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Transforming Mental Models onEmerging Markets

CHARLES DHANARAJIndiana University

TARUN KHANNAHarvard University

Economic growth in the Western world increasingly depends on meaningful engagementwith emerging markets, such as Brazil, China, India, South Africa, and Turkey. Businessschools are responding in their research and curriculums with increased attention tothese markets. However, to understand and leverage these opportunities for teaching andlearning, it is apparent that students and executives require a major transformation oftheir mental models, not simply incremental adjustments or extensions. Institutionaleconomics can help prospective and established managers recognize the role of formaland informal institutions and enable them to work around the “institutional voids” inemerging markets (Khanna & Palepu, 2010). We draw on this framework to identifycritical shifts in mental models required for managing effectively in emerging marketsand suggest core elements of the management learning process required to accomplishsuch a change.

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Emerging markets, such as Brazil, China, India,and others, have become important contributors totoday’s global economy. The combined output ofthe emerging world accounted for 38% of worldgross domestic product (GDP; at market exchangerates) in 2010, twice its share in 1990. If GDP ismeasured at purchasing-power parity, emergingeconomies overtook the developed world in 2008and are likely to reach 54% of world GDP in 2011(Economist, 2011). Multinationals are turning theirattention to these markets, and business schoolshave responded in turn by including such marketsin their curriculums (American Council of Educa-tion, 2002; Doh, 2010; Friga, Bettis, & Sullivan, 2003;Navarro, 2008). In its recent report on globalizationof business education, the Association to AdvanceCollegiate Schools of Business (AACSB, 2010) cap-tures this:

All signs point to a world economy withfalling U.S. and European shares of worldGDP, incremental demand, and sales toglobal firms. Companies must cultivate ex-ecutives and managers skilled in overcom-ing distribution and service challenges toreach new markets and shift research anddevelopment (R&D), innovation, and designactivities, over to new, emerging regions.The future of the world economy stronglyfavors business managers who can contrib-ute to the great needs for talent in regionssuch as developing Asia.

Based on a recent survey conducted by the au-thors, (summarized in Fig. 1), the emphasis onemerging markets in curriculums is expected togrow even more in the coming years.

Research has demonstrated the critical role ofmind-set in managerial effectiveness in interna-tional affairs (Beamish, 2008; Gupta & Govindara-jan, 2002; Hofstede, 1991; Murtha, Lenway, &Bagozzi, 1998; Perlmutter, 1969). However, we findthis insight has barely been applied to building ageneration that must manage in the new globaleconomy with its significant “power shift” towardemerging markets. This is evidenced by the fact

The authors gratefully acknowledge the helpful comments re-ceived from Professors Ravi Ramamurti, Paul Beamish, Gio-vanni Gavetti, Torben Pedersen, Anne Tsui, Andrew Lynch, andMarjorie Lyles. We are grateful to the Editors Jonathan Doh andBen Arbaugh for steering us through this process and addingsignificant value along the way. The first author acknowledgesthe research support from the Schmenner Faculty Fellowshipfor motivating this research. Both authors are grateful for theexecutives and the students who have taught us much.

� Academy of Management Learning & Education, 2011, Vol. 10, No. 4, 684–701. http://dx.doi.org/10.5465/amle.2011.0511

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that although the strategic implications of theemerging markets are clear, most executives stum-ble as the harsh realities of doing business inthese [emerging] markets hit them. They recognizethe long-term economic prospects, but agonizeover the ambiguity and lack of transparency per-vasive in many of these markets. Our observation,reinforced by several interactions with senior ex-ecutives, is that managers have a mental model, aheuristic that works well in the developed markets,but does not extrapolate to the emerging markets.

Our goal here is to argue that a shift in one’smental model is necessary to develop a deeperunderstanding of emerging markets and to presenta learning approach to accomplish the same. Werefer to the learners as “executives,” as we thinkthis message is applicable to all groups of learnerswho attend business schools: undergraduates; ourprospective executives of the future; MBA students;and working professionals and senior managers,who attend our executive education programs. Webegin by delving into the paradox of emergingmarkets: The growth opportunities attract inves-tors but the lack of transparency, coupled with theambiguity and the uncertainty pervasive in thesemarkets, deter them. We then present a conceptualframework to understand these complexities incontext by drawing attention to the fundamentalarrangements that support the functioning of mar-kets, namely, institutions (Alchian & Demsetz, 1972;North, 1991). We draw attention to the challengesassociated with the absence of such institutions ascommonly found in the “Western” world. Khannaand Palepu (1997) coined the term, institutionalvoids, which has been used by scholars to describea wide range of issues in diverse markets (Baker,Gedajlovic, & Lubatkin, 2005; Deb & Marisetty,2010; Jackson & Deeg, 2008; Li & Li, 2008; Miller, Lee,Chang, & Le Breton-Miller, 2009). We then identifyfive significant shifts needed in the mental modelsand lay out five core elements of an effective learn-ing strategy to accomplish this shift.

THE PARADOX OF EMERGING MARKETS

The challenge of doing business in emerging mar-kets is that although they offer phenomenal oppor-

tunities, they lack business safeguards familiar tomost executives. Using a robust simulation model,Wilson and Purushothaman (2003), two GoldmanSachs economists, projected that by 2050, China’sGDP could exceed that of the United States, andthat the combined GDP of Brazil, Russia, India, andChina, (which they termed as BRICs) would sur-pass the combined GDP of the G6, the six richestcountries as of 2000. Their predictions have held upover the past decade. As of June 2011, China hadedged past Japan to become the world’s secondlargest economy, next only to the United States.The number of Chinese firms in Fortune’s Global500 list presents an illustrative pattern of thistrend. When the Global 500 list was introduced forthe first time in 1990, hardly any Chinese firmswere in the list. But the number grew steadily to sixin 1999, 10 in 2000, 16 in 2005, and 46 in 2010. Threeof the top 10 companies on the 2010 list are fromChina. Yet for all this, the Chinese capital marketis to a large extent controlled by its government,and the regulatory systems remain unpredictablefor most investors. The concerns for intellectualproperty (IP) rights overwhelm many of the inves-tors whose sole competitive advantage is their IP.

