When China opened its doors to foreign investment in the early 1990s, companies around the world could not contain their excitement at the possibility of entering the world’s largest market. With a population north of 1 billion people, China seemed to present endless opportunities in almost every sector imaginable. Boardrooms across the globe became fixated on entering the market. Companies hastily started looking for office space and set out to find local partners so that they could somehow start doing business in the Middle Kingdom. In all this haste and excitement, however, many companies failed to consider carefully whether their businesses really were suitable candidates for market entry.
That same sort of hysteria is happening again, this time in Myanmar, a country opening after years of military dictatorship and isolation. Myanmar is considered one of the world’s last economic frontiers and companies are clamoring to get their products and services into its market, encouraged by economists and analysts touting the country’s potential. Once again, however, many companies are failing to ask themselves some very basic questions about their own businesses before deciding to enter the Myanmar market.
This is both nearsighted and a great way to lose money. Yes, some companies will make smart investments in Myanmar and do well. Many others, however, will get burned. This was certainly true in China. When China loosened its controls on foreign investment, companies in nearly every sector tried to establish a foothold in this burgeoning new market. Initially, the manufacturing sector attracted the most foreign direct investment (FDI), because of the comparative advantage offered by the low cost of labor. In Myanmar, the garment sector has attracted the most FDI during 2013, again no doubt due to labor costs. In China, however, it took a while for other sectors to gain traction and momentum and many companies hoping to build a Chinese market presence either left the market or bled money trying to survive.
In making the decision to allocate resources to Myanmar, companies need to ask themselves some basic questions. What market opportunities exist in Myanmar? Are these opportunities aligned with our core products and services? Does investing in Myanmar support our business model? Do we have a growth strategy or is Myanmar now our growth strategy? Do we have staying power or are we looking for a quick exit? What is the main reason we want to do business in Myanmar? Answering these basic questions, correctly, in the short run will allow companies to avoid making serious long-term mistakes. This might seem obvious, but a surprising number of companies did not do this in China and are not doing it now in Myanmar. Many companies opened offices in Beijing and Shanghai without a portfolio of clients to support their offices and after twelve to eighteen months exited the market. Large multinationals like Coca-Cola and GE have staying power and typically take a long-term approach to their emerging market investments. However, small and midsize companies do not have unlimited budgets and so have more to lose with bad investments.
Great Expectations and Sunk Costs
Just because your competitors open up offices in new markets does not mean you have to as well. During China’s opening many companies followed the market instead of making decisions that were best for their company. Many others were obsessed with becoming the first mover into the Chinese market. Establishing a first-mover advantage can be a huge benefit to a company during market entry, but only if it is done well. If the wrong relationships are established it can completely eliminate any advantage and possibly impact your sustainability in the market.
Additionally, many companies had unrealistic expectations on entering the Chinese market. These great expectations clouded decision-making by many senior level executives when they devised their market entry plans. Expectations coupled with sunk costs can lead to escalating commitments, which can be very costly to a company in the long term. The best way to avoid potential pitfalls is to avoid getting caught up in the frenzy of new market opportunities, even if they are the size of China or untapped Myanmar. Properly assess market opportunities and do so from an unbiased perspective. Do not get seduced by market size or what your competition is doing. Just as they did in China, these approaches will separate the winners from the losers in the emerging Myanmar market.
Peter Birgbauer is a Senior Consultant for Johns Hopkins University SAIS in Yangon working on establishing an International Center of Excellence at Yangon University. Follow him on Twitter @pbirgbauer.