, policy makers must now concertedly plan for regional development through achieving critical mass in selective types of related sectors in creating pe-cuniary externalities, as well as ensuring there is critical mass in specific sector to promote the growth prospects of firms.



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Relative Competitive Position of East European Countries in 20111

1This research paper was part of the research project “Advancing Serbia’s Competitiveness in the Process of EU Accession”, No. 47028, during the period 2011-2015, !nanced by the Serbian Ministry of Science and Technological Development.2FEFA – Faculty of Economics, Finance and Administration, University of Singidunum, Belgrade, Serbia

Nebojsa Savic2, Goran Pitic2 and Snezana Konjikusic2

AbstractThe current Global Recession points to an even greater need to improve competitiveness. Due to the fact that competitiveness is the key indica-tor of sustainable economic growth with a direct impact on the standard of living, we analyzed the regional competitiveness of eight South East European (SEE-8) countries (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, Montenegro, Romania and Serbia). The compari-son was made with a group of six Central and East European (CEE-6) countries (Czech Republic, Es-tonia, Hungary, Poland, Slovak Republic and Slo-venia). By using the New Global Competitiveness Index methodology, we made competitiveness pro!les for SEE-8 and CEE-6 comparing 2008 and 2011. During the Great Recession, SEE-8 improved their competitiveness. Progress was made by Al-bania, FYR Macedonia, Bosnia and Herzegovina, Montenegro and Bulgaria, while a deterioration in their position was recorded by Croatia, Serbia and Romania. The most signi!cant competitive advantages of SEE-8 lie in administrative, commu-nication and innovation infrastructure within the factor conditions. On the other hand, there are

numerous disadvantages, primarily in logistical infrastructure and then in a part of administrative and innovation infrastructure are also in capital market infrastructure. Apart from these weakness-es in the factor conditions of the diamond, CEE-8 especially displays competitive disadvantages in the second part of the diamond, in the context for strategy and rivalry, due to very unfavorable rank-ings in terms of the intensity of local competition and extent of market dominance, cooperation in labor-employer relations, restrictions on capital "ows, etc. Thus, in order to reduce the competi-tiveness gap relative to CEE-6, SEE-8 must: (i) up-grade underdeveloped logistical infrastructure and a part of administrative infrastructure; (ii) eliminate market dominance and the strength-ening of local competition, (iii) strengthen ex-isting clusters which have not yet been linked into strong regional clusters and (iv) eliminate weaknesses in doing business and corruption.

JEL: O57, O12, F23, R11Key words: competitiveness, Porter diamond, pro-ductivity, Eastern Europe



INTRODUCTIONThe current Global Recession points to an even

greater need to improve competitiveness. Due to the fact that competitiveness is the key indicator of sustainable economic growth with a direct impact on the standard of living, we analyzed the regional competitiveness of eight South East European (SEE-8) countries (Albania, Bosnia and Herzegovi-na, Bulgaria, Croatia, FYR Macedonia, Montenegro, Romania and Serbia).

The comparison was made with a group of six Central and East European (CEE-6) countries (Czech Republic, Estonia, Hungary, Poland, Slovak Repub-lic and Slovenia). It also draws implications and lessons for SEE-8 in terms of both long-term devel-opment policy reforms going forward and taking momentum through quick wins.

By using the New Global Competitiveness In-dex methodology, we made competitiveness pro-!les for SEE-8 and CEE-6 comparing 2008 and 2011. During the Great Recession, SEE-8 improved their competitiveness. Progress was made by Albania, FYR Macedonia, Bosnia and Herzegovina, Monte-negro and Bulgaria, while a deterioration in their position was recorded by Croatia, Serbia and Ro-mania.

LITERATURE REVIEWCompetitiveness depends on the long-term productivity with which a nation uses its human, capital and other national resources (Michael E. Porter, 2012, 6). The Improvement of competitiveness will not be achieved through low wages or low currency. A nation or region is competitive to the extent that !rms operating there are able to compete successfully in the global economy, while at the same time supporting rising wages and living standards for the average citizen. Productivity sets sustainable wages and the standard of living.

Competitiveness is what determines the pro-ductivity with which endowments are used to cre-ate goods and services. Nations compete to o$er

the most productive environment for business due to the fact that competitive businesses create rising incomes and good jobs. In 2008, Porter and his as-sociates created a synthetic competitiveness index - New Global Competitiveness Index (NGCI) (Porter, Delgado, Ketels, and Stern 2008) which is focused on the determinants of an economy’s sustainable level of productivity. The NGCI is calculated on the basis of public data and a unique opinion survey, which have also been used in the WEF’s GCR and the World Bank’s Doing Business.

The aim of the NGCI is to identify the sources of productivity. Therefore, according to the NGCI (Porter, Delgado, Ketels, and Stern 2008, pp. 45-48, and Porter 2012, 6), a country’s level of competi-tiveness is determined by: (i) endowments (location, resources, institutions,

market size), which create only a foundation for prosperity, but true prosperity is created by productivity in the use of endowments;

(ii) macroeconomic competitiveness, which sets the potential for high productivity but is not su#cient, and

(iii) microeconomic competitiveness – productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition.

Only an increase in productivity enables a pros perous development path, which is characterized by high wages, strong currency and high returns on capital. At the same time, this is the path to a higher standard of living. Consequently, prosperity is determined by the level of productivity or, more exactly, the value of goods and services produced per unit of human capital, physical capital and nat-ural resources. In every country, de!ning an attrac-tive value proposition creates the basis for attract-ing foreign and domestic investments.

Both countries and regions compete with each other to attract as much investment as possible. In so doing, it is especially important to create the most productive business environment. Firms’ productivity depends most directly on the quality


FEFA – Faculty of Economics, Finance and Administration, University of Singidunum, Belgrade, Serbia

of their business environment, which is best per-ceived by using the Porter diamond, as well as on the level of cluster development because clusters generate numerous external e$ects.

METHODOLOGYWe used Spearman’s rank correlation coe#cient, t-test and normalized the data from the WEF’s GCR Report, World Bank’s Doing Business report and national statistical reports. After normalizing the data, scale was translated to the interval [0,1].

In order to determine the degree of relationship between GDPpc ppp and competitiveness scores we used Spearman’s correlation coe#cient, which is justi!ed by the fact that we use a numerical scale for GDPpc ppp and an ordinal scale for competi-tiveness scores. The values of Spearman’s correla-tion coe#cient for all observed countries for 2008 and 2011, as well as for SEE-8 and CEE-6 are given in the following table.

Table 1. Spearman’s correlation coefficient

2008 2011

Population 0.88 0.87

SEE-8 0.90 0.67

CEE-6 0.66 -0.20

§Obtain data is statistically insignificant.

The obtained coe#cients are statistically signif-icant, which was con!rmed using Spearman’s test statistic, r=rs*sqrt(n-1), where rs denotes Spear-man’s correlation coe#cient and n – the number of data in a sample.

It was determined that there was a strong direct relationship between GDPpc ppp and competitive-ness scores, which remained almost unchanged for all countries observed in 2008 and 2011. When con-sidering SEE-8, one can observe a direct strong rela-tionship, which becomes signi!cantly weaker dur-ing the Great Recession period. Finally, the values of Spearman’s correlation coe#cient for CEE-6 countries

point to a direct yet not so strong relationship in 2008; in 2011, however, they point to the interdependence of GDPpc ppp and competitiveness scores.

The t-test indicates the existence of a statistical-ly signi!cant di$erence in competitiveness scores for SEE-8 and CEE-6 countries during the Great Re-cession period. Namely, SEE-8 countries recorded a slight increase in their competitiveness scores, while CEE-6 countries reported a slight decrease.

Data normalization enables that competitiveness scores expressed in absolute terms are reduced to relatively normalized scores within the interval [0,1]. By this method the country with the lowest score is assigned a value of 0 and the one with the highest score a value of 1, so that di$erences in scores among countries are also expressed in a more descriptive way. Normalization was performed applying the function f(xi)=xi-xmin/xmax-xmin to the three sum-mary scores derived for the observed countries: basic requirements, e#ciency enhancers and innovation factors. The !nal competitiveness score is obtained by averaging these three normalized values.

By observing the ranked normalized data, it can be determined that the di$erence between the !rst and third quartiles for 2008 is only 0.35, while in 2011 this di$erence was only 0.31 or, in other words, already intense competition among those countries became even more intense. This points to the conclusion that, for countries ranked roughly between 36th and 112th, a very small im-provement in the competitiveness score may bring a signi!cant gain in rank.

By dividing the list of ranked countries into 14 equal intervals and comparing the normalized val-ues within each interval it is possible to get an indic-ative picture of changes in competitiveness within the observed intervals. Figure 1 shows a comparison of those di$erences by interval for 2008 and 2011.

On Figure 1 the horizontal axis depicts 14 inter-vals, while the vertical one depicts normalized scores showing the intensity of competitiveness by inter-val. The higher the column, the greater the interval, which means that the intensity of competitiveness in



that interval is lower and vice versa – the smaller the column, the higher the intensity of competitiveness in that interval. It is evident that the greatest di$er-ence in competitiveness both in 2008 and 2011 is ob-served in the third interval, that is, from 21st to 30th rank, while the smallest is from the 91st to 100th rank. Therefore, it can be concluded that the lowest level of competitiveness is in the third interval and the highest in the tenth one. We observed the existence of strong competitiveness in the neighboring, eighth and ninth intervals. In analyzing which countries be-long to those intervals, we found out that just SEE-8 countries were concentrated in these three intervals, especially the eighth one (Bulgaria 74, Croatia 76, Romania 77, Albania 78, FYR Macedonia, 79). On the other hand, the CEE-6 countries, as aspiration coun-tries for SEE-8, are also markedly concentrated from the fourth to sixth interval.

EMPIRICAL RESULTSOver the past decades, the development of Eastern Europe has been intensive and coupled with signif-

icant changes associated with the establishment of market economies and European integration processes. One can observe the formation of two supranational regions, Central and Southeast Eu-rope. Thus, for purposes of this analysis, we formed two samples of these countries (Figure 2).

It is evident that these two groups of countries form two East European subregions where SEE-8 comprises a group of countries that are less devel-oped relative to CEE-6.

On one side, the SEE-8 region is deeply a$ected by the crisis spilling over from Europe and, on the other side, political and business elites failed to pro!le sustainable recovery programs. The SEE-8 region needs a strategy for improving competi-tiveness and implementing profound economic and social reforms in order to begin catching up with CEE-6.

SEE-8 countries must increase the attractive-ness of their region in order to attract new invest-ments. Due to a di$erent EU accession pace, the political and business elites in the region are faced with the need to develop the concept of improv-

Figure 1


Figure 2

Figure 3



ing competitiveness at the supranational, that is, regional level. The economic development of East-ern Europe over the past ten or so years is shown in Figure 3. The vertical axis denotes the level of ppp adjusted GDPpc, which re"ects the achieved level of development. The horizontal axis denotes the growth rates of GDPpc ppp, which show the growth pace over the past decade.

Yellow circles represent South East European (SEE-8) countries (Albania, Bosnia and Herzegovi-na, Bulgaria, Croatia, FYR Macedonia, Montenegro, Romania and Serbia), while green squares repre-sent Central and East European (CEE-6) countries (Czech Republic, Estonia, Hungary, Poland, Slovak Republic and Slovenia).

Figure 4 shows the scores and ranks of all coun-tries located in the two regions. It can be observed that !ve out of eight SEE-8 countries are concen-trated from 74th to 79th place with the scores ranging from 4.05 to 4.16 or, in other words, in

the 0.11 score interval. During the ongoing Great Recession, the SEE-8 region improved its competi-tiveness (its rank moved up to 77th place from 79th place on average, while the score was improved from 3.92 to 4.05. Among CEE-8 countries prog-ress was made by Albania (+30 places), Macedonia (+10), Bosnia and Herzegovina (+7), Montenegro (+5) and Bulgaria (+2), while a deterioration in their rank position was recorded by Croatia (-15), Serbia (-10) and Romania (-9). At the same time, their scores dropped in absolute terms. The com-petitiveness of CEE-6 countries also deteriorated (their rank dropped from 45th to 48th place, while their score was reduced from 4.45 to 4.41). In order to more thoroughly perceive all determinants of competitiveness, on the basis of New Competitive-ness Index (Porter, Delgado, Ketels, and Stern 2008, pp. 45-48, and Porter 2012, 6), we created competi-tiveness pro!les for both regions. As shown by the competitiveness pro!le of SEE-8 countries for 2011

Figure 4


(Figure 5), macroeconomic competitiveness was ranked higher (74) relative to microeconomic com-petitiveness (82), which can be attributed above all else to the impact of economic policy measures taken in response to the Great Recession. Insofar as macroeconomic competitiveness is concerned, SEE-8 countries improved their rank by 2 places relative to the 2008 ranking. As for microeconomic competitiveness, its rank was improved by one place. Using same methodology Savic (2012) ana-lyzed Serbia’s competitiveness pro!le for 2011.

Within microeconomic competitiveness we found that the rank of national business environ-ment remained unchanged relative to 2008 (81). However, there are great di$erences hidden behind it – within the subindex of factor conditions: the highest rank increase was achieved by administra-tive infrastructure (+20) and communication infra-structure (+8), which was accompanied by the de-terioration of capital market infrastructure (-12) and innovation infrastructure (-3). Progress was made

with respect to company operation and strategy, as the second subcomponent of mircroeconomic competitiveness (+9), which was accompanied by improvements in all its components: strategy and operational e$ectiveness (+10), internationalization of !rms (+10) and organizational practice (+4).

CEE-6 reported a slight decline in competitive-ness (-3), whereby lower ranks were assigned to microeconomic competitiveness (55) relative to mac-roeconomic competitiveness (47) where !scal policy displayed marked weaknesses (82). This points out that CEE-6 should make intensive improvements in its microeconomic competitiveness. Within national business environment (55) the best rank was assigned to the context for strategy and rivalry (51), as well as to factor conditions (55) and supporting and related industries (53), while the rank of demand conditions is unfavorable (87). Within factor conditions the best results were achieved in communication infrastruc-ture (36) and administrative infrastructure (51), while weaknesses were revealed in capital market infra-

Figure 5



Figure 6

Figure 7


structure (69) and logistical infrastructure (59).In continuation of our analysis we will concen-

trate on the analysis of competitive advantages and disadvantages based on the analysis of the Porter diamond for SEE-8

The most signi!cant competitive advantages in

Table 2 Relative Competitive Position of SEE-8’s Countries in 2011

Competitive Advantage Competitive Disadvantages

I. Factor conditions I. Factor conditions

Administrative infrastructure Logistical Infrastructure

-No. of proced. required to start a business 45 -Quality of roads 104

-Time required to start a business 45 -Quality of port infrastructure 104

-Doing business, Paying taxes 52 -Quality of air transport 103

Communication Infrastructure Administrative infrastructure

-Mobile telephone subscription 37 -Burden of customs procedures 86

-Fixed telephone lines 49 -Burden of government regulation 84

-Internet users 50 Capital Market Infrastructure

-Innovation Infrastructure -Protection of minority shareholders’ interests 108

-Quality of math & science education 51 -Soundness of Banks 100

-Tertiary enrollment 53 -Financing through local equity market 98

-II. Context for Strategy and Rivalry -Regulation of security exchange 96

-Trade tari$s 42 Innovation Infrastructure

-Strength of investors protection 48 -Brain drain 114

-University industry collaboration in R&T 96

-Availability of scientist and engineers 88

II. Context for Strategy and Rivalry

-Intensity of local competition 117

-Cooperation in labor-employer relations 108

-Restrictions on capital "ows 100

-Extent of market dominance 99

-Business impact of rules on FDI 99

-E#cacy of corporate boards 97

-Prevalence of foreign ownership 96

Note: Author’s recalculations based on Porter at al. 2008. Rank versus 142 countries; overall, SEE-8 ranks 65th in 2011 ppp adjusted GDPpc and 70th in Global Competitiveness Report.

Source: Global Competitiveness Report (2011-2012).

SEE-8 lie in administrative, communication and in-novation infrastructure within the factor conditions. On the other hand, there are numerous disadvan-tages, primarily in logistical infrastructure and then in a part of administrative and innovation infrastruc-ture; weaknesses are also perceived in capital mar-



ket infrastructure. Apart from these weaknesses in the factor conditions of the diamond, CEE-8 coun-tries especially display competitive disadvantages in the second part of the diamond, in The SEE-8 region must deal with its very pronounced competitive dis-advantages as soon as possible in order to improve its competitive position. The region has a very favor-able location and solid resources, but productivity in their use is low (see Figure 9).

The !rst, undeveloped logistical infrastructure and part of administrative infrastructure must be eliminated. The second important action is to elim-inate an excessive extent of market dominance and weak local competition, which is re"ected in a low market e#ciency and unfavorable context for strategy and rivalry. The third action concerns the strengthening of existing clusters in the countries in this region, which have not yet been elevated to the supranational level and linked into strong regional clusters, especially in the !elds of tour-ism and food processing, as well as ICT and knowl-edge-intensive activities, including ICT, creative industries and life sciences (Nebojsa Savic, Goran Pitic, Marija Dzunic and Ivan Brkic, 2011). The forth, weaknesses of the conditions of doing business,

Figure 8

re"ected in unfavorable doing business indicators, and corruption, also ,must be eliminated the con-text for strategy and rivalry, due to very low ranks in terms of the intensity of local competition (117), extent of market dominance (99), cooperation in labor-employer relations (108), restrictions on cap-ital "ows (100), etc.

The SEE-8 region is faced with the grave prob-lems of systemic corruption (see Figure 7). In 2011, all countries in this region had the country corrup-tion rank above the average level of GDPpc ppp (65). Compared to 2008, the rank was only im-proved by Montenegro, FYR Macedonia and B&H. In order to create a more favorable business cli-mate, this will be a very challenging task because competitiveness cannot be more signi!cantly im-proved without its realization.

Since SEE-8 is faced with the problems of doing business, we presented the indexes of the World Bank’s Doing Business in Figure 8. Doing business is much more favorable in CEE-6 (47) when compared to SEE-8 (72). In SEE-8 these indicators are very unfa-vorable with respect to construction permits (140), paying taxes (108), resolving solvency (97) and reg-istering properties (91). By comparing these two


Ease

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Prop

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Get

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Trad

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Acro

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Bord

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s

Albania 82 45 170 72 15 15 149 75 89 183

B&H 110 160 139 103 65 93 127 71 124 73

Bulgaria 51 43 119 62 6 44 85 108 87 83

Croatia 84 56 132 110 65 132 42 98 47 89

Macedo-nia, FYR

38 5 136 69 46 20 33 66 65 116

Monte-negro

66 51 161 116 32 28 139 34 135 47

Romania 56 44 84 92 15 44 151 47 54 102

Serbia 89 83 176 100 15 74 138 74 94 86

SEE-8 72.0 60.9 139.6 90.5 32.4 56.3 108.0 71.6 86.9 97.4

Estonia 17 37 24 13 32 59 30 4 50 70

Czech Rep

63 130 76 47 46 93 128 62 78 32

Hungary 46 35 86 41 32 120 109 73 22 62

Poland 70 113 164 86 15 44 121 49 77 81

Slovak Rep

41 68 56 9 15 109 122 102 71 33

Slovenia 42 28 63 97 116 20 80 56 60 38

CEE-6 46.5 68.5 78.2 48.8 42.7 74.2 93.8 57.7 59.7 52.7

Greece 109 149 51 153 89 154 74 84 88 49

Lithuania 23 87 59 7 46 93 44 31 17 39

Latvia 24 53 79 57 6 59 59 16 14 80

Turkey 65 63 137 38 72 59 75 76 26 115

Table 3. Doing Business – Selected countries



regions we determined that CEE-8 achieved better results than CEE-6 in: starting business (61), getting credit (32) and protecting investors (56).

Table 3 shows doing business ranks across countries. The best conditions are o$ered by FYR Macedonia (38), Bulgaria (51) and Romania (56), while the least favorable conditions are provided by Bosnia and Herzegovina (110) and Serbia (89).

The SEE-8 region must deal with its very pro-nounced competitive disadvantages as soon as pos-sible in order to improve its competitive position. The region has a very favorable location and solid resourc-es, but productivity in their use is low (see Figure 9).