Despite these dramatic changes in the globaleconomy, the mental models of many of our stu-dents and executives remain stuck in the past.Newsweek columnist, Fareed Zakaria (2010), de-plored the state of mainstream America by noting,“Americans do not really know how fast the rest ofthe world is catching up.” To be fair, for much ofthe 20th century, many of today’s “fast growth”economies were the same countries, which were inearlier decades being referred to as the “ThirdWorld,” or “Developing World.” As recently as adecade ago, the economic relationship of the Westto these markets was dictated by trade in naturalresources, punctuated by international aid towardpoverty-alleviation. Postwar dominance of theglobal economy by the Western world meant thateconomists and business scholars paid scant at-tention to developing economies (Khanna, 2008).Mimicking the (modernized) Roman saying, “Allroads lead to Rome,” the economic equivalent dur-ing “Pax Americana” was that all business-roadsled to New York for much of the past half-century orso. During this time, executives enmeshed in thedeveloped world had the luxury of not needing toknow much about the rest of it (Johnson, Lenartko-wicz, & Apud, 2006). So, for a generation reared onaffluence and predominantly domestic orientation,developing a new perspective on emerging mar-kets is a significant challenge (Bingham, Felin, &Black, 2000; Earley & Peterson, 2004; Mintzberg,2002; National Intelligence Council, 2008).

Although the strategic implications of theemerging markets are clear, mostexecutives stumble as the harsh realitiesof doing business in these [emerging]markets hit them.

2011 685Dhanaraj and Khanna

FIGURE 1Survey of International Business Faculty on Emerging Markets. Survey by authors done in May 2011.

Note: 69 institutions in 18 countries responded to the survey. Average student enrollmentintheseinstitutions was 285 MBAs, 438 undergraduates, and 9 doctoral students. Note that the percent

respondents who expect an increase in the emphasis on emerging markets is higher than those whoexpect an increase in the school enrolment.

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This context calls for a radical approach for ed-ucating Western minds on emerging markets. Crit-ical to any such education is a conceptual frame-work that can address two important issues. First,it should impose some cognitive structure on thedifferences across emerging markets. Second, itshould shed light on how these emerging marketsevolve over time, perhaps along a multitude ofpaths. In essence, the institutional environmentthat directs and controls business activities shouldbe brought to the foreground (Dhanaraj & Beamish,2009). For example, Whitley’s (2008) comparative in-stitutional model integrates institutionalist ap-proaches with the capabilities theory of the firm tohelp explain how environmental factors dictate howbusiness systems evolve over time. London and Hart(2004), Ramamurti (2004), and Ramamurti and Singh(2008) present frameworks to deal with strategies ofmultinational enterprises (MNEs) in emerging mar-kets. Here, we build on Khanna and Palepu’s (1997,2010) institutional voids framework, which provides asound conceptual anchor for emerging markets.

EMERGING MARKETS, INSTITUTIONS, ANDINSTITUTIONAL VOIDS

Nobel Laureate, Douglass North, had the insight thatin order for economic markets to function in a coun-try, there must be a set of “institutions” that direct thebehavior of the citizens. North (1991: 97) defined “[i]n-stitutions [as] the humanly devised constraints thatstructure political, economic and social interaction.They consist of both informal constraints (sanctions,taboos, customs, traditions, and codes of conduct),and formal rules (constitutions, laws, propertyrights). Throughout history, institutions have beendevised by human beings to create order and, inexchange, reduce uncertainty.” Further, institutions“evolve incrementally, connecting the past with thepresent and the future; history in consequence islargely a story of institutional evolution in which thehistorical performance of economies can only be un-derstood as a part of a sequential story. Institutionsprovide the incentive structure of an economy; asthat structure evolves, it shapes the direction of eco-nomic change towards growth, stagnation, or de-cline” (North, 1991: 97).

The institutional approach helps to build a morerealistic model than neoclassical economics,where perfect information flow between the buyersand sellers, frictionless transactions, and uncon-strained market access for both the buyers andsellers are assumed (Alchian & Demsetz, 1972;Coase, 1937). It is well recognized that these as-sumptions do not hold true even in a developedmarket context, but in emerging markets, the vio-

lation of the assumptions has first order signifi-cance. Institutional economics posits that overtime, socially constructed systems and practices—both formal and informal—assist in the creation ofefficient markets. Consider intellectual propertyregime in a country. It consists of the patent lawsthat define the property rights of the inventor, anelaborate network of patent attorneys, an underly-ing system of education that supports the creationand maintenance of the property rights, and last, acourt and arbitration system that enforces therights of the patent owner. Along with these formalinstitutions, the intellectual property regime thriveson a culture of respect for intellectual property byindividuals and organizations, aided by a socialstigma for counterfeits. Institutions thus serve to cre-ate the “rules of the game” that govern the behavior.One of the critical observations of North was thatwhile formal institutions may be created by legisla-tion, informal institutions, which play a critical rolein shaping a society, are harder to create and take along time. In developed economies, when marketswork well, “the market-supporting institutions arealmost invisible,” but when markets work poorly—asin most emerging economies—“the absence of insti-tutions is conspicuous” (McMillan, 2007). Thus, astudy of emerging markets is a study of the absenceof the institutional mechanisms that permit buyerand sellers to efficiently come together, whichKhanna and Palepu (1997, 2010) term “institutionalvoids.” Their absence is pernicious.

Khanna and Palepu’s (2010) contribution is to col-lapse the complexity of missing institutions into aneasy-to-assimilate taxonomy of six classes of insti-tutional voids. Figure 2 presents the typical voidsthat give rise to intermediary institutions. Thesevoids might exist in markets for outputs (products,services), as well as markets for inputs (labor andcapital markets). Being aware of which institutionalvoids characterize a situation at a point in time canallow managers to form a mental map of exactly howthe context differs from others with which they mightbe familiar, and therefore, permit the identification ofa meaningful adaptation of strategy and the formu-lation of a resultant action plan. Table 1 provides asummary of the description and examples of theseintermediary institutions in each of product, laborand capital markets (see Khanna & Palepu, 2010 for adetailed description).1

1 It is possible to complicate the model further. Thus, institu-tional voids are themselves influenced by the openness of so-ciety to the outside that might, for example, permit managers toaccess institutions from outside the emerging market in ques-tion. When capital markets are insufficiently developed, onemight raise capital, to some extent, in overseas markets. When


MANAGING IN EMERGING MARKETS:SHIFTING MENTAL MODELS?

