Many consultants are advising diversified companies in emerging markets such as India, South Korea, Mexico, and Turkey to adopt corporate strategies proven to be of value in advanced economies like the U.S. and the U.K. What are the pros and cons of this advice?

Answer 1

Corporate strategy involves making choices regarding the scope of a firm's business activities. As the chapter discusses, firm scope is a function of transaction costs in the market place. If the transaction costs in the market are high, internalizing some of these activities inside a firm will be optimal. Transaction costs are a function of the degree to which intermediary institutions are developed. Emerging markets such as India, Korea, and Mexico have less developed market institutions compared to advanced markets such as the U.S. and the U.K. As a result, transaction costs in these economies are likely to be higher, leading to a different set of optimal firm scope choices. Therefore, replicating the strategic choices of advanced market companies in these economies will not be optimal.