Emerging Market Firms Are Watching

Indirect learning is more valuable to emerging market firms than learning from their own experience.
Emerging Market Firms Are Watching
When emerging market firms enter into more developed markets, they face a host of technological, financial, and strategic disadvantages. But why do some overcome these limitations and succeed while others fail? A study by three U.K. researchers holds that these firms succeed because of “indirect learning,” a term they define as “the observation, incorporation, and sharing of others’ experience of developed markets.” In fact, they argue that indirect learning is more valuable to emerging market firms than learning directly from their own organizational experience.

The researchers include Sourindra Banerjee, assistant professor of marketing at Warwick Business School; Jaideep C. Prabhu, the Jawaharlal Nehru Professorof Indian Business and Enterprise at the University of Cambridge’s Judge Business School; and Rajesh K. Chandy, professor of marketing and academic director of the Deloitte Institute for Innovation and Entrepreneurship at London Business School.

According to these researchers, emerging market companies can acquire indirect experience in three ways: by hiring leaders with experience in developed markets, by observing the practices of developed market competitors, and by joining formal business networks in their industries. As one example, they point to Chinese telecom company Huawei, which succeeded by observing the Chinese operations of its competitor Nokia-Siemens Networks.

The researchers studied data on 384 companies listed on the Bombay Stock Exchange 500 in India and 314 companies listed on the London Stock Exchange’s FTSE 350 from 1999 to 2008. They found that when an emerging market firm has a one standard deviation increase in indirect learning from any of the three sources—hiring leaders, observing competitors, or joining networks—it experiences revenue growth of 2.24 percent, 2.8 percent, and 5.6 percent, respectively.

These findings are significant because some groups in emerging economies are lobbying their governments to make it more difficult for competitors from developed countries to enter their markets. On the contrary, the authors write, “emerging market firms have much to gain from…opening up to developed market competition.” Policymakers could spur more local growth by forming international trade associations, trade shows, and think tanks. The authors also warn developed market firms not to assume that emerging market companies cannot compete with them on the global stage. Those that learn indirectly, they write, “are likely to pose serious threats to their developed market counterparts.”

“Indirect Learning: How Emerging Market Firms Grow in Developed Markets” appeared in the January issue of the Journal of Marketing. It is also available at faculty.london.edu/rchandy/indirectlearning.pdf.