The challenge for educators is to bring home thismessage and its implications to executive prac-tice. Indeed, our goal as professional educators isto transform the mental model of the learners to thelevel where they not only understand the dynamicsof these markets at an intellectual level, but alsoare capable of relevant action (Johnson, Lenartko-wicz, & Apud, 2006; Mintzberg, 2002). For example,cultural generalizations and stereotypes often dic-tate executive thinking (Adler, Brody, & Osland,2001; Levy, Beechler, Taylor, & Boyacigiller, 2007).Executives tend to interpret information to make itmore consistent with stereotypes and often dis-count creative input from managers of countriesassociated with negative stereotypes as “primi-tive” (Alon & Higgins, 2005; Gupta & Govindarajan,2002; Livers, 2007). The stereotypes persist, as manyexecutives do not have a chance to travel and

experience these places firsthand, making it achallenge to debunk and systematically confrontthem with facts (Hofstede, 1991).

Craik (1943) was an early proponent of the ideaof a mental model, which he defined as a “small-scale model” of external reality and a set of possi-ble actions for potential future situations (Argyris,1991; Johnson-Laird, 1983). Peter Senge (1991) notesthat mental models are “deeply held internal im-ages of how the world works, images that limit usto familiar ways of thinking and acting” and thatoften, “we are not consciously aware of our mentalmodels or the effects they have on our behavior.”Mental models drive executive analysis and ac-tion, particularly, how executives interpret oppor-tunities and identify risks (Gentner & Stevens,1983; Rouse & Morris, 1986). If the models are obso-lete, so will be the derived action (Gavetti, 2011).The criticality of mental models is reinforced byFoster and Kaplan (2001: 64), who suggest, “Fewbusiness strategies are elaborated today withoutrecourse to mental models, which depict the corpo-ration and its role in the market, the economy, thecompetitive landscape, and the world as a whole.More often they are implicit and inarticulate, and

local patent systems don’t enforce intellectual property rights,one might file for patents in the United States or Europe, etc. SeeDhanaraj and Beamish (2008) and Khanna, Palepu, and Sinha(2005) for such elaborations.

FIGURE 2Markets and Institutions: Six Critical Intermediary Institutions


often hidden or invisible. But they are there none-theless. We cannot function without them. They areessential to reasoning.”

A key challenge for educators is to help manag-ers discover their mental models about emergingmarkets and to ensure that they are aligned withreality. Our observation over almost two decadesof teaching about emerging markets is that at leastfive major challenges bedevil students and execu-tives, the contours of which are visible through thelens of institutional voids. First, given their pri-mary experience with the smooth functioning ofthe markets in the West, students and executivesview emerging markets as a problem to be solvedrather than as an opportunity to be leveraged. Forveteran businessmen, these markets are destina-tions for charity and not active candidates for busi-

ness. The extensive role of governments in thesemarkets appears overbearing to free-market en-thusiasts. Most often, many freeze to inaction whenconfronted with the absence of familiar institu-tions, which may have served them well, albeitquietly, in their home markets.

From a Problem-Oriented Mind-Set to anOpportunity-Driven One

For an executive from the developed world, engag-ing with emerging markets can be a daunting ex-perience. For example, India’s poor infrastructureor China’s government control can be a huge prob-lem. Infrastructural bottlenecks, corruption, lack oftransparency, and poor governance are ubiquitousin many emerging markets. These have fostered a

TABLE 1Institutional Analysis Framework

Type of MarketInstitution Function It Performs

Examples in CapitalMarkets

Examples inProduct Markets

Examples inTalent Markets

Credibility Enhancers Third-party certification ofthe claims by suppliersor customers

Audit committees;Auditors

International StandardsOrganization (ISO)certification;

Capability MaturityModel (CMM)-levelcertification

The Association toAdvance CollegiateSchools of Business(AACSB) certification;

Educational TestingServices (ETS)admission tests

Information Analyzersand Advisers

Collect and analyzeinformation onproducers andconsumers in a givenmarket

Financial analysts;Credit rating agencies;Financial press;Financial planners;Investment bankers

Consumer ReportsMagazine;

J.D. Powers ratings;PressIndustry analysts

(Gartner Group);Market research firms;Autobytel

Publications rankinguniversities andprofessional schools;

Career counsellors;Human Resource

consultants

Aggregators andDistributors

Provide low-cost matchingand other value-addedservices for suppliersand customers throughexpertise andeconomies of scale

Banks;Insurance companies;Mutual funds;Venture capital and

Private equity funds

Trading companies;Mass retailers

Universities;Professional training

institutions;Labor unions

TransactionFacilitators

Provide a platform forexchange of informationgoods and services,support consummatingtransactions

Stock, bond, futuresexchanges;

Brokerage houses

eBay;Commodities

exchanges;Credit card issuers;Paypal

Executive recruiters;On-line job

advertisement websites

Regulators Create and enforceappropriate regulatoryand policy frameworks

Securities ExchangeCommission;

Financial andAccoundingStandardsBoard (FASB);

National Association ofSecuritiesDealers (NASD)

Food and DrugAdministration (FDA);

Environment policyadministration;

Product safetycommission;

FederalCommunicationsCommission (FCC)

Occupational Safety &HealthAdministration (OSHA);

Equal EmploymentOpportunityCommission;

Unemployment insuranceagencies

Adjudicators Resolve disputesregarding law andprivate contracts

Courts and arbitrators;Bankruptcy specialists

Courts and arbitrators Courts and arbitrators;Union arbitration

specialists


mind-set of “Problem Ahead—Stay Clear” formany students.

Such a view of emerging markets purely as thelocus of problematic regions is shortsighted. Exec-utives routinely identify institutional voids as theunderlying causes of the problems in emergingmarkets. Thinking through the institutional voidsframework instead can allow executives to opentheir minds to explore these voids as opportunities;understanding the stages of institutional evolutioncan help executives see the problems in perspec-tive. More than providing a positive impetus to theanalysis, this new mental model can present newbusiness opportunities. For example, creating atalent search firm to help sort through tens of thou-sands of workers and local executives so that userscan effectively access talent, can be hugely profit-able, as is the idea of creating a rating agency forproducts and services to fill in for the likes ofConsumer Reports. Once such an intermediarybusiness is set up to fill the void in question, strongentry barriers are created for others, and turnswhat was once a problem into an opportunity. In-frastructure in India is a trillion dollar opportunitywith government signaling a serious commitmentto it. China’s fast changing IP regime is opening upa huge business opportunity for law firms andpatent specialists.