The !rst, undeveloped logistical infrastructure and part of administrative infrastructure must be eliminated. The second important action is to elim-inate an excessive extent of market dominance and weak local competition, which is re"ected in a low market e#ciency and unfavorable context for strategy and rivalry. The third action concerns the

strengthening of existing clusters in the countries in this region, which have not yet been elevated to the supranational level and linked into strong regional clusters, especially in the !elds of tour-ism and food processing, as well as ICT and knowl-edge-intensive activities, including ICT, creative industries and life sciences (Nebojsa Savic, Goran Pitic, Marija Dzunic and Ivan Brkic, 2011). The forth, weaknesses of the conditions of doing business, re"ected in unfavorable doing business indicators, and corruption, also ,must be eliminated

CONCLUSIONDuring the Great Recession, SEE-8 succeeded in slightly improving its competitiveness, although it was exposed to strong shocks caused by a decline in FDI in"ows, as well as a decline in exports and cross-border credits. However, the region is con-siderably lagging behind CEE-6. During the Great

Figure 9


Recession, SEE-8 countries improved their compet-itiveness – their rank moved up from 79th to 77th on average, while their score increased from 3.92 to 4.05. Progress was made by Albania (+30 places), FYR Macedonia (+10), B&H (+7), Montenegro (+5) and Bulgaria (+2), while deterioration was recorded by Croatia (-15), Serbia (-10) and Romania (-9). The competitiveness of CEE-6 countries deteriorated (their rank dropped from 45th to 48th, while their score was reduced from 4.45 to 4.41).

The most signi!cant competitive advantages of SEE-8 lie in a part of administrative, communica-tion and innovation infrastructure within the factor conditions. On the other hand, there are numerous disadvantages, primarily in logistical infrastructure and then in a part of administrative and innova-tion infrastructure, while weaknesses are also per-ceived in capital market infrastructure. Apart from these weaknesses in the factor conditions of the diamond, CEE-8 countries especially display com-petitive disadvantages in the second part of the diamond, in the context for strategy and rivalry, due to their very unfavorable ranks in terms of the intensity of local competition and extent of market dominance, cooperation in labor-employer rela-tions, restrictions on capital "ows, etc.

A rise in the productivity of SEE-8 countries de-pends directly on sectoral changes and the shift to the new paradigm of competitiveness. The com-petitiveness improvement of SEE-8 countries must be based on investment and trade openness, espe-cially when the countries in the region are in ques-tion. The neighbors are natural investment and trade partners. This is the best way to transform the whole region into an attractive investment destination, which also requires the coordination of economic policies within the SEE-8 region.

The SEE-8 region has a favorable location and solid resources, but productivity in their use is low; in order to narrow the competitiveness gap with respect to CEE-6, SEE-8 must: (i) upgrade underde-veloped logistical infrastructure and a part of admin-istrative infrastructure; (ii) eliminate market domi-nance and the strengthening of local competition,

(iii) strengthen existing clusters which have not yet been linked into strong regional clusters, especially in the !elds of tourism and food processing, as well as ICT and knowledge-intensive activities, including ICT, creative industries and life sciences and (iv) eliminate weaknesses in doing business and corruption.

REFERENCESDelgado, Mercedes, Christian Ketels, and Mi-chael Porter. 2011. „Clusters, Convergence, and Economic Performance“, Institute for Strategy and Competitiveness, Harvard Business School. Mimeo.Porter, Michael E. 2007. “Clusters and Economic Policy: Aligning Public Policy with the New Eco-nomics of Competition”. Institute for Strategy and Competitiveness White Paper 5/18/09.Porter, Michael E., 2012. “Regional Competitive-ness and the Role of Business”, lecture delivered at Sintonia, Puebla, Mexico, April 27, 2012. Porter, Michael E., Mercedes Delgado, Chris-tian Ketels and Scott Stern. 2008. “Moving to a New Global Competitiveness Index.“ In The Global Competitiveness Report 2008-2009, ed. Michael E. Porter and Klaus Schwab, 43-63. Ge-neva: World Economic Forum.Savic, Nebojsa. 2012. “Comparative Analysis Based on New Competitiveness Index”, Pano-economicus, 2012, Volume 59, Issue 1, Pages: 105-115.Savic, Nebojsa, Goran Pitic, Marija Dzunic and Ivan Brkic. 2011. “The role of clusters in im-provement of regional cooperation and devel-opment”, proceedings of the 7th ASECU Inter-national Conference, Rostov-on-Don.The World Economic Forum. 2008. Global Com-petitiveness Report 2008-2009. Geneva.The World Economic Forum. 2011. Global Com-petitiveness Report 2011-2012. Geneva.The World Bank. 2009. Doing Business 2009. Washington, DC: The World Bank. The World Bank. 2010. Doing Business 2011. Washington, DC: The World Bank.




The formation of clusters as an alternative to the development and strengthening of SMEs in Mexico

Sergio Garcilazo Lagunes1

Abstract

Our goal is to promote a change in awareness of entrepreneurs and business managers of small and medium enterprises, SMEs, which currently reads “This business is mine,” a perspective of un-derstanding of why companies should not work together to grow. Our main goal is that this meth-odology will serve to consolidate a framework to help SMEs to grow quickly.

In the old days a company that lacked competi-tive capabilities could develop internally or could invest in these skills through training projects. To-day, the speed of business has accelerated to such an extent that companies do not have the time or resources to ensure capabilities to race against its competitors to stay on the market. The proposal of this research is to o$er an alternative, less expen-sive, but undoubtedly more advantageous: the es-tablishment of business partnerships.

The lack of knowledge to form alliances in the SME sector in Mexico range from understanding their own bene!ts to how to run an impact on the level of competitiveness compared to the same types of businesses in major countries. It is therefore necessary to acknowledge gaps existing to achieve the desired levels in order to implement policies for the revival of a dynamic that creates jobs.

Based on these gaps, we have built the concepts of a methodology that can serve as the ABC of a

plan for the formation of alliances in the SME sector in Mexico. Our argument’s logic is that an alliance may eventually become a stronger business group-ing, and thus carry out the so-desired linkages.

Our work establishes an eight-step model plan for the development of partnerships required by the sector, so that they become the basis of a sus-tainable development strategy. Basically, by shar-ing the concepts underlying the alliances to be used as a general methodology and to integrate a company with all the capabilities required to com-pete in a global market.

Companies in the “past” are now entrepreneurs of small and medium businesses, who are con-cerned about how to become more competitive while maintaining high operating costs, among other factors, by the isolation in which they work. The current economic world of business that cre-ates value to shareholders (shareholder value), gains market share and grows based on improving its competitive capabilities. Although the econom-ic laws as they currently are and how they used to be in the past, as well as the context where you do business has evidently changed, mainly by reduc-ing the margins of error.

This does not mean that previous eras were easier than today. Success in the past, as now, has been by no means easy to achieve. There are still

1Universidad Panamericana, Mexico, FEFA – Faculty of Economics, Finance and Administration, University of Singidunum, Belgrade, Serbia



more than 80% of small businesses that die in the !rst !ve years, and 95% that do not survive the !rst ten years. Never before had the economy been faced to a globalized environment, new technolo-gies, fast- changing business conditions and mar-kets as today. Currently competition is intensifying from the most unexpected places:1. Incoming industries, such as servers “minis” in

the industry of mini-computers, for example, completed their cycle of birth, growth and death in less than a decade.

2. The “mainframes” of teams disappeared after threatening to re-host industry software appli-cations, or

3. Web services, today everywhere, by its agility and innovation have tested all the forces that structure every industry and every market.

To survive and thrive, some companies have formed links with their own rivals, while others have served as a liaison to connect to its closest as-sociates. Viewed in this way, we are living a period where mergers, alliances and subcontracting prac-tices (outsourcing) may represent a competitive advantage. From another point of view, in recent years there has been a period of weight loss, de-coupling and re-coupling. From any point of view, we are living an era of great complexity.

INTRODUCTIONMuch has been discussed about the factors that reduce competitiveness of a nation, region or or-ganization. To not be competitive has to do with the ability to maintain a value proposition in the market sustainably. The reasons, range from !s-cal, monetary, !nancial, production, international, regulatory, energy, labor, to any other nature. The most urgent issue for Mexico is the creation of jobs. This goal is inescapable: we impose the level of personal income and its distribution, population dynamics, the loss of international competitive-ness, low productive capacity of the people, the lack of incentives to invest increasingly, the poor

savings, the little ingenuity to solve problems, poor academic links between universities and the pro-ductive reality, the null productive link between suppliers, producers and customers, as well as re-gional di$erences and other social impacts.

One way to address this problem is by organiz-ing partnerships, in many cases probably directed by the government, their importance as a public good. In forming these alliances there is an under-lying level of development and its dynamics over time. It is possible that, given the degree of maturity, some alliances may rapidly become formal group-ings horizontally and vertically integrated into ad-vanced cluster members. In other cases, the margin-al bene!t is likely, though not less important. Simply execute transactional relationships is a giant step in the restructuring of our SMEs. Eventually these early trade relations can mature into long-term relation-ships, while it streamlines network cooperation to pursue business eventually work in groups.

We must understand that the lack of employment opportunities are undermining the !ghting spirit of man, its sense of family life, the spirit of improvement, as well as the economic aspect leisure periods. This is why jobs must be created and sustained in a “real” manner, permeated from the origin of man and his social dynamics, so far as everyone has an everyday pay, or every week or every fortnight, as long as he/she remains economically active until the day of re-tirement. And while it is true that the economic life has a cyclic nature and therefore cannot “make” the jobs open in and competitive economies, we should seek an economy "exible enough to reduce our eco-nomic inability to generate them.

If we are not !t, we do not reach arti!cial recom-mendations permanently and consistently do not create root jobs. There are elements that must be ad-dressed such as consumer demand and sovereignty, social requirement, business opportunity, entrepre-neurship, business, customer satisfaction, respect for property rights and legal certainty, as well as the ex-istence of e#cient !nancial markets make resources "ow to productive projects, human capital accumu-


lation and skilled healthy, and obviously institutional collaboration of all stakeholders in alliance with the same objective. In the case where companies get rich at the expense of environmental or social degrada-tion, it is impossible to think of sustainable develop-ment. If companies do not respect the environment and society, we cannot guarantee its long-term vi-ability and jobs may not be permanent or su#cient.

Then the problem is, the economic situation and not only the issue around this great challenge of job creation, which surround reform discussions and agreements, but also the inability to integrate teams to ensure competitiveness. The logic is simple: Without jobs there is no income for the people and hence there are no possibilities in life, neither, for the unemployed or for the employee. It is, therefore, in the public interest to meet the permanent and con-sistent demand for the creation of jobs.

No reform will be su#cient if the country as a dy-namic, does not change from the source structure and recognizes its limitations in the long-term, and if its people are unable to take risks with a socially re-sponsible attitude, or do not respect the laws. No one can deny the urgent creation of jobs and less if they are well paid. We must say, however, that in a competi-

tive environment, to win everybody has to generate economic value. It is the e$ort or the amount which necessarily brings labor economic value. If so, there is a lot of work that is not worth for the consumer and who is free to buy or not the products. Hence a Company therefore either does not sell or has to reduce its prices, limiting its viability and operational procurement.

All productive sectors have to generate economic value: customers, suppliers, employees, society, gov-ernment and shareholders. If an agent is in contrast to another, competition is limited. It is reasonable to ask whether we have an economic structure that gener-ates the maximum economic value. Are our compa-nies directed to produce or destroy value? Training is required, it takes business vision, technological improvements are demanded, regulatory changes are expected, capital is needed, but you need the complement of all: partnerships, to compete in this new environment.

THEORETICAL FRAMEWORKOur previous discussion shows how to achieve the competitiveness of the entire national economy. It is perhaps this view of competitiveness, the prob-

Figure 1. Levels of commitment and ownership in partnerships

Acquisition

Outsourcing

Ratio

Dedicated

Transport

Services

Joint

manufac-

turing inputs

Annual or

multi-annual

Procure-

ment

contracts

Distribution

contracts

Cross-

licensing

R & D

Programme

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Order Goods

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marketing

Advertising

collabora-

tive

Strategic Alliances

They are

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PropertySource: Own

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lem that is not only intrinsically to organizations and individuals but to the whole system, which strengthens our hypothesis for collaborative busi-ness partnerships.

STRATEGIC ALLIANCESIndividual companies can !nd many ways to ex-pand their businesses through other companies, from the conventional arrangements for suppli-ers and sourcing products and services to the ac-quisition and merge of other companies. Figure 1 shows that we have the level of commitment on the vertical axis, from simple transactions to ongo-ing relationships, and on the horizontal axis, the level of property ranging from companies that are not linked but rather simple transactions to the ac-quisition of another company that can increase the level of ownership in the partnership.

The term alliance can describe a wide range of re-lationships that fall within these extremes, from short-term projects to long-term relationships between suppliers and producers to relationships that meet strategic alliances to complement the capabilities between companies. Strategic alliances are part of a continuing business expansion. Evans and Wurster (1997) argue on how information technologies are producing radical changes in the value chain.

To the extent that the value chain not only in-cludes physical activities connected in a linear fash-ion, but also the information that "ows between suppliers, customers, competitors, employees, sup-pliers and society in general, relations with each of them is constructed from the availability of informa-tion. Knowing or not, for example, the availability of product inventory in real time, can be the di$erence between taking the product immediately to the cli-ent (create value), or incur in higher costs to deliver the product later (destroy value).

Today, despite the increased connectivity and apparent recon!guration of the value chain in many industries, that would invite to reduce the importance of geographical distance; there are

still logical groupings of companies across an in-dustry located in the same area, i.e., the Silicon VaIIey in California, the Biotech Park in Boston, Dot Com Corridor of Fairfax, Virginia, and some more in other locations. According to Rosenfeld (2003) there are three ways to impact the competitive-ness cluster.

the group, as they approached the source of inputs,

sharing ideas and knowledge, and !nd availability of business services tailored to the needs,

within the group, to attract more customers to the industry.

ClusterMajor external economies that feasts within a group of companies that integrates horizontally or vertically, especially if the cluster is mature, has a more continuous "ow of workers with the skills and knowledge of the industry, with the ease of mov-ing within it. Bottlenecks for SMEs, for example, do not impose workers with higher education and se-nior management, as these can be more globally engaged. The problem lies in the critical mass of medium technical level workers, who generally are educated locally and who are less mobile.

Importantly, most of the opportunities of exter-nal bene!ts of this type of grouping (cluster) from both scale and scope that the workers of the busi-ness group can take lie within, and not in the trust re-lationships or simple memberships. Social capital is important, but not the main asset. Tambunan (2005) goes further, referring to the formation of groups or clusters and links these with market opportuni-ties and potential of the cluster to access growing markets, domestic or foreign, is the pre-requisite for success in development of these clusters. In other words, there is no sense of group e$ort if market po-tential is null or is in permanent decline.


In an era where globalization and trade liber-alization generate greater market opportunities, SMEs cannot easily participate in general because these claims require best quality and price, after-sales services, greater quantities, homogenous standards and regular product supply. As small businesses fail individually within economies of scale, this represents an obstacle to internalize cru-cial functions to access larger markets. SMEs do not train their workforce, do not design mechanisms of market intelligence or logistics, nor are they grouped to take advantage of a division of labor interPYMES, resulting in the low competitiveness of each company, industry and accordingly each country (ADB, 2001).

Several studies show the importance of cluster-ing not only for the development of SMEs in the cluster but for the development of cities and re-gions. Smyth (1990) and Schiller and Martin-Schill-er (1997) studied how the producer group of rattan furniture in the communities of East Java in Indo-nesia Tegal Wang led to the development of many economic activities in some neighboring satellite towns. The growth of the cluster in Jepara, Central Java, transformed an entire village in the eighties into a mall containing furniture stores, factories, showrooms, hotels, banks, supermarkets, commu-nications services and European restaurants, over a 9 Km. Avenue.

According to their level of development, Sand-ee (1994) lists the di$erent types of clusters for SMEs:A. Artisan. Comprised mainly of small businesses

with low productivity and wages, characterized by stagnation of their local markets. In these groups no external support networks, are low level of inter-!rm and little or no specialization also brokers are those who direct marketing by producers.

B. Active. These groups use more skilled labor and better technology, o$er their products to the domestic and export market, are more active in their marketing, and the degree of networking

(both internally, between cluster companies, and externally, with other organizations outside the cluster) is high.

C. Dynamic. Here international trade networks are big; there is a greater internal heterogeneity in terms of size, technology and healthcare markets. You play an important role leading enterprises and pioneering.

D. Advanced. In this case the degree of inter-!rm specialization and cooperation is high. Business networks between !rms with input suppliers, business service providers, brokers, dealers and banks are well developed. Cooperation with the local, regional or national, as well as academic institutions, such as universities, is good. It is not uncommon for many of the companies that belong to a cluster of this type are exporting mainly through export companies.

In Figure 2, following the idea of levels of com-mitment and ownership, we show the combina-tions that can be expected in the formation of a cluster.

We understand the level of productive involve-ment commitment of an organization in its busi-ness relationships with its partners grouping, from simple formalization of business transactions, to establishing long-term relationships and other ways to stay in business among its members. Fur-thermore, the degree of property sets the measure of acceptance of both rights and obligations in the group, from Single-employment, information shar-ing, collaboration to complement the use of own resources, the exchange of capital, to acquisition and mergers. According to this classi!cation, level 1 means the highest level of development and ma-turity in a cluster.

For the Mexican case, the SE has been doing an important task of identifying opportunities for clustering. The ways to bring business partner-ships, however, are not clearly de!ned, which is the main objective of this work, and we think it is his greatest contribution.



EIGHT-STEP MODELDisciplinary approach is the key to boosting a com-pany to higher levels SMEs through partnerships that give positive results and avoid the dangers of an inexperienced hand in these matters. Through research and experience with companies in Mex-ico, the methodology proposed here re"ects the consensus for the formation of alliances. In writing this methodology we have tried to show what the experience of work and research we have collected in some successful companies and in some which unsuccessfully tried the partnership process. Most of the time, SME companies in Mexico do not have a broad view of what partnerships can accomplish, because most prefer to focus on individual busi-ness opportunities, and better to be alone than collaborate.

The methodology of the eight steps has four stages for the formation of alliances:

1) Identi!cation,2) Evaluation,3) Negotiation and4) Implementation

This breaks down into eight practical steps that can be run according to the according to the following diagram Figure 3:

This is based on the best practices found to per-form each activity. These practices are from com-panies that have made successful partnerships. They are also used for other failures to understand what happened and how to avoid incurring them again.

A common mistake that companies make is to skip from less experienced stages to the point de!nition of opportunity. This error is so common, along with surface strategies that it creates prob-lems that cause disability and undermine the foun-dation upon which the alliance rests.

Clusters

craft level 1

Clusters

active

level 1

Clusters

dynamic level 1

and advanced

clusters

Clusters

craft level 3

Clusters

craft level 2

Clusters

active

level 2

dynamic

clusters

Advanced

Cluster

level 2

Advanced

Cluster

level 2

Commercial

transactions

between

associated

Shared

information

networks

(electronic

invoice)

Online

Services

(marketpla-

ces)

Common

platform

anchored by

the

association

of cluster

Commercial

transactions

between

non-

associated

Collabora-

tive

marketing

Advertising

collabora-

tive

Level of

commitment

Pe

rm

an

en

tLo

ng

-te

rm

Tra

nsa

ctio

na

l

Strategic Alliances

They are

not bound

Shared

information

Shared

resources

Shared

funds

Exchange

of capital

Share

capital

Total

property

PropertySource: Own

Figure 2. Commitment and ownership in clusters


Consensus best practicesThe period in which these results are based on the application of the methodology and came from a survey of 17 companies with experience in part-nerships that were bene!cial to them, all in the commercial sector. From the answers, we identi-!ed key activities that had experienced better re-sults and compared them with the companies that have obtained poorer results. What matters is the whole process and what we can learn from best practices. For comparison and focusing especially on di$erentiators that guide us to success we have established two groups:1. Companies experienced in strategic alliances

(17), and2. Companies interested in novice or strategic al-

liances (32)The !rst !ve have more alliances and produced

more than 20% of ROI to your company because of the alliances. The latter have had less than !ve alliances and produced less than 10% of the role of

their company due to alliances.In addition we intend to analyze the extent of

successful partnerships, considering only com-panies that have made many alliances and have earned high returns on investment and that were enthusiastic in partnership activities, compared to those who are less successful and are now less motivated. What is called for in the exercise was answering to measures of success using the cri-teria that, according to them, what they thought were relevant measures. This is important because there are many di$erent reasons to motivate you to make alliances.

