Emerging markets are transactional areas where consumers and producers are not able to productively interact due to a lack of intermediaries. This ‘lack of intermediaries’ constitutes an institutional void which, simply put, is a missing part of an economy that would allow market transactions to become more efficient if it existed. For example, India has an institutional void in the form of unaffordable health care for the poor (more on this later). Devi Shetty, an Indian philanthropist, entrepreneur and cardiac surgeon, decided to fill this void by starting a chain of hospitals called ‘Narayana Health‘ which provide state of the art care to anyone who enters its doors, and all at an unbelievably low cost. This is done by exploiting the idea behind economies of scale which is made possible as the population density in India is extremely high.
The above example demonstrates how institutional voids, which are prevalent in emerging economies, provide a huge opportunity for entrepreneurs to innovate. However, the insufficient support framework available for businesses in an emerging market make it difficult for firms to survive.
Nevertheless, companies with a good reputation generally tend to succeed in emerging markets and there are a number of reasons for this, some of which I’ll cover in this post. But first, let’s look at the 2 different ways in which reputation can be defined and explained:
- The economic perspective – This sees reputation as a source of information about a firm, based on the history of the firm’s actions, to consumers. Therefore, reputation can help to combat information asymmetry which often leads to market failure.
- The institutional perspective – In this view, reputation is regarded mainly as a collection of opinions about a company from powerful, high-status institutions.
Now that we know what reputation is, why is it important? Well, unfortunately, one of the many institutional voids in emerging markets is the fact that there aren’t a lot of established organisations that can provide a company with credibility. This gives companies a high ‘potential transaction uncertainty’ which basically means that it is difficult to rely on and trust firms when they make promises as their actions can be unpredictable.
Building reputation can help a firm simultaneously build transactional confidence through defensive mechanisms, which give firms the chance to benefit from existing business opportunities, as well as offensive mechanisms, which enable firms to seize new business opportunities. However, we must understand the 2 types of transaction uncertainty and why they exist:
- Counterparty behavioural uncertainty – Here, there is insufficient knowledge about counterparties and inadequate legal institutions for contract enforcement which makes it difficult to predict whether a company will follow the conditions of an agreement.
- Environmental uncertainty – Regardless of whether the parties involved with an agreement respect the conditions on which the agreement is based, persistent environmental shocks still threaten businesses, e.g. war, chaos, expropriation, coups, regulatory/political shocks etc.
Overall, a favourable reputation can pay dividends to a company operating in an emerging economy as you can see in the graph below with regards to the markets for ‘food and beverage products’.
Reputation can also build trust and credibility between different companies in emerging markets. With good reputations, they may be able to work together on business ventures which is proven to increase their chances of success. In addition, firms in countries with non-emerging markets might find it more attractive to partner with firms in emerging markets if their reputation is good enough. This, too, increases success rates.
I’d like to share a case study so that we can see how a company can build a good reputation and become successful in an emerging economy by filling an institutional void. It is based on the story of ‘Narayana Health’, which I’ve already mentioned at the beginning of this post. It’s founder, Devi Shetty whom I’ve already introduced you to, has a mission to fill the institutional void of a missing link between patients needing cardiac surgery and specialists offering cardiac surgery in India.
In this transaction, patients are the buyers and surgeons are the sellers. They are unable to efficiently make exchanges for a number of reasons, the main one being that healthcare is unaffordable. This has huge consequences because 2.5 million people in India are in need of heart surgeries each year, but only 80,000-90,000 surgeries are being performed. Millions of lives are endangered due to this inefficient allocation of resources.
Luckily, Shetty was able to change this. His healthcare model is able to treat a large number of patients using high-quality equipment and low price points. He uses scale to his advantage by amortising fixed costs, giving doctors plenty of exposure to all possible variants of conditions, providing opportunities for negotiations with suppliers and creating a test bed for new, state of the art medical devices.
Patients at Shetty’s hospitals can receive healthcare of the same standard as that in some of the safest hospitals in the world, e.g. in the US, whilst at a fraction of the cost. In fact, the pricing strategy works so well that the hospital can afford to allow 40% of patients to pay less than it costs to treat them. It’s simply amazing.
Here are some ways in which Shetty could have built the reputation of his hospitals in order to enable them to succeed:
- He does what he says he’ll do. One of Shetty’s aims whilst creating ‘Narayana Health’ was to ‘disassociate the wealth of a nation from the quality of its healthcare.’ I believe that he’s doing just that. Simply keeping your word and showing the world that you can achieve your goals boosts your reputation drastically.
- He exceeds expectations. No one expected that Shetty had the capability of cutting cardiac care costs in India by more than half (see below). Accomplishing goals which were previously deemed impossible shows that a company has huge potential.
- He acts with integrity. Shetty’s ultimate goal is to ensure that everyone, rich or poor, can have access to top notch health care for a dollar a day. Also, he has missed some awards ceremonies, where he has won awards for his entrepreneurship, in order to help his patients as this is his main priority.
To briefly summarise, the key to successfully filling institutional voids in emerging economies is innovating and creating a business that can build a reputation among the consumer base. It’s one thing to operate a business with a good goal, e.g. helping the poor of India to afford healthcare, but it’s another thing to accomplish it.
Here are the sources I used and articles which you can refer to for further information:
- ‘Engaging With Startups in Emerging Markets‘, MIT Sloan Management Review
- ‘When Senior Managers Won’t Collaborate‘, Harvard Business Review
- ‘The Hidden Risks in Emerging Markets‘, Harvard Business Review
- ‘What Companies Have Learned From Losing Billions in Emerging Markets‘, Harvard Business Review
- ‘Narayana Hrudayalaya: A Model for Accessible, Affordable Health Care?‘, Knowledge@Wharton
- ‘Emerging Giants: Building World-Class Companies in Developing Countries‘, Harvard Business Review
- ‘Big Med‘, The New Yorker (this is an article I particularly enjoyed reading)
- ‘Overcoming Institutional Voids: A Reputation-Based View of Long Run Survival‘, a working paper by Cheng Gao, Geoffrey Jones, Tiona Zuzul and Tarun Khanna
- ‘Contextual Intelligence‘, Harvard Business Review
- ‘New Business Models in Emerging Markets‘, Harvard Business Review