Unlock emerging market success in an unforgiving world

Quality of institutions is the key to success, says LBS strategist

In an era of growing global uncertainty, emerging markets could protect themselves from the impact of global shocks, but only if there is deeper investment in the development of strong institutions to underpin economic development, a London Business School strategist has warned.

Michael G Jacobides, Sir Donald Gordon Associate Professor of Entrepreneurship and Innovation at London Business School, made the remarks in ‘The World in 2050’, a recent report published by PwC.

Emerging markets have the potential to mitigate against the compound impact of global shocks such as high inflation and government debt, and remain attractive places to do business and invest in, Jacobides said. But only with a stronger commitment to and deeper investment in, the development of the institutions that influence the political, social and economic incentives of individuals and businesses.

Dr Jacobides said: “These institutions are the key to boosting productivity and inspiring the type of innovation that will propel emerging markets along their technological frontier. They are fundamental to these markets’ ability to attract and retain talent, investment and business.

“But the long-term economic success or failure of emerging markets in the current environment will ultimately be determined by the quality of their institutions.”

Jacobides pointed to the example of Singapore whose ability to economically pull out in front of its Malaysian neighbour, has been down to institutions which have created a leading regional financial and trading centre, and a favourable environment in which to do business.

“Differences in the quality of institutions, as well as broad economic policies, are at the heart of these countries divergent long-term economic paths,” Jacobides explained.

While the traditional focus has been on macroeconomic symptoms, Dr Jacobides argues for greater attention to “structural and institutional causes”, pointing to the Greek crisis and Italy’s worsening position as a forewarning of the dangers of ineffective government and governance in a “more exciting but less forgiving world”.

“If emerging markets can crack this, there is a credible threat to Western companies,” says Jacobides. According to the WIPO, Chinese companies are now filing more patents than the US and Japan combined.

PwC/Strategy& (UK) are the sponsors of this year’s Sumantra Ghoshal conference, the leading global conference for business school academics interested in managerially relevant strategy research.