How to Succeed in Frontier Markets

Tuck visiting professor Thomas Lawton examines non-market strategies in the Ugandan electricity sector.

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Uganda has a drastic undersupply of electricity serving only about seven percent of citizens. | iStock

When a company wants to enter a foreign market, it needs to think beyond the usual concerns of organizational structure and providing the right product at the right price.

It needs to use “non-market” strategies: delivering strategic objectives through political and social engagement and leverage. Cemex, the Mexico-based cement company with operations around the globe, has become especially good at this. In the late 1990s, it sought to enter the Puerto Rican market but encountered significant pushback from a local competitor that had political influence. Cemex’s response was to do a non-market audit of Puerto Rico to see where it could help the country and thereby gain some political clout. The company found that Puerto Rico had a very large population of unemployed ex-convicts, many of whom had the skills needed for jobs in the factory Cemex planned to build. So Cemex made a proposal to the Puerto Rican government: we’ll help you solve your social problem if you facilitate our entry into the market. In 2002, Cemex acquired the Puerto Rican Cement Company, solidifying its grasp on one more foreign location. 

Academics have studied non-market strategies in countries such as China, Russia, India, Brazil, and Mexico—the “emerging economies” of the last two decades. But to go even further back on the spectrum of economic maturity today, researchers are looking at “frontier” markets in places like sub-Saharan Africa. That’s where Tuck visiting professor Thomas Lawton went to do research for his new paper: “Corporate Political Activity and Location-Based Advantage: MNE responses to institutional transformation in Uganda’s electricity industry,” which is forthcoming in the Journal of World Business.

Uganda is a good place to examine non-market strategies for a few reasons. First, its economy is growing at a rate of five to eight percent annually, and it is one of the largest economies in the region. Second, Uganda is a relatively stable country surrounded by war torn countries such as the Democratic Republic of Congo and South Sudan, so it’s interesting to see if the institution building that tends to happen when multinational corporations enter a country will spill over into those neighboring nations. Third, and perhaps most importantly, Uganda has a drastic undersupply of electricity—only about seven percent of citizens have access to regular power. “Access to electricity is about social advancement, but it’s also about business,” Lawton says. “If a corporation wants to do business there, it needs a consistent supply of electricity."

Access to electricity is about social advancement, but it’s also about business. If a corporation wants to do business there, it needs a consistent supply of electricity.

Because hard data is difficult to acquire in Uganda, Lawton teamed up with Ugandan business professor Charles Mbalyohere of the Open University Business School in England to find suitable companies to study. Two other professors are also co-authors: Roshan Boojihawon of Birmingham Business School, and Howard Viney of London Business School. They performed a case study analysis of four multi-national enterprises (MNEs) and looked at their varying approaches to entering Uganda’s regulated electricity market. The MNEs represented a diverse mix of advanced-economy and emerging economy companies, as well as different countries of origin. Pisu-Energy Global was a joint venture between Pisu, an East African infrastructure development arm of a larger company, and the U.S.-based Energy Global. Frinam is a subsidiary of Africa’s largest electricity company and is based in South Africa. Prolux is a Norwegian company partly owned by several local governments in Norway. And Avin is a Uganda-based MNE that has worked in the Ugandan electricity sector since the 1980s. Pseudonyms are used for confidentiality purposes. 

A few patterns emerged from studying these MNEs and how they partnered with the Ugandan government. First, it was clear that advanced-country MNEs, such as the Pisu-Energy Global joint venture, were keen to engage in institution-building. Their rationale was that doing business would be more predictable and less influenced by political factors if Uganda had robust regulations and administrative expertise. At the same time, emerging-market MNEs, such as Frinam, were happy with a limited amount of institution building, but they worried that strong institutions would wipe out their competitive advantage of knowing how to operate in less-than-transparent markets.

Lawton and his co-authors also found that MNEs that embedded themselves into the local economy were best able to create strong relationships with the central government.

Lawton and his co-authors also found that MNEs that embedded themselves into the local economy were best able to create strong relationships with the central government. This was important because in African countries the central government doesn’t change often, and a long relationship between the government and an advanced-economy MNE can result in a spillover of regulation reform beyond the electricity sector. This is evidence that MNEs can play a positive role in emerging economies.

Finally, the researchers saw evidence of MNEs developing non-market capabilities, such as the ability to build relationships with key policy makers and to become part of the dialogue around policy and regulation. This is more than lobbying—something closer to interest representation. “These skills can serve a company well when it tries to enter other new frontier markets,” Lawton says.