From these !ndings we have isolated the best practices with the largest expansion in skills. The thirty-!ve best practices identi!ed have been in-corporated into our methodology for building partnerships. Each of the eight stages in the meth-odology is broken down into best practices, and partnership with each practice is a description of the !ve levels of skills. The complete set of the thir-ty-!ve best practices and associated skills levels is

Phase 1

Define

strategy and

objectives

Boosting

business

partner

Define

opportunities

Enable

potential

offers

Compre-

hensive

planning

Implementa-

tion

Activate

commercial

and leverage

points

Enable

impacts

aggregate

values

Identification

Evaluation

Negotiation

Implementation

Phase 2

Phase 3

Phase 4

1 76

5

4

3

2 8

Source: Own

Figure 3. Model of four phases and eight steps



part of the methodology that we show in the SME sector entrepreneurs in Mexico. Here are some ex-amples to diagnose the use of best practices.

Step 1. De"ne strategy and objectivesCompanies experienced in forming alliances take time to determine what they are looking for:

why they cannot succeed themselves in certain skills and / or abilities, including why alliances can close the gaps better than home develop-ment or the acquisition or purchase.

by an alliance - and because every business partner cannot make this value e$ectively for themselves.

assets in the segments where there is a cause and the willingness to deliver those resources.

market and market forces such “drivers” and the role that partnerships can play in preparing to !nd and meet those market forces.

gap to reach the required levels, particularly

in partnerships formed with the purpose of reaching new markets. Determine how an al-liance can !ll some gaps by bringing union capabilities. Although you have to understand that most alliances fail because other impor-tant gaps were not !lled in.

Over time, market forces and the purposes for which a company can change, so that corporate strategy must be involved. Market forces generally depend on the particular industry we are talking, so that each plant has its own characteristics force diagram Figure 4.

The industry of information technology and communications (ICT), for example, can be characterized by capital intensive, high tech-nology, maturity, local base and product offer-ings and convenience services. In the eighties, the market forces in this industry were high growth, diversification and freedom in “regu-lations”; while in the nineties market forces have changed to vertical integration, broader market access and global presence. Now things are changing again to strategic adjustments, greater access to emerging markets and com-plementary capabilities.

Buyer power Threat of substitutes

Barriers to entrySupplier power

Porter’s Five forces

Competitiveness in the industry

Source: Porter (2008)

Figure 4. Diagram industry forces

A typical alliance could bring several small companies that o$er their own services in order to achieve greater market access and greater stra-tegic "exibility: You could develop an integrated package of communications services and prod-ucts that allow any employee of the allied com-panies, have an intimate collaboration, still based in di$erent geographical locations. This could be achieved through an Intranet. This service is very economical, because through the Internet you can create these business networks that en-able organizations to unite, share !les and docu-ments, have centers of knowledge and access to common project monitoring.

Thus, a company can contribute to network connectivity, another to make available its exper-tise in installation and management of network data, and third, o$er their expertise in software and remote messaging programs. These inte-grated packages through an Intranet allow tar-geted marketing and information products and services, and learn about the resources used and integrated companies. Some members of such al-liances can expect sales of intranets bring millions of dollars in pro!ts.

Everything we do must make an emphasis on just how important it is for rigorous evaluation to de!ne the strategy and objectives. The most e$ective part-nerships have learned that a super!cial assessment puts the partnership in a precarious position from the start. For this we will use the following six points to guide us in the establishment of the best com-mon strategy to strengthen the alliance:

A value propositionIt is the basis of the strategy and objectives. How can we make an alliance if there is no real di$erentiator

resulting from the alliance? What is the !nal product to be allies? A value proposition is what gives mean-ing to the alliance and establishing new product-sand services in emerging markets without the alli-ance would not be possible to exist. Also it must be products and services to justify their participation in the market is having an economic value.

Objectives sustainableGo beyond the payback. The objectives should un-derpin the strategy beyond just payback. We need to design clear objectives for the e$ect of the al-liance that meet elements that help establish this alliance so that you stay on time. Being sustainable means that the business alliances permanently fructify on time and not only represent a business opportunity for a year or two.

Value Chain

It is necessary to provide distinctive value chains that break up with convention and that for their creativity and innovation features provide a com-petitive advantage to the alliance. In order to es-tablish a sustainable value chain one needs to !nd alliance activities and processes that provide per-formance levels exceeding its jurisdiction. Therein lays the competitive e$ect of the alliance.

Niche MarketThe strategy of the alliance must be braced to create new markets or increasing sales in existing markets so it is necessary to de!ne very well what products and services as well as operations and markets that are created by the e$ect of alliance.

Create a process or a systemThe alliance has to go beyond products or services sale, as these can be copied. In the goods or servic-es industry within the value chain what makes so-ciety truly distinctive? What process or system do you have to create to be, highly competitive so you do not become an importer of copies. The quality process, the time to bring products into the mar-

ket, e#ciency and accuracy to provide products and services according to "uctuations in demand, that who will be able to copy? Or for how long?

Continuity in the directionThis is another very important aspect for strategic alliance. They have to create mechanisms to moni-tor and control the process due to the e$ect of alliance. Without the continuity of leadership it is di#cult for companies to develop unique skills and create a good perception of the market.

Step 2. Promote business to business part-nersFinding business partners, their identi!cation and relationship is one of the most complex aspects in building alliances. Successful entrepreneurs say the most important “best practice” in this process is to take a proactive stance rather than a reac-tive. This is di#cult as managers, but it is essential if a company wants to avoid routinely reaction to events and not in advance, since these only involve spending time and resources to respond reactively to competitive strengthening initiatives of others.

An active approach facilitates a company to be exhibited in appropriate forums for meeting rel-evant partners. An active company analyzes the strengths of prospected partners and di$erent options selected partners could o$er. An explicit analysis that is appropriate is one that should go beyond the capabilities of potential partners and the position of its industry and its markets to in-clude an appropriate culture. The cultural !t is key to a good !t between business partners. One fac-tor that should be examined closely is the stories of alliances made by potential partners.

As part of the searching process, managers should articulate the forces driving the partnership and anticipate the bene!ts for both your company and the potential partner. Most alliance partners have a complementary economic force, which does not mean that these forces are the same. Tak-ing into account the needs of each partner helps

build that con!dence and begin to strengthen the relationship and linkages, and o$ers each partner, on solid foundations. With the advance of each reaction of each partner we can begin to be able to envision situations of every potential partner, which helps us to keep open lines of communica-tion when di#culties arise.

For a good selection of business partners and to make a successful alliance is necessary to have a good alternatives evaluation process.

Step 3. Activate commercial coincidence and leverage

By activating business matches and leverage, potential partners can determine what they want to o$er and what they stand to gain. In this case, the process must follow the following steps:1. Activate the capabilities that have the potential

to be partners in the alliance di$erentiators.2. De!ne the deliverables, who is responsible,

and how to divide the property of the partner-ship among the partners, if this division is go-ing to be fair or unfair and reasonable.

3. Understanding the potential bene!ts of the products and services generated by the alli-ance on existing products and services, it is necessary to examine issues from the consum-er perspective.

4. Quantify value creation and its sources. A re-markable number of alliances are not success-ful negotiations because the parties fail to be su#ciently explicit in determining the value creation generated by the partnership itself, beyond the fact that their members have to be clear about their own worth. De!ciencies can sabotage the alliance agreements.

5. Recognition of any disadvantage can accumulate in a dark area of the alliance, so that surprises can be avoided by seeing in a professional manner and not falling into an emotional terrain.

In regard to commercial matches, each partner determines what capabilities are critical to the al-liance and then activates its own capabilities. An-


other approach is to rearrange the market forces to the alliance and to identify the relative contribu-tions that each partner can do.

Step 4. De"ne opportunitiesWhen searching for markets outside their tradition-al skills, it is remarkable how most companies fall into super!cial analysis. This research found that it is very common for feasibility studies of alliances studies seem more faith that a proper analysis. The most common way to deal with this study is that companies measure the reactions of competitors, customers and shareholders. As more companies go depending on the increase in partnerships for growth and revenue generation role, this concern will become increasingly important. From a pro-cess perspective, quantifying the size of the oppor-tunity is essential for a successful negotiation and implementation of an alliance. Many negotiations “taste” the amount of time and opportunity before the !rst change was disappointed by the changes that may arise along the way, instead of maintain-ing permanently lubricated negotiation knowing that it is inevitable to be using the eraser to remove stains, knowing instead that will be okay. Some ne-gotiations fall in determining that the opportunity is very limited and do not try, because they do not have value.

The steps required to activate opportunities vary by the type of industry and the market rate. To overcome these obstacles suggest creating nu-merical scenarios to simulate the behavior of the proposed alliance, changing business conditions and dynamic factors critical for success.

Step 5. Enable impacts that add valueActivation must be external, covering not only the obvious concerns of the parties, investors, employ-ees, suppliers, customers, but also unions and of-!cial regulations. Partnerships have not received a real and procurement regulations and other contracts, but this may soon change. Activation of impacts can also serve to consider how to alleviate

the concerns identi!ed.The way investors perceive the alliances is dif-

!cult to calculate. On any day when an alliance is announced, part of the price will be in"uenced by many other factors as well, along economic news and market movements including analyst recom-mendations on investment: for example, when joined Pixel Arts Walt Disney raised its price by 49%, resulting in value creation for both of $ 438 million. It is the same with British Petroleum and Mobile, which created a combined market value of $ 5.8 billion dollars (Shapiro, 1997).

The joint ventures were met with less enthusi-asm from investors other alliances, so that reactions vary dramatically from one industry to another.

Step 6. Enable potential o#ersHere are !ve of the best practices that companies undertake to enable potential deals:1. Clearly de!ne the contribution of key skills

and resources needed to make the alliance successful.

2. Protect key resources “core” of the company and inform the prospective member untouchable core of what these are and because these protecting.

3. Study all the prospective partners to do the alliance mainly related to its history and culture in business alliances.

4. Knowing what they want all prospects in relation to strategic and non-strategic bene!ts.

5. Making judgments on the nature and depth of the resources provided and the commitment that potential partners can bring to the alliance.

A structure deals that many successful compa-nies have assessed their use are core capabilities that are critical and non-critical business today and if the company has an advantage or disadvantage. After analysis, the company may decide the meth-od to correct problems: buy outsourcing, internal



development or ally. The same method is useful when a company is confronted with a new busi-ness opportunity to !ll the gaps by skill shortages. After analysis, managers must be very clear which the best option is because they must have a realis-tic understanding of the position of his company.

The company is now ready to negotiate e$ec-tively, knowing that it is a complex process. It is advisable to follow in two-way bargaining agree-ments, especially when the alliance seeks equity.

A path, key executives approach a prospective partner, in a friendly and non-threatening way, de!ning strategic proposals for the alliance and goals. Delimiting the most recommended forms of cooperation and broadly describe the resources that will be available to the alliance and the contri-butions of each of the parties. From the initial con-tact, managers must be able to determine the ac-ceptance level of commitment and depth prospect partner who is willing to give the arrangement.

An easy way to stumble at this point is to over-estimate the commitment of the other party, which may lead to misleading objectives and goals. The correct understanding of the commitment is par-ticularly important when the alliance takes place as it is necessary to execute the actions that confer its partnership role to each of the partners constantly. The monitoring and tracking of the parties is the cornerstone to run the alliance.

Once it has reached a comfort zone established between the directors of the partnership, the part-ners must prepare a memorandum of understand-ing that provides a structure for the second route, which involves detailed discussions of operational planning teams and functional alliance. Each of the two teams on the road need to be clear on the strategy and goals of the alliance because the two teams are planning an alliance to detail and esti-mate the changes that will occur in organizations to succeed.

Discussions should cover the following points:

partners and the contribution levels of each,

infrastructure, increase exposure, investing in technology, etc.),

intercommunication.

regard to any arrangement to make alliance with another company that is involved, if previously negotiated restrictions a$ecting the alliance under discussion.

There are many elements that we must verify each alliance agreements. We propose the follow-ing checklist:1. Clear goals and commitment levels de!ned.2. An organizational structure that !ts the

strategy of alliance; incentives that re"ect the risks taken by employees of the alliance.

3. Investment incentives and compensation for the alliance according to performance indicators in such alliance, benchmarking clearly de!ned in the alliance will be measured continuously.

4. Finance, legal and tax considerations.5. Penalties detailed arbitration clauses and

recession speci!cation levels and degree of support that should be necessary to dissolve the alliance.

6. Means for renewed commitment to the alliance.

7. Formulas for transferring estimates, earnings, and equity clearly de!ned and linked to resources and capabilities contribution.

8. An external coalition of directors that re"ects the contribution of each partner resources, remembering that equity formulas often do not re"ect the ownership or in"uence of each alliance partner.

9. A formula de!nition capabilities and contribution of assets (maintaining a receptacle contributions and bene!ts).

10. The ability to accommodate changes and / or "exibility.


Step 7. Comprehensive PlanningThe comprehensive planning for the alliance aims to produce the capabilities of the partners work together, this is a critical area because the alliance planning is an area where there is Mexico “know how”, and that’s where companies could improve. Companies with experience in comprehensive planning emphasize partnerships, provided the best results in gains and accelerate the operation of alliance.

The best practices listed in the Comprehensive Plan are:1. Structuring the alliance to meet the needs of

allied and independent needs of each partner.2. Assign a compensation plan according to the

alliance, which are structured reinvestment, payment incentives and commissions, accord-ing to the results obtained together.

3. Chaining the strategic objectives budgets and resources to adopt a regular review process, and determining the authority and responsi-bility of leaders and managers.

4. Clearly de!ne rescission procedures, penalties, and obligations and exit clauses.

Step 8. ImplementationManagers respond, “I always take a Deployment Plan !rst line and a more or less good strategy over an implementation plan and a second-line strategy class. Why? Because this type of experienced man-agers know how to adjust and learn to anticipate what lies ahead. Without implementation capacity, however, we respond with another question: “what is the use of the !rst line strategy if we cannot im-plement it?”

This philosophy applies perfectly to the imple-mentation of a partnership process. A partnership must have a structure based on the challenges to be faced. You need to be nurtured and fed back. This means that there must be measurement tools and time tables that help managers to locate both resolve the di#culties and opportunities to take advantage of them.

The main “best practices” for implementing partnerships that have been used by successful companies are these:1. Creating a simple and "exible organizational

structure.2. Basing alliance structure and processes

in the strategy of the alliance and the alliance’s requirements, rather than the individual partners’ strategies and their own requirements.

3. Monitor competitors’ reactions to the alliance, created throughout the progress of the alliance.

4. Prepare detailed time tables and measurement tools, and provide for periodic review.

5. Open communication to provide "exibility in solving problems instead of rolling our eyes to the original contract of partnership as the guide.

Managers and entrepreneurs of SMEs in Mexico put particular emphasis on three additional best practices:

6. Early de!nition of the roles of the administration of the alliance.

7. Provide the necessary authority to the directors to complete the goals.

8. Generate lessons learned exercises at any time of the alliance on a real time basis.

CONCLUSIONSThe importance of a conceptual framework about the advantages of business group lies in !nd-ing ways to help SMEs increase their productivity through the sharing of knowledge and skills. What in isolation results in a higher unit cost, formalizing partnership agreements (from simple supply con-tract in the value chain of an industry, to the forma-tion of a cluster advanced) provide an opportunity to reduce it by taking advantage of economies of scale, but also to move further down the ability to access other economies such as the scope or tech-nological improvements.



As computer technologies have transformed the value chain, leading the world into the virtual reality has opened many opportunities for each company to focus on what really produces value. While it is true that computer technology moves physical labor, provides opportunities for better paying jobs when there is proper training it is the transit of labor that “pushes” toward labor that “thinks”.

When in the new economy companies decide to reduce certain physical tasks and execute them thought third parties, or otherwise link them to the value chain, opening the possibility to other external providers that cater tasks internally or ser-vices more costly for business owners. This is the case of some restaurants that recognize that their “core business” is not the receiving and delivery of customer vehicles, and better outsourcing refers to valet parking services. Bad for the restaurant worker receiving and delivering vehicles, good for business valet parking.

The eight-step plan that is presented here along with the best practices companies can assist SMEs in Mexico who have no experience in this partnership process, to achieve superior gains similar to those experienced in business alliances. Thus through a disciplined approach, a company in Mexico SMEs can !ll the gaps or “gaps” of skills and critical skills necessary. This may open the possibility of raising the productivity and competitiveness of the sec-tor, taking into account the realities and constraints on resources that are, with the main advantage of reaching your goals achieving competitiveness in short-term cycles thanks to collaborative work.

By leveraging existing resources and avoiding incremental investments, alliances enable a com-pany to create di$erential capabilities in more ar-eas that could be developed with the resources that are available.

The results can be seen quickly as an outlet to develop markets in Mexico and Latin America. That’s why we have called it a growth model for SME sector in Mexico.

We have, however, made a signi!cant e$ort to collect factual arguments and evidence, with the intention of persuading intelligent reasoning in !nding a real state. Thus, it was emphasized throughout the work in the emphasis of collabora-tive work, highlighting external recognition capa-bilities to complement internal strengths.

The impact of all that happens in SMEs af-fects the job-creating potential of our economy and affects the way companies interact to give workers the country competitiveness. This study seemed perhaps to emphasize the role of the company and little work. Both are two sides of the same coin, because either hardly thrives without complement. Labor productivity in the largely determines the progress of companies. Companies, for lack of vision or resources, do not invest in technology and innovation, or choose to walk alone in the economic environment, de-termine the status of their workers productive, and thus their earnings.

The problem is not simple. It is, however, in the public interest to allocate resources for under-standing these vicious circles that keep develop-ment organizations in weak states. And although we recognized during the investigation that the problem of competitiveness is holistic, we pro-posed, in the aspect of collaborative work, which alliances can be a legitimate, and not necessarily “expensive”, which could enhance the competi-tiveness of SMEs.

Much of the eight-step model developed here is essentially put a “cornerstone” for the imple-mentation of a standard mechanism that helps the replication of best practices in alliances.

It is hoped that this model is dynamic and evolving. Each stage deserves a more accurate and detailed description, provided we rede!ne the processes and more fully known implementation structure of each of these stages is given. More questions are sure to be raised than the answers o$ered here, and as such we hope we can meet our expectations.


REFERENCESAsian Development Bank, ADB, (2001). “Best Prac-tice in Developing Industry Clusters and Business Networks, Asian Development Bank SME Develop-ment TA, Policy Paper No. 8. Jakarta: Kantor Menteri Negara Urusan Koperasidan UKM.Evans, Philip B y T. S. Wurster, (1997). “Estrategia y la Nueva Economía de la Información,” en La Administración de la Nueva Economía, Oxford University Press editores.Porter, Michael E. (2008) “On Competition”. Har-vard Business School Press.Sandee, H., (1994). “The Impact of Technologi-cal Change on Interfirm Linkages. A Case Study of Clustered Rural Small-Scale Roof Tile Enter-prises in Central Java,” in Flexible Specializa-tion. The Dynamics of Small-Scale Industries in the South. Ed. P.C. Pedersen, A. Sverrison, and M.P. van Dijk. London: Intermediate Technol-

ogy Publications, pp. 21-40.Schiller, J. y B. Martin-Schiller, (1997). “Market, Culture, and State in the Emergence of Indone-sian Export Furniture lndustry,” Journal of Asian Business, 13(1), pp. 33-35.Shapiro, Robert B., (1997). “Crecimiento con Sustentabilidad Global”, en La Administración de la Nueva Economía. Oxford University Press editores.Smyth, l.A. (1990). “Collective E#ciency and Selective Bene!ts: The Growth of the Rallan ln-dustry of Tegalwangi,” Working Paper Series, Bi, December, Bandung: AKATIGA.Tambunan, Tulus, (2005). “Promoting Small and Medium Enterprises with a Clustering Ap-proach: A Policy Experience from Indonesia,” Journal of Small Business Management, 43(2), pp. 138-154.




Transforming Mindsets creating Innovative Business Models In emerging markets

Abstract

There is a need for understanding the emerging economies from a di$erent perspective as compared to developed economies. The signi!cant growth in emerging markets has changed the paradigm for investment, creating a new economic develop-ment reality with which many companies have yet to address. Achieving success in emerging markets require dynamic business models. The purpose of

this research paper is to explore the magnitude of opportunities within emerging markets. In doing so, the focus will be on companies that have trans-formed their business models in order to capture opportunities within emerging markets

Keywords: emerging markets, business models, emerging economies, innovation

Mark T. McCord 1,Dr Amit Kapoor 2, Sandeep Goyal 3, Dr M P Jaiswal 4

1Innovation and Economic Specialist, [email protected]

2Honorary Chairman of Institute for Competitiveness, India & Professor of Strategy and Industrial Economics at MDI, Gurgaon, India, [email protected] / [email protected]

3Doctoral Research Scholar at MDI, Gurgaon, India and Consulting Manager (Global IT Services Company), [email protected]

4. Professor of Information Management at MDI, Gurgaon, India, [email protected]



INTRODUCTIONIncreasingly, emerging markets, formerly known as developing economies, are becoming important platforms to drive business growth. To compare this, one has only to look at the data surrounding the substantial opportunities a$orded by the world’s economies in transition. In 1990, emerging markets represented a miniscule amount of the overall glob-al GDP, registering a paltry 21%, of which 13% came from the BRIC (Brazil, Russia, India, and China). By 2008, emerging markets account for more than 34% of global GDP, as BRIC economies began to reach their strides and a growing number of other tran-sitioning economies emerged1. This total grew to 38% in 20102. Even more striking is the trend since 1999 of emerging market growth in terms of GDP. As re"ected in Figure 1, the GDP growth in emerg-ing markets has outpaced that in advanced markets even in periods of global economic downturn, such as 2001 and 2008–093.

