A new study finds that on the uneven terrain of emerging economies, more intense competition drives high performance.
The question of why some emerging economies perform much better than others is perennial. In a new quest for answers, McKinsey Global Institute (MGI) zeroed in on one factor that is usually overlooked: the intense competitive dynamics within the best-performing emerging economies. Counter to the belief that emerging economies tend to protect their best firms from competition, MGI found that the most successful are more competitive than firms in advanced economies.
MGI studied 71 emerging economies and identified 18 that have achieved rapid, consistent GDP growth over the past 50 and 20 years. They include China, South Korea and Singapore, as well as less obvious contenders such as Ethiopia and Vietnam. One characteristic of these ‘outperformers’ is that, in comparison to their peers, they have twice as many large firms with revenues exceeding $500 million, relative to the size of their economies. This distributes economic gains more broadly. It also intensifies domestic competition, so getting to the top and staying there is much harder.
Another distinguishing feature of high-performing emerging economies is the role of large companies. In a survey of companies in seven countries, MGI found that the top-performing emerging-market firms innovate more than their counterparts in advanced economies: 56% of their revenue comes from new products and services, versus 48% for firms in advanced economies. They also invest almost twice as much, and generate higher total returns to shareholders. Their rise at the global level is evident in rankings such as the Fortune Global 500.
Other emerging as well as advanced economies can learn from the success stories of the outperformers. For one, encouraging domestic competition brings results not only for the winning firms, but for the economy as a whole – in terms of GDP growth and beyond. Successful large firms in these economies invest and build capability in supply chains, which are often major employers. They also lead by example, helping to instil management and operational best practices, and accelerate the adoption of technology.
Policy also plays an important role, as policy-makers work with the private sector on the development agenda. Some governments offer incentives to young companies, but in countries where this has been most successful, the support comes with specific targets and time frames. This is apparent in the productivity record of these countries. MGI studied the total productivity growth in their economies from 1965 to 2012 across 35 sectors. In most cases, long-term growth was driven by productivity growth within individual sectors. In Harvard Business Review, the researchers explain that “success depends less on finding the right mix of sectors than on identifying sources of competitive advantage—and continuously driving productivity improvements within those sectors.”
