Institutional Voids in Emerging Markets

When global companies or small entrepreneurs formulate market entry strategies they often disregard or pay inadequate attention to contextual factors which can make or break the success of their product or service in a given market. When an innovation is involved, the absence of adequate legal frameworks around IP protection may further hinder effective market entry and commercialization.

Tarun Khanna, a professor at Harvard, coined the phrase “institutional voids” in his book Winning in Emerging Markets. He describes institutional voids as the absence of intermediaries like market research firms and credit card systems to efficiently connect buyers and sellers. He goes on to note that “the primary exploitable characteristic of these markets is their lack of developed infrastructures and institutions that enable efficient business operations, factors that are taken for granted in advanced economies.”

It follows that institutional voids need to be fully considered in any business analysis, opportunity assessment and strategic decision-making, especially when considering emerging markets where poor physical infrastructure, absent or unreliable sources of market information, uncertain regulatory environments and inefficient judicial systems pose potential institutional obstacles.

One major implication of these obstacles is the degree of transactional difficulty, which affects costs, sometimes drastically. Transaction costs are one of the key measures of how well a market works. Well-functioning markets (such as those in the US and Europe) tend to have relatively low transaction costs and high liquidity – conditions which can’t be taken for granted in emerging market contexts.

So, do not assume uniform market ecosystems based on efficient financial, legal and labour frameworks that typically exist in developed economies. One may regard this as common sense but we need to continually remind ourselves that “common sense is not very common”.