This growth has not only been felt in terms of GDP, but also across industry segments such as

2

Introduction

Increasingly, emerging markets, formerly known as developing economies, are becoming important

platforms to drive business growth. To compare this, one has only to look at the data surrounding the

substantial opportunities afforded by the world’s economies in transition. In 1990, emerging markets

represented a miniscule amount of the overall global GDP, registering a paltry 21%, of which 13% came

from the BRIC (Brazil, Russia, India, and China). By 2008, emerging markets account for more than

34% of global GDP, as BRIC economies began to reach their strides and a growing number of other

transitioning economies emerged1. This total grew to 38% in 2010

2. Even more striking is the trend

since 1999 of emerging market growth in terms of GDP. As reflected in Figure 1, the GDP growth in

emerging markets has outpaced that in advanced markets even in periods of global economic downturn,

such as 2001 and 2008–093.

Source: Financial Times (2011)

This growth has not only been felt in terms of GDP, but also across industry segments such as mobile

telephone subscriptions and steel consumption. According to A.T. Kearny and the United Nations

Development Program, emerging markets controlled nearly 82% of the world market in mobile

telephone subscriptions and 75% of steel consumption in 2010.Motor vehicles sales in emerging markets

for the same period topped 52% of the global total while accounting for 46% of the world’s retail sales4.

-4

-2

0

2

4

6

8

10

'86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Figure 1: Emerging Country and Developed Country GDP Growth (with IMF

Forecasts)

Developed Countries Emerging Countries Trend Trend

mobile telephone subscriptions and steel con-sumption. According to A.T. Kearny and the United Nations Development Program, emerging markets controlled nearly 82% of the world market in mobile telephone subscriptions and 75% of steel consump-tion in 2010.Motor vehicles sales in emerging mar-kets for the same period topped 52% of the global total while accounting for 46% of the world’s retail sales4. This highlights a proportionate increase in disposable income attributed largely to the emer-gence of a middle class.

This growth in both macro and micro-economic areas has made emerging markets desirable for both domestic and foreign investment. In fact, in 2010 almost a quarter of Fortune Global 500 !rms came from emerging markets, up from only 4% in 19955. While growth trends in a number emerging markets have slowed, there seems to be little reason to believe they will not continue to provide substan-tial opportunities for investment.

Figure 1: Emerging Country and Developed Country GDP Growth (with IMF Forecasts)

Source: Financial Times (2011)

1“The End of Emerging Markets?,” Everest Capital, accessed May 3, 2012, http://www.evcapan.com/documents/TheEndofEmergingMarkets.pdf.2Ibid.3G. Davies, ”Emerging vs. developing countries GDP growth rates 1986-2015,” Financial Times, (2011).4“Power shift,” The Economist Online, last modi!ed Aug 4 2011, http://www.economist.com/blogs/dailychart/2011/08/emerging-vs-developed-economies5 “The End of Emerging Markets?,” Everest Capital, accessed May 3, 2012, http://www.evcapan.com/documents/TheEndofEmergingMarkets.pdf.


The signi!cant growth in emerging markets has changed the paradigm for investment, creating a new economic development reality with which many companies have yet to address. Achieving success in emerging markets is still fraught with challenges, and it is apparent that new business models must be explored in order to take full ad-vantage of their increased market potential. Some of these business model changes have been driven by increased innovation within the markets them-selves, while others have been driven by outside factors, organizational and otherwise, that require companies to transform their mindset and organi-zational structures in order to adapt.

This paper will explore the magnitude of op-portunities within emerging markets, as well as the changing business models that are emerging out of and because of them. In doing so, the focus will be companies that have transformed their business models in order to capture opportunities within emerging markets.

EMERGING FROM THE MIST: THE RISE OF EMERGING MARKETSThe noted authorities in emerging markets invest-ment such as Everest Capital have acknowledged the “Emerging Markets” term all but obsolete, as these markets by 2015 will likely account for 50% of the world’s total GDP6. The primary di$erence in developed and emerging markets is the trends in growth. According to the industry experts, emerg-ing markets are likely to continue growing while de-veloped economies are likely continue to contract with time. If it does in fact continue, this will con-tinue to blur the line between emerging markets and developed economies. Figure 2 highlights the growth trend in emerging markets, both in terms of the macro-economy as well as within speci!c indus-try segments:

The takeaway from these indicators is that the potential for emerging markets will continue to

4

The takeaway from these indicators is that the potential for emerging markets will continue to be vast,

but there is also a danger of overheating, which could undermine both near and long-term projections7.

In 2008, the combined economy of the six largest emerging markets was larger than those of all the G7

economies combined, when excluding the United States8. However, overheating

9 could undercut this

progress within emerging markets, as the supercharged economies especially of BRIC could begin to

level off if specific controls are not put in place to manage the rampant growth. In 2011, the

International Monetary Fund’s deputy managing director, John Lipsky, noted that “For emerging

economies, growing at 6.5-7 percent, their margins of excess capacity have been largely used up, and as

a result we are starting to see incipient signs of overheating10.” While enjoying exponential growth,

many emerging economies, including BRIC, struggle to contain inflation and control heavy inflows

from investment. This overheating has manifested itself in a number of ways, not the least of which has

been in higher food prices, which have an acute and predominantly negative effect on emerging

economies.

Figure 2: Growth Trends in Emerging Markets

6Ibid



5

The ramifications of overheating can be significant, resulting in currencies that become too strong thus

choking off exports or a “slam-on-the-breaks” scenario that could result in an economic meltdown. In

some ways, it seems emerging markets could become the victims of their own success, with growth

fueling the very overheating that could undermine growth.

The Figure 3 reflects the “Sizzling Seven” countries because of the upward trajectory of their growth

patterns, economies such as Argentina, Brazil, Hong Kong, India, Indonesia, Turkey, and Vietnam at the

same time provide quality opportunities and unmitigated challenges11

. Even so, while some people do

enjoy the benefits of an economic bonanza, others, such as retirees, low-skilled workers, and less-

experienced youth suffer from rising prices and increased competition for employment. In smaller

economies, growth rates have still been for the most part significant, but from a business model

perspective they offer somewhat different challenges since they do not offer massive access to potential

customers.

0 20 40 60 80 100

Hungary

Taiwan

Mexico

South …

Venezuela

Saudi …

Colombia

Chile

Peru

Thailand

Vietnam

Indonesia

Hong Kong

Argentina

Figure 3: The Sizzling Seven

Emerging-market overheating index*, latest maximum risk=100

Sources: The Economist; national statistics; IMF

*Based on inflation, GDP growth, unemployment, credit growth, real interest rates and change in current-account balance

be vast, but there is also a danger of overheating, which could undermine both near and long-term projections7. In 2008, the combined economy of the six largest emerging markets was larger than those of all the G7 economies combined, when ex-cluding the United States8. However, overheating9

could undercut this progress within emerging mar-kets, as the supercharged economies especially of BRIC could begin to level o$ if speci!c controls are not put in place to manage the rampant growth. In 2011, the International Monetary Fund’s deputy managing director, John Lipsky, noted that “For

Figure 3: The Sizzling Seven

Emerging-market overheating index*, latest maximum risk=100

7 L. Wroughton, and C. Freeland, “IMF: Signs of overheating in emerging markets,” last modi!ed Mar 7 2011, http://www.reuters.com/article/2011/03/08/us-imf-lipsky-oil-idUSTRE7265I820110308.8 The End of Emerging Markets?,” Everest Capital, accessed May 3, 2012, http://www.evcapan.com/documents/TheEndofEmergingMarkets.pdf9 The term “overheating” refers to an economy in which productive capacity is growing faster than aggregate demand. This may cause demand pull in"ation as suppliers try to capitalize on excess demand that cannot be satis!ed by current production. Often, growth at unsustainable rates increases consumer prices and ultimately undermines demand if proper macro-economic policies are not put in place.


emerging economies, growing at 6.5-7 percent, their margins of excess capacity have been large-ly used up, and as a result we are starting to see incipient signs of overheating10.” While enjoying exponential growth, many emerging economies, including BRIC, struggle to contain in"ation and control heavy in"ows from investment. This over-heating has manifested itself in a number of ways, not the least of which has been in higher food pric-es, which have an acute and predominantly nega-tive e$ect on emerging economies.

The rami!cations of overheating can be sig-ni!cant, resulting in currencies that become too strong thus choking o$ exports or a “slam-on-the-breaks” scenario that could result in an economic meltdown. In some ways, it seems emerging mar-kets could become the victims of their own suc-cess, with growth fueling the very overheating that could undermine growth.

The Figure 3 reflects the “Sizzling Seven” countries because of the upward trajectory of their growth patterns, economies such as Ar-gentina, Brazil, Hong Kong, India, Indonesia, Turkey, and Vietnam at the same time provide quality opportunities and unmitigated chal-lenges11. Even so, while some people do enjoy the benefits of an economic bonanza, others, such as retirees, low-skilled workers, and less-experienced youth suffer from rising prices and increased competition for employment. In smaller economies, growth rates have still been for the most part significant, but from a busi-ness model perspective they offer somewhat different challenges since they do not offer massive access to potential customers.

This being said, emerging markets will likely, for the foreseeable future, continue to provide

substantial opportunities for international and local investors alike, but accessing these oppor-tunities will depend on the design and integra-tion of a dynamic business model.

INNOVATIVE BUSINESS MODELS IN EMERGING MARKETSWhile emerging markets can offer access to cus-tomers, they can also stress business models that are not designed to flexibly navigate the inherent challenges presented by these econo-mies. With this in mind, a growing number of companies are approaching emerging markets as entrepreneurs, focusing on market niches and “customer-centric” business models that carve out space in the marketplace. Business mod-els in emerging markets should be customized, tailored if you will, to specific customer groups, not the least of which is the economically disad-vantaged12. A standard approach for all markets has proven unsustainable, as each economy is having a different context regarding macro and micro economic indicators as well as regarding size and scope.

In lower end markets, new entrants and small enterprises will likely find it easier to adopt suc-cess-oriented business models than will large corporations, which have more hurdles over which to jump in order to create market-based solutions for lower-end consumers. Corpora-tions will likely do better, however, in more siz-able markets where disposable incomes and customer mass are larger. This is especially true in mega-markets such as BRIC, where local com-

10 L. Wroughton, and C. Freeland, “IMF: Signs of overheating in emerging markets,” last modi!ed Mar 7 2011, http://www.reuters.com/article/2011/03/08/us-imf-lipsky-oil-idUSTRE7265I820110308.11 “Some like it hot,” The Economist, last modi!ed July 2 2011, http://store.eiu.com/article.aspx?productid=220000222&articleid=138256198.12 M.J. Eyring, M.W. Johnson and H.Nair, “New Business Models in Emerging Markets,” in Thriving in Emerging Markets (Boston, MA: Harvard Business Review Press, 2011).



petition will likely be severe. Timing is important, but volume is also a key to success, making these markets potentially lucrative if the proper busi-ness model is put in place13.

It is clear, however, that innovative business models in emerging markets are not just a cor-porate phenomenon. As a matter of fact, in the author’s experience some corporations have met numerous challenges in trying to gain a foothold due to their limited knowledge concerning the economy, culture, and market as a whole. Domes-tic enterprises are rapidly carving out a niche by utilizing innovative business models that can al-low them required leverage in the marketplace. In some ways, changing the business model of a large corporation is akin to “turning an aircraft car-rier” in that it takes a great deal of pre-planning and requires a substantial amount of time to oc-cur. Domestic enterprises, on the other hand, al-ready have a strong understanding of the market and thus transforming their business models is more like “turning a speed boat” in that they can capture market share rather quickly and e#ciently. It is therefore necessary for international !rms, re-gardless of size, to consider utilizing some of the same tactics in developing their business models, speci!cally gaining a sound understanding of cus-tomer needs and wants, leveraging technology, and utilizing integrated production and distribu-tion processes to name a few14.

The companies entering the emerging markets should be focused on creating market-based solu-tions that focus on what emerging markets cus-tomers, especially those with lower incomes, need instead of what they want15. Even economically disadvantaged customers have speci!c needs that

can be addressed through an innovative and "ex-ible business model. Mobile phones are a prime example, as access to communications cuts across socio-economic barriers.

In analyzing business models, this paper will explore nine that have served as viable options for accessing economically disadvantaged consum-ers, as well as !ve more that have been used exten-sively to reach consumers with higher disposable incomes. In addition, the paper will highlight case studies of speci!c companies within emerging markets that will reinforce the concepts outlined within these models, as well as explore impetus for others that are emerging at present.

Whether reaching lower-income customers or those with higher capacity to access goods and ser-vices, several business model trends have prolifer-ated in emerging markets. Chesbrough16 discusses many such models at length in his seminal work on the topic, Open Business Models. There are literally dozens of models being used around the world, but many can be grouped into speci!c thematic areas. The key among them are the following:

Market-basedThis model is designed to allow companies to de-termine the end-state they desire for their involve-ment in emerging markets. For instance, does a company want to capture a larger share of the mar-ket, increase the market size, or simply generate additional income through added-value processes versus volume? This model can allow for signi!cant customization as the company begins with the end in mind, namely what it wants to accomplish and how it can achieve its goals. This strategy will likely drive many of the others listed here.

13 T. Hout and P. Ghemawat, “China vs. the World,” in Thriving in Emerging Markets (Boston, MA: Harvard Business Review Press, 2011).14 A.K. Bhattacharya and D.C. Michael, “How Local Companies Keep Multi-Nationals at Bay,” in Thriving in Emerging Markets (Boston, MA: Har-vard Business Review Press, 2011).15 M.J. Eyring, M.W. Johnson and H.Nair, “New Business Models in Emerging Markets,” in Thriving in Emerging Markets (Boston, MA: Harvard Business Review Press, 2011).16 H. Chesbrough, Open Business Models: The New Imperative for Creating and Pro!ting from Technology (Boston, MA: Harvard Business Review Press, 2006).


Volume/Price-Based This business model o$ers facilities and services to potential customers at prices they can a$ord, yet the volume of business makes the scenario vi-able for the company. In other words, the company may sell its products and services for less than its normal rate in other markets, but seek to sell more units. While this model has been demonstrated as viable in many emerging markets, it is di#cult to sustain as competition becomes more intense. In-novative new approaches will be needed to help determine whether the company can continue to do volume business. Nokia’s presence in India is an example of a company that created volume and sustained it even in the face of mounting com-petition by transforming its business model. This model is most widely used to reach economically disadvantaged customers but it can also be e$ec-tive reaching emerging middle class consumers who are price conscious but still desire products and services that are beyond necessities.

Tier-based This model is designed to provide ranges of prod-ucts and services to customers based on their will-ingness and ability to pay. Economically disadvan-taged consumers, for instance, may choose basic products or packages of services, while middle income and higher income consumers may select a higher “tier” of products/services. This model has been widely used by mobile telephone companies, which o$er basic telephones and packages as well as higher end products and services for those who desire them. Typically, these tiers are linked with !-nancing packages that make them more palatable. Nokia developed such a system in India and it re-sulted in an increase in market share17.

Collaboration-based This model is designed to allow companies to “pig-gyback” products and services through existing supply chains, thus enabling economically disad-vantaged customers to gain access to products such as solar water heaters without large up-front investment. This is sometimes called the “pull” model as it allows companies to pull resources and mass from its already existing operations. An example of this strategy is the proliferation of MVNO (Mobile Virtual Network Operators), which cellular telephone services to the customers but do not own local infrastructure. By working with and through local providers who own the infrastruc-ture, the companies utilizing MVNO can provide services at far less up-front cost.

Innovation-basedThis model is typically used by companies, which have the ability to integrate incremental improve-ments to products and services that add relatively small cost but generate higher value. This may be as simple as a color or design change or as com-plex as a change in software or components. In the case of services, it may simply be a di$erent way of approaching customer service or market-ing. The innovation-based model can be rooted in disruptive processes, as de!ned later on in this article. Chesbrough18 discusses a concept called “open business models,” which is a mechanism through which !rms utilize both internal and ex-ternal ideas, as well as internal and external paths to the market, to advance their technology and innovation. This not only created greater under-standing of the market, but can allow !rms to le-verage broad-based resources to help endeavor to facilitate innovative approaches.

17 “Nokia’s Business Strategy in India,” last modi!ed Jan 8 2010, http://www.casestudyinc.com/nokia-strategy-india. 18 H. Chesbrough, Open Business Models: The New Imperative for Creating and Pro!ting from Technology (Boston, MA: Harvard Business Review Press, 2006).



Integrated channelsThis model is designed to allow companies to in-volve more people in production and distribution processes, thereby providing space for local com-panies but retaining quality control.

Hub-N-SpokeThis model enables companies to build a network having a strategic center (hub) connected to a net-work of smaller units (spokes) in surrounding areas. This enables ease of accessibility and availability in multiple geographies as well as "exibility of ex-perimentation and decentralized decision-making as per local requirements. This model is quite com-mon among healthcare service providers operating at the base of the pyramid in emerging markets. The business network of Aravind Eyecare19 consists of eye hospitals (hubs) supported by rural vision care centers and community camps (spokes). They are inter-connected by mobile outreach vans with internet and other communications technologies.

Crowdsourcing/CrowdfundingThis model enables companies to shift their sourc-ing (anything from ideas, raw materials and !-nancing) from a few large suppliers to a network of multiple micro-suppliers or individuals. This brings about a signi!cant shift in the value chain by changing the dynamics of input level engage-ment (at source). Crowdfunding and Cooperative models are variants of this model. RangDe20 (India), a micro-!nance organization, launched a peer-to-peer micro lending platform, which acted as a bridge between individual investors (crowd fund-ing) and micro-entrepreneurs lying at base of the

economic pyramid. This dynamic shift in the busi-ness model enabled the company to reduce the cost of micro-credit for the borrower from a range of 13.5% - 20% to a range of 6% - 10% ("at rate).

Price Minus Also known as the challenge cost model, this ap-proach enables companies to establish a target price !rst, depending upon the paying capacity of target consumers and then work backwards across the value chain to achieve the required challenge cost. This requires ongoing cost innovation mea-sures without compromising the quality aspects of the products/services. Aravind eyecare’s assem-bly line system for cataract surgery was set up to ensure low cost and high performance-price ratio by improving the productivity of critical resources (surgeons) by ten times21.

As stated previously, companies entering emerging markets should take the lead from the strategy of startups by looking to ful!ll unmet needs instead of looking for additional outlets for their products and services22. In doing so, they can utilize innovation and entrepreneurship to deliver what consumers want but currently cannot ac-cess either because the products and services do not exist or because they cannot a$ord them. This mindset will lead to a business model that can al-low companies to compete on value and customer demand instead of on price. Even if the innovation is incremental, it is likely more e$ective and more pro!table for companies to focus on incremental innovation of products and services that are al-ready in demand than to create customer demand where none exists. In addition, it is easier to reach consumers that are already spending money.

19 For Aravind Eyecare details, refer to the company website at http://www.aravind.org/. 20 For RangDe details, refer to company website at http://www.rangde.org/.21 V. Kasturi Rangan and R.D. Thulasiraj, “Making Sight A$ordable – Innovations Case Narrative: The Aravind Eyecare System,” innovations 2, no. 4 (2007): 35-49.22 “Nokia’s Business Strategy in India,” last modi!ed Jan 8 2010, http://www.casestudyinc.com/nokia-strategy-india.


Regardless of the type of business model used in emerging markets, there are some commonali-ties in building customer value, which is the “holy grail” for companies, which seek to favorably in-tegrate their products and services into the mar-ketplace. One such commonality is a$ordability, which should be demarcated from the terms “in-expensive” or “cheap. “A$ordability is an element of a business model whereby a company introduces a product or service at a price, which consumers can a$ord, even if it has to change the design or approach to the product or service to do so. For ex-ample, Coca Cola’s decision in 2001 to o$er a 200 ml bottle of Coke in the Indian market, thereby cut-ting in half the price of 10 rupees it was charging for a 300 ml bottle. This allowed it access to the ap-proximately 96% of the population that could not a$ord to spend 10 rupees, a day’s wages on aver-age, for a Coke but would spend 5 rupees23.

