Globalization—a growth perspective
By Kaitlyn Briggs ’13, DVM ’17, MBA ’21; Glenn Mendez, MBA ’21; Oluwanifemi Oluwadairo ’20 (Mechanical Engineering); and Heidi Xu, MBA ’21
In our Leaders in Emerging Markets class, taught by Lourdes Casanova, senior lecturer and Gail and Rob Cañizares Director of the Emerging Markets Institute, guest speakers shed light on the advantages and challenges that come with investing in emerging markets and expanding their companies to emerging markets.
Considerations for investing in emerging markets
Wim Vandenhoeck, MBA ’94, senior portfolio manager at Invesco US, visited our class to discuss his work managing fixed income portfolios in emerging markets.
Vandenhoeck spoke to us about the importance of understanding asset classes and return drivers when investing in developing countries. It is vital to understand that the currency of your investment matters (US dollars, euros, or local currency), as investments made in local currency often have the monetary and fiscal policy of the country driving returns. These local currency investments make up 12 trillion dollars of return each year; the largest segment of assets and returns in emerging markets. Investments can be managed actively, by a manager, with the thought that over time (when managed well), these assets will outperform the market. Or investments can be managed passively, typically with an index fund that is diversified but performs at the level of the market.
About half of all money invested each year is invested passively, commonly to avoid the higher fees of active management and because of the belief that the market performance is adequate. However, this is a mistake, because there is a significant difference in the performance of the top 20 and bottom 20 countries in emerging markets.
Economic vs. health impacts of emerging markets
Vandenhoeck also addressed COVID-19’s effect on the performance of emerging markets. Many emerging markets were hit hard early in the pandemic, which significantly decreased growth and shrank their economies. This economic effect was seen even before the health impact of COVID-19 occurred in these countries, in late April. In order to attempt to reverse the economic effects of COVID-19, central banks lowered rates. This loan rate decrease was meant to facilitate credit growth and support, but it was not enough for many businesses and investors; external support was also needed. Unlike several developed countries, the economic and health impacts due to COVID-19 turned around quickly in many emerging markets. This is potentially due to the significantly younger average age of the population in these developing nations, as younger people have lower COVID-related mortality rates.
Because these developing nations recovered more quickly from a health standpoint, exports and new orders have begun picking up more rapidly as well. In fact, the cumulative growth of low-income countries and emerging markets is faster than that of more advanced economies.
Yield curve differences
The US Treasury yield curve allows fixed-income investors to compare similar Treasury investments with different maturity duration to understand the risk and reward. Historically, emerging market real yields are significantly higher than developed markets. After COVID-19, the emerging market and developed market yield differential have become more prominent.
Emerging market bonds can be grouped into the categories of steep curves, anchored curves, and in-between curves. Brazil and South Africa fall into the most uncertain category: steep curves. Anchored curves countries are those where the government cannot move the policy rate lower. For in-between countries such as Mexico and Indonesia, investors have some opportunities with relatively less uncertainty. When the US market is doing well—for example, when the vaccine comes out—the yield curves from emerging markets will come down. These different category yield curves reflect country-specific fiscal policy, economic forecast, and uncertainty. Investors can capture the fixed-income opportunities based on their risk tolerance and their prediction of economic movement. Historically, returns are 2 percent to almost 4 percent. When the Federal Reserve and the European Central Bank cut their interest rates significantly in response to COVID-19, emerging markets followed by doing the same. Due to growing uncertainty, the yield curve has since become steeper.
Challenges with global expansion
The Yingke Law team joined our class to discuss their approach to expanding their law firm to become the largest law firm in the world. While discussing challenges to global expansion, they explained how having a local impact can be crucial to the success of global companies.
Yingke Law is an international, commercial law firm founded in 2001 in Beijing, China. Right now, Yingke Law has 83 offices in China and employs more than 10,000 lawyers, making it the largest independent law firm in the world. The firm pioneered the global expansion of Chinese law firms in 2010, but this has not been without its challenges.
One of the difficulties that Yingke Law faces in their quest for global expansion is the huge variation in regulations specific to each jurisdiction. Each jurisdiction differs on how law firms can organize themselves and operate. In the U.S., for example, law firms can be organized as LLCs, while some countries require them to operate only as partnerships and others require lawyers to operate as standalone entities. Some countries allow for senior lawyers to supervise and revise the work of junior lawyers, while other countries require that each lawyer does their work entirely independently from the rest of their firm.
As data privacy and protection have become increasingly crucial, each jurisdiction has developed its own set of data privacy laws. That means Yingke Law has to set up a separate, distinct cloud infrastructure for each partner; the firm cannot set up an intranet that spans the whole firm.
In addition, most nations are not as relaxed as the U.S. when it comes to marketing and advertising. A lot of countries do not allow firms to host websites or to advertise and use services such as Google advertising, so building brand recognition has been very difficult for Yingke Law.
Lastly, in the West—particularly the U.S.—firms bill by the hour and compensate their lawyers with a salary. Almost all of Yingke Law’s Chinese clients prefer billing using other metrics, such as a percentage of the contract. Furthermore, some Chinese lawyers do not want a salary at all because they think that a flat fee makes them susceptible to exploitation. This creates inefficiencies in their pricing structure. For example, what may be $100,000 worth of labor in one nation could be worth only $10,000 in another.
International mindset, local instinct
As a result of these variations in regulations, there is little to no standardization in Yingke Law’s network. They cannot offer standard products or standardize their practices and operations. This is very costly for them and hinders their expansion. Yingke Law has applied the slogan “international mindset, local instinct” to their globalization attempts. They have been systematic in their approach to selecting partners, requiring that their international partners have an understanding of Chinese work culture and are willing to be flexible in their quotations.
Yingke Law’s main strategy has been to partner with law firms in other nations in lieu of setting up its own offices in those nations. This allows Yingke Law to avoid the tedium of meeting all the varied regulations of each nation while still being able to work with local firms in other countries that are already compliant with the laws of the land. This approach is representative of the “local instinct” aspect of Yingke Law’s slogan and they have been able to successfully present and operate as local firms in other countries, despite being China-based.
Although Yingke Law will always face challenges as it attempts to globalize further, its forward-thinking and innovative approach will continue to enable it to grow beyond what some initially thought possible.
About the authors
Kaitlyn Briggs ’13, DVM ’17, MBA ’21, is a Two-Year MBA student and a veterinarian interested in the intersection of sustainability and marketing in the food industry, especially the dairy sector. Her interest in emerging markets is particularly related to food systems and agriculture.
Glenn Mendez, MBA ’21, is a Two-Year MBA student who developed his interest in emerging markets when he worked as an engineer for China National Petroleum and CEMEX, prior to enrolling at Johnson.
Oluwanifemi Oluwadairo ’20 (Mechanical Engineering) is a student pursuing a master’s of engineering in Mechanical Engineering. As much as he enjoys mechanical engineering, he is always looking to expand his knowledge on other topics and in other fields. He is particularly interested in the potential opportunities in emerging markets around the world, especially those on his home continent of Africa. Oluwanifemi believes that there is a need to understand the idiosyncrasies of the African market so that value-adding products can be designed for and offered to the African population.
Heidi Xu, MBA ’21, is a Two-Year MBA student and an Emerging Markets Institute Fellow. She comes from China and she worked in the tech industry in both the U.S. and China prior to enrolling at Johnson. As someone who has experienced the uniqueness of an emerging market, Heidi is interested in learning about other emerging markets from insiders’ points of view.