From Charity-for-Desperatesto Strategy-for-Confidents

If the uninformed view emerging markets as a“problem,” there is another group with an anach-ronistic view for whom emerging markets are prin-cipally the habitat of the poor and the illiterate.These uniformed cannot conceive of a serious busi-ness exploration of such a market, and relinquishall engagement to the province of charity. For morethan a century, the overwhelming policy approachto emerging markets has been dominated by whatStephen Cohen (2001: 4) terms the “charity” view.For example, Cohen describes American policy inthe 1960s on India as being influenced by two con-trasting viewpoints:

The implications for U.S. policy were clear;India was barely a country; it was mired incaste conflict, social malignancies, and pov-erty. The Indian state had to look to its sur-vival, not its greatness. Americans could, andshould, help India climb out of this pit, butIndia was an object for American charity, notstrategy. These two approaches, one optimis-tic about India’s prospects, the other deeplypessimistic, have, when combined, created a

bifurcated high-low American perceptionof India.

To be sure, every emerging market has a signif-icant number of social issues it must contend with.Yet, the same countries also are the breedingground for dynamic entrepreneurs and innovators(Khanna, 2008). General Electric has its largestR&D facility in Bangalore, India, which has and isinvesting substantially in innovative products forthe health care industry. CISCO has just com-pleted its $1 billion facility in Bangalore, India,which will serve as its second global headquar-ters. Microsoft has the second largest research cen-ter in Beijing, China. Eli Lilly and Company has20% of its scientists in China—enough that its CEOshifted his office for a whole month to its Chinesesubsidiary. There is a new breed of multinationalsfrom these emerging markets with very innovativebusiness models that are challenging the domi-nance of established MNEs (Ramamurti &Singh, 2008).

This generation of senior managers grew up at atime when international aid dictated policy discus-sions on emerging markets such as China andIndia. If the dynamics of institutions and marketsare not factored in the mental models, executivethinking can remain frozen in the past and can bea major stumbling block to recognizing current re-ality. There are at least two reasons for this. First,aid has generally not worked, as is now widelyacknowledged. Second, perhaps more signifi-cantly, the youth in emerging markets are morelikely to respond to approaches that recognizetheir intrinsic talent, equal to that elsewhere in theworld, than to patronizing charity. The newer gen-erations entering business schools worldwide are,fortunately, less a prisoner of the charity view.

From Free-Market Stereotype to ModeratedMarket Reality

Although students and executives have a clearernotion of the divide between government and busi-ness in their home markets, they find the diversityof institutional environments they encounter inemerging markets confounding. For the Westernmind, it is at first a shock to see the central rolegovernments take in these emerging markets. InChina, the 90-year-old Communist Party has asolid grip not only on political matters, but also ismore actively interventionist in the nation’s busi-nesses. Government pervades every sphere of so-ciety, and it is inappropriate to equate govern-ment’s ubiquity with inefficiency per se, as weoften do with our experience of developed markets.


Even when the public sector is inefficient, it isgargantuan and a force to be reckoned with re-gardless. For example, the largely inefficient In-dian public sector enterprises have a cumulativemarket capitalization that exceeds half a trillionAmerican dollars, generate one third of the coun-try’s GDP, and employ a sizable portion of the laborforce (Gupta 2003).

Much of the difficulty in comprehending theemerging markets stems from stereotypes thathave not been grounded in history. Thinking aboutinstitutions as a product of history can help exec-utives to see things in perspective. The dominantrole of governments in the banking industry inmost emerging markets is an example. The topbanks in China and India are majority owned bythe government, even though a significant numberof shares are traded in the public domain. Much tothe chagrin of the free-market economists, theUnited States’ action to take an equity stake inCitibank and General Motors to stem the economiccrisis was an effort to protect the economy fromshock. Understanding the history behind the evo-lution of the banking industry in the United Statesand United Kingdom helps students to gain a per-spective of the transitioning role of governments inemerging market businesses. How do we get ourexecutives to think of the differentiated role of gov-ernment in these communities, with differences ofthe order of magnitude of those illustrated abovefor China and India (see Khanna, 2008 for a com-parative picture between the two countries)? At therisk of imprecision, a simple summary might bethat the government in China (here, for “govern-ment” think of an ensemble of the local and centralpower structures) has alleviated the problem ofphysical connectivity of buyers and sellers (thinkroads and railroads), but has failed to address thatof informational connectivity (free and unbiasedinformation flows are underdeveloped), while In-dia presents the converse situation. Institutionalvoids frameworks can provide a parsimonious wayof incorporating such differences in the analysis ofthese markets; the framework clarifies the role ofgovernments and of private collective action inattempting to respond to the voids, or to fill them(Khanna et al., 2005; Miller et al., 2009).

From Strategic Planning to Scenario Analysis

Most professional managers see strategic plan-ning as critical to their success. While one cananticipate the evolution of the institutional envi-ronment in a country, it remains largely unpredict-able over time (Mintzberg, 2002; Xiao & Tsui, 2007).When such uncertainty is coupled with fast

growth, routine ways of planning for a market op-portunity prove futile (Chang & Velasco, 2001).Growth opportunities may be stalled because ofgovernment indecision, or may suddenly emergebecause of other unexpected policy decisions.Thus, emerging markets demand a dynamic ap-proach (Khanna & Palepu, 1997). Further, a varietyof differing development trajectories is consistentwith any particular growth profile (Filatotchev,Dyomina, Wright, & Buck, 2001; Jackson & Deeg,2008; Rodrik, 2008). To operate in such an iterativemanner can be frustrating for many executivesaccustomed to long-term plans and strategy. Get-ting them to see the evolution of the markets andthe relevance of scenario planning rather thanstrategic planning can dramatically improve theireffectiveness (Chang & Velasco, 2001; Henisz, 2011;Schwartz, 1996).