Another commonality among e$ective emerg-ing market business models is access, speci!cally reaching customers that have been unreachable. ETranzact24 , Ghana helped accomplish this by de-veloping a mobile application for banking designed to allow customers to conduct most if not all of their transactions on their mobile phones, thereby alle-viating a major impediment to accessing the !nan-cial system in many African countries. This helped allow even customers in rural areas to access their accounts, make payments, and deposit funds. This application led to eTranzact Ghana’s market growth, and it now serves customers in six countries.

E$ective recruitment of talent is also a com-monality within e$ective emerging markets busi-ness models. Many companies have addressed the talent issue by utilizing predominantly expatriates or diaspora in key management/supervisory posi-tions. Experience indicates this is typically neither practical nor particularly e$ective. Building the capacity of local talent, o$ering a reasonable pay

structure, "exible working hours, and providing bene!ts that can put the company in a strong posi-tion to retain key personnel are keys to e$ectively recruiting, training, and retaining talent.

Integrating the elements of strategy, customer value, a$ordability, and access is also a commonal-ity in the creation of a workable business model for emerging markets. It is not enough for companies to simply focus on a one-dimensional approach to market access, but rather it should fully integrate its strategy with its operations in order to create the de-mand and the scale necessary to reach pro!tability.

Salient to the development of a business model, and yet often left out of the equation, is market re-cognizance that can allow a company to determine what market demands are unmet or under-met. Instead, many companies attempt to simply “sell what they have” in great volume or at prices they perceive consumers can a$ord. This has shown to be a self-defeating strategy for a growing number of companies, especially large corporations that are not as “"eet of foot” in embracing market op-portunities. There are four ways that companies can explore unmet needs in preparation for creat-ing a viable business model to meet them. First, a company should study what consumers are doing with its product. In doing so, company o#cials will quite likely !nd that the traditional use(s) they intended for the product or service are not what is being embraced by the consumer, thereby giv-ing the company the space to meet emerging de-mand. Secondly, a company should explore the alternatives to its existing products and services of-ferings. Understanding the competition in emerg-ing markets is a key element in developing a viable business model.

A third element of identifying unmet needs is to determine what products or services are being produced or provided poorly and where consumers would bene!t and pay for an upgrade in quality and

23 C.K. Prahalad and A. Hammond, “Serving the World’s Poor, Pro!tably,” Harvard Business Review 80, no. 9 (2002): 48-57.24 For eTranzact details, refer to company website at http://www.etranzact.com/etranzact/.



or service. Finally, a company should take nothing in an emerging market at face value. Company o#cials should dig deep into the layers of the market to un-earth the real reasons why consumers do what they do, buy what they buy, and want what they want. The open mindset is likely the most important asset one can bring to an emerging market25.

It is clear from a business modeling standpoint that integration into emerging markets is not just an opportunity for large multi-national !rms. On the contrary, as has been stated previously, it is these !rms that sometimes have the most di#-culty in establishing a workable business model because they tend to be steeped in tradition and “tried and true” approaches that turn out to be otherwise in emerging markets. Small !rms, both indigenous (home grown) and international can in many ways take advantage of opportunities that are either unnoticed or unworkable for large and multi-national !rms. With this in mind, some indig-enous and small !rms, which better understand the market and have the "exibility in their process-es, products, and services to deliver on-demand and a$ordable o$erings to consumers have reaped and are reaping the rewards of developing a sound business model.

This being said, reaching customers with higher disposable incomes is somewhat less complicated for larger and international corporations, as it typi-cally requires less adaptation of their normal busi-ness models. Still, there are emerging models that have shown to be useful in accessing a growing number of higher-end and middle class consum-ers in emerging markets. Often these business models include elements of disruptive innovation, which is de!ned by Harvard University’s Clayton Christiansen26 as “a process by which a product or service takes root initially in simple applications at the bottom of the market, eventually displacing established competitors.” Elements of the business

models mentioned above can provide the impe-tus for disruptive innovation, but regardless of the method(s) used, the mindset of the company is critical in achieving the desired results.

Disruptive innovation, and elements of other cre-ative approaches, have allowed a growing number of companies to develop models that have allowed them to “emerge from the mist” surrounding emerg-ing markets to develop thriving businesses based on demand-driven and on-time, on-target products and services. The next section of this paper will fea-ture case studies of companies that have e$ectively implemented viable business models in emerging markets. While their stories vary in scope and focus, the common theme is the utilization of innovative and "exible approaches to customize the design, production, and delivery of products and services.

In order to develop an innovative approach, a strategic design is needed to ensure all elements of a particular market are integrated in such a way as to lay the groundwork for success. While many tools are available to facilitate strategic design of business models, the canvas approach is one that is being used globally by an increasing number of companies.

THE CANVAS: ONE APPROACH TO DEVELOPING A BUSINESS MODELIn utilizing the canvas approach, a company devel-ops its business model around nine speci!c building blocks. The following Figure 4 outlines the nine build-ing blocks comprising the business model canvas27.

The canvas approach links strategic planning and a traditional approach to the development of business models, with a collaborative, input-oriented process designed to increase innovation and promote synergy. Many of the companies high-lighted below used a variation of this approach in

25 M.J. Eyring, M.W. Johnson and H.Nair, “New Business Models in Emerging Markets,” in Thriving in Emerging Markets (Boston, MA: Harvard Business Review Press, 2011).26 For a note on disruptive innovation, refer to Christensen’s website at http://www.claytonchristensen.com/disruptive_innovation.html.


determining the appropriate business model for en-try into target emerging markets. Regardless of the planning mechanism used, however, these compa-nies are some examples of the need to carefully plan entry in or expansion within emerging markets, as what is not known is potentially damaging.

In essence, these companies used a process-oriented approach to strategy development, which led to the creation of a customized busi-ness model for entry into targeted markets. In doing so these companies, a) identified the need/opportunity with targeted markets, b) de-termined gaps that needed to be filled either technologically, industrially, or service –orient-ed, c) innovated to fill the gaps, and d) emerged with a new or customized business model.

The next section of this paper features case studies of companies that have successfully im-plemented innovative business models in emerg-ing markets. While their stories vary in scope and focus, the common theme is the utilization of

innovative and "exible approaches to customize the design, production, and delivery of products and services.

EMERGING MARKETS, EMERGING PROFITSEntering emerging markets is not for the faint of heart and should not be considered a strategy for every company. For those that decide to enter these markets, it is clear that a "exible and innova-tive business model could be integral to success. The following mini-case studies highlight compa-nies that have been able to e$ectively navigate emerging markets through the creation of sound business models, as well as some that have not. In many cases, their stories focus on elements of business modeling highlighted previously, while in others the companies were able to innovatively ex-ploit on-the-ground opportunities in a timely and “consumer-centric” manner.

27 A. Osterwalder and Y. Pigneur, Business Model Generation (Hoboken, New Jersey: John Wiley & Sons, Inc., 2010).

13

The canvas: One approach to developing a business model

In utilizing the canvas approach, a company develops its business model around nine specific building

blocks. The following Figure 4 outlines the nine building blocks comprising the business model

canvas27

.

The canvas approach links strategic planning and a traditional approach to the development of business

models, with a collaborative, input-oriented process designed to increase innovation and promote

synergy. Many of the companies highlighted below used a variation of this approach in determining the

appropriate business model for entry into target emerging markets. Regardless of the planning

mechanism used, however, these companies are some examples of the need to carefully plan entry in or

expansion within emerging markets, as what is not known is potentially damaging.

In essence, these companies used a process-oriented approach to strategy development, which led to the

creation of a customized business model for entry into targeted markets. In doing so these companies, a)

identified the need/opportunity with targeted markets, b) determined gaps that needed to be filled either

technologically, industrially, or service –oriented, c) innovated to fill the gaps, and d) emerged with a

new or customized business model.

Figure 4: Business Model Canvas

Source: Osterwalder & pigneur (2010)



Case 1: Wal-Mart in India28 In December 2006, Wal-Mart hypothesized that by the year 2015, 35% of India’s retail sales could be from chain stores. This was a signi!cant increase from the prevailing 2%. In May 2009, Wal-Mart opened its !rst store in the Amritsar, Punjab in northern India, with its focus clearly on the emerging Indian middle class. It employed 200 workers initially and created approximately 500 indirect jobs.

The retailer had been working on its strategy for India for around two years, which included working with small and disadvantaged Indian pro-ducers, and by 2010, Wal-Mart’s purchases from Punjabi producers were more than $125 million annually. Wal-Mart’s strategy in India, unlike in the United States and Western Europe focused on the “wants” of the Indian middle class, who were not as price conscious as they were focused on the products and services they desired. Also, unlike in other areas of the world, Wal-Mart partnered with a local !rm, Bharti Enterprises, in a 50/50 joint ven-ture. This provided Wal-Mart with a local partner that understood the marketplace and had integral knowledge of consumer values and attitudes.

Wal-Mart and its partner also established train-ing centers to develop the skills of disadvantaged youth to work in their stores throughout the coun-try. In doing so, Wal-Mart provided not only a well-known location to purchase products and services, but also integrated itself into the communities it served by helping to increase economic capacity.

Right from the outset, Wal-Mart sought a di$er-ent business model for India, one that could position itself to capture an increasing share of a potentially huge market. Raj Jain, President of Wal-Mart India highlighted this in 2009 by saying, “India is not a homogeneous market, so ours is not a cookie-cutter approach from the U.S. …Wal-Mart is in no hurry to unfurl the Wal-Mart "ag nationally. The easiest thing

is to roll out stores, but the most di#cult is to sustain and feed them.” The “care and feeding” of its Indian operations has provided Wal-Mart with a pro!table and sustainable footprint within the country.

Case 2: A tale of two business models: Whirlpool in China29 and Nokia in India30

Since 1988, Whirlpool has followed an aggressive globalization strategy under the leadership of for-mer CEO, David Whitman. China had been one of its main entry targets and also !t into its global strategy of becoming the market leader in Asia. Whirlpool formed several joint ventures in China and India in the mid-1990s signaling its entry into the Asian market. Due to its size and global pres-ence, market analysts took it for granted that it would build a brand presence in China. However, in 1997, only two years after entering the Chinese market, Whirlpool had not been able to better the performance of its Chinese partners prior to the joint ventures. One of its local brands, Whirlpool Narcissus, was an example of the overall challenge, as it lost $6 million in 1997 alone. According to industry experts, Whirlpool’s main challenge was it nascent understanding of local culture. The Chi-nese saw Whirlpool as just another foreign brand and thus its size and global recognition did not resonate with customers. Faced with mounting losses, Whirlpool decided to restructure its opera-tions in China, ending the relationship with Snow-"ake, its Peking-based refrigerator manufacturer and reducing its interest in Raybo, another Chinese partner, ending this arrangement entirely in 2000. Industry reports estimated that these two deci-sions cost Whirlpool nearly $300 million.

Whirlpool’s e$orts in the world’s most-pop-ulous country proved initially ine$ective due to lack of cultural awareness, unsatisfactory com-munication between the company’s international

28 “Wal-Mart in India,” last modi!ed Feb 11 2010, http://www.casestudyinc.com/wal-mart-india-case-study.29 “Whirlpool’s Problems in China,” last modi!ed Aug 31 2010, http://www.casestudyinc.com/whirlpool-problems-in-China; P. Yigang, K. Sethi and L.Y. Thomas, “Whirlpool’s Roadmap in China: 2004 (MNC),” Asia Case Research Centre, The University of Hong Kong30 “Nokia’s Business Strategy in India,” last modi!ed Jan 8 2010, http://www.casestudyinc.com/nokia-strategy-india.


management team and local management team, and lack of control over the actions of the Chinese management team. Whirlpool’s 1997 annual re-port justi!ed the realignment of the company’s China strategy by noting, “As we looked at our capacity in this environment, it became clear that we needed to refocus our resources to allow us to grow from our strengths, while reducing costs and simplifying our structure throughout the region. Eventually, Whirlpool overcame the challenges inherent in the China, increasing sales to $18.67 billion in 2011, but its initial di#culty in adapting an e$ective business model is a lesson for other companies considering business opportunities in emerging markets.

Nokia, on the other hand, crafted its business model for entry into the Indian market in 1995. Early on, Nokia saw the potential of the Indian mar-ket, as it was adding more than 10 million users a month and had a rural penetration of only 13%. By rolling out a business model focused on "exibility, openness, and not underestimating its competi-tion, it captured 54.1% of the mobile phone mar-ket share by 2010.While this shrank to 38% in 2011 due to increasing competition, the market still ac-counts for 12% of the company’s global sales.

India’s vast sales platform also opened up other opportunities for Nokia as well, speci!cally in the manufacturing space. In 2006, it opened a $250 million facility in Chennai that now provides 50% of its production to more than 59 countries. Nokia also embraced innovative ways to increase its market share by rolling out two Nokia Mobile Micro!nance projects in 2009 where it sold mo-bile phones on weekly installments of 100 rupees ($2.00) over 25 weeks. Nokia also used an aggres-sive marketing campaign and inter-connected distribution network as pillars of its business

model. The result was more than just pro!ts, as in 2010 Nokia received the designation as “India’s most trusted brand” in a survey conducted by the Economic Times –Brand Equity.

The di$erence in these business models speaks directly to the results achieved by each company. In Nokia’s case, it achieved positive results through innovative approaches to sales, manufacturing, and even !nancing, which carved out a niche in the market that has survived even with the onset of signi!cant competition. Whirlpool’s initial expe-rience in China, however, was less successful due perhaps in part to a business model that did not fully integrate knowledge of the marketplace.

Case 3: Taking care of business: Softwin helps facilitate a Romanian Information Technology Surge31 Since 1989, when sweeping unrest led to the de-posing of Dictator Nicolai Ceausescu, Romania has struggled to gain its economic footing. Its entrance into the European Union in 2007 provided it with the visibility, credibility, and the institutional sup-port it needed to gain momentum, but much of its economic growth was halted by the recent global economic crisis. The World Economic Forum’s Glob-al Competitiveness Report32 ranked Romania 67th out of 139 countries in 2010-2011, while the 2011 Legatum Prosperity Index33 ranked it as 58th out of 110 countries, a ranking that highlights Romania’s increasing focus on creating a prosperous environ-ment for its citizens. This indicates that even with its di#culties (a relatively mediocre ranking in the Global Competitiveness Report but a higher one in the Legatum Index), Romania has and continues to produce innovative companies that are increasing economic capacity as well as establishing innova-tion models for the future.

31 For softwin details, refer to company website at http://www.softwin.ro/?pagina=index&&limba=2.32 GlobalCompetitivenessReport_2010-11.pdf.33 “The 2011 Legatum Prosperity Index Table Rankings,” Legatum Institute, accessed June 21, 2012, http://www.prosperity.com/rankings.aspx



One such company is Softwin, founded by Flo-rin Talpes in 1990. It began as a software develop-ment company, but expanded into other verticals such as e-content solutions (1993), data security solutions (1997), e-learning solutions (1998), con-tact centers (2000), help desks (2001), IT consulting (2002) and solution integration (2004). Through continuous innovation and expansion of services, Softwin has become a company with global scope, having o#ces in six countries.

Because the enabling environment for innova-tion was nascent in Romania, the company had to be agile — adapting to changing trends in the information and communications technology (ICT) sector and taking advantage of opportuni-ties. Softwin’s ability to do this was enhanced by its workforce, which continues to enhance the Roma-nian information technology industry.

Case 4: Virtual reality: Rubicon in Jordan34 Jordan has a stable business environment for ac-cessing the lucrative Middle East and North African (MENA) market. In recent years, it has endeavored to embrace innovation as a core component of competitiveness in order to address the growing demand for knowledge-based jobs by its young and educated workforce. A bi-product of Jordan’s stable economy and economic development strat-egy is that a small group of Jordanian entrepre-neurs has emerged to embrace disruptive innova-tion, while at the same time increasing prosperity. Rubicon is one such company.

In 1994, Rubicon’s CEO and founder, Randa Ayoubi, raised $100,000 in capital to launch her company, but it was ten years before she was able to move beyond the nascent stage. Then, in 2004 she raised the remaining capital and took her mes-sage to major movie studios in the United States. Eventually Ayoubi’s persistence paid o$ and a large

Hollywood movie studio partnered with Rubicon to do animation for an iconic cartoon series35. The company’s work on this series won international awards and earned it the credibility it needed to work with other major studios. Rubicon’s experi-ence in animation was certainly a catalyst for the venture, but equally important was Ayoubi’s tenac-ity.

“I sometimes think they agreed to partner with us just to get rid of me,” she said in jest.

Starting with animation, Ayoubi expanded into other areas of digital content including e-learning, electronic game development, and virtual reality technical training. Today, Rubicon focuses on cre-ating animated programming by controlling the various parts of the production process from con-cept to !nished product.

Many ex-Rubicon employees have opened their own companies and Ayoubi outsources smaller projects to them in an e$ort to assist in their growth, providing them with mentorship as John Chambers, CEO of Cisco, did for her begin-ning in 2004. This has contributed signi!cantly to the prosperity of local !rms, building a growing cluster of subject matter specialists (SMEs) that are focusing on digital content.

Rubicon’s e$ectiveness has expanded beyond the country’s borders, as it has licensing and mer-chandising agreements with several major movie studios. It has o#ces in Los Angeles, Dubai and Ma-nila, providing it with broader visibility.

The company’s e$ectiveness in the digital con-tent industry was achieved through Ayoubi’s vision and perseverance, and also because she focused on the development of a strong business plan that fo-cused on niche verticals with the digital content in-dustry. She also recruited and retained a high-quality workforce, providing them with the latest technol-ogy and creating an environment where ideas are

34 Mark McCord’s Interview with Rubicon CEO - Randa Ayoub35 R. DeMott, “Jordan’s Rubicon to Co-Produce Pink Panther and Pals with MGM,” Animation World Network, June 25, 2007, http://www.awn.com/news/television/jordans-rubicon-co-produce-pink-panther-and-pals-mgm.


highly valued. As a small company, Rubicon helped to create momentum in the market by taking on small projects, building a portfolio, and eventually using this experience to land large contracts.

Rubicon is one of the companies creating a re-newed focus on innovation in Jordan, dispelling the image of Jordan as a strictly agriculture and tourism-based economy, while creating momentum for in-novation in other knowledge-based sectors such as medical services, pharmaceuticals, clean technolo-gy and ICT. Largely due to the e$ectiveness of com-panies such as Rubicon, the Government of Jordan has adopted a focus on the knowledge economy and is actively pursuing investments that will likely increase the prosperity of its citizens through the creation of high-quality jobs.

Case 5: A study in business model transfor-mation: AGD in Argentina36 Founded in 1948 by Adria´ n Urqu´ıa, Aceitera Gen-eral Dehaza, S.A. (AGD) transformed itself from an oil-processing factory into a larger indigenous !rm in the industry in the 1990s.A leading edible oil export company in Argentina, AGD is also one of the leaders in the retail bottled oil industry, sporting several suc-cessful brands. It ranked 40th among the 1,000 top companies in Argentina in 1999 and it is considered the !fth most important exporter in the country.

AGD’s transformation was based largely on a business model that was crafted through the vision and dedication of its founder, and included im-provements in technology that led to increases in production and the improvement of economies of scale. In addition, the model focused on enhance-ment of logistics, through which the company was able to link the various parts of its value chain.

The transition was not easy however, as in 1968 the company was forced to close due to a series of unfortunate events including a global increase in oilseed prices and a "awed commercial strategy.

By changing its business model to take better ad-vantage of logistical and technological advances, the company was able to get back into pro!tability from 1968–1985.

From 1985–1999 the company weathered a number of economic and political storms, thriv-ing by again transforming its business model to take advantage of opportunities within the indus-try. Speci!cally, it began to manufacture branded products to compete within Argentina as well as strengthening its logistics chain to reduce costs. The company was able to achieve this by not only looking externally at market forces, but also inter-nally at its own values and vision.

The AGD story is consistent with the basic ten-ants of business modeling in emerging markets. The company already had signi!cant understanding of the Argentine market, but it was able to build its business by addressing innovative ways of produc-ing, selling, and shipping its product. It transformed its business model not once but multiple times in order to become e$ective in the industry.

