Transportation Infrastructure Leads Challenges and Opportunities in Emerging Markets

Jan. 8, 2013
Corruption and government policies also weigh heavily against doing business in some countries.

Companies operating or investing in emerging markets identified economic growth as the top reason they believed those markets held most promise from a logistics standpoint. Economic growth was cited three times more often than “cheap labor force,” which was followed by “foreign direct investment” and “growing trade volumes,” according to the Agility Emerging Markets Logistics Index 2012, a study comparing the major emerging markets on a number of different metrics. Agility, provider of integrated logistics and supply chain services, partnered with Transport Intelligence, a global provider of logistics research and analysis, on this report which is based on the responses of 550 senior executives.

The report’s authors note that while “strong transport infrastructure” was not considered a top reason supporting market choice, it was cited as one of the major difficulties in doing business in an emerging market. They explain this seeming contradiction by reasoning that the respondents believe the main emerging markets will develop despite their weak infrastructure due to more important macro-economic factors at work, such as GDP growth and cheap labor.

Another difficulty respondents cited in doing business in emerging markets is corruption. This can take many different forms, including facilitating payments at a local or national level (i.e., in ports or unofficial road tolls) or protection money to local police.  Most respondents identified corruption as either “important” or “very important,” suggesting that it results in significant supply chain costs. The report suggests this issue should be at the top of business and government leaders’ priority list when it comes to developing their logistics industries.

Government policies are seen as the third most important challenge for doing business in emerging markets. This can include elements of protectionism such as rules on foreign ownership or licensing, for example. This is followed by “difficult customs procedures” and “difficulty in setting up and doing business,” both suggesting overly bureaucratic systems.

The authors recommend that countries at the bottom of the Emerging Market ranking address these issues if they want to benefit from further investment in their markets.

The Top 10 emerging markets on Agility's Logistics Index are China, India, Brazil, Saudi Arabia, UAE, Indonesia, Russia, Malaysia, Chile and Mexico. The emerging markets that took the biggest ranking slide in this survey include Jordan, Bolivia, Venezuela, Tunisia, Libya, Algeria, Pakistan, Philippines, Bahrain and Mexico.

Mexico’sscore declined mostly due to crime and violence associated with drug-related trafficking. In the past Mexico’s geographic location and strong connections with the U.S. were major advantages, but the global recession made this less of a benefit.

Jordan fell six places in the rankings due to a decline in scores for both shipping and infrastructure. While the country’s score for “market compatibility” increased, unlike other countries in the Middle East, Jordan does not benefit from large supplies of oil and natural resources and has one of the smallest economies in the region.

The “Arab Spring” was cited as the reason for the declines of both Tunisia and Egypt. Their “market compatibility” declined as a result of increased security risks to the operations of potential investors.