Scenario planning is not specifically an emerg-ing market issue. In many instances where there ishigh uncertainty, strategists have applied this suc-cessfully. Once executives accept the reality ofuncertainty and the fact that uncertainty does notmean “unmanageable,” they are able to work ef-fectively. In a scenario process, as Schwartz (1996)suggests, “managers invent and then consider, indepth, several stories of equally plausible futures.The stories are carefully researched, full of rele-vant detail, oriented toward real life decisions.”Such an approach prevents getting stuck withinone preferred scenario, which can form the basis ofa static strategy,whereas, remaining flexible andopen to multiple possibilities allows strategic dy-namism. The implication for strategy is significant.Rather than being shocked by policy changes, ex-ecutives learn to expect the unexpected, and pre-pare for multiple scenarios so they are able to acton the changes. Strategy setting then entails aseries of scenario planning exercises and carefulinvestment in options that would enhance futuregrowth (Deb & Marisetty, 2010; Mintzberg, 2002). Forexample, focusing on the emergence of specialistintermediaries, such as regulatory agencies, pro-vides a concrete way for managers to understandthe what, how, and why of the evolution of theunderlying institutional environment and to helpthem factor those into a baseline scenarioanalysis.

From Searching for Data to Generating Data

Good information is necessary for planning. Inhighly institutionalized markets, managers areused to readily available market research data orother forms of information needed for decisionmaking (Li & Li, 2008). In emerging markets, the


short history of market reforms, the rapid pace ofchange, and the weak institutional environmentcreate a situation where such data are unavail-able. Businesses may need to be entrepreneurialand may have to adopt a learning-by-doing strat-egy. Unfortunately, companies that stay out of themarket to wait until reliable information emergesoften get shut out by the competition. Even whendata are available, these can be biased or noisy,and interpretation may need a lot of context(Khanna, 2008; Filatotchev et al., 2001). Only byworking in the market can one generate meaning-ful data and ideas for action. We interpret thisabsence of data as an institutional void, as exec-utives in developed markets are used to the likes ofcredit registries, information analyzers, market re-search firms, all of which are underpinned by reg-ulatory authorities that enforce accuracy of infor-mation.

In the case of global banking behemoth HSBC’sentry into Poland, no credit registry existed, andthe bank had to create its own data by partneringwith a retailer (Khanna & Lane, 2006). Since 1990,HSBC had been present in Poland as an invest-ment services company. In 2003 HSBC bought Pol-ski Kredyt Bank S. A. in Poland, starting its activi-ties on the consumer finance market under thebrand of Beneficial Kredyt and continuing to growover the years. Citibank’s operation in India fol-lows a similar profile, where the bank was the firstto offer credit cards in the country and developed asophisticated information network over the yearsto assess consumer credit. For most emerging mar-kets, business information comparable to thatavailable in the Western world is hard to come by,and such information has to be generated to beactionable. The challenge for the instructor then isto develop an openness to “learning-by-doing” ap-proach in the minds of the learners (Anzai & Simon,1979). We discussed earlier the necessary shiftfrom a strategic planning to a scenario planningapproach. Scenario planning thrives on a constantflow of new information. It infuses an action orien-tation that allows a business to make an entry intothe market, and provides valuable information inreal time that allows one to build better plans.Often, there are unplanned but exciting opportuni-ties that originate from such actions that lead tonew products for the home markets.

A synthesis of these required mind-set changes,difficult tasks assuredly, is to increase receptivityof students and executives to new ideas. In partic-ular, reality is different from the stereotype, espe-cially in the sense that development paths differquite dramatically for different societies. For ex-ample, simply shipping money overseas to encour-

age people to adopt what we “know” to be goodpractice does not work; charity is good, but it ismore of a supplement to underlying developmen-tal processes, rather than a sufficient cure in and ofitself. In addition, the larger emerging nations aretoo proud to accept handouts on the terms of thedeveloped world. With this in mind, we need toavoid the trap of extrapolating from the recentpast, and instead identify alternative scenarios.Experiments are essential to imagine the unimag-inable, and require generating one’s own data foranalysis, rather than relying on extant datasources.

HOW TO TRANSFORM MENTAL MODELS

How does one transform mind-sets? Often one’smind-set is the product of concepts and contextsone has grown up with and developed over a sig-nificant portion of one’s life (Craik, 1943; Johnson-Laird, 1983). It is a distinct cognitive orientationthat determines how we interpret contexts, whichin turn control behaviors (Langer, 1989; Taylor &Gollwitzer, 1995). International business researchhas much to say about the global mind-sets (Gupta& Govindarajan, 2002; Harveston, Kedia, & Davis,2000; Jeannet, 2000; Levy, 2005; Lobel, 1990; Murthaet al., 1998; Perlmutter, 1969). To change a mind-setmeans to motivate an individual to challenge thestatus quo, search for alternatives, provide con-cepts and contexts for new cognitive structures,and provide sufficient logic and reasoning so theparticipants replace existing structures with newones (Muñoz, Mosey, & Binks, 2011).

Shifting mental models demands that learnerschallenge their mental models, systematicallyexpose the assumptions, and provide an alterna-tive model that is coherent and compelling. Wesee five critical tools for creating such a shift.First, changes in mental models are more feasi-ble when the instructor is able to anchor thelearning content on a compelling theory. Second,it is convincing if the instructor can expose stu-dents’ minds to diverse contexts, so that they getto see the variations across the emerging mar-kets. Third, it is compelling if the instructor can

Shifting mental models demands thatlearners challenge their mental models,systematically expose the assumptions,and provide an alternative model that iscoherent and compelling.


emphasize diverse goals of business, so as toexpand students’ thinking beyond the profit-making model. Fourth, it is engaging if the in-structor can bring a multi-method approach tothe learning process, so as to bring the context asmuch as possible to the classroom. And finally, itis enduring if the instructor can build on experi-ential learning opportunities so that there islearning by doing. We expand on these ideas inthis section. Table 2 presents a summary, specif-ically linking them to the types of shifts in men-tal models, as discussed earlier.