Case 6: Helping to change the paradigm of banking: eTranzact Ghana Ltd.37 The World Economic Forum’s 2010–2011 Global Competitiveness Index ranks Ghana114th out of 139 countries. For the same period, the Legatum Prosperity Index, which measures the relative pros-perity of country’s citizens relative to nine criteria, ranks Ghana at 79th out of 104 countries, which re-cords a modest improvement over previous years. One would not necessarily expect innovation with-in this climate. But an emerging group of Ghanaian companies is leading a technological and service revolution that has established a model for the country and also for other emerging markets. One such company is eTranzact Ghana Ltd, which was featured in The International Trade Center’s Service Pioneers: Stories of Innovative Entrepreneurship.

36 A.Hatum, “The transformation process of AGD, Argentina”, Emerald Emerging Markets Case Studies Collection 1, no. 1 (2011): 1-12.37 “Service Pioneers: Stories of Innovative Entrepreneurship,” International Trade Centre (Geneva: ITC, 2009).



In 2006, a group of Ghanaian entrepreneurs started eTranzact Ghana Ltd, with the purpose of building a cashless society in Africa. eTranzact is designed to o$er electronic payment platforms for banks, companies and individuals in order to create a virtually cashless society. With eTranzact’s system, banks, merchants and individuals can transfer cash in a number of ways, including using mobile applications for banking, telecom services, merchant services (e-billing), ordering and pay-ment, web-based payment, online cash collection and facilitation of export services. The company’s services are customized for each of its commercial and banking clients according to their needs.

One of the larger challenges for the company, according to CEO George Babafemi, was overcom-ing the cultural norms of doing business by mov-ing people from a predominantly cash society to an electronic format. Over time, it was able to overcome cultural paradigms of doing business by o$ering leading/e$ective services. Today, the com-pany has branches in Cote d’Ivoire, Nigeria, South Africa, the United Kingdom and Zimbabwe and is also doing business with foreign companies that are investing on the African continent.

While Ghana has traditionally been a stable country, companies like eTranzact have helped to galvanize the government around a platform of increasing reforms, including infrastructure up-grades and reductions in bureaucracy and regu-lations. This highlights the e$ect that companies embracing disruptive innovation techniques can have on a country as a whole, establishing an in-novation model that can be copied by others.

Case 7: Changing the business dynamics - Minutes Factory Model by Airtel in India38 Airtel entered the mobile telecommunication services market in 1995 during which indus-try dynamics was governed by high fixed and operating costs driven by large investments in

license fees, telecom towers, telecom network and technology support systems, such as billing and customer care. To manage capital intensive infrastructure, the focus was on premium pricing strategy measured by ARPUs (Average Revenue per User). Airtel decided to alter the industry dynamics by changing the focus from thousands of premium customers to millions of small cus-tomers (micro-consumers). This required focus on “4A’s” such as affordability, accessibility, avail-ability and awareness. The key metrics shifted from ARPUs to gross revenue, profits, operating efficiency and capital efficiency. To achieve this, Airtel distributed the existing business model through a series of strategic measures.

From a value creation perspective, Airtel moved from an asset-ownership model to an asset-light model by outsourcing the core func-tions related to IT services and telecom network to technology industry experts like IBM, Ericsson and Nokia. To align the goals and objectives of the vendors, Airtel aligned the payment model of the partners with the capacity utilization and revenue generation. This resulted in conversion of fixed costs and capital expenditures into vari-able operating expenses. To enable cost feasi-bility while penetrating into sparsely populated rural areas, Airtel collaborated with competitors to establish shared infrastructure such as tele-com towers, air-conditioning, and generators to name a few. From a value delivery and customer relationship perspective, Airtel decided to lever-age the existing distribution network of FMCG and consumer durable companies. Also, to pen-etrate rural India, it entered into a partnership with non-traditional partners like SKS micro-fi-nance and IFFCO (fertilizer manufacturers).

These cost innovation and delivery channel measures led to rapid expansion of subscriber volumes. This resulted in creating a unique min-ute-factory (charging 1 cent per minute) business

38 C.K. Prahalad and R.A. Mashelkar, “Innovation’s Holy Grail,” Harvard Business Review 88, no. 7/8 (2010): 132-141.


model, which transformed the prevalent industry metrics, target segment and benchmarks in the telecom industry. The continuous focus on busi-ness model innovation enabled Airtel to become the largest cellular services provider in India.

Case 8: Serving the Rural Poor – Self Sus-tainable Healthcare Business Model by Aravind Eyecare (AEH) in India39 According to the World Health Organization (2011), 285 million people are visually impaired world-wide, which includes 39 million who are blind and 246 million people who have reduced vision. About 90% of the world’s visually impaired popula-tion lives in developing countries. Around 80% of all visual impairment can be avoided or cured. Dr V took the !rst step towards ful!lling a dream of eradicating needless blindness by establishing an 11-bed eye-care hospital in 1976. As of 2011, this has grown into a network of 8 eye hospitals, 40 vi-sion centers in rural areas, 7 community eye clin-ics, a PG and Research Institute of Ophthalmology, Aurolab (manufacturing), eye banks and LAICO (consulting for knowledge transfer) .As of 2011, AEH has treated 32 million patients and performed 4 million surgeries.

The business model’s success is due largely to founder’s leadership as well as to key strategic de-cisions made from 1976 till date. The !rst such de-cision was the orbit-shifting challenge, which was established by Dr V in 1976. That is, to eliminate the needless blindness from India. This included the philosophy of providing treatment to all irrespec-tive of the paying capacity.

The second strategic decision was to move away from external funding in order to create a self-sustaining business activity. This led to the cre-ation of a hybrid business model, where the rev-

enues from the paying customers cross-subsidized the non-paying customers.

The third strategic decision was to scale and build the volumes necessary to ful!ll the vision. This required overcoming accessibility and avail-ability constraints, especially for the rural popula-tion. AEH setup the hub and spoke model com-prising an integrated network of hospitals, vision care centers and community camps. The commu-nity camps throughout rural areas and the devel-opment of an e-network facilitated outreach to patients who had otherwise been inaccessible.

The fourth strategic decision was to build op-erational capacity to meet the volumes. This led to the creation of an assembly-line for cataract surgery. The focus was to establish an operational ecosystem, in which surgeries could be performed in minimal time without a$ecting quality and safe-ty measures. The assembly-line model improved the productivity of critical resources (surgeons) by tenfold, thereby increasing the capacity to match the increase in volumes.

The !fth strategic decision was to integrate verti-cally into manufacturing of ophthalmic products such as sutures, lenses (IOLs), and other medical products The manufacturing process for IOLs in India, enabled AEH to reduce the price of IOLs by ten times.

Case 9: Financing the Micro-Entrepreneurs – Crowd funding Model by RangDe in India40 Microcredit is a !nancial innovation that refers to various kinds of small loans and !nancial services meant for low income households. The borrowers of microcredit usually lack collateral, steady em-ployment and veri!able credit history and hence fail to qualify for regular bank loans. The access to micro-credit helps to bring the poor in the formal !nancial eco-system.

39 V. Kasturi Rangan and R.D. Thulasiraj, “Making Sight A$ordable – Innovations Case Narrative: The Aravind Eyecare System,” innovations 2, no. 4 (2007): 35-4940 For RangDe details, refer to company website at http://www.rangde.org/.



RangDe (India) was founded in 2006 with the objective of providing access to micro-credit for micro-entrepreneurs. They decided to di$erentiate themselves from the traditional micro-!nance in-stitutions, which rely on banks and !nancial institu-tions as source of credit. Rather than looking upon banks and !nancial institutions as sources of funds, RangDe decided to approach the individuals as source of funds. In doing so, RangDe established a peer-to-peer technology platform and acted as a bridge partner between individual investors and micro-entrepreneurs lying at base of the economic pyramid. This dynamic shift in the business model enabled the company to reduce the cost of micro-credit for the borrower from a range of 13.5% - 20% to a range of 6% - 10% ("at rate).

RangDe is still in the consolidation phase and has come a long way since 2006. As of April-2012, RangDe has impacted 1,294 micro-entrepreneurs, engaged 3,577 investors, raised INR 69.7 million and has a repayment rate of 99.2%.

Unwilling to waitThese companies are examples of entrepreneurs in emerging markets who have not waited for donor organizations or governments to lay the ground-work for innovation. They represent a new mindset in emerging markets, one that infuses disruptive innovation to promote productivity, competitive-ness and ultimately prosperity. Hundreds of other emerging markets entrepreneurs are following their examples and if buoyed by a practical strate-gy and focused support, they are expected to grow rapidly into generators of jobs which help promote competitiveness.

These companies can be models of innovation in emerging markets, but how did they gain the desired results when others did not? Arguably, it was because their leaders rejected conventional notions that would focus on quick wins without providing sustainable and prosperous growth. In other words, they focused on innovation rather

than convention while many of their competitors were unable to see beyond the obvious challenges faced by them in their respective countries. These companies managed to not just survive in the cha-os that is sometimes prevalent in emerging mar-kets, but move passed it to achieve their desired results.

Conclusions from the ChaosIn many respects, the leaders of companies have been trying to address persistent issues related to market access using the same techniques in an at-tempt to !nd the magic bullet that leads to pro!t-ability. They have not found it because it does not exist.

While poverty is a signi!cant challenge for emerging markets, this does not mean they are not viable platforms for business. Prahalad and Hammond41 have pointed out, entrepreneurial companies both small and large are “already serving the world’s poor in ways that generate strong revenues, lead to greater operating e#ciencies, and uncover new sources of innovation.” The key component in this success can be a company’s ability to break down rigid mindsets and focus on the growth potential of these markets.

While emerging markets can appear chaotic, there are several strategies that can lead to the emergence of a sound business model. In sum-mary, they include the following:

Do not assume Assumptions are risky in any business venture, but this is especially true in considering emerging mar-kets. For instance, companies often assume that because people are poor, they do not spend. This assumption is incorrect when looked at from ag-gregate purchasing power perspective. From an aggregate purchasing power view-point, the poor do have money and they are willing to spend it on non-essentials as well as items of need. Additional-ly, companies may assume that a recognized brand

41 C.K. Prahalad and A. Hammond, “Serving the World’s Poor, Pro!tably,” Harvard Business Review 80, no. 9 (2002): 48-57


can capture a share of a huge market if it is avail-able. Companies such as Whirlpool in China helped to reinforce that this is not necessarily true. Despite infrastructural de!ciencies, technological change has in many cases made it cheaper to conduct business in most emerging markets, which increas-es pro!t potential. In many countries, reforms are now beginning to intersect with economic poten-tial to make them attractive markets for business expansion and new investment. In eTranzact Gha-na’s case, it has built an e$ective business model through an understanding that even those with low disposable incomes require and desire bank-ing and !nancial services.

Find a niche (value proposition) Companies that are able to !nd a business niche in emerging markets can greatly increase their pro!t-ability. Finding such a niche requires understand-ing of the market, creative approaches, and sig-ni!cant research. Quite simply, a niche in a speci!c emerging market may be a need or response to a dilemma that does not exist in more developed economies. The upside potential can be worth the e$ort. Rubicon, for instance, was able to carve out a niche in digital content that up to that point had not been explored in Jordan. This helped it to cap-ture signi!cant market share in a relatively short amount of time.

Start small and grow from there Small companies can potentially make a big impact in a short amount of time by focusing on niche markets, starting with small projects, and taking advantage of opportunities in which larger compa-nies in more advanced markets are not interested. Softwin, for example, grew from a small software development company to a larger ICT company in just over twenty years by focusing on innovative approaches that led to incremental milestones.

Focus on innovative approaches Companies such as Nokia, Rubicon, eTranzact

Ghana and Softwin focused on innovation, disrup-tive and incremental that allowed them to break through the assumed limitations of their geopo-litical and economic circumstances by focusing on new technology and approaches. With no power-ful incumbents, leapfrogging was based on tech-nology in the case of eTranzact Ghana’s bypassing conventional ways to move money and instead focusing on technology. In Nokia India’s case, inno-vation came through a creative way(s) to deliver its product to the market. Innovative business models helped make these companies market leaders rath-er than followers, with the perhaps unanticipated advantage that no paradigms existed in some cas-es. They were able to begin from a clean slate and use innovation as a catalyst for growth. Disruptive innovation in emerging markets di$ers from the strategic situation in developed markets primarily in that it can help drive success not only for com-panies, but also can create models that generate opportunities for the entire country — again, a type of cycle that creates its own fertile ground for further innovation and market development.

Build alliances with key stakeholders Collaboration is important to any business, but Rubicon helped establish that by building alli-ances with local and international stakeholders, in-novation and pro!tability can occur more rapidly. Wal-Mart achieved signi!cant results through its partnership with an Indian !rm. This is especially important in emerging markets because these stakeholders play a key role in overall develop-ment and have resources that can be harnessed to embrace innovative approaches. It also ingratiated itself to local and national authorities by sourcing many of its products locally, as well as providing jobs for underprivileged citizens.

Local EngagementIn analyzing various business models, one must ask whether or not it is su#cient to look for ways and means to build pro!table business models to serve



the BoP consumers, who make up the predominant part of the socio-economic segment in emerging markets. The answer is likely “no.” The companies aiming for long term sustainable business models in emerging markets need to change their business dynamics by shifting the focus on BoP segment from transactional engagement to transforma-tional engagement. This means, that rather than viewing the BoP segment as prospective consum-ers, the companies should engage them across the value-chain as micro-entrepreneurs, micro-suppli-ers, last-mile connectivity agents, value co-creators and micro-innovators apart from consumers. This will result in sustainable and adaptable business models for emerging markets.

Technology is the key Considering the a$ordability, accessibility and availability challenges in emerging economies, technology is a key stakeholder for any business. With this in mind, business models designed for emerging economies should focus on technology integration as a key aspect in value creation and delivery.

While many companies are still looking for conventional mechanisms by which to enter emerging markets, others have found success by embracing innovation as a growth strategy. By removing psychological and bureaucratic barriers to market access, a growing number of companies are defining a new age for entrepre-neurship and innovation in emerging markets — an age that could redefine the paradigm of development.

The success stories of business model creation in emerging markets are well-publicized, as are many failures. The question that remains is whether or not companies that have not already accessed these markets may be too late, even with a strong busi-ness model. Edward Tse poses this challenge in rela-tionship to China stating, “CEOs are losing sleep over expectations that their one time (Chinese) partners are morphing into predators-and that their own technology and know-how will be coming back to them globally in the form of cut-priced products from subsidized state-owned behemoths.” 42

While these concerns are real, the fact is com-panies that are not in emerging markets today can still !nd ways to integrate them. Whether fo-cusing on BRIC or on one or more smaller econo-mies, a company’s business model is still the most important aspect of its location decision. Edward Tse43 poses !ve questions that CEOs should ask before entering an emerging market:

operations with our other operations around the world?

emerging markets?Based on the answers to these questions, com-

panies can crystalize a customized, “consumer-centric” strategy that includes a sound business model. It is not too late to explore the potential of emerging markets, but it is also not too early to build a business model to do so.

42 E. Tse, “The Globe: Is It Too Late to Enter China,” in Thriving in Emerging Markets (Boston, MA: Harvard Business Review Press, 2011)43 Ibid


Creating Shared Value in the Brazilian context: The ideology of WEG Electric Corporation

Siqueira de Morais Neto1, Maurício Fernandes Pereira1

AbstractAlthough the context for !rm’s rivalry and strategy in Brazil is unfavorable, WEG has been achieving signi!cant results. Starting as a small company some decades before, it has become a world-class, a global player. In 2011, WEG bought the cente-nary Electric Machinery from General Electric, and moreover, it reached a Net Revenue of 18% CAGR (Compound Annual Growth Rate) during the last 16 years, through a tactic of international market conquest. In 1961, since its beginning, WEG has shown evidences that in the future it would be-come a great company, due its visionary’s actions. The main objective of this article is to analyze how WEG has been Creating Shared Value. This paper uses the phenomenological method to answer the research’s objective. Considering the approach of this paper’s goal, this is a qualitative research of an applied nature. To analyze how this sequence of events promoted by WEG in the region occurred, the case study was the most appropriate research

design. This work has been based on data collec-tion through semi-structured interviews, internal documents analyze, systematic observation and secondary data. WEG’s internal documents, its leaders, and the Northeastern Santa Catarina re-gion represent the subjects of research. The cre-ation of shared value is the object of study, and in order to verify that, the methodology applied was: to de!ne WEG’s core business; to check the points of intersection between business and social issues; and to identify the existence of social dimensions for value proposition. Additionally, the results in-dicate that WEG is working on the three levels of Creating Shared Value. Moreover, WEG has linked its core business to four social dimensions: energy e#ciency; renewable energy; electrical products for human care; and technical education.

Keywords: Creating Shared Value; Santa Catarina; WEG.

1Federal University of Santa Catarina



INTRODUCTIONThe context for !rms’ growth and development in Brazil has been a challenging one over the last de-cades. Nevertheless, in the southern region of the country, more speci!cally, in the northeast part of Santa Catarina State, a company founded there has become a world class. Its business is not related to natural extraction, but with industrial transforma-tion, segments related to electric machinery.

In 2011, WEG bought the centenary Electric Machinery from General Electric, establishing even more its presence in North America, but gaining also speci!c technological knowledge. As its CEO Harry Schmelzer Jr. in an interview for this article said: “WEG buys companies mainly for two reasons. The !rst is to gain access to markets it still does not have; and the second, is to acquire some comple-mentary technology”. The company has developed a “one-stop shop” approach of sales. WEG sells elec-tric energy solutions, whether it is a small motor or a complete hydroelectric power plant.

Starting as a small business (start-up), WEG has become a world-class enterprise, a global player and world leader in some industries. In the begin-ning (1961), only the three founders were working there, but in 2012, the company has a workforce of 24,900 people, spread over the !ve continents (WEG, 2012).

WEG initiated its operations in a 280 m2 rented area; nowadays it owns a 900,000 m2 area (3,000 times larger), apart of having the world’s largest electric motors facility in Jaraguá do Sul. The com-pany has gone through an impressive growth, from an initial investment capital equal to three small cars to annual revenues that exceed US$ 2,400 mil-lion. Along all these years, WEG executives have followed the path and principles of ethics, environ-mental and social responsibility, inherited from its founders (Ribeiro, 2011).

Currently, WEG is a publicly traded corporation, still headquartered in the city of Jaraguá do Sul, Santa Catarina. It is engaged in the production and marketing of capital goods, such as electric motors,

equipment for the electric generation, transmis-sion and distribution, industrial automation and in-dustrial paints. At the site where the company was founded, is concentrated most of its production, which is highly vertically integrated. WEG is highly verticalized company, having its dependency from casting, stamping, up to enameling copper and aluminum, and it makes its own packaging (WEG, 2012).

Since 2000, the company employs a tactic of international market conquest, buying established businesses in target countries or building factories in these nations. In 2012, WEG has branches in twenty-!ve countries, with eight production units (Austria, Argentina, Mexico, USA, Portugal, India, China and South Africa), and in another seventeen countries it has commercial o#ces (Colombia, Chile, Peru, Spain, Italy, France, Belgium, Germany, Holland, Sweden, UK, UAE, Russia, Venezuela, Singapore, Japan and Australia). Via the symbol “WEGE3”, the company is traded in the Brazilian stock exchange market, and since 2007, is part of a special corporate governance segment, the “Novo Mercado” (New Market). In addi-tion, WEG has American Depositary Receipts “ADRs” Level I, which are traded under the symbol WEGZY (WEG, 2012).

In 2011, its Consolidated Net Revenue was R$ 5,189.4 million (around US$ 2,470 million), an in-crease of 18.2% over the previous year. The EBITDA (earnings before interest, taxes, depreciation and amortization) summed R$ 882.3 million (around US$ 420 million), an increase of 12% over the result obtained in 2010. Consolidated Net Pro!t reached R$ 586.9 million (around US$ 280 million), an in-crease of 13% compared to 2010 (WEG, 2012).

In the second quarter of 2012, the Net Revenue was R$ 1,528.8 million (around US$ 728 million), up 20% over the second quarter of 2011 and 12% over the previous quarter. EBITDA reached R$ 260 million (around US$ 124 million), with a margin of 17%, an increase of 21% over the previous year’s second quarter and 25% over the previous quarter (WEG, 2012).


These are expressive numbers, considering that the context for !rm’s rivalry and strategy in Brazil is unfavorable. The country is ranked at 48th posi-tion, among 142 nations analyzed, in the intensity of local competition. Plus, the extent and e$ect of taxation hinder and discourage investors in Brazil - which is at the last position (142th), showing the tax burden on Brazilian businesses. The impact of FDI rules over business are far from having a posi-tive e$ect, the country is positioned in 83th in this criteria; even worst is taxation over company’s pro!t - Brazil is ranked at position 133th (World Economic Forum, 2011).

