The lead article on the cover of the Harvard Business Review, December 2016 issue reads “where to find hyper growth. Frontier Economies may be Risky but they offer big rewards.” The article written by Aldo Musacchio and Eric Werker, explains where to play and how to win in 2017 for global companies in search of double digit growth.
As “emerging market giants such as Brazil, Russia and China are experiencing an economic slowdown, they are increasingly expensive as a base for operations and it’s harder to export to and import from these countries than it used to.”
The solution is to shift focus to what the authors call “frontier economies” – a country possessing one or more of the three characteristics: (i) faltering prosperity, no established dependable prosperity for its citizens; (ii) corruption, the country’s industries are driven by politically engineered market distortions or state given concessions rather than innovation or competitive differentiation; and (iii) Arbitrary enforcement of rules and regulations, the country’s leaders have broad power to do as they please without checks and balances.
The authors provide a guide to map opportunities in frontier economies. Two dimensions are suggested: (i) the degree to which profitability is determined by competition between firms and not by government policies and actions; and (ii) whether the industry is focused primarily on domestic sales or on exports. And that industries will fall into one of the four categories
(a) Workhorses – relatively small companies sell to domestic customers and compete with one another.
(b) Cluster builders – companies in this category compete with one another in export businesses, often as supply chain partners to large foreign corporations serving developed markets.
(c) Powerbrokers – companies serve the domestic market, as workhorses do, but they operate in industries where political influence has a big role.
(d) Rentiers – here companies are export oriented, but the terms of their operation, including taxes, royalties and other obligations are spelt out in contracts with government. Often large, they operate in “concession” space i.e. on the basis of government license.
The article is a great read and full with real life examples. It lists 25 frontier economies including all four major east African economies – Rwanda, Kenya, Tanzania and Uganda. In the list Rwanda comes out as outstanding as, the authors indicate, there is no corruption of much threat to investors seeking double digit growth.