First, Anchor Content on a Compelling Theory

Celebrated successes and notorious failures inemerging markets are, by now, legend, but theyare just that, stories. Exposure to disconnected vi-gnettes is an inefficient way to build a mentalmodel of emerging markets. Anchoring them to anunderlying theoretical structure is far more help-ful, as it provides a scientific base for the studentsto organize their learning (Christensen & Carlile,2009; Trank & Rynes, 2003). Theory helps makesense of why conventional environmental scan-ning tools might suggest different answers for thesame setting—industry, for example—in differentgeographies (Shuell, 1993; Tennyson & Cocchi-arella, 1986).

The application of Porter’s (1979) celebrated Five-Forces analysis to understand the distribution ofrents in an industry is one such theory. The insti-tutional voids framework is an explanatory com-plement to such an analysis, since it shows thatthe bargaining power of different constituents inthe Five-Forces model, for example, is driven by aset of other structural determinants—the voids inquestion—not just by “technology” of the industryin question. The industry structure for the cementindustry across OECD-developed countries, seemsreasonably similar. The cement industry in West-ern Europe is not that different from that in theUnited States. But when one expands the sampleto include a larger number and include countriesat all levels and types of development, the dif-ferences are conspicuous. Even though the tech-nology is the same over time and space, the waythe rents in the industry are split depends on anumber of institutional factors besides the un-derlying technology. It depends on the relativebargaining power of buyers and suppliers,which, in turn, are influenced by institutionalvoids. For example, suppose there are powerfulbuyers, and their power cannot be attenuatedbecause it is difficult for new buyers to show updue to institutional voids that prevent de novo

entry. The cement firms’ ability to capture therents is limited (by the powerful buyers). Thus weshow that an equilibrium industry structure isderived not just from the technological primi-tives of the industry, but also from its interactionwith the institutional context. This is seen in thecomparison across emerging markets, or be-tween emerging and developed markets, that is,by exploiting institutional variation (Khanna &Rivkin, 2001; Makino, Isobe, & Chan, 2004).

As Drucker (1994:99) pointed out, every organiza-tion has a theory of business, which includes “as-sumptions about the environment of the organiza-tion; society and its structure, the market, thecustomer, and technology.” In most cases they ex-trapolate the theory that has worked in the West-ern world and look for confirmation of the same inthe emerging markets. Unfortunately, obsolete andinvalid theories can lead to wrong interpretation ofthe data, and hence, can be a cause for missteps.The institutional voids approach described abovecan be a useful framework for strategizing inemerging markets. Understanding the politicaland social environment and sizing up where themarket intermediaries are in each of capital, prod-uct, and labor markets (as in Table 1) provide ananchor from which to see the challenges and op-portunities that lie ahead.

Khanna and Palepu’s (1997, 2006, 2010) institu-tional voids framework provides a conceptual an-chor for developing mental models suitable tothinking about businesses dealing with, and orig-inating from, a diverse range of the emerging mar-kets. The framework provides the tools to conduct arigorous institutional analysis to identify the stateof the “emerging” market and decide on an appro-priate and implementable strategic action. As stu-dents begin to see emerging markets from an in-stitutional lens, it is easier to help them moveaway from a “problem-oriented” mind-set to a “so-lution-oriented” one. It allows them to see the du-ality of social and business opportunities in thesemarkets. The diverse roles of the government asthe markets emerge become explicit in such amodel. Scenario planning and learning by doingfit in naturally, as the institutional voids approachemphasizes the dynamics of these emerging mar-kets. In short, anchoring learning in good theorycan address all five challenges of the mind-setchange expected of executives. We recommend in-troducing the theory upfront in a course on emerg-ing markets, and as the course progresses, gettingstudents to analyze the market intermediaries fordifferent countries.


TABL

E2

Shif

ting

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tal

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tin

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Second, Expose the Mind to Divergent Contexts

Consideration of diverse contexts in the classroomsetting is helpful in breaking down stereotypes,especially the idea that evolution from emerging todeveloped market is a straight-line extrapolationprocess (Jackson & Deeg, 2008; Muñoz et al., 2011).This perspective is especially helpful in address-ing moving the mind-set from strategic planning toscenario planning. One effective way to considerthis is to pair conventional emerging market geog-raphy with an example of an emerging market setin a rich country context (Black & Mendenhall,1990). There are plenty of “emerging markets” inthe developed world. After all, the defining featureof emerging markets is that the intermediaries thatfacilitate exchange have not developed. This com-monly happens when the “technology” for gettingsomething done runs ahead of the underlying pre-existing rules governing that type of exchange.This is exactly what happened in the United Statesdot.com crisis and the recent subprime loan fiasco;both situations were characterized by extensiveinstitutional voids resulting in many characteris-tics common to those in the developing world (Day& Glick, 2000; Earley & Peterson, 2004; Egan & Ben-dick, 2008; Henisz, 2011).

The pharmaceutical industry provides a greatexample for understanding institutional voids. Thedrug approval process is so market specific thatpharmaceutical firms have to develop strong localmarket knowledge in order to gain entry or marketshare there. As one looks at a market such as India,at first glance the price control comes across as adraconian device to curtail the profitability offirms. A U.S.-based executive without substantialexposure to how different markets exercise controlon pricing could come to the erroneous conclusionthat price control is an “emerging market-specific”feature. However, with more exposure to the phar-maceutical markets in countries such as Canada,Germany, China, and Brazil, one can get a bettersense of the prevalence of the price control mech-anism and the varied ways in which it is adminis-tered in different countries. We have also experi-mented with discussing a firm’s strategy inmultiple markets, such as Nokia in India andChina (Dhanaraj, Mukherjee, & Bindu, 2010). Givensimilar market potential, but diverging institu-tional conditions, Nokia has adopted very differentstrategies in these two markets. Understanding thesources of these differences can help students ap-preciate how strategies can be developed aroundinstitutional voids. This helps students grasp thatthere is no single strategy that fits all emergingmarkets; one must understand the nuances of the

institutional evolution in each market well in orderto serve them well.

In terms of pedagogy, getting students to look atmultiple markets is more beneficial than givingthem focused courses such as “Doing Business inChina” or “Doing Business in India.” The emergingmarkets course that the authors teach at their in-stitutions typically takes the students throughseven to eight emerging markets, each represent-ing different stages of institutional evolution. Webegin with an overview of the constellation of theemerging markets using Figure 3, where we mapthe different country groupings to highlight theshift in economic power from G7 to G20. The coursealso takes the students to different industries, asthis can help students gain a better understandingof the varying ways in which institutional forcescan influence the industry structure and competi-tion.