While having to deal with this unfavorable situation in Brazil, WEG was able to keep track of a continuous growth over the last sixteen years. Figure 1, shows a 18.3% CAGR (Compound Annual Growth Rate) of WEG’s Net Revenue between 1995 and 2011.

Since its beginning in 1961, WEG has shown the evidence that in the future it would become a great company, for its leaders have been visionaries, hav-ing pioneer actions. They have imprinted into the corporation advanced managerial thoughts for the time, like the corporate governance and resource conservation, apart of always investing in techno-logical and process innovation. WEG have always been concerned about its community (Jaraguá do

Sul) and with all the others where it has production plants. The founders have put the organization’s well being ahead of their own, and the commu-nity’s needs before the corporation’s immediate interests. It can be found in the corporation’s daily projects, practices and conducts, sometimes with decades in advance, of what nowadays it could be called a sustainable corporation, in the sense that it cares for its environment and people, while it’s pro!ting (Ribeiro, 2011).

Therefore, the main objective of this paper is to analyze how WEG have been Creating Shared Value (CSV). So, it has been set three speci!c objec-tives according to Porter & Kramer (2011) method-ology:a) To identify what WEG has done to meet new

needs, redesign markets and provide new products to its customers;

b) To verify how productivity has been rede!ned in the company’s Value Chain;

c) To detect WEG’s role in the development of a local cluster.

LITERATURE REVIEWSustainable DevelopmentBefore going through the CSV literature, it’s ex-plained the beginning of modern society’s concern

Figure 1: WEG Net Revenue Growth



about mankind and the environment. Sustainabil-ity theories have shown the problems of actual capitalism and helped to raise the awareness of leaders about the development model that is pres-ently igniting and commanding business.

Nowadays, pollution, environmental destruc-tion and the di$erence in life’s quality among people have become very evident. The richest and more technologically advanced societies are facing increasing economic and environmental problems, which should not be underestimated (Diamond, 2005).

In this sense, Diamond (2005) argues that mys-terious abandonments recorded in the history of civilizations, must have been caused by ecological problems and the improper destruction of environ-mental resources on which they depended. How-ever, di$erent societies collapsed to di$erent de-grees and in di$erent ways, while others have not collapsed. The fact is that this westernized global civilization is at a sensitive period, demanding a change in the behavior of its citizens, demanding their action to prevent its collapse.

Currently, the environment and humanity situation are critical, where natural resources are consumed as if they were in!nite and people are mistreated. There is probably an anthropogenic e$ect causing the extinction of animal species (Courchamp et al., 2006; Nichols et al., 1998). So, any activity, technique or technology that aim at minimizing the e$ects of man on wildlife and on the natural environment, can be considered im-portant.

Sustainable development is presented as a path that civilization should take. The demands of the society to the companies and to the governments are of a more sustainable future in the long term, where future generations can enjoy the biosphere, as did his ancestors (WCED, 1987).

The concept of sustainable development comes from a long history of critical reappraisal of the re-lationship between civil society and the natural en-vironment. Because it is a continuous and complex

process, it is observed that there is now a variety of approaches that attempt to explain the concept of sustainability. It can be shown by the variety of de!nitions of this concept (Bellen, 2005).

Thus, the research on the risks of environmental degradation, called Limits to Growth, shows that if nature exploitation levels keep at the same pace, the development of the planet would reach a limit in a hundred years, causing a sudden reduction of world population and industrial capacity (Mead-ows et al., 1972).

When the capacities of biomes are exceeded it causes a reduction of services provided by the biosphere to human society. It happens due to the activities that interact with the environment.

Likewise, Sachs (1994) argues that the interde-pendence of the economy and the environment are important concepts for politicians and deci-sion makers around the globe. The United Nations Conference on the Human Environment in Sweden in 1972 has put sustainability on the international agenda, but still focusing only on the environment, e$ectively disregarding the welfare.

The concept of sustainable development was !rst discussed by the World Conservation Union, in the paper World’s Conservation Strategy. This document states that for development to be sus-tainable, it must consider issues related to the so-cial and ecological as well as economic factors of living and non-renewable resources, and above the advantages of short and long-term alternative actions (Bellen, 2005).

In an attempt to set up a direction to this new form of capitalist transformation, the report of the Brundtland Commission promotes the idea of sus-tainable development as the “development that meets the needs of the present without compro-mising the ability of future generations to meet their own needs” (WCED, 1987, p.43).

Therefore, to better understand all the perspec-tives of the concept of sustainable development, Sachs (1994) presents !ve dimensions to sustain-ability: economic, social, ecological, geographical


(spatial) and cultural. These !ve perspectives pres-ent the concepts that Sachs (1994) makes about the development within a new paradigm. This view helps to promote actions to improve the levels of quality and preservation of human life and ecosys-tems.

The United Nations Conference on Sustainable Development (RIO +20), held in Rio de Janeiro in June 2012, was the last attempt to gather world leaders in order to write common goals and to pro-mote a more sustainable development.

Sustainable development makes companies and peoples to think in terms of long-term and to recog-nize their place within the biosphere (Bellen, 2005).

To serve the interests of some society’s share, companies have been competing and using tech-nology since modern capitalism has emerged. Thus, to meet some demand, !rms are likely to have attitudes with harmful or bene!cial consequences for humanity. Whether building bridges crossing rivers to connect people or to make weapons for extermination, companies are systems that work to satisfy any existing human needs. However, the direction given to a production or service will al-ways depend on the demand and the willingness of leaders to do so. It’s a matter of meeting con-sumers’ needs, who are willing to exchange cur-rency for a product or service designed for their demands.

Creating Shared ValueIn the last decade, sustainability has established itself as a management model used by many com-panies around the world. Due to environmental and social problems, there is currently demand for companies to consider the environment and soci-ety in their decisions. Moreover, there are rankings of Corporate Social Responsibility (CSR), which at-tract considerable publicity, making CSR emerge as a priority for managers inevitable in all countries (Porter & Kramer, 2006).

However, some common types of CSR are frag-mented and disconnected from !rm’s core busi-

ness and strategy. If corporations used the same tools that guide their core business choices to ana-lyze opportunities for CSR, this attitude towards society, which is not charity per se, could lead to new sources of opportunity, innovation and com-petitive advantage (Porter & Kramer, 2006).

To deal with this dilemma, Porter & Kramer (2011) created the concept of Creating Shared Value (CSV). It can be de!ned as business practices and policies that increase !rm’s competitiveness, while promoting the improvement of the eco-nomic and social conditions at the communities in which it operates. The focus of CSV is about the interconnections between economic and social progress (Porter & Kramer, 2011).

In practice, the goal of CSV is to implement strategies that re"ect the social, environmental and economic aspects in which each company op-erates, in order to incorporate sustainability into its values, strategy and competitive advantages (Por-ter & Kramer, 2011).

Making an allusion to wildlife, competition is part of everyday life in many di$erent species. The struggle for food and shelter is daily, where prey and predator (rivals) compete to get an advantage over the other, to continue living. Taking this anal-ogy with animals, a parallel to human society can be traced. By the concepts of CSR is expected the “good” behavior from business, much more than competitive attitudes. However, whether among humans or wildlife, Planet Earth is an environment where competitiveness has always prevailed.

In the human’s pre-history the competitive-ness was needed for the survival, in disputes be-tween mankind and another animals. Afterwards, came the human’s disputes in ethnic and tribal wars. Presently, groups of people are conducting economic battles. Therefore, since primitive soci-eties, the rivalry existed on the day-to-day of this planet. However, the competition has been chang-ing over the centuries, and with the advent of new techniques and technologies, modern man goes mainly to compete economically.



Porter & Kramer (2011) do not believe that companies are rivals of humans; instead, they are valuable ways to meet human needs. To use the business as e#cient tools to meet social demands, they developed the CSV, which has the principles of competitiveness inherent in its operating sys-tem. This structure appears to enable a new form of relationship between companies and society, to develop the Shared Value Capitalism.

Corroborating the idea of this being a new capitalism, one that Porter & Kramer (2011) call the Shared Value Capitalism, Peter Drucker (1993) states that there is already a new society, which he calls the Post-Capitalist Society. It uses the free market as engine for economic integration, where the institutions of capitalism survive, although some may play very di$erent roles (Drucker, 1993).

In this sense, the company’s role may expand its scope for a more social approach while revenues increase, if the attitudes of environmental and so-cial responsibility are aligned with !rm’s core busi-ness (Porter & Kramer, 2011).

The center of the Post-Capitalist Society, its struc-ture, social and economic dynamics, its classes and social problems, all is di$erent from the capitalism that led the last two and a half centuries. So, this new capitalism will formulate new political parties, groups, social and political value systems (Drucker, 1993).

Amartya Sen (1999), Porter & Kramer (2011) and Drucker (1993), realize the need for a capitalism that seeks social outcome, where development should promote more freedom for individuals.

It is di#cult to think that any substantial process of human development can happen without an ex-tensive use of markets. However, this does not ex-clude the role of companies in the social support, of public regulation aimed at people’s welfare and policies that can improve the conditions of human life. This is a more extensive and complete perspec-tive that the one traditionally applied on markets’ functions (Sen, 1999).

This is the moment for a new conception of capitalism, for social needs are large and continue

to grow. Currently, consumers, employees and the new generation of young people are asking for companies to take control of the situation in a re-sponsible manner (Porter & Kramer, 2011).

Prahalad & Hart (2002) give insights in the same direction of Porter & Kramer (2011), they say that multinational companies should look at globalization strategies through the lens of inclusive capitalism.

Companies should not stop promoting contin-uous improvement and they should also consider the possibility of pro!ting from another logic. Eco-e#ciency is based on continuous improvement, but the companies will not guarantee the sustain-ability of the planet simply by doing better what they already do today. It is necessary more than that, and organizations that are anticipating may obtain a sustainable competitive advantage (Pra-halad & Hart, 2002).

A new logic of pro!ting can be part of a di$er-ent perspective on the economy, the one called “green”. For Joel Makower (2011) there are three types of “green” economy:a) One based on clean technologies and innova-

tive ventures backed by venture capital and connected to energy, transportation, water use and new raw materials.

b) Another one consists of small !rms, such as travel agencies specialized in “green” automo-tive repair, “green” shops, and “green” restau-rants. These are projects that integrate envi-ronmental and social values to their way of operating and convert them into a signi!cant portion of its value proposition.

c) Probably the most important is the “green” econo-my related to large global corporations. For years, they are integrating the environmental theme to their operations and, gradually, aligning it to their strategy and their sources of value.

In this sense, Porter & Kramer (2011) say that companies should connect their core business with social necessities. Therefore, they explain how to develop shared value, using the three following levels:


a) A new concept of needs, products and customer markets.

b) The rede!nition of productivity in the value chain.

c) Supporting the development of a local cluster.

MethodologyThis paper uses the phenomenological method to answer the research objective. It considers that reality is not unique, but there are as many as the interpretations and communications. The subject is the most important aspect in the process of knowledge construction. The object of study is the phenomenon and the facts themselves, where one tries to remove the bias of the subjects that narrate the fact, by including a maximum of possible per-spectives, about the phenomenon (Gil, 1991).

Therefore, the explanations given for the choic-es made by WEG, through the lens of CSV, will be withdrawn based on the interpretations of WEG’s leaders have from the fact. Moreover, the choices of indicators and documents to be analyzed have been chosen by the researchers, based on the lit-erature.

According to Gil (1991) this study is of an applied nature, it aims to generate knowledge for practical application, intended to address a speci!c issue, encompassing characteristics and interests of WEG and region of its main factories, the northeast of Santa Catarina.

Considering the approach of this paper’s goal, this is a qualitative research. This type of study can consider phenomenology to guide the under-standing of the study, by answering questions of the type “how?”, “what?” and “why?” (Yin, 2001).

The qualitative research allows a dynamic re-lationship between object and subject. The inter-pretation of events, followed by the characteriza-tion and explanation of the meanings and reasons “how”, are the structure of the qualitative research process, where there is no need to use statistical techniques (Gil, 1991).

In phenomenology, the object of the research

is the phenomenon itself (Gil 1991). Therefore, it was tried to get as many perspectives as possible to write this review, where information was gener-ated from interviews with managers and internal documents, but also from the secondary data.

Therefore, the researchers went to the WEG headquarters several times, with the intent to un-derstand the events that promoted the creation of shared value. The !rst subject is represented by WEG’s internal documents and its leaders: Deisne Araújo (Corporate Marketing Chief ), Luis Tiefensee (Industrial Director), Sebastião Lau (R & D Man-ager), Antônio César da Silva (Marketing Director) and Harry Schmelzer Jr. (CEO). The second subject, the Northeastern Santa Catarina, will be properly characterized in the next chapter.

The concept of Creating Shared Value relates to the common bene!t that occurs between the !rm and its close geographic region. Thus, based on the concept of clusters, this paper focuses on verifying the economic and social in"uence for decades pro-moted by the company in the Northeast of Santa Catarina State.

Thus, this research should be done with a tem-poral cut that does not consider only a single mo-ment, but rather a progression of events that led to the transformation of space, society and economy of that area. To analyze how this sequence of events promoted by WEG in the region occurred, a case study is the most appropriate research design.

According to Bryman (2008), there are di$er-ences among strategy, design and method of re-search. Following the classi!cations of this author, in this study the strategy is qualitative; the method is through interviews, observations and documen-tal analysis; and the design is a single case study.

The single case study can be used when one research is representative of the phenomenon. Along with other typical cases, it will provide an appropriate context to certain research questions (Bryman, 2008; Yin, 2001).

The case study is suitable for an empirical in-vestigation, when the search for a phenomenon



is within its real context, with little control of the events by the investigator (Yin, 2001).

To qualify a qualitative research as scienti!c, one can use the triangulation of information, data and evidence, to ensure the reliability and the va-lidity of the research !ndings (Yin, 2001).

A qualitative research cannot meet the typical criteria of natural science, such as internal validity, external validity and ecological validity. However, these validity criteria commonly used for quantita-tive studies, cannot be properly used in a qualita-tive approach (Bryman, 2008).

So, according to Lincoln & Guba (1985), in a qualitative research validity should be replaced by four criteria of trustworthiness: “credibility”; “trans-ferability”; “dependability” and “con!rmability”.

After the de!nition of the method; subject of study; object of study and; research design; it is presented the collection and processing of data.

This work is based on primary data collection through semi-structured interviews and systematic observation. The primary data are those taken di-rectly from study subjects, about the phenomenon. In a semi-structured interview, the questions do not demand an objective (closed) answer, giving then freedom to a conversation with relative "exibility.

The secondary data are found in publications and archives built by others that have helped to describe parts of the phenomenon. In addition, statistical information about the region have been consulted, reports from o#cial industrial federa-tions and commercial associations from the Santa Catarina State, for example, SEBRAE-SC and FIESC.

To obtain the primary and secondary data, this research consisted of periodic visits between May and September 2012 to WEG’s headquarters in Ja-raguá do Sul, aiming to check documents and con-duct interviews with the company’s leaders.

Directing the structure of this research, Porter & Kramer (2006; 2011) describe how a !rm can share value with its community:a) First, companies must be sensitive to the en-

vironment in which they operate and !nd out

what are the best ways to a$ect positively soci-ety with its core business. At the same time, the !rms must understand how they are a$ected by their competitive context (cluster).

b) Then, the companies should look at their value chain to see which social and environmental actions that su$er the greatest impact of its activities and thus, understand the potential opportunities that arise.

Following the recommendations of Porter & Kramer (2006; 2011), this study proposes a logical construction for this Creating Shared Value case. The procedure followed the order described below:a) To de!ne WEG’s core business.b) To check the points of intersection

between business and social issues.c) To identify the existence of social dimensions

for value proposition.

DISCUSSION AND DEVELOPMENTThe History of WEGThe word “WEG” which also means path in the Ger-man language, demonstrates some of the history of this world-class Brazilian company. This term was chosen due to the initial letters of its three founders, Werner Ricardo Voigt, Eggon João da Silva and Geraldo Werninghaus. In 1961, when founded, the company created by an electrician, a manager and a mechanic was called Eletromotores Jaraguá. Years later, however, the company’s name is changed to WEG, honoring its founders.

In the early 1960s, these three entrepreneurs began their path to a destination inaccurate and this endeavor was a risky undertaking. By that time, the Jaraguá do Sul had approximately twenty thousand inhabitants, and was connected with the rest of the country only by one railroad and bad roads, with di#cult access. In the 1960s, phones in Brazil were found only in large capitals and in that region they were rare (Ribeiro, 2011).

The geographical isolation of the region, com-


bined with a strong and technically rich German culture were important sources of motivation for entrepreneurship in the entire northeast region of Santa Catarina. Throughout the history of this piece of Germany in Brazil, several companies were born to meet the needs of the local population. The European emigrants and their descendants left a legacy of good management and pioneering spirit, so that Jaraguá do Sul, which currently has less than 150,000 inhabitants, is the birthplace of some important companies of the nation (Ribeiro, 2011).

This venture conceived in Northeastern Santa Catarina spread over the !ve continents, after a few decades. At the beginning it used to produce only electric motors, but it has diversi!ed its port-folio, starting to deliver complete industrial elec-trical systems, including transformers, generators, components and automation systems. Today WEG is among the world’s biggest players in electrical equipment, for example, drive and protection, in-dustrial process automation, power generation and distribution, and industrial paints and varnish-es (FIESC, 2012; WEG 2012).

In seeking this level of synergic diversi!cation the company has grown, not only in size, but also regarding the concern it has for its community and people. Currently, several companies often show indi$erence to their employees. However, the val-ues evidenced by WEG demonstrate that appar-ently, things are di$erent there. A phrase credited to WEG’s !rst CEO, Eggon João da Silva, is painted on the wall next to the stairs that lead to the direc-tors’ o#ces, re"ects the company’s culture: “If ma-chines are missing, you can buy them. If there is no money you can borrow it. But men, you cannot buy or borrow and men motivated by an idea are the base of success”.

After two decades of continuous growth, WEG was only su$ering great di#culties in the 1980s. With the economic crisis in Brazil and worldwide, for the !rst time, the demand for electric motors decreased. However, the company opted to follow

its strategic plan, it was believed that the economic activity would stay low only for a while. Thus, WEG did not lay o$ employees or reduced production. When inventories accumulated considerably the directors with the support of the unions instituted a plan to deal with this situation. The proposal was a reduction of quarter hours and ten percent of wages, instead of layo$s, and the bill was shared between WEG and its employees (Diegues & Bruno, 2009; Ribeiro, 2011).

As there was a worldwide trend of outsourc-ing, WEG was heading in the opposite way, keep-ing a very verticalized structure. To overcome the crisis and increase sales, the company opted to diversify in a synergistic way, taking advantage of it verticalization. In the 1980s, it was created WEG Acionamentos (Drives), to develop controls and electronics. Then, it was founded WEG Máquinas e Transformadores (Machines and Transformers), in order to enter the market of higher voltage. WEG Química (Chemical) was created to manufacture industrial paints and varnishes. And, in 1988, WEG Automação (Automation) was established to pro-duce robots and automation systems. During the 1980s, the company was developing and accumu-lating knowledge in software and electronics. This fact enabled it to enter into new markets, and led the company to a higher level of innovation that associated with a synergistic vertical integration, guaranteed to WEG a competitive standard that match internationally established players (Ribeiro, 2011).

In the late 1980s came the most sensitive mo-ment to the history of WEG, it was time to move Eggon from the company’s command, and after a professional succession contest, his son was demo-cratically elected. Décio Silva, the new CEO, during his term in charge multiplied by twenty times the revenue, compared to when he had started his mandate. He raised the level of WEG to a world-class company, taking its products to new and distant markets and maintaining the principles of simplicity and responsibility (Ribeiro, 2011).



Eggon once again coordinated a important succession in the company, now was the time of Décio to pass the stick to a WEG’s career executive, Harry Schmelzer Jr., that has started as trainee at the company. So, once again WEG demonstrated consideration for its employees, where several can-didates were evaluated and the chosen one was a professional who shares the company’s culture. In 2008, when Schmelzer became CEO, Décio became Chairman of WEG’s Council (Diegues & Bruno, 2009; Ribeiro, 2011).

Nowadays, WEG has !ve business units: Mo-tors (commercial and industrial); Automation; En-ergy (generation); Transmission & Distribution and; Paints & Varnishes (WEG, 2012).

WEG motors for commercial usage are used in machinery and equipment such as commercial food processors, mixers, reapers, and home ap-pliances such refrigerators and air conditioners. They are mostly single-phase motors working on low voltage. The industrial motors are used in vari-ous industry segments such as oil & gas, mining, steel, sugar & ethanol, pulp & paper, shipbuilding, cement and more. They are used both in low and medium voltage. Its main applications are cranes, centrifugal pumps, and compressors, among oth-ers (WEG, 2012).