Third, Emphasize Divergent Goals in Business

Business schools have traditionally focused sin-gle-mindedly on short-term financial outcomesas a metric for performance, which has comeunder increasing debate all over the world (Da-tar, Garvin, & Curran, 2010; Khurana, 2007; Mar-golis & Walsh, 2003). But this issue surely meritsscrutiny in the emerging world, where not everyentity interprets its mission solely in terms ofshareholder returns (Maak & Pless, 2009). Con-sideration of diverse outcomes can help addressthe second and third mind-set changes depictedin Table 2.

In many emerging markets, where governmentdoes not provide the public goods needed to facil-itate societal function, and civil society is under-developed, business is often among the betterfunctioning institutions in society. It is, therefore,called upon to perform social functions. Regard-less of what ideological position one espouses re-garding this statement, it often, as it turns out,maximizes shareholder value. In a setting in ruralIndia, for example, Fisman and Khanna (2004)show that Indian business groups are often able tobenefit from wage arbitrage between rural andurban locations by incurring the social and infra-structural investments needed to circumvent ruralinstitutional voids. Those that do so find it en-hances, rather than diminishes, returns (Margolis

One must understand the nuances of theinstitutional evolution in each marketwell in order to serve them well.


& Walsh, 2003). In Western classrooms, such alleg-edly non-core investments tend to be dismissed,but that fails to account for the contextual institu-tional voids. It may even be that confronting theneed for such social investments in emerging mar-kets can re-energize the debate about the role ofbusiness in society (Capelli, Singh, Singh, & Us-eem, 2010).

Taking the students through business cases thatgo beyond the profit-maximizing model or the sim-ple corporate social responsibility model can alsohelp in moving their mind-sets (Christensen & Car-lile, 2009). For example, one of the authors use theBayer Corporation case set in India. Bayer Crop-science, a division of the Germany-based BayerCorporation, had acquired an Indian company,Proagra, for expanding its hybrid cotton seedsbusiness in India (Dhanaraj, Branzei, & Subrama-nian, 2010). After the acquisition, the company

learned about the use of child labor in some of thefarms where the hybrid seeds were produced. Eventhough Bayer had attempted to monitor and controlthe process, it remained a major issue. The non-government organizations (NGOs) raised the issueto the public eye, and the German T.V. aired adocumentary on the issue in early 2000. Faced withthis crisis, Bayer decided to do something extraor-dinary. From an economic perspective, it did notmake sense to continue to hold on to the smallvolume business that was inflicting significantdamage to the prestige of the company. Yet, ratherthan sell off the troublesome unit and walk out, thecompany executives decided to commit significantresources to build a child education program in thetwo regions where they had significant operations.Three years into the program, the company hasmanaged to create a significant reduction in childlabor in those two regions of India. A senior exec-

FIGURE 3Country Groupings: From G7 to G20


utive who spearheaded Bayer’s initiative in Indiacommented,

Many asked me why should Bayer do this?My question to them was, why should Bayernot do this? Here is an issue where we as acompany have a professed value of zerotolerance to child labor. We are an agricul-tural company, and India is one of the larg-est agricultural markets. It is an opportunityfor us to mean what we say and walkthe talk.

Tata Chemicals’ development of a water puri-fier, Tata Swach, for Indian households is a caseillustrating a similar story (Dhanaraj et al., 2010).The company applied its innovative prowess totackle a significant social issue. These kinds ofactions are not done purely as philanthropy orcorporate social responsibility (CSR) activities, butare strategic to the company to give them a senseof identity and purpose. IBM’s impact in shapingthe rural education markets in China, or Pepsi’sfocus on contributing to water conservation in sev-eral emerging markets, serve to emphasize the di-vergent outcomes of emerging market strategies.Our own experience is that students find suchcases not only inspiring, but also practical, as theyprovide ways to think about the economic and so-cial needs of the markets they serve, while work-ing in emerging markets.

Fourth, Adopt a Multimethod Learning Approach

Given the complexity of the topic and the unfa-miliarity of the context for most learners, peda-gogy becomes critical to accomplish the goal ofshifting mental models. Business school educa-tion has become significantly tuned toward theuse of cases. Often instructors are satisfied inbringing cases that are set in the emerging mar-ket contexts. Although the case method is a greattool to use, it has its limits. Students often find itdifficult to get a “touch and feel” of the case’sissue because many may have not been to any ofthese countries and, thus, they show vastly un-familiar contexts. A multimethod approach,which can inject some reality to the classroom, iscritical for transforming their mind-sets, espe-cially in deflecting participants’ impulse to ex-trapolate their familiar contexts onto the emerg-ing markets (Avery & Thomas, 2004).

Multimedia is emerging as a powerful way toconstruct these unfamiliar contexts (Mallinger &Rossy, 2003; Ng, Van Dyne, & Ang, 2009). Digitalvideo clips on businesses and markets in several

countries are available, many in the public do-main. YouTube has become a potential source ofclips that can be either assigned as an off-lineassignment or in-class viewing. Radio interviewswith CEOs or audio files of conversations withexperts, CEOs, and political leaders are now avail-able on different topics. Audio files can be used aspodcasts that students can listen to while theydrive or walk. Augmenting case studies withspeakers who can provide live perspectives pro-vides an interactive platform for the students tochallenge their assumptions. More importantly,video-conferencing facilities that are becoming in-creasingly common in classrooms enable the in-structors to bring key executives live to the class-room to have an interactive conversation followinga case discussion.

For example, in one session on India’s busi-ness environment, we used publicly availablevideos on India to open the class, and discusseda previously assigned podcast of Charlie Roseinterviewing the Prime Minister of India to setthe context. We then discussed a case of Nokia’sstrategy in India, at the end of which we video-conferenced with the CEO of Nokia, India(Dhanaraj et al., 2010). In another situation, weused the case of the Chinese appliances com-pany, Haier, and its globalization strategy(Khanna, Vargas, & Palepu, 2006), following it upwith Haier’s CEO interacting with the class overa live video-conference to bring home the com-plexities of marketing an emerging market com-pany’s product in the United States and someEuropean countries. Bringing together multipleelements of technology can pose a logisticalchallenge, but over time, the power of technologywill enable us to reach across the oceans.