The Automation unit has three main usages: drives, controls and electric panels. Drives are electronics that allow motors activation, their pos-sible e$ects are variation of speed and torque and they allow various protections incorporated into a single product. Controls are developed for the pur-pose of sectioning, protection, control and signal circuits. Through the electric panels it is possible to organize drives and controls in order to control and protect machines, from a simple application to an industrial plant (WEG, 2012).

WEG Energy delivers the full range of special-ized equipment and services for thermal power plants, hydropower plants, wind power plants, so-lar power plants and critical power: turbines, turbo generators, hydro, synchronous alternators, wind

generators, panels, cubicles, among others (WEG, 2012).

Transmission & Distribution unit o$ers solutions as conventional energy substations (on turnkey), mobile solutions (substations and transformers), breakers and transformers, and more (WEG, 2012).

WEG Paints and Varnishes protect equipment against corrosion and other harsh conditions. The solutions are present in various segments, such as ships and oil platforms, re!neries, tanks, steel struc-tures, auto parts, agricultural implements, lighting, electrical panels, enameled wires, tubular steel fur-niture and appliances (WEG, 2012).

The context of the State of Santa CatarinaThe State of Santa Catarina is one of the 27 Brazilian federal states. It has a population of approximately 6.2 million inhabitants, is the eleventh most popu-lous and the ninth densest state of Brazil, with an area of 95,703 km square. Santa Catarina possesses 293 municipalities and its capital is the city of Flo-rianópolis. The state is bordering to the south with the state of Rio Grande do Sul, to the north with the state of Paraná, to the west with the Republic of Argentina, and the Atlantic Ocean is to the east, along a coastline of 450 kilometers (IBGE, 2010).

Considering the totality of its population, 18% are in rural areas and 82% are in urban areas. The state can be considered progressive in economic terms and relatively wealthy compared to other states. The HDI of Santa Catarina is 0.84, the second highest among Brazilian states, combined with a literacy rate of 96% among citizens over !fteen years (OECD, 2010).

Imposing an accelerated pace of industrial pro-duction, the GDP of Santa Catarina (eighth largest in Brazil), was over R$ 129.8 billion (around US$ 61,8 billion), this value is approximately 4% of the Brazil-ian GDP and has expanded more than 5% between 2008 and 2009 (latest data available). The GDP per capita of Santa Catarina was R$ 21,214 (around US$ 10,100), that is the fourth largest among Brazilian states (IBGE, 2011).


Santa Catarina has many natural attractions and has developed widely the tourism. There are several beaches, !elds and mountains. In addition, there are !ve federal state reserves for environ-mental protection and ecological parks. Consider-ing the natural endowments, Santa Catarina has economically viable mineral reserves. The state has the largest reserves in Brazil presently producing coal for steelmaking, "uorite and "int. It also holds the third largest industry of ceramic clay and the second largest national industry of quartz and nat-ural phosphate (Santa Catarina, 2012).

The trade and services sector is the main creator of wealth in Santa Catarina. The state has a promi-nent position in the tourism industry, knowledge industry, and services related to technology. Its production system is organized in a balanced way, so that the economic output and its population are not concentrated in a few big cities, but in many regional centers. The agribusiness is the main pro-ductive force of the state, the segments of hens has 14% of world’s exports and the tobacco industry is also a signi!cant exporter (FIESC, 2010).

Added to this, Santa Catarina is competitive in segments as metallurgy, machinery and elec-tric motors, generators, metal castings, bolts and nuts, among others. The textile industry is the sec-ond largest in Brazil and the shipping industry by number of employees, is also the second largest. Moreover, there are other representative industrial segments, as the furniture and paper’s pulp (FIESC, 2010).

In 2011, although it has been Santa Catarina’s best year for exportation, with a historical record of US$ 9 billion (19.4% more than 2010), its trade balance’s de!cit has increased; it has been accu-mulating a de!cit since 2009. In 2011, the exports of Santa Catarina accounted for 3.5% of Brazilian exports, tenth state with the highest export value. The main destination countries of these products were the United States (11%), Japan (7.6%), Argen-tina (7.5%) and 7.1% to the Netherlands (FIESC, 2012).

The Northeast region of Santa Catarina was mainly colonized by Europeans, mostly from Ger-many, Italy, Norway, Switzerland, Portugal and Po-

Figure 2 - Electric equipment industry structure as perceived by WEG



land (Santa Catarina, 2012). This region is constitut-ed of 26 cities and has an area of 10,830 km2 and a population of approximately 1.1 million inhabit-ants. It is the region with the highest concentration of industry in the state and in 2009, had a nominal GDP of R$ 30,3 billion (around US$ 14,4 billion), 8% higher than in 2008. In 2009, according to IBGE (2011), its GDP per capita was R$ 20,050 (around US$ 9,547).

Hence it will be described according to this pa-per’s three speci!c goals, what WEG has done since its foundation that characterizes the creation of shared value.

CREATING SHARED VALUE BY WEGCore BusinessBefore presenting WEG’s core business it is appro-priate to describe the company’s mission, vision and values. Afterwards it will be presented the social aspects and necessities that are being posi-tively a$ected by its businesses.

As stated by its CEO Harry Schmelzer Jr., the mission of WEG is “continuous and sustainable growth while maintaining simplicity”. The com-pany’s vision is “to be global reference in electrical machines, having a wide range of products, pro-viding complete and e#cient solutions”.

WEG’s corporate values are: “humanitarian company”; “teamwork”; “e#ciency”; “"exibility”; “innovation” and “leadership” (WEG, 2012).

WEG’s core business is related to electric en-ergy. Its products are energy generators, some are equipment controllers, another ones use energy to move various kinds of machines in all segments, from residential use to heavy industry. Therefore, all the segments that are part of the electric indus-try are covered (Figure 2), from generation to com-ponents and integration, until conversion (WEG, 2011).

It is part of WEG’s strategy to be a leading pro-vider of energy e#ciency solutions for rotating

electrical machines. A more e#cient and rational-ity of the use of this energy is part of the decisions of the day-to-day business. (WEG, 2011).

Points of intersection between business and social issues

WEG is concerned to minimize operating costs in the industry since the 90s, when they released lines of electric motors with output well above industry standards. In addition, WEG drives, con-trols, motors and even paints are also inserted in projects that require reliability and energy savings (WEG, 2011). In Brazil, 42% of energy consump-tion goes to industrial usage and industrial motors utilize 29% of the country’s total energy consump-tion. Consequently, WEG has developed a corpo-rate culture of energy e#ciency; all its products are conceived to save energy (WEG, 2012).

The demand for energy is growing worldwide. However, the power generation today dependent heavily on fossil fuels and non-renewables likes coal, oil and gas. The expertise in the area of re-newable energy developed by WEG over the past years, allows it to deliver complete solutions in renewable energy power plants. Hence, this trend also aligns with the global actions to minimize the impacts of climate change from the use of fossil fu-els (WEG 2011).

Human safety, especially when it involves work-ing in extreme conditions is a concern for many in-dustries, such as fossil fuel extraction, mining, steel mill or energy transmission. So, to protect and care for the people that work in such conditions is a way of connecting society’s needs with WEG’s core business. There are in its portfolio, products and procedures that assure human well-being, that have explosion protection systems or that work as exhaustion systems, in order to withdraw smoke from a closed environment, such as mines and tun-nels. Some drives and controls, protect workers from receiving electric shock by deactivating an entire energy grid, if needed. Added to this, WEG has developed electric traction systems for marine vessels and automobiles.


Beside of selling products, WEG has contributed to society by linking the human needs of educa-tion and professional training to its core business. Its executives have stated that the corporation’s fundamental values include investment in people’s development, due its own necessity of innovation and technological development. These actions that have bene!ced the education of the Northern Santa Catarina have begun a few years after WEG was created, with the founding of the technical school CentroWEG.

Social dimensions for value propositionIn this sense, it has been identi!ed four social di-mensions that are related with WEG’s core busi-ness:a) Energy e#ciency;b) Renewable energy;c) Electrical products for human care;d) Technical education.

A new concept of needs, products and marketsThe rationalization of energy use has been a relent-less pursuit of the industry in general. Companies want to reduce their energy-related costs but there is also another great concern, which is the level of emissions of greenhouse gases, as they might cause global warming. It has been a global trend setting targets for reducing emissions. Thus, mar-kets are favorable for equipment that generates cleaner and more e#cient solutions (WEG 2011).

Laws are becoming more stringent regard-ing minimum levels of energy e#ciency. From an environmentally responsible perspective, WEG’s products and their in"uence have a strong bias in cleaner production and rational use of energy, directly related to the emissions of greenhouse gases. WEG has around 1,200 engineers, 30% are specialists, while 10% have a masters or doctors degree. In 2011, innovation investments totaled R$ 134,8 million (around U$ 63,8 million), that rep-resents 2.5% of the Net Revenue. In this direction,

some examples are:a) High e#ciency motors and machines, which

meet the highest degree of e#ciency, as the class IE4. Some motors have protection against explosion and can be used in the mining and oil & gas industries. There are also motors used for smoke extraction in extreme working con-ditions.

b) Electronic sensors for commercial usage, in-dustrial automation and human protection. For example, these sensors can turn o$ a machine when a line is crossed, protecting the employ-ees.

c) Frequency inverters and control systems re-duce energy consumption by avoiding losses. These products have also protection systems, blocking electrical current in energy grids, avoiding human life damage.

d) Paints that are antifungal and antifouling. These varnishes can be used on the hulls of marine vessels, preventing the proliferation of marine material, reducing losses by extra energy con-sumption.

e) Complete systems for power generation us-ing renewable sources, including generators, transformers and automation. WEG has de-livered more than 7,600 mVA from 2008 until 2012, including small hydro, biomass and wind power plants.

f ) Electric drive systems for transportation, such as the trolleybus in São Paulo, the solar boat in the Amazon Rainforest, and the hybrid elec-tric-ethanol bus, in partnership with the Itaipu power plant.

Energy e#ciency is embedded in WEG’s cor-porate culture. Apart of developing a wide range of electrical products that are energy saving, the company works together with many customers in order to improve the energy e#ciency of their pro-duction plants. The “Think Green” project (Pense Verde) o$ers higher e#ciency solutions to a wide range of industries. It is a program that encourages consumers replacing old, damaged or lower e#-



ciency motors, of any brand, to become part of the payment for a new WEG motor. Hence, WEG pro-motes the use of motors with higher e#ciency and creates awareness of energy conservation.

Rede"nition of the productivity in the val-ue chain In 1968, a few years after WEG’s foundation, it was created the company’s “Training Center” - the Cen-troweg. By that time, in the Northeastern Santa Catarina people’s ability to work were mainly lim-ited to agriculture skills. At the surrounding area there were no su#cient people to work at a mo-tor’s factory, so the ones who were graduating had a job guaranteed at the !rm. Since the beginning, there were more than 2,200 young people trained, 1,300 from these are still working at the company.

WEG’s pioneering approach was revealed in the late 1960s, when the model of participative man-agement started at the company. The commissions and committees are composed from four to eight members, from areas with an interest in the mat-ter discussed. The outputs of these committees are not decided by majority but by consensus. Nowa-days, there are more than 65 commissions spread all over the group’s !rms and the controlled com-panies (Diegues & Bruno, 2009).

In 1971, the company initiated a system of med-ical care at its own facility that bene!ted both the workers and their families; the managers by that time were already concerned about the wellbeing and the productivity of the employees (Ribeiro, 2011). WEG has also invested signi!cant amount of money in the health public systems of the North-eastern Santa Catarina and have created programs to help employees to overcome drugs and alcohol addiction.

Also in the 1970s, the company created work-groups in order to promote campaigns of “zero defect” (Ribeiro, 2011). Since 1982, there are the “Quality Control Circles”, groups of people (5-8) who work in the same area or correlated ones and carry out activities to address issues related to quality,

productivity and work atmosphere. In 2011, these groups have implemented 7,000 new ideas that generated more than R$ 15 million (around US$ 7,1 million) in return. From 1982 until 2011, there were implanted more than 81,000 ideas, created by 568 groups.

In the early 1980s, in a period of global econom-ic crisis, Eggon did not lay o$ the employees, they were put on vacation or training (Diegues & Bru-no, 2009). Moreover, the free time created by the lower journey was used in educational programs (Ribeiro, 2011).

In 1986, when there was no health insurance in Brazil, WEG created a system of salary advance-ment so that the employees could meet expenses incurred on medical treatment. The program re-mains for cases that are not covered by the current coverage (Ribeiro, 2011).

In 1991, the “WEG Plan for Productivity and Quality” established the pro!t’s participation pro-gram. Since then, the !rm have been distributing among its employees 12.5% of pro!ts before In-come Tax. WEG has also a “Program for Health and Security”, where the workers inspect production sites, in order to perceive security de!ciencies (Di-egues & Bruno, 2009).

In 1995, WEG has established an environmen-tal policy and in 1998 those policies were adjusted to meet ISO standards. It was the extern recogni-tion of what has always been the company’s cul-ture, one long-term ideology that is re"ected in the way in which it operates in the Northeastern Santa Catarina (Ribeiro, 2011). WEG’s “Usage 100” (Aproveitamento 100) program was established for the reuse of wood processing sub-products, water and solid residues (Diegues & Bruno, 2009).

The electrical sensors that WEG produces, since 2010, when it started to control Instrutech - an au-tomation !rm founded in São Paulo, were initially bought to prevent in-house accidents. Buying elec-tric sensors for safekeeping, instead of just drawing safeguard lines at the "oor, shows how WEG cares about its workers and their productivity.


Supporting the development of a local cluster

As Harry Schmelzer Jr. (CEO) stated: “WEG is not an island, it is embedded in a community, and the company must help to develop its surrounding, not just for humanitarian reasons, but because it will also re"ect in WEG’s businesses”.

In 1962, there was already established the “Ja-raguá do Sul Commercial and Industrial Association” (Associação Comercial e Industrial), but it was not re-ally being signi!cant for the city’s development until WEG’ !rst CEO, Eggon João da Silva, became its presi-dent. In 2001, together with other companies, WEG founded the city’s newest “Business Center” (Centro Empresarial) gathering under the same roof eight business entities of the city (Diegues & Bruno, 2009).

WEG has already given a signi!cant !nancial assistance to public institutions at the Northeast-ern Santa Catarina, through direct donations, en-trepreneurships, and managerial assistances. The company gives each year more than R$ 2 million (U$ 950,000) to local institutions, but since Eggon’s time WEG prefers to teach and to help people, so they could evolve themselves, instead of giving donations (Diegues & Bruno, 2009).

The Centroweg, WEG’s “Training Center”, was established in 1968. By that time, the people who were !nishing their technical studies were choos-ing either to stay at the company or to start work-ing at WEG’s suppliers or at another enterprises of the region. Moreover, in 1970 together with Jaraguá do Sul city’s administration; it was created a basic educational program for adults. In 1972, Eggon stirred up the city’s entrepreneurs to found a better higher educational institution; it was then created the “Jaraguá do Sul Region Educational Foundation” (Fundação Educational da Região de Jaraguá do Sul). Therefore, WEG’s founders knew the bene!t to the entire region and to their company of providing education (Diegues & Bruno, 2009).

Through WEG’s o#cial assistance network, another pioneering initiative in Brazil, it was started a recycling program of obsolete motors, that were replaced by

others with higher energy e#ciency. The old engines that WEG collects go for recycling and the materials reach a reuse index of over 90% (Ribeiro, 2011).

There was a movement to standardize measure-ments of electric motors in Brazil between 1969 and 1970. Eggon da Silva and Werner Voigt worked together with the “Brazilian Association of Techni-cal Norms” (Associação Brasileira de Normas Técni-cas) to standardize the use of metric units for the construction of motors, giving to WEG competitive advantage over the competitors that were using another units (Diegues & Bruno, 2009). Nowadays, WEG has representatives working together with the “International Electrotechnical Commission” and with institutions connected to the Brazilian government, such as the BNDES (National Bank for Development) and FINEP (Agency for Projects and Studies). Décio Silva, WEG’s Chairman is now work-ing with politicians and business leaders in the project “Greater Brazil” (Brasil Maior) to formulate strategies to improve Brazilian competitiveness.

WEG has developed the “Costumer’s Training Center” o$ering for employees of companies it has relations 18 courses about WEG’s products, elec-tronics, dimensioning, installation, maintenance and management techniques. In 2011, 2,484 cus-tomers have been trained and more than 25,500 customers studied at WEG Training Center, since 2000. Also, WEG executives and managers have kept close contact with leaders of the other com-panies in related segments at the region, like Whirl-pool, Embraco, Tupy and Schultz.

Raw materials account for most of WEG’s pro-curement; however they are only available very far from its productions plants. Therefore, 22% of the total value of WEG’s procurement is realized at the Northeastern Santa Catarina. Considering that, the company started to increase the value share spent on local procurements. Since then, the company outsources a few components and began to pre-pare and to develop its local suppliers, where 54 families were bene!ciated. From 1993 until 2011, there was an increase of 10 times in the number of



local suppliers and 78 times in the total value spent by WEG with local procurement.

WEG have partnership with the best universities in Brazil and worldwide. The Federal University of Santa Catarina (UFSC) was WEG’s partner in the solar boat construction, this university and WEG have already made many projects together and is the place were many of WEG’s engineers come from. Moreover, WEG is part of a international committee for technological development and innovation and some of its con-stitutes are: Technische Universität Dresden (TUD); Technische Universität Braunschweig (TUB);

Leibniz Universität Hannover;Laboratório de Ensayos y Mediciones Eléctricas (LEME); University of Glasgow; University of Wis-consin; Texas A&M University; Nippon Paint.

In July 2012, WEG’s engineer Harry Schmelzer Neto of the Solar Energy and Smart Grid Depart-ment, established a partnership with the research group on photovoltaic energy (Fotovoltaica UFSC) of the Federal University of Santa Catarina, coordi-nated by professor Ricardo Rüther, and in that occa-sion, by professor Trajano Viana. This project aimed to exchange knowledge about solar energy and gather people together to develop Brazilian’s pho-tovoltaic market. Among the participants of these seminars and expositions there were students, re-searchers, entrepreneurs and representatives from other companies in related segments. One exam-ple is the Elementar Energias Renováveis, which is in the renewable energy industry, and was repre-sented by Kamran Fard, that stated: “Photovoltaic energy generation is the business of my company. Therefore, I would like to thank WEG and Fotovol-taica UFSC for the experiences and knowledge ob-tained at these courses and gatherings “.

FINAL CONSIDERATIONSThe State of Santa Catarina and entire country have WEG as a good example of corporation and leader. Its humanitarian actions impact positively

its surroundings and it is part of a long-term vi-sion and ethics values, which are embedded in the company’s culture. Furthermore, in the long run this !rm has never lost competitiveness by acting in this way towards society.

In the last decades, as the company started to internationalize itself it had to spread worldwide its core values. Those are principles that have be-come competitive advantages. In this article, it has been identi!ed four social dimensions where the company is pro!ting by satisfying society’s needs: energy e#ciency; renewable energy; electric prod-ucts for human care; and technical education. Also, the research indicates that WEG is working on the three levels of Creating Shared Value.

WEG’s is concerned about its productivity since its !rst years of existence, in the 1960s. The founders were well aware of the economic ben-e!ts from taking care of its community. Addition-ally, the corporate’s commissions and committees are part of day-to-day work, and they have a huge autonomy of decision, assuring a good communi-cation and a sense of shared engagement among its employees.

Moreover, the care for its community is some-thing that has been born with the corporate’s cul-ture. Many companies in the Northeastern Santa Catarina have taken WEG as leader, the !rm has been promoting integration and transmitting knowledge to another institutions as no other did. Since the 1960s, it works close to governmental agencies in order to improve Brazilian competitive-ness and standards.

Nowadays, WEG have compromised itself with a publicly stated strategic plan, entitled WEG 2020. Through its mission, that is continuous and sus-tainable growth while maintaining simplicity, from 2011 to 2020, the company aspires to grow almost 3 times its present annual revenue, reaching a 17% CAGR and R$ 20 billion (around US$ 9,5 billion) in annual revenues. To get bigger and more competi-tive is a way that WEG has found to keep its people safe and able to reach higher human standards.


The company’s growth drivers are mainly keep doing more and better, international expansion and new businesses entry. This once start-up !rm, has already gained the BCG 100 New Global Chal-lengers Award and is Creating Shared Value, even though the context for !rm’s rivalry and strategy in Brazil is unfavorable, WEG has managed to keep track of an impressive and inclusive development.

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