Much has been said about the use of movies inbusiness education (Champoux, 1999; Mallinger &Rossy, 2003; Tyler, Anderson, & Tyler, 2009). Teach-ing emerging markets can be a great context forthe use of movies from different countries. Thereare several in particular, that can bring home thesocial context of life in these countries, and withEnglish subtitles, they can provide the second-bestexperience of getting to know these countries. Of-ten this works best as a take-home exercise, wherestudents are assigned specific movies with somebroad exploratory questions, and the class discus-sion meets to get a debrief from the students. Newschannels such as Cable News Network (CNN; e.g.,Fareed Zakharia’s show, Global Public Square,which is digitally archived in the CNN Website),and PBS (e.g., Charlie Rose’ interviews with vari-ous business and political leaders) have rich con-tent that address topics in depth. A guided learn-


ing environment to use these materials canprovide a rich context for students to develop aholistic experience about the topic or the countrydiscussed in class.

Fifth, Build on ExperientialLearning Opportunities

We discussed above the need for looking at emerg-ing markets’ operations as learning-by-doing ex-periments. What better way to enforce that than toactually use an experiential-learning process?There are two ways to go about this, either workwith local companies that want to expand toemerging markets or take the students to emergingmarkets to undertake projects with companies inthese emerging markets (Pless, Maak, & Stahl,2011). Projects that focus on developing feasibilityplans in emerging markets for local companiesprovide a sense of realism and, at times, can be ofmuch benefit to the local companies. Getting stu-dents to work on projects of relevance for localcompanies with minimal advisory role from seniorexecutives can enrich the learning as well as em-bed some of the principles in students. Where stu-dents can travel, consultancy projects in emergingmarkets have been effective in motivating the stu-dents to learn intensely about these markets aswell as in providing them a context to engage inpractice (Schuster et al., 1998). Business schools inthe United States and Europe are increasinglyadopting this strategy in partnership with localschools in emerging markets. Students are pairedtogether and engage in solving a business issuefor a local company. Engagement in a local prob-lem-solving exercise and working alongside localexecutives provides an invaluable experience toWestern students (Ng et al., 2009).

Another idea that can work well is to leveragetechnology and create virtual networks of studentteams from different geographies. Collaborationtechnologies such as Skype conference calls,Google docs, and Skype video-conferences provideinexpensive ways for students to connect and worktogether. We have tried creating multinational stu-dent groups, students drawn from the UnitedStates, India, and China, working on an identicalproject (case study). Students are encouraged tocommunicate through forums such as Google talkor Skype, and produce a joint report. They can meetby way of video conferencing with easy to use toolssuch as Cisco’s Web-Ex or Adobe’s Adobe Connect(previously known as Breeze). Often such interac-tions highlight the deep differences in how man-agers from different contexts look at the same is-sues. These experiences allow students to hone

their skills in interacting across cultures, oftenlearning how to negotiate and resolve conflicts asthey work through solving the assignments (Ya-mazaki & Kayes, 2004). The experiential learningapproach can be significant in developing thelearning-by-doing mind-set, and in addressing thefirst mind-set change, to move students from prob-lem-oriented pessimists to opportunity-orientedoptimists.

CONCLUSIONS

We have addressed the question of how to buildexecutives who can leverage the new opportuni-ties that emerging markets bring. While the issueis real and widespread, we also see many excel-lent cases of companies reinventing themselves bytheir engagement in emerging markets. The spe-cific challenge is to educate a broad base of West-ern executives who lack the historical and institu-tional context to work effectively in these markets.As emerging markets take the center stage in theglobal economy, more and more business schoolsare responding by expanding related course offer-ings. We have argued that many of these effortsrun the risk of expanding information, surely use-ful but only minimally so, and that the academy isbetter served by attempting a more far-reachingtransformation of the managerial mind-set. View-ing emerging markets as characterized by a pleth-ora of institutional voids (Khanna & Palepu, 1997,2010)—that is, by the absence of the several inter-mediaries that are vital to the creation of effectivemarkets—provides a helpful conceptual anchor.

Drawing on the learning literature and cognitivepsychology, we suggested that mental models areat the base of analysis and action for executivesand that these need to be changed in order toidentify the opportunities in the emerging marketsand to exploit them. We outlined five salient mind-set changes demanded by the needs of operatingin emerging markets and interpreted thesethrough the institutional voids framework. Fromseeing the emerging markets as a problematicarena, effective managers have to see them also asrepository opportunities, break down the stereo-types, and adapt to an action orientation that pro-motes learning by doing. Our suggested ensembleof pedagogical tools can, we believe, move us to-ward addressing these mind-set changes, includ-ing, at its base, a sound theory, and embracing anorientation to diverse contexts and outcomesthrough multiple methodologies and an emphasison experiential learning.

Integrating institutional economics with man-agement theory has a rich potential to advance


theory and practice in today’s global economy. Un-derstanding how institutions evolve and the fac-tors that determine the ultimate state of institu-tions and associated business models in aneconomy remains an active area of research today(Tsui, 2007; Tsui et al., 2004). Bringing such researchto the classroom can significantly contribute todeveloping better mental models in the managerswe train. Such an approach would equip thesemanagers well for handling the complexity inthese high growth markets.

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Charles Dhanaraj is an associateprofessor of management andSchmenner Faculty Fellow at theKelley School of Business, Indi-ana University. He holds a visit-ing appointment at the Centerfor Leadership, Innovation, andChange at Indian School ofBusiness (ISB), Hyderabad.Dhanaraj earned his PhD fromRichard Ivey School of Business,Canada. His research focuseson globalization, innovation,and collaboration.

Tarun Khanna is the Jorge PauloLemann Professor at HBS, Direc-tor of Harvard’s South Asia Initia-tive, Young Global Leader ofWorld Economic Forum, and Fel-low of the Academy of Interna-tional Business. Khanna is coau-thor of Winning in EmergingMarkets: A Roadmap for Strategyand Execution and author of Bil-lions of Entrepreneurs: HowChina and India are Reshapingtheir Futures, and Yours (HarvardBusiness Press).


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